-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C9ViCP34h62ZOur0/AYdXHMk0fKZ6o8jGFwMIKgmLD/3py8YxduN178gVAJtth47 IT8R3nsok5G8DkYVbc2uaA== 0001047469-98-027591.txt : 19980720 0001047469-98-027591.hdr.sgml : 19980720 ACCESSION NUMBER: 0001047469-98-027591 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980717 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON HOLDING GROUP LP CENTRAL INDEX KEY: 0000900346 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 954408577 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-55755 FILM NUMBER: 98667695 BUSINESS ADDRESS: STREET 1: 10900 WILSHIRE BLVD STREET 2: 15TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3108249990 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON FUNDING CORP CENTRAL INDEX KEY: 0001060530 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 954681480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-55755-01 FILM NUMBER: 98667696 BUSINESS ADDRESS: STREET 1: 10900 WILSHIRE BLVD STREET 2: 15TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3108249990 MAIL ADDRESS: STREET 1: 10900 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90024 S-4/A 1 S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998 REGISTRATION NO. 333-55755 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- FALCON HOLDING GROUP, L.P. FALCON FUNDING CORPORATION (Exact Name of Registrants as Specified in Their Charters) DELAWARE 4841 95-4408577 CALIFORNIA 4841 95-4681480 (States or Other Jurisdictions of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Numbers)
10900 WILSHIRE BOULEVARD--15TH FLOOR LOS ANGELES, CALIFORNIA 90024 (310) 824-9990 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants' Principal Executive Offices) -------------------------- STANLEY S. ITSKOWITCH, ESQ. FALCON HOLDING GROUP, INC. 10900 WILSHIRE BOULEVARD--15TH FLOOR LOS ANGELES, CALIFORNIA 90024 (310) 824-9990 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants' Agent for Service) -------------------------- Please address a copy of all communications to: EDWARD J. O'CONNELL THOMAS D. TWEDT Dow, Lohnes & Albertson, PLLC 1200 New Hampshire Avenue, N.W. Washington, D.C. 20036 (202) 776-2000 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JULY 17, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS FALCON HOLDING GROUP, L.P. [LOGO] FALCON FUNDING CORPORATION OFFER TO EXCHANGE 8.375% SERIES B SENIOR DEBENTURES DUE 2010 FOR ANY AND ALL OUTSTANDING 8.375% SERIES A SENIOR DEBENTURES DUE 2010 AND TO EXCHANGE 9.285% SERIES B SENIOR DISCOUNT DEBENTURES DUE 2010 FOR ANY AND ALL OUTSTANDING 9.285% SERIES A SENIOR DISCOUNT DEBENTURES DUE 2010 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"), and Falcon Funding Corporation, a California corporation ("FFC," and each of FHGLP and FFC being sometimes referred to herein individually as an "Issuer" and collectively as the "Issuers"), hereby offer, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (which together constitute the "Exchange Offer"), to exchange (i) $1,000 original principal amount of 8.375% Series B Senior Debentures due 2010 of the Issuers (the "Senior Exchange Debentures") for each $1,000 original principal amount of the Issuers' issued and outstanding 8.375% Series A Senior Debentures due 2010 (the "Old Senior Debentures," and collectively with the Senior Exchange Debentures, the "Senior Debentures"), and (ii) $1,000 original principal amount at maturity of 9.285% Series B Senior Discount Debentures due 2010 of the Issuers (the "Senior Discount Exchange Debentures," and collectively with the Senior Exchange Debentures, the "Exchange Debentures") for each $1,000 original principal amount at maturity of the Issuers' issued and outstanding 9.285% Series A Senior Discount Debentures due 2010 (the "Old Senior Discount Debentures," and collectively with the Senior Discount Exchange Debentures, the "Senior Discount Debentures") (the Old Senior Discount Debentures and the Old Senior Debentures being sometimes referred to herein collectively as the "Old Debentures," and the Old Debentures and the Exchange Debentures being sometimes referred to herein collectively as the "Debentures"). As of the date of this Prospectus, $375,000,000 aggregate original principal amount of the Old Senior Debentures are outstanding, and $435,250,000 aggregate original principal amount at maturity of the Old Senior Discount Debentures are outstanding. The form and terms of the Exchange Debentures are the same as the form and terms of the corresponding Old Debentures except that (i) the issuance of the Exchange Debentures will have been registered under the Securities Act and, therefore, the Exchange Debentures will not bear legends restricting the transfer thereof and (ii) holders of the Exchange Debentures will not be entitled to certain rights of holders of Old Debentures under the Registration Rights Agreement (as defined). The Exchange Debentures will evidence the same debt as the Old Debentures (which they replace) and will be issued under and be entitled to the benefits of the Indenture, dated as of April 3, 1998 (the "Indenture"), by and among the Issuers and U.S. Trust Company of New York, as Trustee, governing the Old Debentures. See "The Exchange Offer" and "Description of the Debentures." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Debentures being tendered for exchange. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, unless the Issuers, in their sole discretion, extend the Exchange Offer (as such date may be so extended, the "Expiration Date"), in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. Old Debentures tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date; otherwise such tenders are irrevocable. SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Old Senior Discount Debentures were originally issued at a price of $633.29 per $1,000 original principal amount at maturity, and each Senior Discount Exchange Denbenture will be issued with original issue discount for federal income tax purposes and will have an Accreted Value equal to that of the Old Senior Discount Debenture exchanged therefor. No interest on the Senior Discount Debentures will be payable prior to April 15, 2003; PROVIDED, HOWEVER, that any time prior to April 15, 2003, the Issuers may elect to commence accrual of cash interest on any interest payment date, in which case the outstanding principal amount at maturity of a Senior Discount Debenture will be reduced to the Accreted Value of such Debenture as of such interest payment date and interest will be payable semiannually in cash on each interest payment date thereafter. The Debentures will mature on April 15, 2010. The Debentures will be redeemable at the option of the Issuers, in whole or in part, at any time on or after April 15, 2003, in the case of Senior Debentures, initially at 104.188% of the principal amount thereof and, in the case of Senior Discount Debentures, initially at 104.643% of the Accreted Value thereof, in each case plus accrued and unpaid interest, if any, to the date of redemption, declining to 100% of their principal amount, plus accrued and unpaid interest, if any, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the Issuers may redeem up to 35% of the aggregate principal amount or Accreted Value, as applicable, of the Debentures with the net cash proceeds of one or more sales by the Company of its Capital Stock (as defined) (other than Redeemable Capital Stock (as defined)) at a redemption price, in the case of Senior Debentures, equal to 108.375% of the principal amount thereof and, in the case of Senior Discount Debentures, equal to 109.285% of the Accreted Value thereof, in each case plus accrued and unpaid interest, if any, to the date of redemption. In the event of a Change of Control (as defined), the holders of the Debentures will have the right to require the Issuers to purchase their Debentures at a price equal to 101% of their principal amount or Accreted Value, as the case may be, plus accrued and unpaid interest, if any, to the date of purchase. There can be no assurance, however, that the Company will have sufficient funds to pay the purchase price for all of the Debentures that might be delivered by holders in connection with a Change of Control. In addition, this provision may not afford holders of the Debentures protection in the event of certain highly leveraged transactions. If the TCI Contribution (as defined) is not consummated on or before June 30, 1999, the interest rate on the Senior Debentures will increase by 0.75% per annum, the Discount Debentures will bear cash interest on the Accreted Value thereof (in addition to accretion of principal) at a rate of 0.75% per annum until April 15, 2003, and thereafter the interest rate on the Senior Discount Debentures will increase by 0.75% per annum; provided that such additional interest will no longer be payable if the TCI Contribution is consummated on or before December 31, 1999. The Debentures will be joint and several senior unsecured obligations of the Issuers, will rank PARI PASSU in right of payment with all existing and future senior unsecured obligations of the Issuers and will be senior in right of payment to all subordinated indebtedness of the Issuers. The Issuers do not currently have any plans to incur any such subordinated indebtedness with respect to which the Debentures would be senior in right of payment. FHGLP is a holding company that has no material operations and conducts substantially all of its business through subsidiaries. As a result, FHGLP's ability to make interest and principal payments when due to the holders of the Debentures is dependent upon the receipt of sufficient funds from FHGLP's subsidiaries. The Debentures will be the obligations of the Issuers only, and the Issuers' subsidiaries will not have any obligation to pay any amounts due under the Debentures. Therefore, the Debentures will be effectively subordinated to all existing and future indebtedness and other liabilities of the Issuers' subsidiaries. As of March 31, 1998, after giving pro forma effect to the Offering (as defined), the refinancing of the Bank Credit Agreement (as defined) with proceeds from the New Credit Facility (as defined), the repurchase of all of the Notes pursuant to both the Notes Tender (as defined) and the Notes Redemption (as defined), and the consummation of the TCI Transaction, (i) the Issuers (excluding indebtedness of their subsidiaries) would not have had any indebtedness outstanding other than the Debentures (representing aggregate indebtedness of approximately $650.6 million as of the date of issuance) and (ii) the Issuers' subsidiaries would have had $936.5 million of indebtedness outstanding, all of which would have been effectively senior to the Debentures. In addition, the New Credit Facility is ii collateralized by a pledge of the partnership and other equity interests of substantially all of FHGLP's subsidiaries and a negative pledge on the assets of such subsidiaries, subject to a subsequent grant of a security interest in such assets if the TCI Transaction has not closed by December 31, 1998. FFC is a wholly owned subsidiary of FHGLP and was incorporated solely for the purpose of serving as a co-issuer of the Debentures. FFC does not have any material operations or assets and will not have any revenues. Prospective purchasers of the Debentures should not expect FFC to participate in servicing the principal, interest, premium, if any, or any other payment obligations on the Debentures. The Exchange Offer is being made pursuant to the Registration Rights Agreement, dated as of April 3, 1998 (the "Registration Rights Agreement"), among the Issuers and Morgan Stanley & Co. Incorporated, Lazard Freres & Co. LLC, Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancAmerica Robertson Stephens, BancBoston Securities Inc., Chase Securities Inc., CIBC Oppenheimer, NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc., as the Placement Agents for the initial offering of the Old Debentures (the "Placement Agents"). Upon consummation of the Exchange Offer, holders of Old Debentures that were not prohibited from participating in the Exchange Offer and did not tender their Old Debentures will not have any registration rights under the Registration Rights Agreement with respect to such nontendered Old Debentures and, accordingly, such Old Debentures will continue to be subject to the restrictions on transfer contained in the legend thereon. Based upon interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in certain no-action letters issued to third parties (including EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter (April 13, 1989); MORGAN STANLEY & CO. INC., SEC No-Action Letter (June 5, 1991); and SHEARMAN & STERLING, SEC No-Action Letter (July 2, 1993)), the Issuers believe that the Exchange Debentures issued pursuant to the Exchange Offer in exchange for Old Debentures may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder that is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act of 1933, as amended (the "Securities Act")), without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Debentures are acquired in the ordinary course of such holder's business and that at the time of the consummation of the Exchange Offer such holder has no arrangement or understanding with any person to participate in the distribution of such Exchange Debentures. See "The Exchange Offer--Resale of the Exchange Debentures." Holders of Old Debentures wishing to accept the Exchange Offer must represent to the Issuers, as required by the Registration Rights Agreement, that such conditions have been met and that such holder is not an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act. Each broker-dealer that is the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of Exchange Debentures received by such broker-dealer for its own account pursuant to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Debentures. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by any person subject to the prospectus delivery requirements of the Securities Act (other than a Participating Broker Dealer (an "Excluded Participating Broker Dealer") who either (x) acquired Debentures other than for its own account as a result of market-making activities or other trading activities or (y) has entered into any arrangement or understanding with any Issuer or any affiliate of any Issuer to distribute the Exchange Debentures). See "Plan of Distribution." The Old Debentures were originally issued and sold on April 3, 1998 in an offering of $375,000,000 aggregate original principal amount of the Senior Debentures and $435,250,000 aggregate original Principal Amount at Maturity of the Discount Debentures (the "Offering"). The Offering was exempt from registration under the Securities Act in reliance upon the exemptions provided by Section 4(2), Rule 144A and Regulation S of the Securities Act. Accordingly, the Old Debentures may not be reoffered, resold or otherwise pledged, hypothecated or transferred in the United States unless so registered or iii unless an exemption from the registration requirements of the Securities Act and applicable state securities laws is available. The Issuers have not entered into any arrangement or understanding with any person to distribute the Exchange Debentures to be received in the Exchange Offer, and to the best of the Issuers' information and belief, each person participating in the Exchange Offer is acquiring the Exchange Debentures in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the Exchange Debentures to be received in the Exchange Offer. Any holder who is an "affiliate" of the Issuers (within the meaning of Rule 405 under the Securities Act), who does not acquire the Exchange Debentures in the ordinary course of business or who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Debentures could not rely on the position of the staff of the Commission enunciated in the no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Issuers. There has not previously been any public market for the Old Debentures or the Exchange Debentures. Although the Debentures are designated for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") Market, there can be no assurance that an active market for the Exchange Debentures will develop. Moreover, to the extent that Old Debentures are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Debentures could be adversely affected. The Company has been advised by the Placement Agents that they presently intend to make a market in the Exchange Debentures. However, the Placement Agents are not obligated to do so, and any market-making activity with respect to the Exchange Debentures may be discontinued at any time without notice. See "Risk Factors--Lack of Public Market for the Debentures." THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUERS ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD DEBENTURES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE ISSUERS. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE DEBENTURES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. The Exchange Debentures will be available initially only in book-entry form and the Issuers expect that the Exchange Debentures issued pursuant to the Exchange Offer will be represented by one or more Global Debentures (as defined), which will be deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in its name or in the name of Cede & Co., its nominee. Beneficial interests in the Global Debentures will be shown on, and transfers thereof will be effected through, records maintained by DTC and its participants. After the initial issuance of the Global Debentures, Debentures in certificated form will be issued in exchange for the Global Debentures only under limited circumstances as set forth in the Indenture. See "Description of the Debentures--Book-Entry; Delivery and Form." iv TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 1 Risk Factors.............................................................. 17 The TCI Transaction....................................................... 27 Use of Proceeds........................................................... 31 Capitalization............................................................ 32 Selected Consolidated Financial Data...................................... 33 Pro Forma Condensed Combined Financial Data............................... 35 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 44 Business.................................................................. 59 Legislation and Regulation................................................ 79 Management................................................................ 86 Certain Relationships and Related Transactions............................ 94 Security Ownership of Certain Beneficial Owners and Management............ 97 Description of the Partnership Agreements................................. 99 Description of Certain Indebtedness....................................... 111 The Exchange Offer........................................................ 115 Description of the Debentures............................................. 125 Federal Income Tax Considerations......................................... 156 Plan of Distribution...................................................... 161 Legal Matters............................................................. 162 Experts................................................................... 162 Available Information..................................................... 162 Index to Financial Statements............................................. F-1
------------------------ THIS PROSPECTUS INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT. ALL STATEMENTS REGARDING THE ISSUERS' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD LOOKING STATEMENTS. ALTHOUGH THE ISSUERS BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD LOOKING STATEMENTS ARE REASONABLE, THE ISSUERS CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD LOOKING STATEMENTS ATTRIBUTABLE TO THE ISSUERS OR PERSONS ACTING ON THE ISSUERS' BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. v PROSPECTUS SUMMARY THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS AND THE DEBENTURES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, THE "COMPANY" REFERS TO FALCON HOLDING GROUP, L.P., A DELAWARE LIMITED PARTNERSHIP ("FHGLP"), AND ITS SUBSIDIARIES (INCLUDING CONSOLIDATED PARTNERSHIPS) UNLESS THE CONTEXT REQUIRES OTHERWISE. THE COMPANY HAS ENTERED INTO A DEFINITIVE AGREEMENT WITH TCI FALCON HOLDINGS, LLC ("TCI"), AN AFFILIATE OF TELE-COMMUNICATIONS, INC., FALCON COMMUNICATIONS, L.P., A NEWLY ORGANIZED HOLDING COMPANY ("NEW FALCON"), THE EXISTING PARTNERS OF FHGLP AND INVESTORS IN FALCON VIDEO (AS DEFINED) TO CONSOLIDATE UNDER THE COMMON OWNERSHIP AND CONTROL OF NEW FALCON SUBSTANTIALLY ALL OF THE COMPANY'S EXISTING CABLE OPERATIONS (THE "FALCON SYSTEMS") AND CERTAIN CABLE TELEVISION SYSTEMS OWNED AND OPERATED BY AFFILIATES OF TCI (THE "TCI SYSTEMS"). FHGLP WILL RETAIN ITS OWNERSHIP INTERESTS (RANGING FROM 0.5% TO 1.0%) IN THE SYSTEMS UNDER THE MANAGEMENT OF ENSTAR COMMUNICATIONS CORPORATION ("ENSTAR"), AN INDIRECT SUBSIDIARY OF FHGLP (THE "ENSTAR SYSTEMS"), AS WELL AS CERTAIN OTHER NON-OPERATING ASSETS THAT WILL NOT BE TRANSFERRED TO NEW FALCON. FHGLP WILL OWN, SUBJECT TO POSSIBLE ADJUSTMENT PURSUANT TO THE CONTRIBUTION AGREEMENT (AS DEFINED), WHICH SPECIFIES THE ASSETS THAT WILL BE CONTRIBUTED TO NEW FALCON, APPROXIMATELY 53% OF THE EQUITY OF NEW FALCON AND WILL SERVE AS THE MANAGING GENERAL PARTNER OF NEW FALCON. TCI WILL OWN, SUBJECT TO POSSIBLE ADJUSTMENT PURSUANT TO THE CONTRIBUTION AGREEMENT, APPROXIMATELY 47% OF THE EQUITY OF NEW FALCON. IT IS CONTEMPLATED THAT, AS A RESULT OF THE TCI TRANSACTION, THE DEBENTURES WILL BE ASSUMED BY NEW FALCON, WHICH WILL BE SUBSTITUTED FOR FHGLP AS AN OBLIGOR UNDER THE DEBENTURES. THE TCI TRANSACTION IS PRESENTLY EXPECTED TO BE COMPLETED IN THE THIRD QUARTER OF 1998, ALTHOUGH THERE CAN BE NO ASSURANCES AS TO THE SUCCESSFUL COMPLETION OF THE TCI TRANSACTION. SEE "RISK FACTORS--CONDITIONS OF CLOSING THE TCI TRANSACTION" AND "THE TCI TRANSACTION." THE COMPANY The Company owns or manages cable television systems in 26 states. On December 30, 1997, FHGLP entered into a definitive agreement with TCI to consolidate substantially all of the Company's cable television systems and certain systems owned and operated by affiliates of TCI (the "TCI Transaction"). Upon consummation of the TCI Transaction, the Company will be the 13th largest cable television operator in the United States, serving subscribers principally in California, Oregon, Washington, Missouri and Alabama. After giving effect to the TCI Transaction, the Company would have served approximately 1,070,000 basic subscribers at March 31, 1998. Led by Marc B. Nathanson, the Chairman and Chief Executive Officer, and Frank J. Intiso, the President and Chief Operating Officer, the Company's senior management team has an average of over 19 years of experience in the cable industry and has worked together for over a decade. The Company's owned cable television systems (the "Owned Systems") are located in 23 states, principally California, Oregon, Missouri, Georgia, North Carolina, Texas and Kentucky. As of March 31, 1998, the Owned Systems passed approximately 1,008,000 homes and served approximately 607,000 basic subscribers. The Company also holds varying equity interests in and manages certain other cable television systems (the "Affiliated Systems" and, together with the Owned Systems, the "Falcon Systems"). The Affiliated Systems are located in 14 states, including South Carolina, Kentucky, Illinois, Washington and Tennessee. As of March 31, 1998, the Affiliated Systems passed approximately 262,000 homes and served approximately 170,000 basic subscribers. The Company is a leading operator of cable systems primarily located in small to medium-sized communities and suburban areas surrounding large and medium-sized cities proximate to many of the major television markets in the United States (also known as "Designated Market Areas" or "DMAs"). Management believes that the Company's cable systems generally have higher operating cash flow margins and more predictable operating cash flow and are subject to less risk of increased competition than systems in large urban cities. In many of the Company's markets, consumers have access to only a limited number of over-the-air broadcast television signals. In addition, these markets typically offer fewer competing entertainment alternatives than large urban cities. Management also believes that its cable television 1 systems generally have a more stable customer base and generally have lower labor, operating and system construction costs than systems in urban markets. The principal executive offices of the Company are located at 10900 Wilshire Boulevard, 15th Floor, Los Angeles, California 90024, and the Company's telephone number is (310) 824-9990. BUSINESS STRATEGY FOCUS ON SMALL AND MEDIUM-SIZED MARKETS. The Company's business strategy has focused on serving small to medium-sized communities and the suburbs of certain cities. The Company believes that given a similar technical and channel capacity/utilization profile, its cable television systems generally involve less risk of increased competition than systems in large urban cities. The Falcon Systems, taken as a whole, are not dependent on any single local economy, are resistant to regional economic fluctuations, and provide the Company with stable revenue and operating cash flow streams. However, it is the goal of the Company to consolidate its operations in fewer states while continuing its geographic and economic market diversity and maintaining or increasing its current revenue and cash flow. CLUSTERING OF CABLE SYSTEM PROPERTIES. Management plans to continue its acquisition strategy by pursuing opportunities to purchase cable television systems in the Company's existing DMAs as well as by entering new DMAs, if and when attractive acquisition opportunities become available. In addition to opportunities to acquire systems, management expects to pursue opportunities to exchange certain of its systems for other cable television properties with both TCI and other cable operators, to further facilitate the Company's clustering strategy, and to concentrate in fewer states. REBUILD AND UPGRADE CABLE SYSTEMS. Through the upgrade of its cable plant, including the utilization of addressable technology, fiber optic cable and digital compression, the Company seeks to benefit from providing additional tiers of programming and from the further development of advertising, pay-per-view and home shopping services, as well as possible future services such as Internet access, video-on-demand and other interactive services. Through a significant capital expenditure program, the Company plans to increase this channel capacity in most of its clusters by deploying fiber optic cable, digital compression or both. However, many of the Falcon Systems currently have almost no available channel capacity with which to add new channels or to further expand pay-per-view offerings to customers. See "Risk Factors--Lack of Available Channel Capacity for New Channels or Expanded Services." MAXIMIZE REVENUES AND CASH FLOW MARGINS. The Company seeks to maximize revenues by increasing subscriptions to basic, expanded basic, and other tiers of satellite services and premium programming services through a combination of innovative marketing programs, an emphasis on customer service and active community relations. As a result of the Company's success in facilitating revenue growth, combined with operating efficiencies generated by the Company's clustering strategy, economies of scale, volume discounts for cable programming and decentralized management structure, the Company believes its operating cash flow margins have been and continue to be among the highest in the cable television industry. The Company has, however, historically reported net losses. See "Risk Factors--Substantial Leverage; History of Net Losses." BENEFIT FROM PARTNERSHIP WITH TCI. The Company expects that it will derive numerous operational synergies from its partnership with TCI, including increased concentration of cable systems, purchasing discounts and other economies arising from more streamlined management of Company assets and those assets contributed by TCI. The Company will also benefit from the expertise and valuable industry knowledge of TCI's Leo J. Hindery, Jr. and William R. Fitzgerald, who will join New Falcon's Advisory Committee upon consummation of the TCI Transaction. 2 THE TCI TRANSACTION On December 30, 1997, the Company entered into a definitive agreement with TCI to consolidate substantially all of the Falcon Systems and all of the TCI Systems into New Falcon, a newly organized holding company. Following the consummation of the TCI Transaction, the Company will own approximately 53% and TCI will own approximately 47% of the equity of New Falcon, subject to possible adjustment pursuant to the Contribution Agreement. FHGLP will serve as the managing general partner of New Falcon, and FHGLP will separately retain its ownership interests (ranging from 0.5% to 1.0%) in the Enstar Systems, as well as certain other non-operating assets. Under the terms of the TCI Transaction, TCI will contribute certain cable television systems serving approximately 293,000 basic subscribers in small and medium-sized markets in California, Oregon, Washington, Missouri and Alabama. As adjusted for the TCI Transaction, the concentration of the Company's subscribers will increase to 69% in these five states, resulting in increased capital, personnel, marketing and advertising sales efficiencies. Additionally, the Company's increased concentration will provide greater critical mass to launch new services and enhance revenue opportunities. The Company plans to improve and integrate the TCI Systems through the consolidation of certain headends, the streamlining of management and the leveraging of economies of scale for marketing and advertising promotions. Giving pro forma effect to the consummation of the TCI Transaction, certain subscriber and operating data for the Company as of and for the three months ended March 31, 1998 are as follows:
PRO FORMA AT MARCH 31, 1998(1) -------------------------------------------------- FALCON SYSTEMS(2) TCI SYSTEMS NEW FALCON SYSTEMS ---------------- ------------ ------------------ Homes passed................................................. 1,118,735 438,950 1,557,685 Basic subscribers............................................ 681,734 293,266 975,000 Basic penetration............................................ 60.9% 66.8% 62.6% Basic subscribers per headend................................ 2,738 6,817 3,339
PRO FORMA THREE MONTHS ENDED MARCH 31, 1998(1) -------------------------------------------------- FALCON SYSTEMS(2) TCI SYSTEMS NEW FALCON SYSTEMS ---------------- ------------ ------------------ (IN THOUSANDS OF DOLLARS, EXCEPT PER SUBSCRIBER DATA) Total revenues............................................... $ 75,476 $ 30,071 $ 105,547 Operating loss............................................... $ (809) $ (5,347) $ (6,156) Net loss..................................................... $ (25,974) $ (11,527) $ (37,501) EBITDA(3).................................................... 38,610 11,525 50,135 EBITDA margin................................................ 51.2% 38.3% 47.5% Average monthly revenue per basic subscriber................. $ 36.51 $ 34.20 $ 35.82 Average monthly EBITDA per basic subscriber.................. 18.88 13.10 17.14
- ------------------------ (1) See "Selected Consolidated Financial Data" and "Pro Forma Condensed Combined Financial Data." (2) Includes Falcon Classic (as defined) and Falcon Video systems, but excludes the Enstar Systems. Substantially all the Falcon Classic systems were acquired in March 1998, and the remaining system was acquired in July 1998. The Falcon Video systems are currently managed by FHGLP as part of the Affiliated Systems, and Falcon Video will become an Owned Subsidiary following consummation of the TCI Transaction. The Enstar Systems had approximately 95,000 basic subscribers as of March 31, 1998, and the Company will continue to manage the Enstar Systems following consummation of the TCI Transaction. (3) EBITDA is calculated as operating income before depreciation and amortization. See footnote (6) to "Selected Consolidated Financial Data." Upon consummation of the TCI Transaction, it is contemplated that FHGLP's obligations under the Debentures will be assumed by New Falcon, which will be substituted for FHGLP as an obligor thereunder. FHGLP commenced on April 20, 1998 an offer to purchase (the "Notes Tender") all of the $282.2 million aggregate principal amount of the Company's outstanding 11% Senior Subordinated Notes 3 due 2003 (the "Notes"). The Notes Tender expired on May 18, 1998, and FHGLP repurchased approximately $247.8 million aggregate principal amount of the Notes on May 19, 1998 pursuant to the terms of the Notes Tender. The Company will redeem the remaining outstanding Notes prior to October 15, 1998 in accordance with the redemption provisions of the indenture governing the Notes. See "Description of Certain Indebtedness--11% Senior Subordinated Notes due 2003." If the TCI Transaction is consummated before all of the Notes have been redeemed, New Falcon will initially assume (subject to a subsequent assumption by New Falcon II, as described below) the rights and obligations of FHGLP under the Notes. In addition, New Falcon will assume certain other FHGLP and TCI indebtedness. See "Use of Proceeds" and "Capitalization." On June 30, 1998, the Company entered into a new $1.5 billion senior bank credit agreement (the "New Credit Facility"), which provides for three committed credit facilities (one revolving credit facility and two term loans) and one uncommitted supplemental credit facility (the terms of which will be negotiated at the time the Company makes a request to draw on such facility). See "Description of Certain Indebtedness--New Credit Facility." The Owned Subsidiaries (as defined), other than Falcon Video, are the initial borrowers under the New Credit Facility. Immediately prior to the TCI Closing (as defined), Falcon Video will use proceeds from borrowings under the New Credit Facility to satisfy in part its obligations under certain financing notes. Upon the TCI Closing, the Company will use proceeds from additional borrowings under the New Credit Facility to refinance any other senior indebtedness of the Company, including without limitation certain existing senior indebtedness of Falcon Video, the initial borrowings of Falcon Video under the New Credit Facility, and the indebtedness of TCI to be assumed by New Falcon at the TCI Closing. See "The TCI Transaction." The consummation of the TCI Transaction is subject to, among other things, the satisfaction of customary closing conditions and the receipt of certain third-party and governmental approvals, including the consent of franchising authorities. Although there can be no assurances that such closing conditions will be satisfied or that the TCI Transaction will be consummated, management presently anticipates that the TCI Transaction will be consummated during the third quarter of 1998. See "Risk Factors--Conditions of Closing the TCI Transaction." Immediately following the consummation of the TCI Transaction, New Falcon will contribute substantially all of its assets to Falcon Cable Communications, LLC ("New Falcon II"), a newly formed limited liability company wholly owned by New Falcon. New Falcon II will assume certain indebtedness, including any Notes that remain outstanding and any indebtedness outstanding under the New Credit Facility, but excluding the Debentures. New Falcon II will thereupon be substituted for New Falcon as the obligor under the Notes and become the sole borrower under the New Credit Facility. New Falcon II will then contribute the TCI Systems to the Owned Subsidiaries. See "Risk Factors--Dependence on Receipt of Funds From Operating Subsidiaries to Service Debentures; Structural Subordination." As part of the TCI Transaction, FHGLP will redeem a specified portion of the partnership interests in FHGLP currently held by certain of the non-management limited partners of FHGLP (the "Redeemed Partners") in exchange for a portion of FHGLP's limited partnership interest in New Falcon (such portion being referred to herein as the "New Falcon Interests"). Following the redemption, TCI will purchase the New Falcon Interests from the Redeemed Partners for cash in the approximate aggregate amount of $154.7 million. See "Risk Factors--Conditions of Closing the TCI Transaction" and "--Obligations of FHGLP to Redeem Limited Partnership Interests." New Falcon is a California limited partnership that will operate under the name "Falcon Communications, L.P.," and all of the systems owned and operated by New Falcon will operate under the names "Falcon" or "Falcon Cable TV." On June 24, 1998, AT&T Corp. and Tele-Communications, Inc. announced that they have entered into an agreement under which AT&T Corp. would acquire Tele-Communications, Inc. by merger. Although there can be no assurances as to whether this merger will be consummated, the Company does not anticipate that this proposed merger will have any material adverse effect upon the consummation of the TCI Transaction. 4 The following chart illustrates in summary form the structure of FHGLP, New Falcon and certain affiliated entities upon consummation of the TCI Transaction (including the assumption by New Falcon of all of the obligations of FHGLP under the Debentures offered hereby). [ORGANIZATIONAL CHART] (1) FHGLP will retain its ownership interests (ranging from 0.5% to 1.0%) in the Enstar Systems, as well as certain other non-operating assets. New Falcon will provide management services to, and receive management fees and reimbursement of expenses from, the Enstar Systems. (2) Subject to possible adjustment pursuant to the Contribution Agreement. (3) On May 19, 1998, FHGLP repurchased approximately $247.8 million aggregate principal amount of the outstanding Notes and prior to October 15, 1998, FHGLP will redeem the approximately $34.4 million remaining outstanding Notes. (4) Includes the cable television systems acquired from Falcon Classic. (5) These groups are for illustrative purposes only. The systems are, or will be, owned by the Owned Subsidiaries. 5 RISK FACTORS Ownership of the Debentures involves certain risks, including that the Company is, and will continue to be, highly leveraged, that the Company has a history of net losses, that the Debentures will be effectively subordinated to all future and existing indebtedness of the Issuers' subsidiaries and that FHGLP may be required to repurchase certain limited partnership interests in the future. These and other risks are described in detail under "Risk Factors," and holders of the Old Debentures should consider carefully the risks described therein, as well as the other information contained in this Prospectus, before tendering the Old Debentures for the Exchange Debentures. RECENT DEVELOPMENTS FHGLP commenced the Notes Tender on April 20, 1998, and the Notes Tender expired on May 18, 1998. FHGLP repurchased approximately $247.8 million aggregate principal amount of the Notes on May 19, 1998 pursuant to the terms of the Notes Tender with borrowings under the Company's prior senior bank credit agreement (the "Bank Credit Agreement"). Under the indenture governing the Notes, FHGLP has the right to redeem all or a portion of the Notes on or after September 15, 1998 at 105.5% of the outstanding principal amount thereof, plus accrued interest, to the redemption date. The Company will redeem the remaining approximately $34.4 million aggregate principal amount of outstanding Notes prior to October 15, 1998 in accordance with the redemption provisions of the indenture governing the Notes (the "Notes Redemption"). The Company will use borrowings under the New Credit Facility to effect the Notes Redemption. In addition, in connection with the Notes Tender, FHGLP solicited and received sufficient consents to amend the indenture governing the Notes to eliminate certain covenants and events of default. See "Description of Certain Indebtedness--11% Senior Subordinated Notes due 2003." On June 30, 1998, the Company entered into the New Credit Facility. See "Description of Certain Indebtedness--New Credit Facility." The Company borrowed approximately $425.8 million under the New Credit Facility on June 30, 1998, approximately $329 million of which was used to repay the remaining indebtedness outstanding under the Bank Credit Agreement. The remaining proceeds resulted in an excess cash balance of approximately $90 million (after payment of approximately $4.5 million in fees and expenses related to the New Credit Facility). 6 THE OFFERING Old Debentures: The Old Debentures were sold by the Issuers on April 3, 1998 to the Placement Agents pursuant to a Placement Agreement, dated April 3, 1998 (the "Placement Agreement"), among the Issuers and the Placement Agents. The Placement Agents subsequently placed the Old Debentures with (i) qualified institutional buyers pursuant to Rule 144A under the Securities Act, (ii) other institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and (iii) qualified buyers outside the United States in reliance upon Regulation S under the Securities Act. Registration Rights Agreement: Pursuant to the Placement Agreement, the Issuers and the Placement Agents entered into a Registration Rights Agreement, dated as of April 3, 1998 (the "Registration Rights Agreement"), which grants the holders of the Old Debentures certain exchange and registration rights. The Exchange Offer is intended to satisfy such exchange rights, which terminate upon the consummation of the Exchange Offer. THE EXCHANGE OFFER Securities Offered: $375,000,000 aggregate original principal amount of 8.375% Series B Senior Debentures due 2010 (the "Senior Exchange Debentures") and $435,250,000 aggregate original principal amount at maturity of 9.285% Series B Senior Discount Debentures due 2010 (the "Senior Discount Exchange Debentures"); PROVIDED, HOWEVER, that any time prior to April 15, 2003, the Issuers may elect to commence accrual of cash interest on the Senior Discount Exchange Debentures on any interest payment date, in which case the outstanding principal amount at maturity of a Senior Discount Debenture will be reduced to the Accreted Value of such Debenture as of such interest payment date and interest will be payable semiannually in cash on each interest payment date thereafter. The Exchange Offer: $1,000 original principal amount of Senior Exchange Debentures in exchange for each $1,000 original principal amount of Old Senior Debentures, and $1,000 original principal amount at maturity of Senior Discount Exchange Debentures in exchange for each $1,000 original principal amount at maturity of Old Senior Discount Debentures.The Issuers will issue the Exchange Debentures on or promptly after the Expiration Date. Based upon interpretations by the staff of the Commission set forth in certain no-action letters issued to third parties (including EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter (April 13, 1989); MORGAN STANLEY & CO. INC., SEC No-Action Letter (June 5, 1991); and SHEARMAN & STERLING, SEC No-Action Letter (July 2, 1993)), the Issuers believe that Exchange Debentures issued pursuant to the Exchange Offer in exchange for Old Debentures may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder that is an "affiliate" of the Issuers within the meaning of
7 Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Debentures are acquired in the ordinary course of such holder's business and that at the time of the consummation of the Exchange Offer such holder has no arrangement or understanding with any person to partici- pate in the distribution of such Exchange Debentures. Any Participating Broker-Dealer that acquired Old Debentures for its own account may be a statutory underwriter. Each Participating Broker-Dealer that receives Exchange Debentures for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by any person subject to the prospectus delivery requirements of the Securities Act (other than an Excluded Participating Broker Dealer). The Issuers have agreed that, for a period of up to 180 days after the consummation of the Exchange Offer (subject to extension under certain circumstances), they will use their reasonable best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement this Prospectus in order to permit this Prospectus to be lawfully delivered by all persons subject to the prospectus delivery requirements of the Securities Act (provided that, as set forth in the Letter of Transmittal, such persons shall have expressed that they may be subject to such requirements and have undertaken to use their reasonable best efforts to notify Holdings when they are no longer subject to such requirements). See "Plan of Distribution." Any holder who is an "affiliate" of the Issuers (within the meaning of Rule 405 under the Securities Act), who does not acquire the Exchange Debentures in the ordinary course of business or who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Debentures could not rely on the position of the staff of the Commission enunciated in the above-mentioned no-action letters and, in the absence of an exemption therefrom, must comply with the regis- tration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Issuers. Expiration Date: 5:00 p.m., New York City time, on , 1998 unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended.
8 Principal Amount of and Accreted Value on the Exchange Debentures and the Old Debentures: Each Senior Exchange Debenture will have a principal amount equal to that of the Old Senior Debenture for which it is exchanged, and each Senior Discount Exchange Debenture will have an Accreted Value equal to that of the Old Senior Discount Debenture for which it is exchanged. Conditions to the Exchange Offer: The Exchange Offer is subject to certain customary conditions, which may be waived by the Issuers. See "The Exchange Offer-- Conditions." Procedures for Tendering Old Debentures: Each holder of Old Debentures wishing to accept the Exchange Offer must complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof, or transmit an Agent's Message (as defined) in connection with a book-entry transfer, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, or such Agent's Message, together with the Old Debentures and any other required documentation to the Exchange Agent (as defined) at the address set forth herein. By executing the Letter of Transmittal or Agent's Message, each holder will be deemed to represent to the Issuers that, among other things, the Exchange Debentures acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Debentures, whether or not such person is the holder, that neither the holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Debentures and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Issuers. See "The Exchange Offer--Purpose and Effect of the Exchange Offer" and "--Procedures for Tendering." Untendered Old Debentures: Following the consummation of the Exchange Offer, holders of Old Debentures eligible to participate but who do not tender their Old Debentures will not have any further exchange rights and such Old Debentures will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Old Debentures could be adversely affected. Consequences of Failure to Exchange: The Old Debentures that are not exchanged pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Old Debentures may be resold only (i) to the Issuers, (ii) pursuant to Rule 144A or Rule 144 under the Securities Act or pursuant to some other exemption under the Securities Act, (iii) outside the United States to a foreign person pursuant to the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act. See "The Exchange Offer--Consequences of Failure to Exchange."
9 Shelf Registration Statement: If (i) the Issuers determine that the Exchange Offer would violate applicable law or the applicable interpretations of the Commission, (ii) the Exchange Offer is not for any other reason consummated by September 30, 1998 or (iii) the Exchange Offer has been completed and, in the opinion of counsel for the Placement Agents, a registration statement must be filed and a prospectus must be delivered by the Placement Agents in connection with any offer or sale of the Exchange Debentures, the Issuers shall file a shelf registration statement (the "Shelf Registration Statement") covering the Old Debentures. The Issuers have agreed to use their best efforts to maintain the effectiveness of the Shelf Registration Statement until the date which is two years from the date of issuance of the Old Debentures. Special Procedures for Beneficial Owners: Any beneficial owner whose Old Debentures are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Old Debentures, either make appropriate arrangements to register ownership of the Old Debentures in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Guaranteed Delivery Procedures: Holders of Old Debentures who wish to tender their Old Debentures and whose Old Debentures are not immediately available or who cannot deliver their Old Debentures, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Old Debentures according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures." Withdrawal Rights: Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Acceptance of Old Debentures and Delivery of Exchange Debentures: The Issuers will accept for exchange any and all Old Debentures which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Debentures issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Federal Income Tax Considerations: The exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Federal Income Tax Considerations." Use of Proceeds: There will be no cash proceeds to the Issuers from the exchange pursuant to the Exchange Offer. Exchange Agent: U.S. Trust Company of New York
10 THE EXCHANGE DEBENTURES General: The form and terms of the Exchange Debentures are the same as the form and terms of the Old Debentures (which they replace) except that (i) the Exchange Debentures have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, and (ii) the holders of Exchange Debentures will not be entitled to certain rights under the Registration Rights Agreement, including the provisions providing for an increase in the interest rate on the Old Debentures in certain circumstances relating to the timing of the Exchange Offer, which rights will terminate when the Exchange Offer is consummated. See "The Exchange Offer--Purpose and Effect of the Exchange Offer." The Exchange Debentures will evidence the same debt as the Old Debentures and will be entitled to the benefits of the Indenture. See "Description of the Debentures." Issuers: The Exchange Debentures will be the joint and several obligations of FHGLP and FFC. Upon the consummation of the TCI Transaction, FHGLP's obligations under the Exchange Debentures will be assumed by New Falcon, which will be substituted for FHGLP as an obligor under the Exchange Debentures. Senior Exchange Debentures: Maturity Date: April 15, 2010. Interest Payment Dates: Cash interest on the Senior Debentures will accrue at a rate of 8.375% per annum and will be payable semi-annually in arrears on April 15 and October 15 of each year until maturity, commencing October 15, 1998. TCI Contribution: If the TCI Contribution is not consummated on or before June 30, 1999, the interest rate on the Senior Debentures will thereafter increase by 0.75% per annum; PROVIDED that such additional interest will no longer be payable if the TCI Contribution is consummated on or before December 31, 1999. Senior Discount Debentures: Maturity Date: April 15, 2010. Accreted Value and Interest: The initial Accreted Value of the Senior Discount Debentures will be $633.29 per $1,000 principal amount at maturity. The Senior Discount Debentures will accrete at an annual rate of 9.285% (computed on a semiannual bond equivalent basis) based on the initial Accreted Value, calculated from the Issue Date. Cash interest will not accrue on the Senior Discount Debentures prior to April 15, 2003; PROVIDED, HOWEVER, that at any time prior to April 15, 2003, the Issuers may elect to commence the accrual of cash interest on any Semiannual Accrual Date (as defined), in which case the outstanding principal amount at maturity of each Senior Discount Debenture will be reduced to the Accreted Value of such Senior Discount
11 Debenture as of such Semiannual Accrual Date and cash interest will be payable on such Senior Discount Debenture on each interest payment date thereafter. Commencing on April 15, 2003, cash interest on the Senior Discount Debentures will accrue at a rate of 9.285% per annum and will be payable semiannually in arrears on April 15 and October 15 of each year until maturity, commencing October 15, 2003. Original Issue Discount: Each Senior Discount Debenture is being offered at an original issue discount for federal income tax purposes. Thus, although cash interest is not expected to accrue on the Senior Discount Debentures prior to April 15, 2003, original issue discount (I.E., the difference between the stated redemption price at maturity and the issue price of the Senior Discount Debentures) will accrete from the issue date of the Senior Discount Debentures until April 15, 2003 and will be includable as interest income periodically in a holder's gross income for federal income tax purposes in advance of receipt of the cash payments to which the income is attributable. See "Federal Income Tax Considera- tions--Original Issue Discount." TCI Contribution: If the TCI Contribution is not consummated on or before June 30, 1999, (i) from July 1, 1999 until April 15, 2003, the Company will pay cash interest on the Senior Discount Debentures (in addition to accretion of principal) equal to 0.75% per annum of the then outstanding Accreted Value of Senior Discount Debentures and (ii) from April 15, 2003 until the maturity of the Senior Discount Debentures, the interest rate on the Senior Discount Debentures will increase by 0.75% per annum; PROVIDED that such additional interest will no longer be payable if the TCI Contribution is consummated on or before December 31, 1999. Additional Terms of the Debentures: Ranking: The Debentures will be joint and several senior unsecured obligations of the Issuers ranking PARI PASSU in right of payment with all other existing and future senior unsecured obligations of the Issuers. FHGLP is a holding company that has no material operations and conducts substantially all of its business through subsidiaries. As a result, FHGLP's ability to make interest and principal payments when due to holders of the Debentures is dependent upon receipt of sufficient funds from FHGLP's subsidiaries. The Debentures will be the obligations of the Issuers only, and the Issuers' subsidiaries will not have any obligation to pay any amounts due under the Debentures. Therefore, the Debentures will be effectively subordinated to all existing and future liabilities of the Issuers' subsidiaries. As of March 31, 1998, after giving pro forma effect to the Offering, the refinancing of the Bank Credit Agreement with proceeds from the New Credit Facility, the repurchase of all of the Debentures pursuant to the Debentures Tender and the consummation of the TCI Transaction, (i) the Issuers (excluding indebtedness of their
12 subsidiaries) would not have had any indebtedness outstanding other than the Debentures and (ii) the Issuers' subsidiaries would have had $936.5 million of indebtedness outstanding, all of which would have been effectively senior to the Debentures. In addition, subject to certain limitations, the Indenture permits the Company to incur additional indebtedness that would be effectively senior to the Debentures. Optional Redemption: The Debentures will be redeemable, at the Issuers' option, in whole or in part, on or after April 15, 2003, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to April 15, 2001, the Issuers may redeem up to 35% of the aggregate principal amount or Accreted Value, as applicable, of the Debentures with the net cash proceeds of one or more sales by the Company of its Capital Stock (as defined) (other than Redeemable Capital Stock (as defined)) at a redemption price, in the case of Senior Debentures, equal to 108.375% of the principal amount thereof and, in the case of Senior Discount Debentures, equal to 109.285% of the Accreted Value thereof, in each case plus accrued and unpaid interest, if any, to the date of redemption. Change of Control: In the event of a Change of Control, the Issuers must commence an offer to purchase all of the Debentures then outstanding at a purchase price equal to 101% of the principal amount thereof in the case of Senior Debentures, and 101% of the Accreted Value thereof in the case of Senior Discount Debentures, in each case plus accrued interest, if any, to the payment date. There can be no assurance, however, that the Company will have sufficient funds to pay the purchase price for all of the Debentures that might be delivered by holders in connection with a Change of Control. Certain Covenants: The Indenture will contain certain covenants that will restrict the ability of the Issuers and certain of their subsidiaries to, among other things, (i) incur certain indebtedness, (ii) make certain restricted payments, (iii) create liens, (iv) pay dividends and make other distributions, (v) enter into certain transactions with affiliates or (vi) consummate certain mergers, consolidations or transfers.
For additional information concerning the Debentures, see "Description of the Debentures." 13 SUMMARY CONSOLIDATED FINANCIAL DATA Set forth below is summary consolidated financial data of the Company for each of the years in the three-year period ended December 31, 1997 and for the three-month periods ended March 31, 1997 and 1998. This data should be read in conjunction with the Company's historical consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The summary consolidated financial data for the three-month periods ended March 31, 1997 and 1998 have been derived from unaudited consolidated financial statements of the Company, which in the opinion of management include all adjustments (consisting of normal recurring adjustments) which are necessary to present fairly the results of operations and financial position for the periods and at the date presented. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. The unaudited pro forma data give effect to (i) the Offering, (ii) the refinancing of the Bank Credit Agreement with proceeds from the New Credit Facility, (iii) the repurchase of all of the Notes pursuant to both the Notes Tender and the Notes Redemption, and (iv) the acquisition (the "Falcon Classic Acquisition") of certain cable television systems from Falcon Classic Cable Income Properties, L.P. ("Falcon Classic"), as if such transactions had been consummated on January 1 of the respective periods presented in the case of the operations statement data and other operating data and on March 31, 1998 in the case of the balance sheet data. The unaudited New Falcon pro forma data give effect to all of the transactions described in the preceding sentence and to the TCI Transaction, including the consolidation of systems currently owned by Falcon Video Communications, L.P. ("Falcon Video"), as if such transactions had been consummated on January 1 of the respective periods presented in the case of the operations statement data and other operating data and on March 31, 1998 in the case of the balance sheet data.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- NEW FALCON PRO FORMA PRO FORMA 1995(1) 1996(1) 1997 1997(2) 1997(2) ----------- ------------ ---------- ------------ ------------ (IN THOUSANDS OF DOLLARS) OPERATIONS STATEMENT DATA Revenues.............. $ 151,208 $ 217,320 $ 255,886 $ 274,894 $ 424,994 Costs and expenses.... (71,652) (97,180) (122,080) (132,194) (215,719) Depreciation and amortization........ (54,386) (100,415) (118,856) (135,054) (224,617) ----------- ------------ ---------- ------------ ------------ Operating income (loss).............. 25,170 19,725 14,950 7,646 (15,342) Interest expense, net(3).............. (57,777) (71,602) (79,137) (85,894) (119,925) Equity in net income (loss) of investee partnerships........ (5,705) (44) 443 447 447 Other income, net..... 13,077(4) 814 885 674 1,950 Income tax benefit.... -- 1,122 2,021 2,021 2,021 ----------- ------------ ---------- ------------ ------------ Loss before extraordinary item................ $ (25,235) $ (49,985) $ (60,838) $ (75,106)(5) $(130,849)(5) ----------- ------------ ---------- ------------ ------------ ----------- ------------ ---------- ------------ ------------ OTHER OPERATING DATA EBITDA(6)............. $ 79,556 $ 120,140 $ 133,806 $ 142,700 $ 209,275 EBITDA margin......... 52.6% 55.3% 52.3% 51.9% 49.2% Total debt to EBITDA.............. 7.01x(7) 6.62x(7) 6.81x 7.22x 7.50x Net cash provided by operating activities.......... $ 43,162 $ 90,631 $ 79,537 Net cash used in investing activities.......... (22,674) (284,247) (76,287) Net cash provided by (used in) financing activities.......... (15,906) 192,199 (2,966) Capital expenditures(8)..... 37,149 57,668 76,323 $ 81,155 $ 99,488 Deficiency of earnings to fixed charges(9).......... (25,254) (51,252) (63,302) (77,574) (133,317) THREE MONTHS ENDED MARCH 31, --------------------------------------------- NEW FALCON PRO FORMA PRO FORMA 1997 1998(11) 1998(2) 1998(2) --------- --------- --------- --------- OPERATIONS STATEMENT DATA Revenues.............. $ 63,984 $ 64,557 $ 68,136 $105,547 Costs and expenses.... (29,474) (31,243) (33,146) (55,412) Depreciation and amortization........ (29,793) (31,079) (33,900) (56,291) --------- --------- --------- --------- Operating income (loss).............. 4,717 2,235 1,117 (6,156) Interest expense, net(3).............. (20,384) (20,487) (21,408) (30,433) Equity in net income (loss) of investee partnerships........ (71) (248) (226) (226) Other income, net..... (163) (774) (1,110) (1,051) Income tax benefit.... 566 365 365 365 --------- --------- --------- --------- Loss before extraordinary item................ $ (15,335) $(18,909) $(21,262) $(37,501) --------- --------- --------- --------- --------- --------- --------- --------- OTHER OPERATING DATA EBITDA(6)............. $ 34,510 $ 33,314 $ 35,017 $ 50,135 EBITDA margin......... 53.9% 51.6% 51.4% 47.5% Total debt to EBITDA.............. 6.25x 7.51x 7.48x 7.91x Net cash provided by operating activities.......... $ 15,322 $ 2,729 Net cash used in investing activities.......... (10,941) (95,318) Net cash provided by (used in) financing activities.......... (7,155) 89,834 Capital expenditures(8)..... 10,624 18,021 $ 19,508 $ 24,111 Deficiency of earnings to fixed charges(9).......... (15,940) (19,319) (21,672) (37,911)
14
AS OF MARCH 31, 1998 AS OF DECEMBER 31, 1997 ----------------------------------------- ------------------------------- NEW FALCON 1995(1) 1996(1) 1997 ACTUAL PRO FORMA(2) PRO FORMA(2) --------- --------- --------- ----------- ------------- ------------- (IN THOUSANDS OF DOLLARS) BALANCE SHEET DATA Cash and cash equivalents............ $ 15,050 $ 13,633 $ 13,917 $ 11,162 $ 5,000 $ 5,000 Total assets......................... 585,258 774,323 740,358 800,326 819,772 1,457,972 Total debt........................... 669,019 885,786 911,221 1,001,054 1,047,715 1,587,157 Redeemable partners' equity(10)...... 271,902 271,902 171,373 171,373 171,373 75,000 Partners' deficit.................... (411,681) (456,499) (416,755) (435,664) (466,778) (281,358)
- ------------------------------ (1) The December 31, 1995 consolidated balance sheet data include the assets and liabilities of Falcon First, Inc. ("Falcon First"), which were acquired on December 28, 1995. The consolidated statement of operations data for the year ended December 31, 1995 exclude the operations of Falcon First due to the proximity of the acquisition date to the end of the year, except that management fees from Falcon First of $1.6 million are included in the consolidated statement of operations data. On July 12, 1996, FHGLP acquired the assets of Falcon Cable Systems Company ("FCSC") and, accordingly, the results of the FCSC systems have been included from July 12, 1996. Management fees and reimbursed expenses received in 1996 by FHGLP from FCSC prior to July 12, 1996 amounted to $1.5 million and $1.0 million, respectively, and are included in the 1996 consolidated statement of operations data. The amounts attributable to management fees and reimbursed expenses received by FHGLP from FCSC in 1995 were $2.6 million and $2.0 million, respectively. (2) The unaudited pro forma financial statements and operating data may not be indicative of the results that actually would have occurred if the transactions described above had been completed and in effect for the periods indicated or the results that may be obtained in the future. The unaudited pro forma financial and operating data presented should be read in conjunction with the audited historical financial statements and related notes thereto of FHGLP and the TCI Systems and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. See "Pro Forma Condensed Combined Financial Data." (3) Interest expense, net includes payment-in-kind interest expense amounting to $27.1 million, $26.6 million and $20.4 million for the years ended December 31, 1995, 1996 and 1997, respectively, and $7.0 million for the three months ended March 31, 1997. There was no payment-in-kind interest expense for the three months ended March 31, 1998. See Note 7 to FHGLP's consolidated financial statements. (4) Other income (expense), net in 1995 includes a gain on sale of marketable securities ($13.3 million). (5) The pro forma operations statement data do not reflect the impact of certain non-recurring expenses associated with the transactions. The FHGLP pro forma operations statement data do not include the write-off, as an extraordinary charge, of deferred loan costs of $11.7 and $11.3 million, respectively, at December 31, 1997 and March 31, 1998, related to the extinguishment of the Bank Credit Agreement and the repurchase of the Notes, as well as an approximate $19.8 million in premiums and costs related to the repurchase and redemption of the Notes. Additionally, the New Falcon pro forma operations statement data do not include a one-time charge of approximately $6.6 million in compensation expense related to the payment to certain FHGLP employees of amounts due under the Incentive Plan (as defined), as required by the Contribution Agreement. The pro forma balance sheet data reflect the pro forma effect of these adjustments. (6) EBITDA is calculated as operating income before depreciation and amortization. Based on its experience in the cable television industry, FHGLP believes that EBITDA and related measures of cash flow serve as important financial analysis tools for measuring and comparing cable television companies in several areas, such as liquidity, operating performance and leverage. In addition, the covenants in the primary debt instruments of FHGLP use EBITDA-derived calculations as a measure of financial performance. EBITDA is not a measurement determined under generally accepted accounting principles ("GAAP") and does not represent cash generated from operating activities in accordance with GAAP. EBITDA should not be considered by the reader as an alternative to net income as an indicator of FHGLP's financial performance or as an alternative to cash flows as a measure of liquidity. In addition, the Company's definition of EBITDA may not be identical to similarly titled measures used by other companies. (7) Total debt to EBITDA has been computed on a pro forma basis for 1995 to include the EBITDA of Falcon First of $15.9 million, making the combined 1995 EBITDA $95.4 million. Similarly, total debt to EBITDA has also been computed on a pro forma basis for 1996 to include the EBITDA of FCSC of $13.6 million, making the combined 1996 EBITDA $133.8 million. Without these pro forma adjustments, 1995 data would include the debt incurred to acquire Falcon First, but would exclude Falcon First's EBITDA resulting in a debt to EBITDA historical ratio of 8.41x compared to a pro forma ratio of 7.01x, and 1996 data would include the debt to acquire FCSC, but would exclude its EBITDA for the period January 1, 1996 through July 11, 1996 resulting in a total debt to EBITDA historical ratio of 7.37x compared to a pro forma ratio of 6.62x. (8) Excluding acquisitions of cable television systems. (9) For purposes of this computation, earnings are defined as income (loss) before income taxes and fixed charges, as adjusted for earnings and distributions of less than 50% owned companies accounted for under the equity method. Fixed charges are defined as the sum of (i) total interest costs (including an estimated interest component of rental expenses) and (ii) amortization of debt discount and expense. (10) FHGLP's Third Amended and Restated Partnership Agreement, dated December 28, 1995 (the "Existing FHGLP Partnership Agreement"), provides that certain limited partners of FHGLP have various liquidity rights, which will be deferred, modified and reduced upon consummation of the TCI Transaction. See "Risk Factors--Obligations of FHGLP to Redeem Limited Partnership Interests," "Description of the Partnership Agreements" and Note 2 to FHGLP's consolidated financial statements. (11) In March, 1998, FHGLP acquired substantially all of the assets of Falcon Classic and, accordingly, the results of these acquired systems have been included from the date of their acquisition. Management fees and reimbursed expenses received during the three months ended March 31, 1998 by FHGLP from Falcon Classic amounted to $190,000 and $114,000, respectively, and are included in the unaudited statement of operations data. The amounts attributable to management fees and reimbursed expenses received by FHGLP from Falcon Classic in 1997 were $1.3 million and $1.0 million, respectively. 15 SUMMARY SUBSCRIBER DATA The following table sets forth certain operating statistics for (i) the Owned Systems on a historical basis, (ii) the Owned Systems after giving pro forma effect to the Falcon Classic Acquisition and (iii) the Owned Systems after giving pro forma effect to the Falcon Classic Acquisition and the TCI Transaction, including the consolidation of systems currently owned by Falcon Video. Please refer to "Business-- Overview of the Falcon Systems" for the historical operating statistics of the Affiliated Systems and the Enstar Systems.
DECEMBER 31, ------------------------------------------------------------- NEW FALCON NEW FALCON PRO FORMA PRO FORMA PRO FORMA PRO FORMA MARCH 31, MARCH 31, MARCH 31, 1995(1) 1996(2) 1997 1997 1997 1998(8) 1998 1998 ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- (AT END OF PERIOD, EXCEPT AVERAGE DATA) Homes passed(3)........ 691,941 924,030 937,786 1,013,593 1,567,651 1,007,614 1,012,733 1,557,685 Basic subscribers(4)... 442,166 570,708 562,984 611,968 974,772 606,937 611,127 975,000 Basic penetration(5)... 63.9% 61.8% 60.0% 60.4% 62.2% 60.2% 60.3% 62.6% Premium service units(6)............. 186,477 203,679 165,960 181,569 308,485 183,234 183,990 305,363 Premium penetration(7)....... 42.2% 35.7% 29.5% 29.7% 31.6% 30.2% 30.1% 31.3% Average monthly revenue per basic subscriber........... $ 32.77 $ 34.22 $ 36.67 $ 36.52 $ 35.78 $ 36.56 $ 36.51 $ 35.82
- ------------------------------ (1) On December 28, 1995, the Company acquired all of the direct and indirect ownership interests in Falcon First that it did not previously own and, as a result, the systems of Falcon First became Owned Systems. On July 1, 1996, the Company sold certain of the Falcon First systems. As a result, comparisons of 1996 and 1995 to prior years must take these changes into account. At December 31, 1997, 1996 and 1995, respectively, Falcon First had approximately 97,549, 96,318 and 114,682 homes passed, 67,601, 68,212 and 77,258 basic subscribers and 22,230, 29,571 and 36,413 premium service units, respectively. At December 31, 1994, the corresponding totals for Falcon First were 113,403, 75,688 and 38,756, respectively. At July 1, 1996, the Falcon First systems that were sold had approximately 18,957 homes passed, 9,547 basic subscribers and 3,932 premium service units. (2) On July 12, 1996, the Company acquired the assets of FCSC, and, as a result, the systems of FCSC became Owned Systems. As a result, comparisons of 1996 to prior years must take this change into account. At December 31, 1997 and 1996, respectively, the FCSC systems had approximately 245,807 and 239,431 homes passed, 127,315 and 140,599 basic subscribers and 33,844 and 44,199 premium service units. At December 31, 1995 and 1994, the corresponding totals for the FCSC systems were 233,304 and 228,522 homes passed, 140,642 and 138,196 basic subscribers and 52,694 and 59,732 premium service units. (3) Homes passed refers to estimates by the Company of the approximate number of dwelling units in a particular community that can be connected to the distribution system without any further extension of principal transmission lines. Such estimates are based upon a variety of sources, including billing records, house counts, city directories and other local sources. (4) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts are included on a "basic customer equivalent" basis in which the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. (5) Calculated as basic subscribers as a percentage of homes passed. (6) Premium service units include only single channel services offered for a monthly fee per channel and do not include tiers of channels offered as a package for a single monthly fee. Prior to July 1, 1996, The Disney Channel was offered as a premium service. Effective July 1, 1996, it was offered as part of tiered services. As a result, the number of reported premium service units was reduced by this service offering change. The number of Disney Channel premium service units at June 30, 1996, December 31, 1995 and at December 31, 1994 were: Owned Systems 19,124, Affiliated Systems 7,060; Owned Systems 22,613, Affiliated Systems 18,970; and Owned Systems 21,309, Affiliated Systems 29,641, respectively. (7) Calculated as premium service units as a percentage of basic subscribers. A customer may purchase more than one premium service, each of which is counted as a separate premium service unit. This ratio may be greater than 100% if the average customer subscribes for more than one premium service. (8) In March 1998, FHGLP acquired substantially all of the assets of Falcon Classic. The number of homes passed, basic subscribers and premium service units acquired, which are included in the March 31, 1998 totals, were 70,771, 45,816, and 14,206, respectively. 16 RISK FACTORS OWNERSHIP OF THE DEBENTURES INVOLVES A HIGH DEGREE OF RISK. HOLDERS OF THE OLD DEBENTURES SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE TENDERING THE OLD DEBENTURES IN EXCHANGE FOR EXCHANGE DEBENTURES. SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES The Company is, and will continue to be, highly leveraged. As of March 31, 1998, after giving pro forma effect to the Offering, the refinancing of the Bank Credit Agreement with proceeds from the New Credit Facility, the repurchase of all of the Notes pursuant to both the Notes Tender and the Notes Redemption and the Falcon Classic Acquisition, the Company would have had approximately $1 billion of debt outstanding and a partners' deficit of $466.8 million. After giving additional pro forma effect to the TCI Transaction, New Falcon would have had approximately $1.6 billion of debt and a partners' deficit of $275.4 million. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the Indenture will allow the Company to incur additional indebtedness under certain circumstances. See "Description of the Debentures--Covenants." The degree to which the Company is leveraged could have important consequences to the holders of the Debentures, including, but not limited to, the following: (i) increasing the Company's vulnerability to adverse general economic and industry conditions; (ii) affecting the proportion of the Company's operating cash flow required to pay interest, principal and other amounts on indebtedness, thereby reducing the funds available for operations; (iii) impairing the Company's ability to obtain additional financing for future capital expenditures, acquisitions or other general corporate purposes; and (iv) because certain of the Company's indebtedness bears interest at variable rates, increasing the Company's vulnerability to fluctuations in interest rates. The Company reported net losses of $25.2 million, $50 million and $60.8 million for the years ended December 31, 1995, 1996 and 1997, respectively, and $18.9 million for the three-month period ended March 31, 1998. Substantial amounts of depreciation and amortization expense and interest expense totaling $112.2 million, $172 million, and $198 million for the years ended December 31, 1995, 1996 and 1997, respectively, and $51.6 million for the three-month period ended March 31, 1998 have contributed and will continue to contribute to the net losses experienced by the Company. Historically, cash generated from operating activities and borrowings has been sufficient to fund FHGLP's debt service, working capital obligations and capital expenditure requirements. The Company believes that it will continue to generate cash and obtain financing sufficient to meet such requirements. However, if the Company were unable to meet such requirements, the Company would have to consider refinancing its indebtedness or obtaining new financing. Although in the past the Company has been able both to refinance its indebtedness and to obtain new financing, there can be no assurance that the Company will be able to do so in the future or that, if the Company is able to do so, the terms available will be acceptable to the Company. In the event that the Company were unable to refinance its indebtedness or obtain new financing under these circumstances, the Company would likely have to consider various options, including the sale of certain assets to meet its required debt service, reduction of planned capital expenditures or negotiation with lenders to restructure applicable indebtedness. See "Selected Consolidated Financial Data," "Pro Forma Condensed Combined Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON RECEIPT OF FUNDS FROM OPERATING SUBSIDIARIES TO SERVICE DEBENTURES; STRUCTURAL SUBORDINATION As a holding company, FHGLP does not hold substantial assets other than its direct or indirect investments in and advances to its operating subsidiaries (the "Owned Subsidiaries"). As a result, 17 FHGLP's ability to make interest and principal payments when due to holders of the Debentures is dependent upon the receipt of sufficient funds from the Owned Subsidiaries. Immediately following the consummation of the TCI Transaction, New Falcon will contribute substantially all of its assets to New Falcon II (excluding the capital stock of FFC), subject to certain liabilities and indebtedness (estimated to be approximately $970.9 million in the aggregate as of March 31, 1998) to be assumed by New Falcon II, including the approximately $34.4 million aggregate principal amount Notes that remain outstanding after the Notes Tender and any indebtedness outstanding under the New Credit Facility, but excluding the Debentures. Thus, New Falcon II will be substituted as an obligor under the Notes (which the Company has agreed to redeem prior to October 15, 1998) and will become the sole borrower under the New Credit Facility. New Falcon will be substituted as an obligor under the Debentures and FFC will continue to be an obligor under the Debentures as a wholly owned subsidiary of New Falcon. In addition, the TCI Systems contributed to New Falcon in the TCI Transaction will be contributed by New Falcon II to the Owned Subsidiaries. As a result, New Falcon's ability to make interest and principal payments when due on the Debentures will be dependent on the receipt of sufficient funds from New Falcon II, which in turn will be dependent upon distributions from the Owned Subsidiaries. RESTRICTIONS IMPOSED BY NEW CREDIT FACILITY ON ABILITY OF SUBSIDIARIES TO MAKE DISTRIBUTIONS The New Credit Facility imposes substantial restrictions, including the satisfaction of certain financial conditions and the absence of an event of default, on the ability of the Owned Subsidiaries to make distributions to FHGLP. In addition, the New Credit Facility contains similar restrictions with respect to the ability of New Falcon II to make distributions to New Falcon. The ability of the Company or New Falcon II, as the case may be, to comply with such conditions may be affected by events that are beyond their control. Expected increases in the funding requirements of FHGLP combined with limitations on its sources of cash may create liquidity issues for FHGLP in the future. If the maturity of loans under the New Credit Facility were to be accelerated, all indebtedness outstanding thereunder would be required to be paid in full before the Owned Subsidiaries would be permitted to distribute any assets or cash to FHGLP or before New Falcon II would be permitted to make such distributions to New Falcon. Additionally, the Debentures will not be guaranteed by any of the subsidiaries of the Company or New Falcon II and will therefore be effectively subordinated to all indebtedness and other liabilities of such subsidiaries. Furthermore, any right of FHGLP or New Falcon, as the case may be, to receive assets of any of its subsidiaries upon such subsidiary's liquidation or reorganization will be effectively subordinated to the claims of that subsidiary's creditors, except to the extent, if any, that FHGLP or New Falcon, as the case may be, is recognized as a creditor of such subsidiary, in which case the claims of FHGLP or New Falcon, as the case may be, would still be subordinate to the claims of such creditors who hold security in the assets of such subsidiary to the extent of such assets and to the claims of such creditors who hold indebtedness of such subsidiary senior to that held by FHGLP or New Falcon, as the case may be. See "Description of Certain Indebtedness." CONDITIONS OF CLOSING THE TCI TRANSACTION The consummation of the TCI Transaction is subject to, among other things, the satisfaction of customary closing conditions and the receipt of certain third-party and governmental approvals, including the consent of franchising authorities. In addition, if the stay of the cable multiple ownership rules adopted by the Federal Communications Commission (the "FCC") is lifted, and the court decision finding such rules unconstitutional is reversed, and if, as a result of the foregoing, TCI or New Falcon would be in violation of the cable multiple ownership rules, the TCI Transaction may require certain changes in the relationship between FHGLP and TCI or the closing of the TCI Transaction may be delayed or otherwise materially adversely affected. See "Legislation and Regulation--Ownership." Each of TCI and FHGLP also has certain rights to terminate the Contribution Agreement if the closing of the TCI Transaction has not occurred by September 30, 1998, unless the reason for not closing is due to failure to obtain certain 18 franchise consents, in which case the right to terminate does not arise until December 31, 1998. There can be no assurances that such closing conditions will be satisfied or that the TCI Transaction will be completed. This Exchange Offer is not conditioned on the consummation of the TCI Transaction, nor will either Issuer be under any obligation to repurchase any Debentures if the TCI Transaction is not completed. If the TCI Transaction is not consummated, FHGLP would remain an obligor under the Debentures, and the existing liquidity rights of certain non-management limited partners of FHGLP would remain in full effect in accordance with the terms of the Existing FHGLP Partnership Agreement. The obligations of FHGLP to redeem any significant amount of its limited partnership interests would result in a material liquidity demand on FHGLP, and there can be no assurance that FHGLP would be able to raise funds to meet such obligations on terms acceptable to FHGLP, or at all. See "--Obligations of FHGLP to Redeem Limited Partnership Interests." OBLIGATIONS OF FHGLP TO REDEEM LIMITED PARTNERSHIP INTERESTS The Existing FHGLP Partnership Agreement contains provisions that may require FHGLP to purchase substantially all of the limited partnership interests held by certain non-management limited partners. Redemption of such limited partner interests is at the option of the holders, subject to certain timing requirements set forth in the Existing FHGLP Partnership Agreement. In contemplation of the TCI Transaction, by agreement of the non-management limited partners, the dates on which FHGLP may be obligated to purchase their interests pursuant to the liquidity rights were tolled in accordance with the Contribution Agreement. The new dates are determined by adding to the original dates the number of days in the period beginning on December 1, 1997 and ending ninety days after the earlier of December 31, 1998 or the date that the Contribution Agreement is terminated in accordance with its terms. As a result, assuming that the TCI Transaction is not consummated and that the Contribution Agreement is not terminated prior to December 31, 1998, FHGLP may be required to purchase limited partnership interests constituting approximately 60% of the common equity of FHGLP during the period of January 2000 to October 2000. If the Contribution Agreement is terminated prior to December 31, 1998, FHGLP may be required to redeem certain partnership interests earlier than the dates set forth above. Subject to certain customary exceptions, the Contribution Agreement may not be terminated without the consent of FHGLP prior to December 31, 1998. The redemption values of all partnership interests (other than FHGLP's Class C preferred partnership interests, which had a liquidation value of $51.4 million at December 31, 1997) will generally be determined through a third party appraisal mechanism, as specified in the Existing FHGLP Partnership Agreement, at the time such interests are redeemed, or through negotiation. The estimated redemption value of such non-preferred partnership interests at March 31, 1998 was approximately $120 million, based upon preliminary estimates by management which are subject to change. For more details regarding rights and value of interests held by various groups of FHGLP's limited partners, please refer to Note 2 of FHGLP's consolidated financial statements for the year ended December 31, 1997. The actual redemption amount will be determined as provided in the Existing FHGLP Partnership Agreement and may be greater than or less than management's estimate, and such variations could be significant. Factors which could cause significant variations in the redemption amount include without limitation, material changes in the business or operations of FHGLP and unforseen changes in the economic or regulatory environment. Upon consummation of the TCI Transaction, the Existing FHGLP Partnership Agreement will be terminated, and the existing liquidity rights of the non-management partners will expire and be replaced by certain new put rights provided to the non-management limited partners in the New FHGLP Partnership Agreement. Under the New FHGLP Partnership Agreement (to which New Falcon will be a party), New Falcon may be required to purchase limited partnership interests of the non-management partners in FHGLP constituting approximately 48% of the partnership interests of FHGLP, and these put rights become exercisable eight years after the consummation of the TCI Transaction. In addition to these liquidity rights, the non-management limited partners have certain rights to require incorporation of FHGLP for the purpose of effecting an initial public offering. 19 Certain of the Company's debt agreements (including the New Credit Facility) restrict the Company's ability to (i) make distributions to fund the purchase of the limited partnership interests pursuant to the liquidity provisions of the Existing FHGLP Partnership Agreement, (ii) incur indebtedness or issue debt securities in connection with such purchase, and (iii) sell a substantial portion of its assets. The Indenture for the Debentures does not restrict the Company's ability to make distributions to fund the purchase of such limited partnership interests of the non-management partners of FHGLP so long as the Company is otherwise in compliance with the covenant in the Indenture relating to the incurrence of indebtedness. See "Description of the Debentures." The obligations of FHGLP to redeem any significant amount of its limited partnership interests would result in a material liquidity demand on FHGLP, and there can be no assurance that FHGLP would be able to raise funds to meet such obligations on terms acceptable to FHGLP, or at all. If FHGLP fails to purchase certain partnership interests within a specified period after FHGLP's purchase obligations arise, absent an alternative arrangement with the partners, FHGLP may be required to liquidate. With respect to the liquidity rights under the New FHGLP Partnership Agreement, certain of the Company's loan agreements may restrict the ability of FHGLP or New Falcon to obtain funds to satisfy such liquidity rights, and if FHGLP or New Falcon, as the case may be, fails to satisfy such rights within a specified period, absent an alternative arrangement with the partners, FHGLP or New Falcon, as the case may be, may, among other things, be subject to damages or be required to liquidate. See "Description of the Partnership Agreements--Existing FHGLP Partnership Agreement," "--New FHGLP Partnership Agreement," "Description of Certain Indebtedness--11% Senior Subordinated Notes Due 2003" and "Description of the Debentures." In addition to the foregoing liquidity rights relating to FHGLP, the New Falcon Partnership Agreement provides that, at any time after the seventh anniversary of the closing of the TCI Transaction (other than at certain times specified in such partnership agreement), either TCI or FHGLP has the right to offer to sell to the other the offering partner's partnership interest in New Falcon. Under certain circumstances in connection with such offer, New Falcon can be required to purchase partnership interests of TCI or FHGLP. See "Description of the Partnership Agreements--New Falcon Partnership Agreement--Partner Liquidity--Buy/Sell Rights." SIGNIFICANT COMPETITION IN THE CABLE TELEVISION INDUSTRY Cable television systems face competition from alternative methods of receiving and distributing television signals and from other sources of news, information and entertainment, such as off-air television broadcast programming, newspapers, movie theaters, live sporting events, online computer services and home video products, including videotape cassette recorders. Because the Company's franchises are generally non-exclusive, there is the potential for competition with the Company's systems from other operators of cable television systems, including systems operated by local governmental authorities, and from other distribution systems capable of delivering programming to homes or businesses, including direct broadcast satellite ("DBS") systems and multichannel, multipoint distribution service ("wireless cable") systems. In recent years, there has been significant national growth in the number of subscribers to DBS services, and such growth would be assisted if one or more DBS providers is successful in delivering local broadcast signals. Legislation has recently been introduced in Congress to amend the Copyright Act to authorize carriage of local broadcast signals by DBS providers. Subscribership to wireless cable can be expected to grow due to the allocation of additional spectrum in the 28 GHz range for a new multichannel wireless video service. Additionally, recent changes in federal law and recent administrative and judicial decisions have removed many of the restrictions that historically have limited entry into the cable television business by potential competitors such as telephone companies, registered utility holding companies and their subsidiaries. Such developments will enable local telephone companies to provide a wide variety of video services in the telephone company's own service area which will be directly competitive with services provided by cable television systems. Other new technologies, including Internet-based services, may also become competitive with services that cable operators can offer. 20 Many of the Company's potential competitors have substantially greater resources than the Company, and the Company cannot predict the extent to which competition will materialize in its franchise areas from other cable television operators, other distribution systems for delivering video programming and other broadband telecommunications services to the home, or from other potential competitors, or, if such competition materializes, the extent of its effect on the Company. See "Business--Competition" and "Legislation and Regulation." NON-EXCLUSIVE FRANCHISES; NON-RENEWAL OR TERMINATION OF FRANCHISES Cable television companies operate under franchises granted by local authorities which are subject to renewal and renegotiation from time to time. The Company's business is dependent upon the retention and renewal of its local franchises. A franchise is generally granted for a fixed term ranging from five to 15 years, but in many cases is terminable if the franchisee fails to comply with the material provisions thereof. The Company's franchises typically impose conditions relating to the use and operation of the cable television system, including requirements relating to the payment of fees, system bandwidth capacity, customer service requirements, franchise renewal and termination. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") prohibits franchising authorities from granting exclusive cable television franchises and from unreasonably refusing to award additional competitive franchises; it also permits municipal authorities to operate cable television systems in their communities without franchises. The Cable Communications Policy Act of 1984 (the "1984 Cable Act" and collectively with the 1992 Cable Act, the "Cable Acts") provides, among other things, for an orderly franchise renewal process in which franchise renewal will not be unreasonably withheld or, if renewal is denied and the franchising authority acquires ownership of the system or effects a transfer of the system to another person, the operator generally is entitled to the "fair market value" for the system covered by such franchise, but no value attributable to the franchise itself. Although the Company believes that it generally has good relationships with its franchise authorities, no assurances can be given that the Company will be able to retain or renew such franchises or that the terms of any such renewals will be on terms as favorable to the Company as the Company's existing franchises. The non-renewal or termination of franchises relating to a significant portion of the Company's subscribers could have a material adverse effect on the Company's results of operations. See "Business--Franchises." LACK OF AVAILABLE CHANNEL CAPACITY FOR NEW CHANNELS OR EXPANDED SERVICES Many of the Falcon Systems have almost no available channel capacity with which to add new channels or to further expand pay-per-view offerings to customers. As a result, significant amounts of capital for future upgrades will be required in order to increase available channel capacity, improve quality of service and facilitate the expansion of new services, such as advertising, pay-per-view, new unregulated tiers of satellite-delivered services and home shopping, so that the Falcon Systems remain competitive within the industry. The Company postponed a number of rebuild and upgrade projects that were planned for 1994 and 1995 because of the uncertainty related to implementation of the 1992 Cable Act and the impact thereof on the Company's business and access to capital. As a result, even after giving effect to certain upgrades and rebuilds that were started or completed in 1996 and 1997, the Company's systems are significantly less technically advanced than had been expected prior to the implementation of re-regulation. The Company believes that the delays in upgrading many of its systems will, under present market conditions, most likely have an adverse effect on the value of the systems compared to systems that have been rebuilt to a higher technical standard. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation by federal, local and, in some instances, state governmental agencies. The Cable Acts, both of which amended the Communications Act of 1934 (as amended, the "Communications Act"), established a national policy to guide the development and 21 regulation of cable television systems. The Communications Act was recently substantially amended by the Telecommunications Act of 1996 (the "1996 Telecom Act"). Principal responsibility for implementing the policies of the Cable Acts and the 1996 Telecom Act has been allocated between the FCC and state or local regulatory authorities. Advances in communications technology as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring. Thus it is not possible to predict the effect that ongoing or future developments might have on the cable communications industry or on the operations of the Company. FEDERAL LAW AND REGULATION The 1992 Cable Act and the FCC's rules implementing that Act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established, among other things, (i) rate regulations, (ii) mandatory carriage and retransmission consent requirements that require a cable system under certain circumstances to carry a local broadcast station or to obtain consent to carry a local or distant broadcast station, (iii) rules for franchise renewals and transfers and (iv) other requirements covering a variety of operational areas such as equal employment opportunity and technical standards and customer service requirements. In addition, the 1996 Telecom Act eliminated certain barriers to entry in the telecommunications and cable industries, declaring that state or local laws or regulations may not prohibit or have the effect of prohibiting the ability of an entity, such as a cable operator, to provide interstate or intrastate telecommunications services. The 1996 Telecom Act also allows telephone companies to compete directly with cable operators by repealing the previous telephone company-cable cross-ownership ban and replacing the FCC's previous video dialtone regulations with an "open video system" ("OVS") plan by which local exchange carriers can provide cable service in their telephone service areas. The 1996 Telecom Act deregulates rates for certain cable programming services tiers ("CPSTs") in 1999 and, for certain small cable operators, immediately eliminates rate regulation of CPSTs, and, in certain circumstances, basic services and equipment. The FCC has developed regulations to implement these provisions of the 1996 Telecom Act. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulations, the Company expects Congress and the FCC to explore additional methods of regulating cable services rate increases, including deferral or repeal of the March 31, 1999 sunset of CPST rate regulation. The Company is currently unable to predict the ultimate effect of the 1992 Cable Act, the 1996 Telecom Act or the FCC's implementing regulations, future Congressional action, or the litigation challenging various aspects of this federal legislation and the FCC's regulations implementing the legislation. However, any further limitation on the ability of the Company to raise service rates could have an adverse effect on revenues and cash flow. STATE AND LOCAL REGULATION Cable television systems generally operate pursuant to non-exclusive franchises, permits or licenses granted by a municipality or other state or local governmental entity. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. A number of states subject cable systems to the jurisdiction of centralized state governmental agencies. To date, Nevada and New York are the only states in which the Company currently operates that have enacted some form of regulation at the state level. Management cannot predict whether any of the states in which it currently operates will engage in such regulation in the future. See "Legislation and Regulation." RELIANCE ON KEY PERSONNEL; MANAGEMENT CONFLICTS Falcon's success is partially dependent upon the continued availability of the services of certain key individuals, including Marc B. Nathanson, Chairman of the Board of Directors and Chief Executive Officer of Falcon Holding Group, Inc., the general partner of FHGLP ("FHGI" and, together with its 22 predecessors, "Falcon"), and Frank J. Intiso, President and Chief Operating Officer of FHGI. The Company does not have an employment contract with any of its executive officers. In addition, Mr. Nathanson serves as Chief Executive Officer of Falcon International Communications LLC ("FIC"), which position could occupy up to approximately 20% of his time. SIGNIFICANT CAPITAL EXPENDITURES The Company intends to upgrade a significant portion of its cable television systems over the next several years. Management's current plan calls for the expenditure of approximately $101 million in 1998, including approximately $68 million to rebuild and upgrade certain of the Owned Systems (exclusive of any capital expenditures related to the TCI Systems). The Company's level of capital expenditures is presently expected to remain at or above the 1998 level for the foreseeable future. The Company's inability to upgrade its cable television systems could adversely affect its operations and competitive position. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business." ABILITY TO PURCHASE DEBENTURES UPON A CHANGE OF CONTROL If a Change of Control Offer (as defined) is made, there can be no assurance that the Company will have sufficient funds to pay the purchase price for all of the Debentures that might be delivered by holders seeking to accept the Change of Control Offer. In the event that a Change of Control Offer occurs at a time when the Company does not have sufficient funds available to repurchase the Debentures or at a time when the Company is prohibited from repurchasing the Debentures under the terms of other indebtedness of the Company (and the Company is unable either to obtain the consent of holders of such other indebtedness or to repay such other indebtedness), an Event of Default would occur under the Indenture. This provision may not, however, afford holders of the Debentures protection in the event of certain highly leveraged transactions. Furthermore, the New Credit Facility includes "change of control" provisions that permit the lenders thereunder to accelerate the repayment of indebtedness thereunder. Any acceleration of the obligations of the Company under the New Credit Facility could materially and adversely affect the ability of the Company to effect a purchase of the Debentures upon a Change of Control. In addition, the existence of a holder's right to require the Company to repurchase its Debentures upon the occurrence of a Change of Control may deter a third party from acquiring the Company in a transaction which would constitute a Change of Control. See "Description of Certain Indebtedness" and "Description of the Debentures." The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of the holders of Debentures to require the Company to repurchase such Debentures as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its subsidiaries to another party may be uncertain. See "Description of the Debentures--Certain Definitions." ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS The Senior Discount Debentures will be issued at a substantial original issue discount from their principal amount at maturity. Consequently, holders of the Senior Discount Debentures will be required to include amounts in their gross income for federal income tax purposes in advance of receipt of the cash payments to which the income is attributable. See "Federal Income Tax Considerations" for a more detailed discussion of the federal income tax consequences to the holders of the Senior Discount Debentures resulting from the purchase, ownership or disposition thereof. 23 Under the Indenture, in the event of an acceleration of the maturity of the Senior Discount Debentures upon the occurrence of an Event of Default, holders of the Senior Discount Debentures may be entitled to recover only the amount which may be declared due and payable pursuant to the Indenture, which could be less than the principal amount at maturity of such Senior Discount Debentures. See "Description of the Debentures--Events of Default." If a bankruptcy case is commenced by or against the Issuers under the United States Bankruptcy Code (the "Bankruptcy Code"), the claim of a holder of Senior Discount Debentures with respect to the principal amount thereof may be limited to an amount equal to the sum of (i) the issue price of the Senior Discount Debentures and (ii) that portion of the original issue discount (as determined on the basis of such issue price) which is not deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code. Accordingly, under such circumstances, even if sufficient funds are available, holders of Senior Discount Debentures may receive a lesser amount than they may otherwise be entitled to under the express terms of the Indenture. In addition, the same rules as those used for the calculation of original issue discount under federal income tax law could apply in a bankruptcy to determine the claim of a holder of Senior Discount Debenture. Furthermore, a holder of Senior Discount Debentures might be required to recognize gain or loss in the event of a distribution related to such a bankruptcy case. See "Federal Income Tax Considerations." NOMINAL ASSETS OF CO-OBLIGOR FFC is a newly created California corporation formed solely for the purpose of serving as a co-obligor under the Debentures. FFC is wholly owned by FHGLP, has nominal assets and has no operations. Holders of the Debentures should not expect FFC to participate in servicing the principal, interest, premium, if any, or any other payment obligations on the Debentures. LACK OF PUBLIC MARKET FOR THE DEBENTURES The Old Debentures have not been registered under the Securities Act or under the securities laws of any state and may not be resold unless the Debentures are subsequently registered or an exemption from the registration requirements of the Securities Act and applicable state securities laws is available. The Exchange Debentures will be registered under the Securities Act, but will constitute a new issue of securities with no established trading market, and there can be no assurance as to (i) the liquidity of any such market that may develop, (ii) the ability of holders of Exchange Debentures to sell their Debentures or (iii) the price at which the holders of Exchange Debentures would be able to sell their Debentures. If such a market were to exist, the Exchange Debentures could trade at prices that may be higher or lower than their principal amount or purchase price, depending on many factors, including prevailing interest rates, the market for similar debentures and the financial performance of the Company. The Debentures are designated for trading among qualified institutional buyers in the PORTAL market. The Company has been advised by the Placement Agents that they presently intend to make a market in the Debentures. However, the Placement Agents are not obligated to do so, and any market-making activity with respect to the Debentures may be discontinued at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may be limited during the Exchange Offer or the pendency of an applicable shelf registration statement. There can be no assurance that an active trading market will exist for the Debentures or that such trading market will be liquid. CONSEQUENCES OF EXCHANGING OR FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES Based upon interpretations by the staff of the Commission set forth in certain no-action letters issued to third parties (including EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter (April 13, 1989); MORGAN STANLEY & CO. INC., SEC No-Action Letter (June 5, 1991); and SHEARMAN & STERLING, SEC No-Action Letter 24 (July 2, 1993)), the Issuers believe that Exchange Debentures issued pursuant to the Exchange Offer in exchange for Old Debentures may be offered for resale, resold and otherwise transferred by any holder thereof (other than any such holder which is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Debentures are acquired in the ordinary course of such holder's business and that at the time of the consummation of the Exchange Offer such holder has no arrangement or understanding with any person to participate in the distribution of such Exchange Debentures. Any Participating Broker-Dealer that acquired Old Debentures for its own account may be a statutory underwriter. Each Participating Broker-Dealer that receives Exchange Debentures for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Debentures. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by any person subject to the prospectus delivery requirements of the Securities Act (other than an Excluded Participating Broker Dealer). See "Plan of Distribution." Any holder who is an "affiliate" of the Issuers (within the meaning of Rule 405 under the Securities Act), who does not acquire the Exchange Debentures in the ordinary course of business or who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Debentures could not rely on the position of the staff of the Commission enunciated in the above-mentioned no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Issuers. To comply with the securities laws of certain jurisdictions, it may be necessary to qualify for sale or register the Exchange Debentures prior to offering or selling such Exchange Debentures. Upon consummation of the Exchange Offer, holders that were not prohibited from participating in the Exchange Offer and did not tender their Old Debentures will not have any registration rights under the Registration Rights Agreement with respect to such nontendered Old Debentures, and accordingly, such Old Debentures will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, Old Debentures may only be offered or sold pursuant to Rule 144A or Rule 144 under the Securities Act or pursuant to some other exemption under the Securities Act and applicable state securities laws or pursuant to an effective registration statement under the Securities Act. See "The Exchange Offer--Consequences of Failure to Exchange." Issuance of the Exchange Debentures in exchange for the Old Debentures pursuant to the Exchange Offer will be made only after a timely receipt by the Issuers of such Old Debentures, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Old Debentures desiring to tender such Old Debentures in exchange for Exchange Debentures should allow sufficient time to ensure timely delivery. The Issuers are under no duty to give notification of defects or irregularities with respect to the tenders of Old Debentures for exchange. Old Debentures that are not tendered or are tendered but not accepted will, following the consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof, and, upon consummation of the Exchange Offer, certain registration rights with respect to the Debentures under the Registration Rights Agreement will terminate. In addition, any holder of Old Debentures who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Debentures may be deemed to have received restricted securities, and if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives Exchange Debentures for its own account in exchange for Old Debentures, where such Old Debentures were acquired by such broker-dealer as a result of market-making activities or other trading 25 activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Debentures. See "Plan of Distribution." To the extent that Old Debentures are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Debentures could be adversely affected. See "The Exchange Offer." 26 THE TCI TRANSACTION Pursuant to the Contribution and Purchase Agreement, dated as of December 30, 1997, as amended (the "Contribution Agreement"), FHGLP, TCI, the existing partners of FHGLP and the investors in Falcon Video have agreed to consolidate under the ownership and control of New Falcon, a holding company owned by FHGLP and TCI, substantially all of the Falcon Systems and all of the TCI Systems. As a result of the TCI Transaction, New Falcon will own systems that served approximately 975,000 basic subscribers in 25 states as of March 31, 1998. New Falcon will also manage the Enstar Systems, which served approximately 95,000 basic subscribers as of March 31, 1998. As such, New Falcon will own or manage systems that served approximately 1,070,000 basic subscribers in 26 states as of March 31, 1998. The TCI Systems will be consolidated into the Owned Subsidiaries. As used in this Prospectus, the "TCI Transaction" refers individually and collectively, as the context may require, to the transactions contemplated by the Contribution Agreement, as it may be amended, modified or supplemented. See "Business-- Overview of the Falcon Systems" and "--Overview of the TCI Systems." FHGLP will own approximately 53% of the equity of New Falcon and will serve as the managing general partner of New Falcon. TCI will own approximately 47% of the equity of New Falcon. The respective ownership percentages of FHGLP and TCI in New Falcon are subject to possible adjustment pursuant to the Contribution Agreement. The actual ownership percentages of FHGLP and TCI will be based on the relative net fair market value as of closing of the capital contributions to be made by FHGLP and TCI to New Falcon. The values of the contributed Falcon Systems and the TCI Systems have been agreed to and are specified in the Contribution Agreement. To calculate the value of each partner's contribution, the value of its systems will be adjusted to reflect additional current assets to be contributed to New Falcon, the amount of certain capital expenditures made by the partner prior to the contribution, and the amount of liabilities to be assumed by New Falcon. A partner may also be required to contribute cash to New Falcon to offset any diminution in the value of its contributed systems from certain causes (such as casualty losses or certain undisclosed liabilities), but these contributions will not result in an adjustment to the partners' percentage interests. FHGI will continue to serve as the sole general partner of FHGLP. As such, subject to certain governance provisions set forth in the New Falcon Partnership Agreement, Falcon and its senior management will continue to manage the business and day-to-day operations of New Falcon. For additional information regarding the governance and management of New Falcon following consummation of the TCI Transaction, see "Description of the Partnership Agreements--New Falcon Partnership Agreement." The Company expects to benefit substantially from its partnership with TCI, one of the leading cable television operators in the world. The Company expects that it will derive numerous operational synergies from its partnership with TCI, including increased concentration of cable systems, purchasing discounts and other economies arising from more streamlined management of Company assets and those assets contributed by TCI. The Company also expects that its partnership with TCI may increase the Company's access to and recognition in the capital markets. Furthermore, the Company expects to benefit from access to TCI's substantial resources in the areas of technical and engineering research. The Company believes that its partnership with TCI will result in increased availability of certain technological innovations, including state-of-the-art digital converters, cable modems, and HITS digitally compressed cable television programming services. The Company will also benefit from the expertise and valuable industry knowledge of TCI's Leo J. Hindery, Jr. and William R. Fitzgerald, who will join New Falcon's Advisory Committee upon consummation of the TCI Transaction. See "Management" and "Certain Relationships and Related Transactions." The TCI Transaction will consist of the following principal steps (with references to the "TCI Closing" referring to the closing of the TCI Transaction): (1) Immediately prior to the TCI Closing, it is anticipated that Falcon Video will use borrowings under the New Credit Facility to satisfy in part its obligations under certain outstanding notes. Falcon 27 Video will satisfy its remaining obligations under such notes by issuing limited partnership interests in Falcon Video to the holders of those notes, which the holders will in turn contribute to FHGLP at the TCI Closing (Step 6). (2) At the TCI Closing, concurrently with the initial asset contributions by FHGLP to New Falcon (Step 3), TCI will contribute to New Falcon substantially all of the assets relating to the TCI Systems, and New Falcon will assume indebtedness in the approximate amount of $429.7 million and certain other liabilities of TCI. Following the TCI Closing, the TCI Systems will be contributed to the Owned Subsidiaries. (3) At the TCI Closing, FHGLP will contribute to New Falcon substantially all of its assets, including the capital stock of FFC, and New Falcon will assume certain indebtedness in the amount of $936.5 million and other liabilities of FHGLP, including the Debentures and (subject to subsequent assumption by New Falcon II) any Notes that remain outstanding and the indebtedness outstanding under the New Credit Facility. See "Description of Certain Indebtedness" and "Description of the Debentures." The contributed assets will consist principally of FHGLP's equity interests in the Owned Subsidiaries and the Falcon Video systems, and equity interests in the managing general partners of the Owned Subsidiaries and Video Investors (as defined). FHGLP will make its asset contributions to New Falcon in two separate steps: in the first step, concurrently with the asset contributions by TCI to New Falcon (Step 2), FHGLP will contribute all of its assets other than the Falcon Video-related interests contributed to FHGLP in Step 6; in the second step, immediately after the contributions to FHGLP in Step 6, FHGLP will contribute those Falcon Video-related interests to New Falcon. As a result of FHGLP's contributions to New Falcon (and subject to subsequent contributions by New Falcon to New Falcon II), New Falcon will own, directly or indirectly, greater than 99% of the partnership interests in the Owned Subsidiaries, each of which will, in turn, have as its managing general partner a limited partnership which will be owned 99% or greater by New Falcon. The assets to be contributed by FHGLP to New Falcon exclude FHGLP's equity interests in Enstar interest ranging from 0.5% to 1.0% and its subsidiaries, certain passive minority investments held by FHGLP in international cable television businesses and any cash on hand that FHGLP elects not to contribute. See "Business--The Affiliated Systems"; "--International Activities"; and "--Other Investments." (4) At the TCI Closing, the Debentures and the Notes (which the Company has agreed to redeem prior to October 15, 1998) will be assumed by New Falcon, which will be substituted for FHGLP as an obligor thereunder (subject, in the case of the Notes, to a subsequent assumption by New Falcon II). FFC will continue to be an obligor under the Debentures as a wholly-owned subsidiary of New Falcon. As of May 25, 1998, the aggregate principal amount of the Notes outstanding was approximately $34.4 million. (5) At the TCI Closing, FHGLP will redeem a specified portion of the partnership interests in FHGLP currently held by the Redeemed Partners in exchange for the New Falcon Interests. Following the redemption, TCI will purchase such New Falcon Interests from the Redeemed Partners for cash in the approximate aggregate amount of $154.7 million. (6) At the TCI Closing, after the redemption of the Redeemed Partners and the purchase of their New Falcon Interests by TCI (Step 5), (a) the limited partners of Falcon Video will contribute their interests in Falcon Video (including the interests issued in respect of certain notes, as described in Step 1) to FHGLP in exchange for limited partnership interests in FHGLP, (b) the holders of certain equity participation units and warrants previously issued by Falcon Video will contribute those securities to FHGLP in exchange for limited partnership interests in FHGLP, and (c) the limited partners of Falcon Video Communications Investors, L.P., the managing general partner of Falcon Video ("Video Investors"), other than FHGLP, will contribute their interests in Video Investors (other than a 1% interest that will be retained by a trust established for the benefit of members of the 28 family of Marc B. Nathanson) to FHGLP in exchange for limited partnership interests in FHGLP. FHGLP will then contribute these interests and securities to New Falcon in the second step of FHGLP's contributions (Step 3). As a result of these contributions, Falcon Video will become an Owned Subsidiary and its systems, which served approximately 71,000 basic subscribers as of March 31, 1998, will be consolidated under the ownership and control of New Falcon following the TCI Closing. (7) FHGLP will amend its Incentive Plan prior to the TCI Closing to provide for payments by FHGLP at the TCI Closing to participants in an aggregate amount of approximately $6.6 million and to reduce by such amount FHGLP's obligations to make future payments to participants under the Incentive Plan. At the TCI Closing New Falcon will assume (subject to a subsequent assumption by New Falcon II) the obligations of FHGLP under the Incentive Plan, as so amended, other than the obligation to make the payments at the TCI Closing. See "Management--1993 Incentive Performance Plan." (8) Immediately after the TCI Closing New Falcon II will borrow funds under the New Credit Facility to refinance the TCI indebtedness assumed by New Falcon II at the TCI Closing and to refinance the initial borrowings of Falcon Video under the New Credit Facility and Falcon Video's existing senior indebtedness. (9) At the TCI Closing, the existing partners of FHGLP will amend and restate the FHGLP Partnership Agreement, and two additional persons will be admitted to FHGLP as limited partners by virtue of their contributions to FHGLP of their interests in Falcon Video (Step 6). Among other things, the New FHGLP Partnership Agreement will defer and reduce the liquidity rights of the non-management partners under the Existing FHGLP Partnership Agreement, which rights will become an obligation of New Falcon. For additional information regarding the new partnership agreement and a description of certain new liquidity and other rights, see "Description of the Partnership Agreements--New FHGLP Partnership Agreement." (10) Concurrently with or immediately following the TCI Closing, the partnership agreements of the Owned Subsidiaries, including Falcon Video, and the partnership agreements of the managing general partners of the Owned Subsidiaries, including Video Investors, will be amended as appropriate to substitute New Falcon (or New Falcon II as described below) for FHGLP as a partner effective as of the TCI Closing, to provide for distributions to the partners, to reflect the contribution of assets to the Owned Subsidiaries and to make certain other related changes. The Company will redeem the remaining approximately $34.4 million aggregate principal amount of outstanding Notes prior to October 15, 1998, in accordance with the redemption provisions of the indenture governing the Notes. The Notes are redeemable at the option of the obligor, in whole or in part, at any time on or after September 15, 1998, at 105.5% of the outstanding principal amount, plus accrued interest to the redemption date. If the TCI Transaction is consummated before all of the Notes have been redeemed, New Falcon will initially assume (subject to a subsequent assumption by New Falcon II, as described below) the rights and obligations of FHGLP under the Notes. See "Capitalization" and "Description of Certain Indebtedness--11% Senior Subordinated Notes Due 2003." On June 30, 1998, the Company entered into the New Credit Facility, which provides for three committed credit facilities (one revolving credit facility and two term loans) and one uncommitted $350 million supplemental credit facility (the terms of which will be negotiated at the time the Company makes a request to draw on such facility). See "Description of Certain Indebtedness--New Credit Facility." The Owned Subsidiaries, other than Falcon Video, are the initial borrowers under the New Credit Facility. The Company borrowed approximately $425.8 million under the New Credit Facility on June 30, 1998, approximately $329 million of which was used to repay the remaining indebtedness outstanding under the Bank Credit Agreement. The remaining proceeds resulted in an excess cash balance of approximately $90 million (after payment of approximately $4.5 million in fees and expenses related to 29 the New Credit Facility). Immediately prior to the TCI Closing, Falcon Video will use proceeds from borrowings under the New Credit Facility to satisfy in part its obligations under certain financing notes (See Step 1). Upon the TCI Closing, the Company will use proceeds from additional borrowings under the New Credit Facility to refinance any other senior indebtedness of the Company, including without limitation certain existing senior indebtedness of Falcon Video, the initial borrowings of Falcon Video under the New Credit Facility, and the indebtedness of TCI to be assumed by New Falcon at the TCI Closing. The Company also intends to fund the Notes Redemption with proceeds from borrowings under the New Credit Facility. Immediately following the consummation of the TCI Transaction, New Falcon will contribute substantially all of its assets to New Falcon II (excluding the capital stock of FFC), and New Falcon II will assume certain indebtedness of New Falcon, including any Notes that remain outstanding after the Notes Tender and any indebtedness outstanding under the New Credit Facility, but excluding the Debentures. Thus, New Falcon II will be substituted for New Falcon as an obligor under the Notes and will become the sole borrower under the New Credit Facility, and FFC will continue to be an obligor under the Debentures as a wholly-owned subsidiary of New Falcon. In addition, New Falcon II will assume the obligations of the Owned Subsidiaries under the New Credit Facility. New Falcon II will then contribute the TCI Systems to the Owned Subsidiaries. See "Risk Factors--Dependence on Receipt of Funds From Operating Subsidiaries to Service Debentures; Structural Subordination." The consummation of the TCI Transaction is subject to, among other things, the satisfaction of customary closing conditions and the receipt of certain third-party and governmental approvals, including the consent of franchising authorities. Although there can be no assurances that such closing conditions will be satisfied or that the TCI Transaction will be consummated, management presently anticipates that the TCI Transaction will be completed in the third quarter of 1998. On June 24, 1998, AT&T Corp. and Tele-Communications, Inc. announced that they have entered into an agreement under which AT&T Corp. would acquire Tele-Communications, Inc. by merger. Although there can be no assurances as to whether this merger will be consummated, the Company does not anticipate that this proposed merger will have any material adverse effect upon the consummation of the TCI Transaction. 30 USE OF PROCEEDS This Exchange Offer is intended to satisfy certain of the Issuers' obligations under the Registration Rights Agreement. The Issuers will not receive any cash proceeds from the issuance of the Exchange Debentures offered hereby. In consideration for issuing the Exchange Debentures contemplated in this Prospectus, the Issuers will receive Old Debentures in like original principal amount at maturity, the form and terms of which are the same as the form and terms of the Exchange Debentures (which replace the Old Debentures), except as otherwise described herein. The net proceeds received by the Company from the Offering were approximately $631 million after giving effect to discounts, commissions and other expenses payable by the Issuers. The Company used the net proceeds from the Offering to repay indebtedness outstanding under the Bank Credit Agreement. At March 31, 1998, outstanding indebtedness under the Bank Credit Agreement was approximately $695.6 million. The weighted average interest rate on borrowings outstanding under the Bank Credit Agreement as of December 31, 1997 was 7.69%. 31 CAPITALIZATION The following table sets forth (i) the actual capitalization of FHGLP at March 31, 1998; (ii) the Company's capitalization at March 31, 1998, after giving pro forma effect to the Offering, the refinancing of the Bank Credit Agreement with proceeds from the New Credit Facility, the repurchase of all of the Notes pursuant to both the Notes Tender and the Notes Redemption, and the Falcon Classic Acquisition as if such transactions had been consummated as of March 31, 1998; and (iii) New Falcon's capitalization giving pro forma effect to all of the transactions described in the preceding sentence and the TCI Transaction, including the consolidation of systems currently owned by Falcon Video, as if such transactions had been consummated as of March 31, 1998. See "The TCI Transaction" and "Pro Forma Condensed Combined Financial Data."
AS OF MARCH 31, 1998 ------------------------------------------ NEW FALCON ACTUAL PRO FORMA PRO FORMA ------------ -------------- ------------ (IN THOUSANDS OF DOLLARS) Long-term Debt Bank Credit Agreement(1)....................... $ 695,600 -- -- New Credit Facility(2)......................... -- $ 373,815 $ 920,757 Senior Debentures.............................. -- 375,000 375,000 Senior Discount Debentures..................... -- 275,639 275,639 11% Senior Subordinated Notes.................. 282,193 -- -- Other.......................................... 23,261 23,261 15,761 ------------ -------------- ------------ Total debt................................... 1,001,054 1,047,715 1,587,157 Redeemable partners' equity...................... 171,373 171,373 75,000 Partners' deficit.............................. (435,664) (466,778) (281,358) ------------ -------------- ------------ Total capitalization......................... $ 736,763 $ 752,310 $ 1,380,799 ------------ -------------- ------------ ------------ -------------- ------------
- ------------------------ (1) As of June 29, 1998, the amount outstanding under the Bank Credit Agreement was approximately $329 million. Borrowings since April 3, 1998 were used primarily to repurchase outstanding Notes pursuant to the Notes Tender. See "Prospectus Summary--Recent Developments." (2) On June 30, 1998, the Company repaid and discharged the Bank Credit Agreement with proceeds from the New Credit Facility and as of June 30, 1998, the amount outstanding under the New Credit Facility was approximately $425.8 million. See "Description of Certain Indebtedness--New Credit Facility." 32 SELECTED CONSOLIDATED FINANCIAL DATA Set forth below are selected consolidated financial data of the Company for each of the years in the five-year period ended December 31, 1997 and for the three-month periods ended March 31, 1997 and 1998. This data should be read in conjunction with the Company's historical consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data for the three month periods ended March 31, 1997 and 1998 have been derived from unaudited consolidated financial statements of the Company, which in the opinion of management include all adjustments (consisting of normal recurring adjustments) which are necessary to present fairly the results of operations and financial position for the periods and at the date presented. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. The unaudited pro forma data give effect to (i) the Offering, (ii) the refinancing of the Bank Credit Agreement with proceeds from the New Credit Facility, (iii) the repurchase of all of the Notes pursuant to both the Notes Tender and the Notes Redemption, and (iv) the Falcon Classic Acquisition as if such transactions had been consummated on January 1 of the respective periods presented in the case of the operations statement data and other operating data and on March 31, 1998, in the case of the balance sheet data. The unaudited New Falcon pro forma data give effect to all of the transactions described in the preceding sentence and to the TCI Transaction, including the consolidation of systems currently owned by Falcon Video, as if such transactions had been consummated on January 1 of the respective periods presented in the case of the operations statement data and other operating data and on March 31, 1998 in the case of the balance sheet data.
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ----------------------------------------------------------------------------- ------------------------- NEW FALCON PRO FORMA PRO FORMA 1993 1994 1995(1) 1996(1) 1997 1997(2) 1997(2) 1997 1998(11) -------- -------- -------- --------- --------- ----------- ----------- ----------- ----------- (IN THOUSANDS OF DOLLARS) OPERATIONS STATEMENT DATA Revenues................. $146,469 $147,229 $151,208 $ 217,320 $ 255,886 $ 274,894 $ 424,994 $ 63,984 $ 64,557 Costs and expenses....... (67,025) (67,711) (71,652) (97,180) (122,080) (132,194) (215,719) (29,474) (31,243) Depreciation and amortization........... (57,771) (60,935) (54,386) (100,415) (118,856) (135,054) (224,617) (29,793) (31,079) -------- -------- -------- --------- --------- ----------- ----------- ----------- ----------- Operating income (loss)................. 21,673 18,583 25,170 19,725 14,950 7,646 (15,342) 4,717 2,235 Interest expense, net(3)................. (49,122) (49,859) (57,777) (71,602) (79,137) (85,894) (119,925) (20,384) (20,487) Equity in net income (loss) of investee partnerships........... (3,596) (1,782) (5,705) (44) 443 447 447 (71) (248) Other income (expense), net.................... (403) (455) 13,077(4) 814 885 674 1,950 (163) (774) Income tax benefit....... -- -- -- 1,122 2,021 2,021 2,021 566 365 -------- -------- -------- --------- --------- ----------- ----------- ----------- ----------- Loss before extraordinary item................... $(31,448) $(33,513) $(25,235) $ (49,985) $ (60,838) $ (75,106)(5) $(130,849)(5) $(15,335) $(18,909) -------- -------- -------- --------- --------- ----------- ----------- ----------- ----------- -------- -------- -------- --------- --------- ----------- ----------- ----------- ----------- OTHER OPERATING DATA EBITDA(6)................ $ 79,444 $ 79,518 $ 79,556 $ 120,140 $ 133,806 $ 142,700 $ 209,275 $ 34,510 $ 33,314 EBITDA margin............ 54.2% 54.0% 52.6% 55.3% 52.3% 51.9% 49.2% 53.9% 51.6% Total debt to EBITDA..... 6.71x 6.77x 7.01x(7) 6.62x(7) 6.81x 7.22x 7.50x 6.25x 7.51x Net cash provided by operating activities... $ 51,642 $ 49,076 $ 43,162 $ 90,631 $ 79,537 $ 15,322 $ 2,729 Net cash used in investing activities... (27,562) (36,065) (22,674) (284,247) (76,287) (10,941) (95,318) Net cash provided by (used in) financing activities............. (25,221) (18,169) (15,906) 192,199 (2,966) (7,155) 89,834 Capital expenditures(8)........ 25,798 28,232 37,149 57,668 76,323 $ 81,155 $ 99,488 10,624 18,021 Deficiency of earnings to fixed charges(9)....... (31,448) (33,513) (25,254) (51,252) (63,302) (77,574) (133,317) (15,940) (19,319) NEW FALCON PRO FORMA PRO FORMA 1998 1998 ----------- ----------- OPERATIONS STATEMENT DATA Revenues................. $ 68,163 $105,547 Costs and expenses....... (33,146) 55,412 Depreciation and amortization........... (33,900) (56,291) ----------- ----------- Operating income (loss)................. 1,117 (6,156) Interest expense, net(3)................. (21,408) (30,433) Equity in net income (loss) of investee partnerships........... (226) (226) Other income (expense), net.................... (1,110) (1,051) Income tax benefit....... 365 365 ----------- ----------- Loss before extraordinary item................... $(21,262) $(37,501) ----------- ----------- ----------- ----------- OTHER OPERATING DATA EBITDA(6)................ $ 35,017 $ 50,135 EBITDA margin............ 51.4% 47.5% Total debt to EBITDA..... 7.48x 7.91x Net cash provided by operating activities... Net cash used in investing activities... Net cash provided by (used in) financing activities............. Capital expenditures(8)........ $ 19,508 $ 24,111 Deficiency of earnings to fixed charges(9)....... (21,672) (37,911)
33
AS OF MARCH 31, 1998 AS OF DECEMBER 31, ------------ ----------------------------------------------------- 1993 1994 1995(1) 1996(1) 1997 ACTUAL --------- --------- --------- --------- --------- ------------ (IN THOUSANDS OF DOLLARS) BALANCE SHEET DATA Cash and cash equivalents...................................... $ 15,626 $ 10,468 $ 15,050 $ 13,633 $ 13,917 $ 11,162 Total assets................................................... 432,668 425,402 585,258 774,323 740,358 800,326 Total debt..................................................... 532,938 538,626 669,019 885,786 911,221 1,001,054 Redeemable partners' equity(10)................................ 93,964 93,964 271,902 271,902 171,373 171,373 Partners' deficit.............................................. (236,096) (256,758) (411,681) (456,499) (416,755) (435,664) NEW FALCON PRO PRO FORMA(2) FORMA(2) -------------- -------------- BALANCE SHEET DATA Cash and cash equivalents...................................... $ 5,000 $ 5,000 Total assets................................................... 819,772 1,457,972 Total debt..................................................... 1,047,715 1,587,157 Redeemable partners' equity(10)................................ 171,373 75,000 Partners' deficit.............................................. (466,778) (281,358)
- ------------------------------ (1) The December 31, 1995 consolidated balance sheet data include the assets and liabilities of Falcon First, which were acquired on December 28, 1995. The consolidated statement of operations data for the year ended December 31, 1995 exclude the operations of Falcon First due to the proximity of the acquisition date to the end of the year, except that management fees from Falcon First of $1.6 million are included in the consolidated statement of operations data. On July 12, 1996, FHGLP acquired the assets of FCSC and, accordingly, the results of the FCSC systems have been included from July 12, 1996. Management fees and reimbursed expenses received in 1996 by FHGLP from FCSC prior to July 12, 1996 amounted to $1.5 million and $1.0 million, respectively, and are included in the 1996 consolidated statement of operations data. The amounts attributable to management fees and reimbursed expenses received by FHGLP from FCSC in 1995 were $2.6 million and $2.0 million, respectively. (2) The unaudited pro forma financial and operating data may not be indicative of the results that actually would have occurred if the transactions described above had been completed and in effect for the periods indicated or the results that may be obtained in the future. The unaudited pro forma financial and operating data presented should be read in conjunction with the audited historical financial statements and related notes thereto of FHGLP and the TCI Systems and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. See "Pro Forma Condensed Combined Financial Data." (3) Interest expense, net includes payment-in-kind interest expense amounting to $17.5 million, $24.5 million, $27.1 million, $26.6 million and $20.4 million for the three years ended December 31, 1993, 1994, 1995, 1996 and 1997, respectively, and $7.0 million for the three months ended March 31, 1997. There was no payment-in-kind interest expense for the three months ended March 31, 1998. See Note 7 to FHGLP's 1997 consolidated financial statements. (4) Other income (expense), net in 1995 includes a gain on sale of marketable securities ($13.3 million). (5) The pro forma operations statement data do not reflect the impact of certain non-recurring expenses associated with the transactions. The pro forma operations statement data do not include the write-off, as an extraordinary charge, of deferred loan costs of $11.7 and $11.3 million, respectively, as of December 31, 1997 and March 31, 1998 related to the extinguishment of the Bank Credit Agreement and the repurchase of the Notes as well as an approximate $19.8 million in premiums and costs related to the repurchase of the Debentures. Additionally, the New Falcon pro forma operations statement data do not include a one-time charge of approximately $6.6 million in compensation expense related to the payment to certain FHGLP employees of amounts due under the Incentive Plan, as required by the Contribution Agreement. The pro forma balance sheet data reflect the pro forma effect of these adjustments. (6) EBITDA is calculated as operating income before depreciation and amortization. Based on its experience in the cable television industry, FHGLP believes that EBITDA and related measures of cash flow serve as important financial analysis tools for measuring and comparing cable television companies in several areas, such as liquidity, operating performance and leverage. In addition, the covenants in the primary debt instruments of FHGLP use EBITDA-derived calculations as a measure of financial performance. EBITDA is not a measurement determined under GAAP and does not represent cash generated from operating activities in accordance with GAAP. EBITDA should not be considered by the reader as an alternative to net income as an indicator of FHGLP's financial performance or as an alternative to cash flows as a measure of liquidity. In addition, the Company's definition of EBITDA may not be identical to similarly titled measures used by other companies. (7) Total debt to EBITDA has been computed on a pro forma basis for 1995 to include the EBITDA of Falcon First of $15.9 million, making the combined 1995 EBITDA $95.4 million. Similarly, total debt to EBITDA has also been computed on a pro forma basis for 1996 to include the EBITDA of FCSC of $13.6 million, making the combined 1996 EBITDA $133.8 million. Without these pro forma adjustments, 1995 data would include the debt incurred to acquire Falcon First, but would exclude Falcon First EBITDA resulting in a total debt to EBITDA historical ratio of 8.41x compared to a pro forma ratio of 7.01x, and 1996 data would include the debt to acquire FCSC, but would exclude its EBITDA for the period January 1, 1996 through July 11, 1996 resulting in a total debt to EBITDA historical ratio of 7.37x compared to a pro forma ratio of 6.62x. (8) Excluding acquisitions of cable television systems. (9) For purposes of this computation, earnings are defined as income (loss) before income taxes and fixed charges, as adjusted for earnings and distributions of less than 50% owned companies accounted for under the equity method. Fixed charges are defined as the sum of (i) total interest costs (including an estimated interest component of rental expenses) and (ii) amortization of debt discount and expense. (10) The Existing Partnership Agreement provides that certain limited partners of FHGLP have various redemption rights, which will be deferred and reduced upon consummation of the TCI Transaction. See "Risk Factors--Obligations of FHGLP to Redeem Limited Partnership Interests," "Description of the Partnership Agreements" and Note 2 to FHGLP's Consolidated Financial Statements. (11) In March, 1998, FHGLP acquired substantially all of the assets of Falcon Classic and, accordingly, the results of these acquired systems have been included from the date of their acquisition. Management fees and reimbursed expenses received during the three months ended March 31, 1998 by FHGLP from Falcon Classic amounted to $190,000 and $114,000, respectively, and are included in the unaudited statement of operations data. The amounts attributable to management fees and reimbursed expenses received by FHGLP from Falcon Classic in 1997 were $1.3 million and $1.0 million, respectively. 34 PRO FORMA CONDENSED COMBINED FINANCIAL DATA The unaudited pro forma condensed combined financial data presented below are derived from the historical consolidated financial statements of the Company and the TCI Systems and reflect management's present estimate of pro forma adjustments, including a preliminary estimate of purchase price allocations. These preliminary estimates represent management's best estimate based on currently available information. Final purchase price allocation following the closing of the TCI Transaction could be materially different from the preliminary estimates, although management does not expect any material variations at this time. Factors which could cause material changes in the purchase price allocation include without limitation, material adverse changes in the results of operations of the Falcon Systems or the TCI Systems and unforseen changes in the economic or regulatory environment. The unaudited pro forma data for the year ended December 31, 1997 give effect to (i) the Offering, (ii) the refinancing of the Bank Credit Agreement with proceeds from the New Credit Facility, (iii) both the Notes Tender and the Notes Redemption, and (iv) the Falcon Classic Acquisition as if such transactions had been consummated on January 1 of the respective periods presented in the case of the statement of operations data and on March 31, 1998 in the case of the balance sheet data. The unaudited New Falcon pro forma data give effect to all of the transactions described in the preceding sentence and to the TCI Transaction, including the consolidation of systems currently owned by Falcon Video, as if such transactions had been consummated on January 1 of the respective periods presented in the case of the statement of operations data and on March 31, 1998 in the case of the balance sheet data. The unaudited pro forma condensed combined financial statements may not be indicative of the results that actually would have occurred if the transactions described above had been completed and in effect for the periods indicated or the results that may be obtained in the future. The unaudited pro forma condensed combined financial data presented below should be read in conjunction with the audited historical consolidated financial statements and related notes thereto of the Company and the TCI Systems and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The Falcon Classic Acquisition is being accounted for as the purchase by FHGLP of the Falcon Classic systems. The TCI Transaction will be accounted for as a contribution by FHGLP of the Falcon Systems to New Falcon at their historical cost basis and the purchase by New Falcon of the Falcon Video systems and the TCI Systems. The pro forma condensed combined statements of operations do not reflect the impact of certain non-recurring expenses associated with the transactions. The pro forma data do not include the write-off, as an extraordinary charge, of deferred loan costs of $11.7 and $11.3 million, respectively, at December 31, 1997 and March 31, 1998 related to the extinguishment of the Bank Credit Agreement and the repurchase of the Notes, as well as the approximate $19.8 million in premiums and costs related to the repurchase of the Notes. Additionally, the New Falcon pro forma data do not include a one-time charge of approximately $6.6 million in compensation expense related to the payment to certain FHGLP employees of amounts due under the Incentive Plan, as required by the Contribution Agreement. Such adjustments are reflected in the pro forma condensed combined balance sheets. 35 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
HISTORICAL HISTORICAL --------------------- -------------------- THE FALCON FALCON TCI COMPANY CLASSIC ADJUSTMENTS PRO FORMA VIDEO SYSTEMS ADJUSTMENTS ---------- --------- ------------ ----------- --------- --------- ------------ (IN THOUSANDS OF DOLLARS) Revenues............................ $ 255,886 $ 20,299 $ (1,291)(1) $ 274,894 $ 32,145 $ 113,897 $ 4,058(7) Expenses: Costs and expenses................ (122,080) (11,248) 1,134(2) (132,194) (15,908) (64,113) (3,504)(8) Depreciation and amortization..... (118,856) (8,080) (8,118)(3) (135,054) (16,086) (22,509) (50,968)(9) ---------- --------- ------------ ----------- --------- --------- ------------ Operating income (loss)......... 14,950 971 (8,275) 7,646 151 27,275 (50,414) Other income (expense): Interest expense, net............. (79,137) (1,490) (5,267)(4) (85,894) (10,985) (5,832) (17,214)(10) Equity in net income of investee partnerships.................... 443 4(5) 447 Other income (expense), net....... 885 (61) (150)(6) 674 (84) 1,360(11) Income tax benefit (expense)........ 2,021 2,021 (8,808) 8,808(12) ---------- --------- ------------ ----------- --------- --------- ------------ Income (loss) before extraordinary item.............................. $ (60,838) $ (580) $ (13,688) $ (75,106) $ (10,834) $ 12,551 $ (57,460) ---------- --------- ------------ ----------- --------- --------- ------------ ---------- --------- ------------ ----------- --------- --------- ------------ NEW FALCON PRO FORMA ----------- Revenues............................ $ 424,994 Expenses: Costs and expenses................ (215,719) Depreciation and amortization..... (224,617) ----------- Operating income (loss)......... (15,342) Other income (expense): Interest expense, net............. (119,925) Equity in net income of investee partnerships.................... 447 Other income (expense), net....... 1,950 Income tax benefit (expense)........ 2,021 ----------- Income (loss) before extraordinary item.............................. $(130,849) ----------- -----------
36 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998
HISTORICAL HISTORICAL ----------------- ----------------- THE FALCON FALCON TCI COMPANY CLASSIC ADJUSTMENTS PRO FORMA VIDEO SYSTEMS ADJUSTMENTS -------- ------- ----------- --------- ------- -------- ----------- (IN THOUSANDS OF DOLLARS) Revenues................................ $64,557 $ 3,796 $ (190)(1) $ 68,163 $ 7,694 $ 28,421 $ 1,269(7) Expenses: Costs and expenses.................... (31,243 ) (2,099) 196(2) (33,146) (4,094) (16,977) (1,195)(8) Depreciation and amortization......... (31,079 ) (1,321) (1,500)(3) (33,900) (3,609) (5,791) (12,991)(9) -------- ------- ----------- --------- ------- -------- ----------- Operating income (loss)............... 2,235 376 (1,494) 1,117 (9) 5,653 (12,917) Other income (expense): Interest expense, net................. (20,487 ) (86) (835)(4) (21,408) (2,786) (1,448) (4,791)(10) Equity in net income of investee partnerships........................ (248 ) 22(5) (226) Other income (expense), net........... (774 ) 28,991 (29,327)(6) (1,110) 59 Income tax benefit (expense)............ 365 365 (1,793) 1,793(12) -------- ------- ----------- --------- ------- -------- ----------- Income (loss) before extraordinary item.................................. $(18,909) $29,281 $(31,634) $(21,262) $(2,795) $ 2,471 $(15,915) -------- ------- ----------- --------- ------- -------- ----------- -------- ------- ----------- --------- ------- -------- ----------- NEW FALCON PRO FORMA --------------- Revenues................................ $105,547 Expenses: Costs and expenses.................... (55,412) Depreciation and amortization......... (56,291) --------------- Operating income (loss)............... (6,156) Other income (expense): Interest expense, net................. (30,433) Equity in net income of investee partnerships........................ (226) Other income (expense), net........... (1,051) Income tax benefit (expense)............ 365 --------------- Income (loss) before extraordinary item.................................. $(37,501) --------------- ---------------
37 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (1) To eliminate FHGLP management fee income from Falcon Classic. (2) To eliminate Falcon Classic's management fee expense to FHGLP. (3) To record additional depreciation and amortization expense attributable to the allocation of the purchase price (cash of $83.5 million) to tangible and intangible assets acquired and liabilities assumed from Falcon Classic, based on preliminary estimates of their respective fair values as of the acquisition date. These preliminary estimates represent management's best estimate based on currently available information. Final purchase price allocation following the closing of the TCI Transaction could be materially different from the preliminary estimates, although management does not expect any material variations at this time.
THREE MONTHS YEAR ENDED ENDED 12/31/97 3/31/98 ----------- ----------- USEFUL LIFE ------------- (IN YEARS) ($ IN 000'S) Record additional estimated depreciation expense........................................... 3-15 $ 3,312 $ 671 Record additional estimated amortization expense: Franchise cost........................................................................... 12 (1,964) (357) Goodwill................................................................................. 20 279 46 Customer lists and other intangible assets............................................... 5 6,491 1,140 ----------- ----------- $ 8,118 $ 1,500 ----------- ----------- ----------- -----------
(4) To increase interest expense to reflect the Falcon Classic Acquisition, the Notes Tender and the terms of the Debentures as if the Falcon Classic Acquisition, the Notes Tender and the Offering had been in effect during the entire period; and to record the amortization on new debt discount and issuance costs estimated at $28.8 million in connection with the New Credit Facility and the Debentures. The average interest rates used to compute pro forma interest expense on the New Credit Facility were 6.9% for the year ended December 31, 1997 and 7.2% for the three months ended March 31, 1998. The effect on pro forma income (loss) before extraordinary items of a 1/8% change in interest rates would be approximately $470,000 per year (without giving effect to the Company's interest rate hedging agreements).
THREE YEAR MONTHS ENDED ENDED 12/31/97 3/31/98 -------- -------- ($ IN 000'S) Eliminate historical interest expense related to borrowings by Falcon Classic........................................ $ (1,490) $ (86) Eliminate amortization expense on historical deferred loan costs for the Bank Credit Agreement...................... (825) (214) Eliminate amortization expense on historical deferred costs for the Notes............................................ (874) (219) Eliminate historical interest expense on the Notes......... (29,584) (7,760) Eliminate historical interest expense on the Bank Credit Agreement................................................ (44,493) (11,584) Record estimated interest expense on the Debentures........ 57,593 14,399 Record estimated interest expense on borrowings under the New Credit Facility...................................... 22,408 5,666 Record amortization expense on new debt discount........... 84 21 Record amortization expense on new debt issuance costs..... 2,448 612 -------- -------- $ 5,267 $ 835 -------- -------- -------- --------
(5) To eliminate FHGLP's general partners' share of losses of Falcon Classic. (6) To increase other expenses for anticipated legal fees related to the settlement of litigation and to eliminate gain on the sale of Falcon Classic's Cable Systems. 38 (7) To eliminate FHGLP management fee income from Falcon Video, to adjust TCI Systems revenues to reflect revenue from additional assets acquired and to eliminate certain revenues not being acquired pursuant to the Contribution Agreement, and to conform to FHGLP's accounting treatment of franchise fees charged to subscribers, as follows:
THREE YEAR MONTHS ENDED ENDED 12/31/97 3/31/98 -------- -------- ($ IN 000'S) Eliminate FHGLP management fee income from Falcon Video.... $(1,582 ) $ (381) Adjust TCI Systems revenues (See detail of TCI Systems adjustments)............................................. 5,640 1,650 -------- -------- $ 4,058 $ 1,269 -------- -------- -------- --------
(8) To eliminate Falcon Video's management fee expense to FHGLP, to adjust TCI Systems expenses to reflect additional assets acquired and to eliminate certain expenses related to revenues not being acquired pursuant to the Contribution Agreement and to conform to FHGLP's accounting treatment of franchise fees charged to subscribers, as follows:
THREE YEAR MONTHS ENDED ENDED 12/31/97 3/31/98 -------- -------- ($ IN 000'S) Eliminate Falcon Video's management fee expense to FHGLP... $(1,582 ) $ (374) Adjust TCI Systems expenses (See detail of TCI Systems adjustments)............................................. 5,086 1,569 -------- -------- $ 3,504 $ 1,195 -------- -------- -------- --------
(9) To record additional depreciation and amortization expense attributable to the allocation of the fair value to tangible and intangible assets acquired and liabilities assumed of Falcon Video ($143.2 million) and the TCI Systems ($500.2 million), based on preliminary estimates of their respective fair values as of the acquisition date. These preliminary estimates represent management's best estimate based on currently available information. Final allocation following the closing of the TCI Transaction could be materially different from the preliminary estimates, although management does not expect any material variations at this time.
THREE MONTHS YEAR ENDED ENDED 12/31/97 3/31/98 ----------- ----------- USEFUL LIFE ------------- (IN YEARS) ($ IN 000'S) Record additional estimated depreciation expense........................................... 3-15 $ (340) $ (31) Record additional estimated amortization expense: Franchise cost........................................................................... 12 (5,654) (1,448) Goodwill................................................................................. 20 4,145 1,034 Customer lists and other intangible assets............................................... 5 52,816 13,436 ----------- ----------- $ 50,968 $ 12,991 ----------- ----------- ----------- -----------
(10) To increase interest expense to reflect the merger with Falcon Video and the assumption of the TCI Systems' indebtedness. The average interest rates used to compute the pro forma interest expense on the New Credit Facility were 6.4% for the year ended December 31, 1997 and 6.7% for the three months ended March 31, 1998. The effect on pro forma income (loss) before 39 extraordinary items of a 1/8% change in interest rates would be approximately $1.2 million (without giving effect to the Company's interest rate hedging agreements).
THREE YEAR MONTHS ENDED ENDED 12/31/97 3/31/98 -------- -------- ($ IN 000'S) Eliminate historical interest expense of Falcon Video...... $(10,985) $(2,786) Eliminate historical interest expense of the TCI Systems... (5,832) (1,448) Record estimated interest expense on borrowings under the New Credit Facility incurred to refinance the Falcon Video and TCI Systems debt............................... 34,031 9,025 -------- -------- $ 17,214 $ 4,791 -------- -------- -------- --------
(11) To eliminate the historical loss recorded in 1997 on the sale of an international investment. The international investments of FHGLP are not being contributed to New Falcon pursuant to the Contribution Agreement. (12) To eliminate historical tax expense of the TCI Systems, which assets were formerly held by a corporation. DETAIL OF TCI SYSTEMS ADJUSTMENTS The audited combined statement of operations of the TCI Systems for the year ended December 31, 1997 has been adjusted to reflect additional assets acquired (which acquisitions were not material individually or in the aggregate), to eliminate certain revenues and expenses not being acquired pursuant to the Contribution Agreement and to conform to FHGLP's accounting treatment of franchise fees charged to subscribers, as follows:
THREE MONTHS YEAR ENDED 12/31/97 ENDED 3/31/98 -------------------- ---------------------- REVENUES EXPENSES REVENUES EXPENSES --------- --------- ----------- --------- ($ IN 000'S) ($ IN 000'S) Reclassify franchise fee pass-through............................................. $ 5,517 $ (5,517) $ 1,508 $ (1,508) Eliminate revenues and expenses not being acquired................................ (2,122) 1,908 (4) 22 Add Ellensburg, WA................................................................ 1,850 (1,240) -- -- Add Pomeroy, WA................................................................... 179 (107) 55 (31) Add Clatskanie, OR................................................................ 216 (130) 91 (52) --------- --------- ----------- --------- $ 5,640 $ (5,086) $ 1,650 $ (1,569) --------- --------- ----------- --------- --------- --------- ----------- ---------
40 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS MARCH 31, 1998
HISTORICAL HISTORICAL -------------------- ------------------ FALCON FALCON TCI NEW FALCON THE COMPANY CLASSIC ADJUSTMENTS PRO FORMA VIDEO SYSTEMS ADJUSTMENTS PRO FORMA ----------- ------- ----------- ------------ -------- -------- ------------- ------------ (IN THOUSANDS OF DOLLARS) ASSETS: Cash and cash equivalents.............. $ 11,162 $2,508 $ (8,670)(1) $ 5,000 $ 5,880 -- $ (5,880)(11) $ 5,000 Receivables: Trade.................... 12,291 1,132 -- 13,423 1,451 $ 2,557 -- 17,431 Affiliates............... 11,309 -- (35)(2) 11,274 -- -- (8,600)(12) 2,674 Other assets............... 15,647 494 -- 16,141 790 -- (3)(13) 16,928 Other investments.......... 1,555 -- -- 1,555 -- -- (1,519)(14) 36 Property, plant and equipment, net........... 358,074 820 703(3) 359,597 38,528 88,309 91,658(15) 578,092 Franchise cost, net........ 218,844 -- 1,448(3) 220,292 47,710 333,195 (277,868)(15) 323,329 Goodwill, net.............. 71,487 -- 565(3) 72,052 1,513 -- 50,006(15) 123,571 Customer lists and other intangible assets, net... 88,360 -- 2,932(3) 91,292 (43) 700 269,816(15) 361,765 Deferred loan costs, net... 11,597 -- 17,549(4) 29,146 -- -- -- 29,146 ----------- ------- ----------- ------------ -------- -------- ------------- ------------ $ 800,326 $4,954 $ 14,492 $ 819,772 $ 95,829 $424,761 $ 117,610 $ 1,457,972 ----------- ------- ----------- ------------ -------- -------- ------------- ------------ ----------- ------- ----------- ------------ -------- -------- ------------- ------------ LIABILITIES: Bank debt.................. $ 695,600 -- $(321,785)(5) $ 373,815 $ 74,700 -- $ 472,242(16) $ 920,757 Notes Payable Debentures............... -- -- 650,639(6) 650,639 -- -- -- 650,639 11% Notes................ 282,193 -- (282,193)(7) -- -- -- -- -- Other...................... 23,261 -- -- 23,261 54,286 -- (61,786)(17) 15,761 ----------- ------- ----------- ------------ -------- -------- ------------- ------------ 1,001,054 -- 46,661 1,047,715 128,986 -- 410,456 1,587,157 Cash overdraft............. -- -- -- -- -- 1,841 -- 1,841 Accounts payable........... 6,476 $ 948 -- 7,424 1,035 600 -- 9,059 Accrued expenses and other.................... 44,812 2,831 (35)(8) 47,608 5,905 3,458 -- 56,971 Customer deposits and prepayments.............. 1,652 148 -- 1,800 130 -- -- 1,930 Deferred income taxes...... 7,026 -- -- 7,026 -- 121,362 (121,362)(18) 7,026 Minority interest.......... 346 -- -- 346 -- -- -- 346 Equity in losses of affiliated partnerships in excess of investment............... 3,251 -- 7(9) 3,258 -- -- (3,258)(19) -- ----------- ------- ----------- ------------ -------- -------- ------------- ------------ 1,064,617 3,927 46,633 1,115,177 136,056 127,261 285,836 1,664,330 Redeemable partners' equity..................... 171,373 -- -- 171,373 -- -- (96,373)(20) 75,000 Partners' equity (deficit)... (435,664) 1,027 (32,141)(10) (466,778) (40,227) 297,500 (71,853)(21) (281,358) ----------- ------- ----------- ------------ -------- -------- ------------- ------------ $ 800,326 $4,954 $ 14,492 $ 819,772 $ 95,829 $424,761 $ 117,610 $ 1,457,972 ----------- ------- ----------- ------------ -------- -------- ------------- ------------ ----------- ------- ----------- ------------ -------- -------- ------------- ------------
41 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS (1) To reduce the cash balance to reflect the reduction of debt and the retention of $5 million for ongoing business needs. (2) To eliminate receivables of FHGLP management fees from Falcon Classic. (3) To eliminate the historical book values of the tangible and intangible assets of Falcon Classic and allocate the estimated fair values assigned to those assets, as follows:
AT 3/31/98 ------------- ($ IN 000'S) Property, plant and equipment................................................................. $ 703 Franchise cost................................................................................ 1,448 Goodwill...................................................................................... 565 Customer lists and other intangibles.......................................................... 2,932 ------ $ 5,648 ------ ------
(4) To eliminate historical deferred loan costs and record new debt issuance costs incurred in connection with the New Credit Facility and Debentures, as follows:
AT 3/31/98 ----------- ($ IN 000'S) Eliminate historical deferred loan costs--Bank Credit Agreement............................... $ (6,672) Eliminate historical deferred loan costs--11% Notes........................................... (4,628) Record new debt discount and issuance costs................................................... 28,849 ----------- $ 17,549 ----------- -----------
(5) To record changes in bank debt, as follows:
AT 3/31/98 ----------- ($ IN 000'S) Record the issuance of the Debentures......................................................... $(650,639) Record estimated debt discount and issuance costs............................................. 28,849 Record estimated increase in bank debt for the Notes Tender................................... 302,000 Record estimated decrease in cash balance as additional reduction of bank debt................ (8,670) Record estimated increase in bank debt for the acquisition of Falcon Classic.................. 6,675 ----------- $(321,785) ----------- -----------
(6) To record the issuance of the Debentures. (7) To record redemption of $282.2 million of the Debentures pursuant to the Debentures Tender. (8) To record the elimination of Falcon Classic's accrued management fees payable to FHGLP. (9) To eliminate FHGLP's investment, through affiliates, in Falcon Classic. (10) To record changes in partners' deficit, as follows:
AT 3/31/98 ----------- ($ IN 000'S) Eliminate Falcon Classic's partners' equity................................................... $ (1,027) Record estimated premium and costs paid in Notes Tender....................................... (19,807) Record the write-off of historical deferred loan costs--Bank Credit Agreement................. (6,672) Record the write-off of historical deferred loan costs--11% Notes............................. (4,628) Eliminate FHGLP's investment, through affiliates, in Falcon Classic........................... (7) ----------- $ (32,141) ----------- -----------
(11) To reduce the cash balance to maintain $5 million for ongoing business needs. (12) To eliminate receivables of FHGLP for intercompany notes from Enstar Finance Company. (13) To eliminate prepaid expenses of FHGLP for Enstar Finance Company. 42 (14) To eliminate an investment that will be retained by FHGLP. (15) To eliminate the historical book values of the tangible and intangible assets of Falcon Video and the TCI Systems and allocate the estimated fair values assigned to those assets, as follows:
AT 3/31/98 ------------------------------- FALCON TCI VIDEO SYSTEMS TOTAL --------- --------- --------- ($ IN 000'S) Property, plant and equipment............................................ $ 9,884 $ 81,774 $ 91,658 Franchise cost........................................................... (24,712) (253,156) (277,868) Goodwill................................................................. 9,986 40,020 50,006 Customer lists........................................................... 60,443 209,403 269,846 Deferred costs........................................................... (30) -- (30) --------- --------- --------- $ 55,571 $ 78,041 $ 133,612 --------- --------- --------- --------- --------- ---------
(16) To record changes in bank debt, as follows:
AT 3/31/98 ----------- ($ IN 000'S) Refinance TCI Systems' indebtedness........................................................... $ 430,738 Partial redemption of the Falcon Video mezzanine Debentures................................... 40,588 Payment pursuant to the Incentive Plan........................................................ 6,555 Less historical cash balance of Falcon Video.................................................. (5,880) Plus historical cash balance of Enstar Finance Company........................................ 241 ----------- $ 472,242 ----------- -----------
(17) To eliminate the historical balance of Falcon Video's mezzanine notes upon redemption and to eliminate intercompany notes payable of Enstar Finance Company.
AT 3/31/98 ----------- ($ IN 000'S) Eliminate historical balance of Falcon Video's mezzanine Debentures........................... $ (54,286) Eliminate historical balance of intercompany notes............................................ (7,500) ----------- $ (61,786) ----------- -----------
(18) To eliminate the historical balance of deferred income taxes for the TCI Systems. (19) To eliminate FHGLP's equity in losses of Falcon Video in excess of investment, and to eliminate FHGLP's equity in losses of Enstar in excess of investment, which will be retained by FHGLP. (20) To adjust for put rights of certain FHGLP limited partners and to reclassify the balance in part. See "Risk Factors--Partner Liquidity Rights" and the "Description of the Partnership Agreements--New FHGLP Partnership Agreement." (21) To record changes in partners' deficit, as follows:
AT 3/31/98 ----------- ($ IN 000'S) TCI assets contributed........................................................................ $ 496,903 Refinance TCI Systems' indebtedness........................................................... (429,738) Eliminate TCI Systems' historical balance of partners' equity................................. (297,500) Record Falcon Video partners' contribution in excess of their historical deficit.............. 71,080 Reclassify residual value of redeemable partners' equity...................................... 96,373 Less payment pursuant to the Incentive Plan................................................... (6,555) Eliminate FHGLP's partners' equity for Enstar Finance Company................................. (1,246) Eliminate an investment that will be retained by FHGLP........................................ (1,519) Eliminate FHGLP's equity in losses of Enstar in excess of investment.......................... 349 ----------- $ (71,853) ----------- -----------
43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The 1992 Cable Act required the FCC to, among other things, implement extensive regulation of the rates charged by cable television systems for basic and programming service tiers, installation and customer premises equipment leasing. Compliance with those rate regulations has had a negative impact on the Company's revenues and cash flow. The 1996 Telecom Act substantially changed the competitive and regulatory environment for cable television and telecommunications service providers. Among other changes, the 1996 Telecom Act provides that the regulation of CPST rates will be terminated altogether in 1999. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulations, the Company expects Congress and the FCC to explore additional methods of regulating cable service rate increases, including deferral or repeal of the March 31, 1999 termination of CPST rate regulation. There can be no assurance as to what, if any, further action may be taken by the FCC, Congress or any other regulatory authority or court, or the effect thereof on the Company's business. Accordingly, the Company's historical financial results as described herein are not necessarily indicative of future performance. See "Legislation and Regulation." This Prospectus includes certain forward looking statements regarding, among other things, future results of operations, regulatory requirements, pending business combination and acquisition transactions, competition, capital needs and general business conditions applicable to the Company. Such forward looking statements involve risks and uncertainties including, without limitation, the uncertainty of legislative and regulatory changes and the rapid developments in the competitive environment facing cable television operators such as the Company, as discussed more fully elsewhere in this Prospectus. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 The Company's revenues increased from $64 million to $64.6 million, or by 0.9%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. Of the $573,000 net increase in revenues, $1.3 million was due to the acquisition in March 1998 of the Falcon Classic assets. This increase was partially offset by decreases of $424,000 in management fees and $289,000 in cable service revenues. The $289,000 decrease in cable service revenues was caused principally by decreases of $1.5 million due to reductions in the number of regulated subscriptions for cable service and $975,000 due to reductions in the number of premium subscriptions for cable service. These decreases were partially offset by increases of $1.5 million related to increases in regulated service rates implemented during 1997 and 1998 and by $741,000 related to increases in unregulated service rates implemented during 1997. As of March 31, 1998, the Owned Systems had approximately 607,000 basic subscribers and 183,000 premium service units. Management and consulting fees earned by the Company decreased from $1.5 million to $1.1 million for the three months ended March 31, 1998 compared to the corresponding period in 1997 primarily due to a $349,000 reduction in the amounts received from Falcon Classic. $73,000 of this reduction was due to the March, 1998 sale of the Falcon Classic assets to the Partnership; the balance was due to the one-time receipt by the Partnership during the three months ended March 31, 1997 of previously deferred fees from Falcon Classic. Service costs increased from $18.3 million to $19.6 million, or by 6.9%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. Service costs represent costs directly attributable to providing cable services to customers. The $1.3 million increase was primarily caused by an increase in programming fees paid to program suppliers (including primary satellite fees), $411,000 of which was due to the acquisition of the Falcon Classic assets. 44 General and administrative expenses increased from $11.2 million to $11.7 million, or by 4.5%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The $499,000 increase for the three months ended March 31, 1998 compared to the corresponding period in 1997 related primarily to increases in marketing expense and to $262,000 related to the acquisition of the Falcon Classic assets. Depreciation and amortization expense increased from $29.8 million to $31.1 million, or by 4.3%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The $1.3 million increase in depreciation and amortization expense was primarily due to the acquisition of the Falcon Classic assets. Operating income decreased from $4.7 million to $2.2 million, or by 52.6%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The $2.5 million decrease was principally due to increases in operating expenses in excess of increases in revenues and to an increase in depreciation and amortization expense as discussed above. Interest expense, net, including the effects of interest rate hedging agreements, increased from $20.4 million to $20.5 million, or by 0.5%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The increase was primarily due to higher average debt balances outstanding. The increase was partially offset by the effect of slightly lower average interest rates (8.8% during the three months ended March 31, 1998 compared to 9.1% during the corresponding period in 1997). Due to the Company electing to pay interest expense on the 11% Notes in cash on March 15, 1998, there was no payment-in-kind interest expense (in which interest payment requirements are met by an increase in the principal amount of the notes) associated with the 11% Notes for the three months ended March 31, 1998 compared to $7 million of payment-in-kind interest expense for the corresponding period in 1997. Interest rate hedging agreements resulted in additional interest expense of $53,000 during the three months ended March 31, 1998 compared to additional interest expense of $250,000 during the corresponding period in 1997. Other expense, net increased from $163,000 of expense for the three months ended March 31, 1997 to $774,000 for the corresponding period in 1998, primarily due to a $690,000 casualty loss recorded during 1998 as a result of property damage caused by a storm. Due to the factors described above, the Company's net loss increased from $15.3 million to $18.9 million, or by 23.3%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. EBITDA is calculated as operating income before depreciation and amortization. See footnote 6 to "Selected Consolidated Financial Data." EBITDA as a percentage of revenues decreased from 53.9% to 51.6% for the three months ended March 31, 1998 compared to the corresponding period in 1997. The decrease was primarily caused by increases in programming costs and marketing expenses in excess of revenue increases, as described above, and to the acquisition of assets from Falcon Classic (which had an EBITDA as a percentage of revenues of 47.7%). EBITDA decreased from $34.5 million to $33.3 million, or by 3.5%, as a result of these factors. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 FHGLP's revenues increased from $217.3 million to $255.9 million, or by 17.7%, during 1997 compared to 1996. Of the $38.6 million net increase in revenues, $31 million was due to the acquisition of the FCSC assets in July 1996, as discussed in Note 3 to the consolidated financial statements and $8.7 million was due to increased cable service revenues. These increases were partially offset by a decrease of $1.1 million in management fees. The $8.7 million increase in cable service revenues was caused principally by increases of $14 million due to increases in regulated service rates implemented during 1996 and 1997, $4.5 million related to increases in unregulated service rates implemented during 1996 and in May 1997 45 and $1.6 million due to the July 1, 1996 restructuring of The Disney Channel from a premium channel to a tier channel. These increases were partially offset by decreases of $5 million due to reductions in the number of premium subscriptions for cable service, $2.8 million related to decreases in other revenues (primarily installation revenue), $1.9 million related to reductions in the number of regulated subscriptions for cable service and $1.8 million related to the Eastern Georgia cable systems sold on July 1, 1996. As of December 31, 1997, the Owned Systems had approximately 563,000 basic subscribers and 166,000 premium service units. Management and consulting fees earned by FHGLP decreased from $6.3 million during 1996 to $5.2 million during 1997. The decreased fees resulted primarily from the absence in 1997 of management fees earned from FCSC, which was managed by FHGLP prior to July 12, 1996, partially offset by increased fees related to recording in 1997 the balance of previously deferred 1995 management fees from Falcon Classic. Service costs increased from $60.3 million to $75.6 million, or by 25.4%, during 1997 compared to 1996. Service costs represent costs directly attributable to providing cable services to customers. Of the $15.3 million increase in service costs, $9.8 million related to the acquisition of FCSC assets, $4.2 million related to increases in programming fees paid to program suppliers (including primary satellite fees) and $1.2 million related to increases in property taxes, franchise fees and personnel costs. The increase in programming costs included $279,000 related to the July 1, 1996 restructuring of The Disney Channel discussed above. General and administrative expenses increased from $36.9 million to $46.4 million, or by 25.9%, during 1997 compared to 1996. Of the $9.5 million increase, $6 million related to the acquisition of FCSC assets, $2.8 million related to increases in bad debt expense, $1.0 million related to the absence in 1997 of reimbursed expenses from FCSC, which was managed by FHGLP prior to July 12, 1996 and $677,000 related to a reduction in reimbursement from Falcon International Communications ("FIC"), an affiliated entity of expenses incurred in connection with international investments. These increases were partially offset by a decrease of $849,000 related primarily to reduced insurance premiums as a result of self-insuring the Company's cable distribution plant and subscriber connections during 1997 and a $345,000 decrease in costs associated with reregulation by the FCC. Depreciation and amortization expense increased from $100.4 million to $118.8 million, or by 18.4%, during 1997 compared with 1996. The $18.4 million increase in depreciation and amortization expense was primarily due to the acquisition of the FCSC assets partially offset by accelerated 1996 depreciation related to asset retirements and to intangible assets becoming fully amortized. Operating income decreased from $19.7 million to $14.9 million, or by 24.2%, during 1997 compared to 1996. The $4.8 million decrease was principally due to increases in operating expenses in excess of revenues and to an increase in depreciation and amortization expense as discussed above. Interest expense, net, including the effects of interest rate hedging agreements, increased from $71.6 million to $79.1 million, or by 10.5%, during 1997 compared to 1996. The $7.5 increase in interest expense related primarily to increased debt incurred to consummate the acquisition of the FCSC assets, partially offset by lower average interest rates (7.7% during 1997 compared to 8% during 1996). Payment-in-kind interest expense associated with the Notes (under which interest payment requirements are met by delivery of additional Notes) amounted to $20.4 million during 1997 compared to $26.6 million in 1996 (the Company elected to pay interest expense in cash on March 15, 1998). Interest rate hedging agreements resulted in additional interest expense of $350,000 during 1997 and $1.0 million in 1996. Due to the factors described above, the Company's net loss increased from $50 million to $60.8 million, or by 21.7%, during 1997 compared to 1996. EBITDA is calculated as operating income before depreciation and amortization. See footnote 6 to "Selected Consolidated Financial Data." EBITDA as a percentage of revenues decreased from 55.3% 46 during 1996 to 52.3% in 1997. The decrease was primarily caused by increases in programming costs and bad debt expense in excess of revenue increases as described above, and to the acquisition of assets from FCSC (which had an EBITDA as a percentage of revenues of 49%). EBITDA increased from $120.1 million to $133.8 million, or by 11.4%, as a result of these factors. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 The Company's revenues increased from $151.2 million to $217.3 million, or by 43.7%, during 1996 compared to 1995. Of the $66.1 million net increase in revenues, $58.6 million was due to the acquisition in December 1995 of the Falcon First assets and in July 1996 of the FCSC assets, as discussed in Note 3 to the consolidated financial statements and $9.8 million was due to increased cable service revenues. These increases were partially offset by a decrease of $2.3 million in management fees. The $9.8 million increase in cable service revenues was caused principally by increases of $9.3 million due to increases in regulated service rates implemented in April and October 1996, $2.2 million due to increases related to other revenue producing items (primarily advertising sales) and $1.1 million due to the restructuring of The Disney Channel from a premium channel to a tier channel on July 1, 1996. These increases were partially offset by decreases of $1.5 million due to reductions in the number of regulated subscriptions for cable service, $1.1 million due to reductions in the number of premium subscriptions for cable service and $241,000 related to rate decreases implemented in 1995 to comply with the 1992 Cable Act. As of December 31, 1996, the Owned Systems had approximately 571,000 basic subscribers and approximately 204,000 premium service units. Management and consulting fees earned by the Company decreased from $8.6 million to $6.3 million during 1996 primarily due to the absence in 1996 of management fees earned from Falcon First and FCSC, which were managed by FHGLP prior to December 28, 1995 and July 12, 1996, respectively. Service costs increased from $41.6 million to $60.3 million, or by 44.9%, during 1996 compared to 1995. Service costs represent costs directly attributable to providing cable services to customers. Of the $18.7 million increase in service costs, $18.4 million was due to the acquisition of Falcon First and FCSC assets and $1.9 million related to increases in programming fees paid to program suppliers (including primary satellite fees). These increases were partially offset by a net decrease of $1.7 million in other service costs primarily related to increases in capitalized labor associated with increased construction activity. The increase in programming costs included a $269,000 increase related to the restructuring of The Disney Channel discussed above. General and administrative expenses increased from $30 million to $36.9 million, or by 22.8%, during 1996 compared to 1995. The $6.9 million increase was caused principally by a $10.5 million increase related to the acquisition of the Falcon First and FCSC assets partially offset by decreases of $928,000 related to the absence in 1996 of reimbursed expenses from FCSC, which was managed by FHGLP prior to July 12, 1996, $900,000 related to certain one-time charges occurring in 1995, $500,000 related to the recovery of previously reserved bad debt expense and to $1.8 million related to other general and administrative expenses. Depreciation and amortization expense increased from $54.4 million to $100.4 million, or by 84.6%, during 1996 compared with 1995. Depreciation expense increased by $37.1 million due to the acquisition of Falcon First and FCSC assets during 1996, by $6.6 million due to accelerated depreciation related to asset retirements and adjustments of the estimated useful lives of certain tangible assets due to rebuilds and by approximately $2.1 million due to the depreciation of property, plant and equipment additions. These increases were partially offset by intangible assets becoming fully amortized and as a result of the estimated useful lives of certain other intangible assets being extended. Operating income decreased from $25.2 million to $19.7 million during 1996 compared to 1995. The $5.5 million decrease was principally due to a $7.5 million decrease in operating income related to the 47 acquisition of the Falcon First and FCSC assets partially offset by increases in revenues in excess of increases in operating expenses as discussed above. Interest expense, net, including the effects of interest rate hedging agreements, increased from $57.8 million to $71.6 million, or by 23.9%, during 1996 compared to 1995. Interest expense increased by $19.3 million primarily due to the increased debt incurred to consummate the acquisitions of the Falcon First and FCSC assets. These increases were partially offset by the absence in 1996 of $3.5 million of amortization of deferred loan costs and the effect of lower average interest rates (8.0% during 1996 compared to 8.1% during 1995). Payment-in-kind interest expense associated with the Notes (under which interest payment requirements are met by delivery of additional Notes) and, in 1995 only, payment-in-kind interest expense associated with Falcon Telecable's $20 million aggregate principal amount of 11.56% notes payable, amounted to $26.6 million during 1996 compared to $27.1 million in 1995. Interest rate hedging agreements resulted in additional interest expense of $1.0 million during 1996 and $729,000 in 1995. Due to the factors described above, the Company's net loss increased from $25.2 million to $50 million, or by 98.1%, during 1996 compared to 1995. EBTDA is calculated as operating income before depreciation and amortization See footnote 6 to "Selected Consolidated Financial Data." EBITDA as a percentage of revenues increased from 52.6% during 1995 to 55.3% in 1996. The increase was primarily caused by revenue increases as described above. EBITDA increased from $79.6 million to $120.1 million, or by 51%. YEAR END RESULTS ADJUSTED FOR MATERIAL ACQUISITIONS The historical results of operations of the Company for 1995 did not include the results of Falcon First or FCSC, and for the period January 1, 1996 through July 11, 1996 did not include the results of FCSC. Results of operations of the Company in 1996 compared to 1995 were significantly affected by the acquisitions of Falcon First on December 28, 1995 and of FCSC on July 12, 1996. Falcon First and FCSC were managed by FHGLP prior to and subsequent to their acquisitions and have been affected by the same trends in operating costs and revenues as all of the Company's cable systems. Accordingly, the Company believes that it is more meaningful to compare 1997 historical operations to 1996 operations, and to compare 1996 operations to 1995 operations, on an as adjusted basis assuming that the acquisitions of Falcon First and FCSC had occurred on January 1, 1995. The adjusted results include the historical results of Falcon First and FCSC, as well as the effect of increased amortization for both periods relating to the allocated purchase price of the intangible assets acquired, and the effect of increased interest expense related to the increase in debt incurred to finance the acquisitions. Set forth in the table below are adjusted results of operations for 1995 and 1996 prepared on this basis and 1997 historical results of operations. The as adjusted results are not necessarily indicative of what would have occurred had the acquisitions been made as of that date or of results which may occur in the future. 48
AS ADJUSTED YEAR ENDED ACTUAL YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------ ----------------- 1995 1996 1997 ----------- ----------- ----------------- (IN THOUSANDS OF DOLLARS) OPERATIONS STATEMENT DATA Revenues......................................... $ 231,498 $ 244,905 $ 255,886 Costs and expenses............................... (112,141) (111,124) (122,080) Depreciation and amortization.................... (118,772) (126,832) (118,856) ----------- ----------- ----------------- Operating income................................. 585 6,949 14,950 Interest expense, net............................ (94,975) (83,333) (79,137) Equity in net income (loss) of investee partnerships................................... 66 (44) 443 Other income, net................................ 20,355 649 885 Income tax benefit............................... 5,994 1,122 2,021 ----------- ----------- ----------------- Loss before extraordinary item................... $ (67,975) $ (74,657) $ (60,838) ----------- ----------- ----------------- ----------- ----------- ----------------- OTHER OPERATING DATA EBITDA(1)........................................ $ 119,357 $ 133,781 $ 133,806 EBITDA to revenues............................... 51.6% 54.6% 52.3%
- ------------------------ (1) See footnote 6 to "Selected Consolidated Financial Data." 1997 HISTORICAL COMPARED TO 1996 (AS ADJUSTED FOR THE ACQUISITION OF FCSC) FHGLP's revenues increased from $244.9 million to $255.9 million, or by 4.5%, during 1997 compared to 1996. Of the $11 million net increase in revenues, $10.7 million was due to increased cable service revenues and $333,000 was due to increases in management fees. The $10.7 million increase in cable service revenues was caused principally by increases of $12.6 million due to increases in regulated service rates implemented during 1996 and 1997, $4 million related to increases in unregulated service rates implemented during 1996 and in May 1997, $1.6 million due to the July 1, 1996 restructuring of The Disney Channel from a premium channel to a tier channel and $1.1 million due to increases in advertising sales. These increases were partially offset by decreases of $4.5 million due to reductions in the number of premium subscriptions for cable service, $1.8 million related to the Eastern Georgia cable systems sold on July 1, 1996, $1.7 million due to reductions in the number of regulated subscriptions for cable service and $780,000 related to decreases in other revenues. As of December 31, 1997, the Owned Systems had approximately 563,000 basic subscribers and 166,000 premium service units. Excluding the Eastern Georgia cable systems sold on July 1, 1996, FHGLP's revenues increased 5.3% during 1997 compared to 1996. Management and consulting fees earned by FHGLP increased from $4.9 million during 1996 to $5.2 million during 1997. The increased fees resulted primarily from recording in 1997 the balance of previously deferred 1995 fees from Falcon Classic. Service costs increased from $68.9 million to $75.6 million, or by 9.7%, during 1997 compared to 1996. Service costs represent costs directly attributable to providing cable services to customers. Of the $6.7 million increase in service costs, $5 million related to increases in programming fees paid to program suppliers (including primary satellite fees) and $1.7 million related to increases in property taxes, franchise fees and personnel costs. The increase in programming costs included $340,000 related to the July 1, 1996 restructuring of The Disney Channel discussed above. General and administrative expenses increased from $42.2 million to $46.4 million, or by 10.1%, during 1997 compared to 1996. Of the $4.2 million increase, $2.9 million related to increases in bad debt expense, $1.0 million related to the absence in 1997 of reimbursed expenses from FCSC, which was 49 managed by FHGLP prior to July 12, 1996, $810,000 related to increases in personnel costs and $677,000 related to a reduction in reimbursement from Falcon International Communications, LLC ("FIC"), an affiliate of the Company, of expenses incurred in connection with international investments. These increases were partially offset by a decrease of $797,000 related primarily to reduced insurance premiums as a result of self-insuring the Company's cable distribution plant and subscriber connections during 1997 and a $334,000 decrease in costs associated with reregulation by the FCC. Depreciation and amortization expense decreased from $126.8 million to $118.8 million, or by 6.3%, during 1997 compared with 1996. The $8 million decrease in depreciation and amortization expense was primarily due to accelerated 1996 depreciation related to asset retirements and to intangible assets becoming fully amortized. Operating income increased from $6.9 million to $14.9 million, or by 115.1%, during 1997 compared to 1996. The $8 million increase was primarily due to a decrease in depreciation and amortization expense as discussed above. Excluding the Eastern Georgia cable systems sold on July 1, 1996, the Company's operating income increased by $8.9 million. Interest expense, net, including the effects of interest rate hedging agreements, decreased from $83.3 million to $79.1 million, or by 5%, during 1997 compared to 1996. The decrease was primarily due to lower average interest rates (8.9% during 1997 compared to 9.1% during 1996) and lower average debt balances outstanding. Payment-in-kind interest expense associated with the Notes, under which interest payment requirements are met by delivery of additional Notes, amounted to $20.4 million during 1997 compared to $26.6 million in 1996. Interest rate hedging agreements resulted in additional interest expense of $350,000 during 1997 and $1.0 million in 1996. Due to the factors described above, the Company's net loss decreased from $74.7 million to $60.8 million, or by 18.5%, during 1997 compared to 1996. EBITDA as a percentage of revenues decreased from 54.6% during 1996 to 52.3% in 1997. The decrease was primarily caused by increases in programming costs and bad debt expense as a percent of revenue. EBITDA remained relatively unchanged at $133.8 million during 1997 and 1996. Excluding the Eastern Georgia cable systems sold on July 1, 1996, the Company's EBITDA increased from $132.9 million to $133.8 million, or by 0.7%. See footnote 6 to "Selected Consolidated Financial Data." 1996 COMPARED TO 1995 (AS ADJUSTED FOR THE ACQUISITIONS OF FALCON FIRST AND FCSC). The Company's revenues increased from $231.5 million to $244.9 million, or by 5.8%, during 1996 compared to 1995. Of the $13.4 million net increase in revenues, $13 million was due to increased cable service revenues and $444,000 was due to increases in management fees. The $13 million increase in cable service revenues was caused principally by increases of $13.3 million due to increases in regulated service rates implemented in April and October 1996, $3.1 million due to increases related to other revenue-producing items (primarily advertising sales) and $1.7 million due to the restructuring of The Disney Channel from a premium channel to a tier channel on July 1, 1996. These increases were partially offset by decreases of $1.7 million due to reductions in the number of regulated subscriptions for cable service, $1.6 million related to cable systems sold during 1996, $1.4 million due to reductions in the number of premium subscriptions for cable service and $388,000 related to rate decreases implemented in 1995 to comply with the 1992 Cable Act. As of December 31, 1996, the Owned Systems had approximately 571,000 basic subscribers and approximately 204,000 premium service units. Excluding the Eastern Georgia cable systems sold on July 1, 1996, the Company's revenues increased 6.6% during 1996 compared to 1995. Service costs increased from $67.9 million to $69 million, or by 1.6%, during 1996 compared to 1995. Service costs represent costs directly attributable to providing cable services to customers. The $1.1 million increase in service costs was primarily caused by a $1.8 million increase in programming fees paid to program suppliers (including primary satellite fees), partially offset by a $759,000 decrease in property 50 taxes. The increase in programming costs included a $340,000 increase related to the restructuring of The Disney Channel discussed above. General and administrative expenses decreased from $44.3 million to $42.2 million, or by 4.7%, during 1996 compared to 1995. Of the $2.1 million decrease, $900,000 related to certain one-time charges occurring in 1995, $500,000 related to the recovery of previously reserved bad debt expense, and $687,000 related primarily to decreases in personnel costs and other expenses. Depreciation and amortization expense increased from $118.8 million to $126.8 million, or by 6.8%, during 1996 compared with 1995. Depreciation expense increased by approximately $6.8 million due to accelerated depreciation related to asset retirements and adjustments of the estimated useful lives of certain tangible assets due to rebuilds and by approximately $4.5 million due to the depreciation of property, plant and equipment additions. These increases were substantially offset by intangible assets becoming fully amortized and as a result of the estimated useful lives of certain other intangible assets being extended. Operating income increased from $585,000 to $6.9 million during 1996 compared to 1995. The $6.4 million increase was principally due to increases in revenues in excess of increases in operating expenses as discussed above. Excluding the Eastern Georgia cable systems sold on July 1, 1996, the Company's operating income increased by $7.2 million. Interest expense, net, including the effects of interest rate hedging agreements, decreased from $95 million to $83.3 million, or by 12.3%, during 1996 compared to 1995. The decrease was due to interest expense of $3.5 million related to the increased amortization of deferred loan costs recorded during 1995, the effect of lower average interest rates (9.1% during 1996 compared to 9.4% during 1995) and lower average debt balances outstanding. Payment-in-kind interest expense associated with the Notes (under which interest payment requirements are met by delivery of additional Notes) and, in 1995 only, payment-in-kind interest expense associated with Falcon Telecable's $20 million aggregate principal amount of 11.56% Notes payable, amounted to $26.6 million during 1996 compared to $27.1 million in 1995. Interest rate hedging agreements resulted in additional interest expense of $1.0 million during 1996 and $729,000 in 1995. Due to the factors described above, the Company's net loss increased from $68 million to $74.7 million, or by 9.8%, during 1996 compared to 1995. EBITDA as a percentage of revenues increased from 51.6% during 1995 to 54.6% in 1996. The increase was primarily caused by revenue increases as described above. EBITDA increased from $119.4 million to $133.8 million, or by 12.1%. Excluding the Eastern Georgia cable systems sold on July 1, 1996, the Company's EBITDA increased from $117.7 million to $132.9 million, or by 12.9%. See footnote 6 to "Selected Consolidated Financial Data." LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary need for capital has been to acquire cable systems and to finance plant extensions, rebuilds and upgrades, and to add addressable converters to certain of the Owned Systems. The Company spent $76.3 million during 1997 on capital expenditures. In addition to the purchase of substantially all of the Falcon Classic systems in March 1998 for $76.8 million and the subsequent July 1998 purchase of Falcon Classic's Somerset system for approximately $6.5 million, management's current plan calls for the expenditure of approximately $101 million in capital expenditures in 1998, including approximately $68.2 million to rebuild and upgrade certain of the Owned Systems. The Company's proposed spending plans (including its plans for 1998) are frequently reviewed and revised with respect to changes in technology, acceptable leverage parameters (including those specified in its debt agreements), franchise requirements, competitive circumstances and other factors. 51 As noted in "Business--Overview of the Falcon Systems--The Owned Systems," many of the Falcon Systems have almost no available channel capacity with which to add new channels or to further expand pay-per-view offerings to customers. As a result, significant amounts of capital for future upgrades will be required in order to increase available channel capacity, improve quality of service and facilitate the expansion of new services, such as advertising, pay-per-view, new unregulated tiers of satellite-delivered services and home shopping, so that the Falcon Systems remain competitive within the industry. For the three-year period ended December 31, 1997, capital expenditures for line extensions, rebuilds and upgrades, and new equipment for the Company totaled approximately $171.2 million, with approximately $88 million of these capital expenditures being attributable to upgrading and rebuilding existing distribution plant. The Company postponed a number of rebuild and upgrade projects that were planned for 1994 and 1995 because of the uncertainty related to implementation of the 1992 Cable Act and the impact thereof on the Company's business and access to capital. As a result, even after giving effect to certain upgrades and rebuilds that were started or completed in 1996 and 1997, the Company's systems are significantly less technically advanced than had been expected prior to the implementation of re-regulation. The Company believes that the delays in upgrading many of its systems will, under present market conditions, most likely have an adverse effect on the value of the systems compared to systems that have been rebuilt to a higher technical standard. The Company's management has selected a technical standard that incorporates a fiber-to-the feeder architecture for the majority of its systems that are to be rebuilt. A system built with this type of architecture can provide for future channels of analog video service. Such a system will also permit the introduction of high-speed data transmission and telephony services in the future after incurring incremental capital expenditures related to these services, as well as new digital services. The Company is also evaluating the use of digital compression technology in its systems. See "Business--Technological Developments" and "--Digital Compression." The Company's future capital expenditure plans are, however, all subject to the availability of adequate capital on terms satisfactory to the Company, as to which there can be no assurances. The Company plans to finance capital expenditures with cash flow from operations and borrowings under the New Credit Facility. Subject to the Company's ability to remain in compliance with certain covenants of the New Credit Facility and the Indenture for the Debentures, the Company presently intends to spend approximately $101 million for capital expenditures in 1998. On July 12, 1996, the Company amended its principal credit facility with the Bank Credit Agreement, which provided for aggregate borrowing capacity of $775 million, in order to finance the $247.4 million acquisition of the assets of FCSC, pay transaction and financing costs of approximately $5.6 million and prepay $28.6 million of subordinated debt. As of March 31, 1998, the amount outstanding under the Bank Credit Agreement was $695.6 million and borrowings under the Bank Credit Agreement bore interest at an average rate of 7.9% (including the effect of interest rate hedging agreements). The Company has entered into fixed interest rate hedging agreements with an aggregate notional amount at March 31, 1998 of $565 million. Agreements in effect at March 31, 1998 totaled $540 million, with the remaining $25 million to become effective as certain of the existing contracts mature during the balance of 1998. The agreements serve as a hedge against interest rate fluctuations associated with the Company's variable rate debt. These agreements expire at various times through July 2001. In addition to these agreements, the Company has an interest rate swap contract with a notional amount of $25 million under which it pays variable LIBOR rates and receives fixed rate payments, and one $25 million interest rate cap contract under which the Company pays variable LIBOR rates subject to a cap of 5.49%. On June 30, 1998, the Company entered into the New Credit Facility, which provides for three committed credit facilities (one revolving credit facility and two term loans) and one uncommitted $350 million supplemental credit facility (the terms of which will be negotiated at the time the Company makes a request to draw on such facility). See "Description of Certain Indebtedness--New Credit 52 Facility." The Owned Subsidiaries, other than Falcon Video, are the initial borrowers under the New Credit Facility. The Company borrowed approximately $425.8 million under the New Credit Facility on June 30, 1998 approximately $329 million of which was used to repay the remaining indebtedness outstanding under the Bank Credit Agreement. The remaining proceeds resulted in an excess cash balance of approximately $90 million (after payment of approximately $4.5 million in fees and expenses related to the New Credit Facility). At June 30, 1998, the weighted average interest rate under the New Credit Facility was 9.4%, and the Company's aggregate remaining borrowing capacity under the New Credit Facility (excluding the supplemental credit facility) was $125 million. Management believes that borrowings under the New Credit Facility together with cash flow from operations will be adequate to meet the Company's liquidity needs for the forseeable future. On March 29, 1993, FHGLP issued $175 million aggregate principal amount of its 11% Senior Subordinated Notes due 2003 in connection with FHGLP's formation. As a result of payment-in-kind interest payments under the Notes, the aggregate principal of the Notes outstanding as of March 31, 1998 had increased to $282.2 million. Future interest payments are permitted to be paid in kind until 2000, when cash payment is required. However FHGLP, as permitted by the terms of the Indenture for the Notes, elected to begin to pay interest payments in cash beginning with the payment due March 15, 1998. This election required an amendment to the Bank Credit Agreement, which had prohibited cash interest payments on the Notes until September 30, 2000. FHGLP commenced the Notes Tender on April 20, 1998, and the Notes Tender expired on May 18, 1998, and FHGLP repurchased approximately $247.8 million aggregate principal amount of the Notes on May 19, 1998 in accordance with the terms of the Notes Tender. The Company will redeem the remaining approximately $34.4 million aggregate principal amount of the outstanding Notes prior to October 15, 1998. In addition, in connection with the Notes Tender, FHGLP solicited and received sufficient consents to amend the indenture governing the Notes to eliminate certain covenants and events of default. See "Description of Certain Indebtedness--11% Senior Subordinated Notes due 2003." On April 3, 1998, the Company consummated the offering of the Debentures. The net proceeds of approximately $631 million were used to repay certain outstanding indebtedness under the Bank Credit Agreement. Semiannual interest payments with respect to Senior Debentures will be approximately $15.7 million in the aggregate, commencing on October 15, 1998. No interest on the Senior Discount Debentures will be payable prior to April 15, 2003, unless the Issuers elect to pay cash interest. After April 15, 2003, semiannual interest payments will be approximately $35.9 million in the aggregate. The Company anticipates that cash flow from operations and, if necessary, borrowings under the New Credit Facility (or a successor credit facility) will be adequate to meet its interest payment obligations under the Debentures. If the closing of the TCI Transaction occurs prior to consummation of the Notes Redemption, New Falcon will assume the rights and obligations of FHGLP under the Indenture for the remaining outstanding Notes and will be substituted for FHGLP as an obligor under such Notes. In addition, New Falcon will assume certain other indebtedness of FHGLP and TCI, including the Debentures and amounts outstanding under the New Credit Facility. Immediately following the consummation of the TCI Transaction, New Falcon will contribute substantially all of its assets to New Falcon II (excluding the capital stock of FFC), subject to certain indebtedness to be assumed by New Falcon II, including any Notes and any indebtedness then outstanding under the New Credit Facility, but excluding the Debentures. Thus, New Falcon II will be substituted for New Falcon as the obligor under such Notes and become the sole borrower under the New Credit Facility. In connection with the decision to make interest payments on the Notes in cash and the anticipated redemption of the Notes, the Company entered into various interest rate swap agreements with three banks on February 10, 1998 in order to reduce interest costs. The agreements call for the Company to receive payments at 11% and to make payments at 7.625% for the period September 16, 1997 through September 15, 1998 on a notional principal amount of $282.2 million. The contracts further call for the 53 Company to pay at a fixed rate of 7.625% and receive interest at variable LIBOR-based rates for the period September 16, 1998 through September 15, 2003 on a notional principal amount of $297.7 million. On June 6, 1997, FHGLP and Enstar formed Enstar Finance Company, LLC ("EFC"), an unrestricted subsidiary under the Indenture. On September 30, 1997, EFC obtained a secured bank facility with $35 million of availability from two agent banks in order to obtain funds that would be loaned to certain Enstar limited partnerships. The lenders advanced $7.5 million to EFC, which in turn advanced those funds to a number of Enstar limited partnerships. The EFC bank facility is non-recourse to the Company and matures on August 31, 2001, at which time all funds previously advanced will be due in full. Beginning in August 1997, FHGI elected to self-insure the Company's cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to the geographical diversification of the Company's asset base and due to significant increases in the cost of insurance coverage and decreases in the amount of insurance coverage available. The Company continues to purchase insurance coverage in amounts it views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. FHGLP is a holding company which employs all of the Company's management personnel. Prior to October 1995, FHGLP conducted certain international investment and development activities. In October 1995, FHGLP sold certain of its international investments to FIC for approximately $6.3 million. FHGLP was reimbursed $1.9 and $1.1 million in 1995 and 1996, respectively, for operating costs related to these investments. The Company expects to incur no further liquidity obligations in respect of international investments, although the amount of reimbursement FHGLP receives from FIC with respect to the salaries of certain of its employees has been significantly reduced for 1997 and subsequent periods. All of the Owned Systems are owned by subsidiaries of FHGLP. Accordingly, FHGLP is financially dependent on the receipt of permitted payments from the Owned Systems, management and consulting fees from domestic cable ventures, and the reimbursement of specified expenses by certain of the Affiliated Systems to fund its operations. Expected increases in the funding requirements of FHGLP combined with limitations on its sources of cash may create liquidity issues for FHGLP in the future. Specifically, the former bank credit agreement permitted the Owned Subsidiaries to remit to FHGLP no more than 3.75% of their net cable revenues, as defined, in any year. The Bank Credit Agreement increased that amount to 4.25% effective July 12, 1996. For the year ended December 31, 1996, the limit was approximately $8.4 million ($3.5 million was actually remitted), for 1997 the limit was approximately $10.4 million ($6.8 million was actually remitted), and for the three-month period ended March 31, 1998, the limit was $2.8 million ($2.6 million was actually remitted). As a result of the 1998 acquisition of the Falcon Classic systems, FHGLP will no longer receive management fees and reimbursed expenses from Falcon Classic. Receivables from the Affiliated Systems for services and reimbursements described above amounted to approximately $11.3 million at March 31, 1998, which amount includes $7.5 million of notes receivable from the Enstar Systems. If the TCI Transaction is consummated as presently structured, as to which there can be no assurance, the management personnel will become employees of New Falcon and New Falcon will be the obligor on the Debentures, but New Falcon II will be the obligor under any Notes that remain outstanding after the Notes Tender and will be the sole borrower under the New Credit Facility. Consequently, New Falcon will have the same liquidity issues as outlined above and will continue to be dependent on distributions from New Falcon II, subject to restrictions in the New Credit Facility. See "Risk Factors--Dependence on Receipt of Funds From Operating Subsidiaries to Service Debentures; Structural Subordination." The Company has historically pursued a strategy of seeking to acquire attractive acquisition candidates, with an emphasis on the acquisition of systems which can be integrated with its existing operations. Over the past two years, the Company has emphasized the acquisition of Affiliated Systems due to its familiarity with these assets and because, in many cases, these assets were already operationally integrated with Owned Systems located nearby. The Company cannot predict whether it will have access to adequate 54 capital in the future to make further acquisitions of cable systems. The Company frequently considers opportunities to sell assets that it views as non-strategic. Effective as of December 31, 1997, FHGLP and certain other parties entered into a settlement agreement resolving and settling a putative class action lawsuit relating to FHGLP's acquisition of the Falcon Classic systems. In exchange for a complete dismissal of the lawsuit with prejudice and releases, and without admitting or conceding any fault, liability or wrongdoing whatsoever, FHGLP and the other defendants agreed to establish a settlement fund which, net of agreed-upon insurance proceeds, amounted to $750,000 plus interest at 10% on the gross settlement amount of $1,250,000 from January 1, 1998 through closing of the sale, as defined in the settlement agreement. FHGLP estimates its portion of the total net amount of the settlement, including its legal fees, will be approximately $1.0 million. The defendants also agreed to pay interest at a rate of 10% per annum on the projected net sales proceeds of $64 million from January 1, 1998 through the closing of the sale of substantially all of the Falcon Classic systems, which occurred in March 1998. Such interest increased the aggregate sales price of these systems by $1.1 million. A putative class action complaint has been filed against certain Falcon Systems in Missouri alleging that the systems' practice of charging a fee to subscribers whose payments are late constitutes an invalid liquidated damages provision. Plaintiffs seek recovery of all late fees paid to those systems as a class purporting to consist of all subscribers in Missouri who were assessed such fees during the applicable limitations period. Similar lawsuits have been filed against various other MSOs around the country. Although there can be no assurances, based in part upon the outcome of other similar lawsuits against other MSOs, the Company's management does not believe that the disposition of the Missouri lawsuit will have a material adverse effect on the Company. In addition, the Company understands that certain of the TCI Systems are involved with similar lawsuits. The Existing FHGLP Partnership Agreement contains provisions that may require FHGLP to purchase substantially all of the limited partnership interests in FHGLP held by its Group I, Group II and Group III limited partners (constituting approximately 60% of the common equity of FHGLP), at the holders' option. Certain of these interests are mandatorily redeemable at certain dates. Limited partnership interests held by the Group IV limited partner of FHGLP become redeemable at a later date, subject to certain shared liquidity rights. In contemplation of the TCI Transaction, by agreement of the Group I, Group II, Group III and Group IV partners, the dates on which the partners may exercise certain put rights and the dates by which FHGLP is required to redeem certain partnership interests were tolled in accordance with the Contribution Agreement. The new dates are determined by adding to the original date the number of days in the period beginning on December 1, 1997 and ending ninety days after the earlier of December 31, 1998 or the date that the Contribution Agreement is terminated in accordance with its terms. As a result, assuming that the Contribution Agreement is not terminated prior to December 31, 1998, FHGLP may be required to purchase the partnership interests held by the Group I, Group II and Group III partners during the period of January 2000 to October 2000, with the Class C preferred partnership interests held by the Group IV partner becoming mandatorily redeemable in July 2005. If the Contribution Agreement is terminated prior to December 31, 1998, FHGLP may be required to redeem certain partnership interests earlier than the dates set forth above. Subject to certain customary exceptions, the Contribution Agreement may not be terminated without the consent of FHGLP prior to December 31, 1998. The purchase price for all such partnership interests (other than Class C preferred partnership interests, which are valued at their liquidation value as determined in accordance with the Existing FHGLP Partnership Agreement) will generally be determined through a third party appraisal mechanism, as specified in the Existing FHGLP Partnership Agreement, at the time such interests are redeemed, or through negotiation. The estimated purchase price of such non-preferred partnership interests at March 31, 1998 was approximately $120 million, based on preliminary estimates by management which are subject to change. The purchase price is to be paid in cash or, under certain circumstances, may be paid through the issuance of debt or equity securities. The redemption value of the Class C partnership interests 55 will generally be determined based on a formula due to the preferred status of such Class C interests. The Class C interests had an aggregate liquidation value of $51.4 million as of December 31, 1997. Certain of the Company's debt agreements (including the New Credit Facility) restrict the Company's ability to (i) make distributions to fund the purchase of these partnership interests pursuant to the provisions described above, (ii) incur indebtedness or issue debt securities in connection with such purchase or (iii) sell a substantial amount of its assets. The obligations of FHGLP to redeem any significant amount of its limited partnership interests would result in a material liquidity demand on FHGLP, and there can be no assurance that FHGLP would be able to raise funds to meet such obligations on terms acceptable to FHGLP, or at all. FHGLP has not identified a source for funding any material redemption obligation at this time. Upon completion of the TCI Transaction, the existing liquidity rights will be terminated and be replaced by certain new liquidity rights provided to the non-management limited partners in the New FHGLP Partnership Agreement and the New Falcon Partnership Agreement. See "Risk Factors-- Obligations of FHGLP to Redeem Limited Partnership Interests," "The TCI Transaction" and "Description of the Partnership Agreements--Existing FHGLP Partnership Agreement" and "--New FHGLP Partnership Agreement." The "Year 2000" issue refers to certain contingencies that could result from computer programs being written using two digits rather than four to define the year. Many existing computer systems, including certain of the Company's computer systems, process transactions based on two digits for the year of the transaction (for example, "98" for 1998). These computer systems may not operate effectively when the last two digits become "00," as will occur on January 1, 2000. Management has commenced an assessment of its Year 2000 business risks and its exposure to computer systems, to operating equipment which is date sensitive and to the interface systems of its vendors and service providers. Based on a preliminary study, the Company's management has concluded that certain of its information systems were not Year 2000 compliant and has elected to replace such software and hardware with Year 2000 compliant applications and equipment, although the decision to replace major portions of such software and hardware had previously been made without regard to the Year 2000 issue based on operating and performance criteria. Replacement costs will be capitalized in accordance with generally accepted accounting principles and amortized over the lives of the assets. Maintenance costs will be expensed as incurred. Management expects to install substantially all of the new systems in 1998, with the remaining systems to be installed in the first half of 1999. The total anticipated cost, including replacement software and hardware, is expected to be approximately $1.5 million. In addition to evaluating internal systems, the Company's management is currently assessing its exposure to risks associated with its operating and revenue generating equipment and has also initiated communications with significant third party vendors and service suppliers to determine the extent to which the Company's interface systems are vulnerable should those third parties fail to solve their own Year 2000 problems on a timely basis. Management currently expects that the cost to replace non-compliant equipment will be determined during the third quarter of 1998. There can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted and that the failure to do so would not have an adverse impact on the Company's business. The Company continues to closely monitor developments with its vendors and service suppliers. 56 The following table sets forth, on a historical basis, for the periods indicated certain items from FHGLP's Consolidated Statements of Cash Flows:
YEAR ENDED DECEMBER 31, ----------------------------------- THREE MONTHS ENDED 1995 1996 1997 MARCH 31, 1998 ---------- ----------- ---------- ------------------- (IN THOUSANDS OF DOLLARS) Net cash provided by operating activities: Net loss............................................. $ (25,235) $ (49,985) $ (60,838) $ (18,909) Payment-in-kind interest expense..................... 27,127 26,580 20,444 -- Depreciation and amortization........................ 54,386 100,415 118,856 31,079 Gain on sale of securities........................... (13,267) (2,264) -- -- Other................................................ 151 15,885 1,075 (9,441) ---------- ----------- ---------- -------- $ 43,162 $ 90,631 $ 79,537 $ 2,729 ---------- ----------- ---------- -------- ---------- ----------- ---------- -------- Net cash used in investing activities: Capital expenditures................................. $ (37,149) $ (57,668) $ (76,323) $ (18,021) Sale of available-for-sale securities................ 13,487 9,502 -- -- Acquisitions of cable television systems, net of cash............................................... 2,655 (247,397) -- (76,789) Proceeds from sale of cable systems.................. -- 15,000 -- -- Other................................................ (1,667) (3,684) 36 (508) ---------- ----------- ---------- -------- $ (22,674) $ (284,247) $ (76,287) $ (95,318) ---------- ----------- ---------- -------- ---------- ----------- ---------- -------- Net cash (used in) provided by financing activities: Net borrowings, (repayments)......................... $ (9,866) $ 191,022 $ (3,222) $ 89,834 Capital contributions................................ -- 5,000 93 -- Deferred loan costs.................................. (6,320) (3,823) (29) -- Other................................................ 280 -- 192 -- ---------- ----------- ---------- -------- $ (15,906) $ 192,199 $ (2,966) $ 89,834 ---------- ----------- ---------- -------- ---------- ----------- ---------- --------
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Cash provided by operating activities (including interest expense and management fee income) decreased from $15.3 million to $2.7 million, or by 82.2%, for the three months ended March 31, 1998 compared to the corresponding period in 1997, a decrease of $12.6 million. The decrease resulted primarily from a net decrease of $5.6 million in other operating items (receivables, other assets, payables, accrued expenses and subscriber deposits and prepayments) and from the fact that in 1997, unlike 1998, the Company incurred $7 million of payment-in-kind interest expense related to the 11% Notes. Cash used in investing activities increased from $10.9 million to $95.3 million, or by 771.2%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The increase was primarily due to the 1998 acquisition of the Falcon Classic assets for $76.8 million and to an increase in capital expenditures of $7.4 million. Cash from financing activities changed from a $7.2 million use of cash to cash provided of $89.8 million for the three months ended March 31, 1998 compared to the corresponding period in 1997. The change was due primarily to additional borrowings of debt in 1998 related to the acquisition of the Falcon Classic assets and to the increase in capital expenditures. 57 1997 COMPARED TO 1996 Cash provided by operating activities (including interest expense and management fee income) decreased from $90.6 million to $79.5 million, or by 12.3%, for the year ended December 31, 1997 compared to the corresponding period in 1996. The $11.1 million decrease resulted primarily from a net decrease of $5 million of cash provided or used by other operating items (changes in receivables, cable materials and supplies, payables, accrued expenses and subscriber deposits and prepayments), and a $6.1 million decrease in payment-in-kind interest expense related to the Debentures. Cash used in investing activities decreased from $284.2 million to $76.3 million, or by 73.2%, for the year ended December 31, 1997 compared to the corresponding period in 1996. The decrease was primarily due to the 1996 acquisition of FCSC's cable assets for $247.4 million, partially offset by an increase in capital expenditures of $18.7 million. Additionally, 1996 included cash proceeds from the sale of a system and net proceeds received upon the sale of its shares in Comcast UK. Cash from financing activities decreased from cash provided of $192.2 million for the year ended December 31, 1996 to a use of cash of $3 million in 1997. The change was due primarily to decreased borrowing activity in 1997. 1996 COMPARED TO 1995 Cash provided by operating activities (including interest expense and management fee income) increased from $43.2 million to $90.6 million, or by 109.7%, for the year ended December 31, 1996 compared to the corresponding period in 1995. The $47.4 million increase resulted primarily from a net increase of $47.9 million of cash provided or used by other operating items (changes in receivables, cable materials and supplies, payables, accrued expenses and subscriber deposits and prepayments). Cash used in investing activities increased from $22.7 million to $284.2 million, or by 1,152.0%, for the year ended December 31, 1996 compared to the corresponding period in 1995. The change was due primarily to the $247.4 million acquisition on July 12, 1996 of the FCSC assets and an increase in capital expenditures of $20.5 million. These increases were partially offset by $15 million of cash provided in 1996 in connection with the sale of a system and $4 million less proceeds from the sale of securities. Cash flows from financing activities increased from a use of cash of $15.9 million for the year ended December 31, 1995 to cash provided of $192.2 million in 1996, or a change of $208.1 million. The change was due primarily to increased net borrowings in 1996. INFLATION Certain of the Company's expenses, such as those for wages and benefits, equipment repair and replacement, and billing and marketing generally increase with inflation. However, the Company does not believe that its financial results have been, or will be, adversely affected by inflation in a material way, provided that it is able to increase its service rates periodically, of which there can be no assurance due to the re-regulation of rates charged for certain cable services. See "Legislation and Regulation." RECENT ACCOUNTING PRONOUNCEMENTS The Company has considered the effects of recently issued accounting pronouncements from the Financial Accounting Standards Board and the American Institute of Certified Public Accountants and currently believes that the impact of such standards will not have a material impact on the Company's financial position and results of operations. 58 BUSINESS INTRODUCTION The Company owns or manages cable television systems in 26 states. On December 30, 1997, FHGLP entered into a definitive agreement with TCI to consolidate substantially all of the Company's cable television systems and certain systems owned and operated by affiliates of TCI. Upon consummation of the TCI Transaction, the Company will be the 13th largest cable television operator in the United States, serving subscribers principally in California, Oregon, Washington, Missouri and Alabama. After giving effect to the TCI Transaction, the Company would have served approximately 1,070,000 basic subscribers at March 31, 1998. The Company's Owned Systems are located in 23 states, principally California, Oregon, Missouri, Georgia, North Carolina, Texas and Kentucky. As of March 31, 1998, the Owned Systems passed approximately 1,008,000 homes and served approximately 607,000 basic subscribers. The Company also holds varying equity interests in and manages certain other cable television systems. The Affiliated Systems are located in 14 states, including South Carolina, Kentucky, Illinois, Washington and Tennessee. As of March 31, 1998, the Affiliated Systems passed approximately 262,000 homes and served approximately 170,000 basic subscribers. The Company is a leading operator of cable systems primarily located in small to medium-sized communities and suburban areas surrounding large and medium-sized cities proximate to many of the major DMAs. Management believes that the Company's cable systems generally have higher operating cash flow margins and more predictable operating cash flow and are subject to less risk of increased competition than systems in large urban cities. In many of the Company's markets, consumers have access to only a limited number of over-the-air broadcast television signals. In addition, these markets typically offer fewer competing entertainment alternatives than large urban cities. Management believes that its cable television systems generally have a more stable customer base and generally have lower labor, operating and system construction costs than systems in urban markets. A cable television system receives television, radio and data signals at the system's "headend" site by means of over the air antennas, microwave relay systems and satellite earth stations. These signals are then modulated, amplified and distributed, primarily through coaxial and fiber optic distribution systems, to customers who pay a fee for this service. Cable television systems may also originate their own television programming and other information services for distribution through the system. Cable television systems generally are constructed and operated pursuant to non-exclusive franchises or similar licenses granted by local governmental authorities for a specified term of years. The Falcon Systems offer customers various levels (or "tiers") of cable services consisting of broadcast television signals of local network, independent and educational stations, a limited number of television signals from so-called "super stations" originating from distant cities (such as WGN), various satellite-delivered, non-broadcast channels (such as Cable News Network ("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"), ESPN, Turner Network Television ("TNT"), WTBS and The Disney Channel), programming originated locally by the cable television system (such as public, educational and governmental access programs) and informational displays featuring news, weather, stock market and financial reports and public service announcements. A number of the satellite services are also offered in certain packages. For an extra monthly charge, the Falcon Systems offer "premium" television services to their customers. These services (such as Home Box Office ("HBO") and Showtime) are satellite channels that consist principally of feature films, live sporting events, concerts and other special entertainment features, usually presented without commercial interruption. A customer generally pays an initial installation charge and fixed monthly fees for basic, expanded basic, other tiers of satellite services, premium programming services and the lease of cable-related equipment. Such monthly service fees constitute the primary source of revenues for the Falcon Systems. In 59 addition to customer revenues, the Falcon Systems receive revenue from additional fees paid by customers for pay-per-view programming of movies and special events and from the sale of available advertising spots on advertiser-supported programming. The Falcon Systems also offer to their customers home shopping services, which pay the Company a share of revenues from sales of products in the System's service areas, in addition to paying the System a separate fee in return for carrying their shopping service. Certain other new channels have also recently offered the Falcon Systems certain inducements in return for carrying their service. Due to a general lack of channel capacity available for adding new channels, management cannot predict the impact of such potential benefits on the Company's business. Led by the Chairman of the Board and Chief Executive Officer of FHGI, Marc B. Nathanson, and the President and Chief Operating Officer of FHGI, Frank J. Intiso, Falcon's senior management has on average over 19 years of experience in the cable industry and has worked together for over a decade. Mr. Nathanson, a 30-year veteran of the cable business, is a director and a member of the Executive Committee of the National Cable Television Association and a past winner of its prestigious Vanguard Award for outstanding contributions to the growth and development of the cable television industry. Mr. Intiso is a 19-year veteran of the cable industry. He also serves as Immediate Past Chair of the California Cable Television Association and is active in various industry boards including the Board of the Community Antenna Television Association ("CATA"). BUSINESS STRATEGY FOCUS ON SMALL AND MEDIUM-SIZED MARKETS. The Company has followed a systematic approach to acquiring, consolidating, operating and developing cable television systems based on the primary goal of increasing operating cash flow while maintaining the quality of its services. The Company's business strategy has focused on serving small to medium-sized communities and the suburbs of certain cities, including Los Angeles, St. Louis, Eugene, Salem, Portland (Oregon), Norfolk, Little Rock, San Luis Obispo, Seattle, San Jose, Corpus Christi and Huntsville. The Company believes that given a similar technical and channel capacity/utilization profile, its cable television systems generally involve less risk of increased competition than systems in large urban cities. Because the Company operates in geographically and economically diverse markets across the United States, the Falcon Systems, taken as a whole, are not dependent on any single local economy, are resistant to regional economic fluctuations, and provide the Company with stable revenue and operating cash flow streams. However, it is the goal of the Company to consolidate its operations in fewer states while continuing its geographic and economic market diversity and maintaining or increasing its current revenue and cash flow. CLUSTERING OF CABLE SYSTEM PROPERTIES. To date, the Company has sought to acquire cable television systems in communities that are within the same DMAs as other cable television systems owned or managed by Falcon in order to maximize the economies of scale and operating efficiencies associated with "clusters" of systems. Management plans to continue its acquisition strategy by pursuing opportunities to purchase cable television systems in the Company's existing DMAs as well as by entering new DMAs, if and when attractive acquisition opportunities become available. Any such acquisitions, which could be substantial in size, may involve cable systems owned by affiliated entities. In addition to opportunities to acquire systems, management expects to pursue opportunities to exchange certain of its systems for other cable television properties with both TCI and other cable operators, to further facilitate the Company's clustering strategy, and to concentrate in fewer states. REBUILD AND UPGRADE CABLE SYSTEMS. Through the upgrade of its cable plant, including the utilization of addressable technology, fiber optic cable and digital compression, the Company seeks to benefit from providing additional tiers of programming and from the further development of advertising, pay-per-view and home shopping services, as well as possible future services such as Internet access, video-on-demand and other interactive services. In addition to these potential revenue growth opportunities, upgraded plant will provide enhanced picture quality and system reliability, reduced operating costs and improved overall customer satisfaction. Currently, the Owned Systems have an average capacity of 48 channels and 60 approximately 74% of their subscribers are served by systems that utilize addressable technology. Through a significant capital expenditure program, the Company plans to increase this channel capacity in most of its clusters by deploying fiber optic cable, digital compression or both. However, many of the Falcon Systems have almost no available channel capacity with which to add new channels or to further expand pay-per-view offerings to customers. As a result, significant amounts of capital for future upgrades will be required in order to increase available channel capacity, improve quality of service and facilitate the expansion of new services such as advertising, pay-per-view, new unregulated tiers of satellite-delivered services and home shopping, so that the Falcon Systems remain competitive within the industry. See "Risk Factors--Lack of Available Channel Capacity for New Channels or Expanded Service," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Legislation and Regulation." MAXIMIZE REVENUES AND CASH FLOW MARGINS. The Company seeks to maximize revenues by increasing subscriptions to basic, expanded basic, and other tiers of satellite services and premium programming services through a combination of innovative marketing programs, an emphasis on customer service and active community relations. As a result of the Company's success in facilitating revenue growth, combined with operating efficiencies generated by the Company's clustering strategy, economies of scale, volume discounts for cable programming and decentralized management structure, the Company believes its operating cash flow margins have been and continue to be among the highest in the cable television industry. BENEFIT FROM PARTNERSHIP WITH TCI. The Company expects to benefit substantially from its partnership with TCI, one of the leading cable television operators in the world. The Company expects that it will derive numerous operational synergies from its partnership with TCI, including increased concentration of cable systems, purchasing discounts and other economies arising from more streamlined management of Company assets and those assets contributed by TCI. The Company also expects that its partnership with TCI may increase the Company's access to and recognition in the capital markets. Furthermore, the Company expects to benefit from access to TCI's substantial resources in the areas of technical and engineering research. The Company believes that its partnership with TCI will result in increased availability of certain technological innovations, including state-of-the-art digital converters, cable modems and HITS digitally compressed programming services. The Company will also benefit from the expertise and valuable industry knowledge of TCI's Leo J. Hindery, Jr. and William R. Fitzgerald, who will join New Falcon's Advisory Committee upon consummation of the TCI Transaction. USE DECENTRALIZED MANAGEMENT TO KEEP "CLOSE TO THE CUSTOMER." The Company manages the Falcon Systems through 42 separate regional service centers in 26 states. In some circumstances, both Owned Systems and Affiliated Systems are operated through the same regional service center to take advantage of cost efficiencies. The Company believes that its decentralized management structure, by enhancing management presence at the system and state level, increases its sensitivity to the needs of its customers, enhances the effectiveness of its customer service efforts, eliminates the need for maintaining a large centralized corporate staff and facilitates the maintenance of good relations with local governmental authorities. MARKET AND PACKAGE PROGRAMMING TIERS. The Company has made substantial changes in the way in which it packages and sells its services and equipment in the course of its implementation of the FCC's rate regulations promulgated under the 1992 Cable Act. Pursuant to the FCC's rules, the Company has set rates for cable-related equipment (E.G., converter boxes and remote control devices) and installation services based upon actual costs plus a reasonable profit and has unbundled these charges from the charges for the provision of cable service. In addition, in some systems, the Company began offering programming services on an a la carte basis that were previously offered only as part of a package. Services offered on an a la carte basis typically were made available for purchase both individually and on a combined basis at a lower rate than the aggregate a la carte rates. The FCC subsequently amended its 61 rules to exclude from rate regulation newly created packages of program services consisting only of programming new to a cable system. The FCC also decided that newly-created packages containing previously offered non-premium programming services will henceforth be subject to rate regulation, whether or not the services also are available on an existing a la carte basis. With respect to a la carte programming packages created by the Company and numerous other cable operators, the FCC decided that where only a few services had been moved from regulated tiers to a non-premium programming package, the package will be treated as if it were a tier of new program services, and thus not subject to rate regulation. Substantially all of the a la carte programming packages offered by the Company have received this desirable treatment. These amendments to the FCC's rules have allowed the Company to resume its core marketing strategy and reintroduce program service packaging. As a result, in addition to the basic service package, customers in substantially all of the systems may purchase an expanded group of regulated services, additional unregulated packages of satellite-delivered services and premium services. The premium services may be purchased on either an a la carte or a discounted package basis. See "Legislation and Regulation." The TCI Systems to be owned and operated by New Falcon upon consummation of the TCI Transaction did not implement the type of programming tier marketing strategy that Falcon utilized in the wake of cable rate regulation. As a result, those TCI Systems do not generally have, as the Falcon Systems do, multiple levels of unregulated programming tiers and programming packages. Under current FCC regulations, New Falcon generally does not expect to be able to implement in the TCI Systems the same type of unregulated programming tier structures that exist in the Falcon Systems. The Company has employed a variety of targeted marketing techniques to attract new customers by focusing on delivering value, choice, convenience and quality. The Company employs direct mail, radio and local newspaper advertising, telemarketing and door-to-door selling utilizing demographic "cluster codes" to target specific messages to target audiences. In many systems, the Company offers discounts to customers who purchase premium services on a limited trial basis in order to encourage a higher level of service subscription. The Company also has a coordinated strategy for retaining customers that includes televised retention advertising to reinforce the initial decision to subscribe and encourage customers to purchase higher service levels. ENHANCE QUANTITY AND QUALITY OF PRODUCTS AND SERVICES WITH SYSTEM UPGRADES. The Company believes that the increase in channel capacity resulting from the rebuild of its systems and the introduction of digital compression technology create attractive opportunities to enhance value and to market additional services to its existing and prospective customers. A typical rebuild involves state-of-the-art fiber to the feeder technology, with a typical bandwidth of 750 MHz and nodes of 500 homes. This platform delivers significant improvements in service reliability and picture quality. In addition, a 750 MHz system generally provides up to 95 channels of analog capacity. This additional capacity is used to add channels to existing service tiers, to create new service tiers, to introduce multiplexing of premium services and to increase the number of pay-per-view channels. Finally, when marketing the new and expanded service to its customers, the Company generally upgrades its addressable technology by deploying advanced analog converters with a digital music service and/or an interactive program guide. Digital compression can be used to deliver even more channels over an already rebuilt system and, in some cases, is used to add additional channels in lieu of or in advance of a rebuild. TCI has led the cable industry in developing digital technology and is technologically capable of delivering digital video services in approximately 70% of the systems that it is contributing to New Falcon. The Company continues to evaluate digital compression as both a complement and/or a substitute for analog rebuilds. EMPHASIZE CUSTOMER SERVICE AND COMMUNITY RELATIONS. The Company places a strong emphasis on customer service and community relations and believes that success in these areas is critical to its business. The Company has developed and implemented a wide range of monthly internal training programs for its employees, including its regional managers, that focus on the Company's operations and employee 62 interaction with customers. The effectiveness of the Company's training program as it relates to the employees' interaction with customers is monitored on an ongoing basis, and a portion of the regional managers' compensation is tied to achieving customer service targets. The Company conducts an extensive customer survey on a periodic basis and uses the information in its efforts to enhance service and better address the needs of its customers. In addition, the Company is participating in the industry's Customer Service Initiative which emphasizes an on-time guarantee program for service and installation appointments. The Company's corporate executives and regional managers lead the Company's involvement in a number of programs benefiting the communities the Company serves, including, among others, CABLE IN THE CLASSROOM, Drug Awareness, Holiday Toy Drive and the Cystic Fibrosis Foundation. Cable in the Classroom is the cable television industry's public service initiative to enrich education through the use of commercial-free cable programming. In addition, a monthly publication, Cable in the Classroom magazine, provides educational program listings by curriculum area, as well as feature articles on how teachers across the country use the programs. THE TCI TRANSACTION Pursuant to the Contribution Agreement, FHGLP, TCI, the existing partners of FHGLP and the investors in Falcon Video have agreed to consolidate under the ownership and control of New Falcon, a holding company to be owned by FHGLP and TCI, substantially all of the Falcon Systems and all of the TCI Systems. As a result of the TCI Transaction, New Falcon will own systems that served approximately 975,000 basic subscribers in 25 states as of March 31, 1998. New Falcon will also manage the Enstar Systems, which served approximately 95,000 basic subscribers as of March 31, 1998. As such, New Falcon will own or manage systems that served approximately 1,070,000 basic subscribers in 26 states as of March 31, 1998. The TCI Systems will be consolidated into and operated by the Owned Subsidiaries. As used in this Prospectus, the "TCI Transaction" refers individually and collectively, as the context may require, to the transactions contemplated by the Contribution Agreement, as it may be amended, modified or supplemented. See "--Overview of the TCI Systems" and "--Overview of the Falcon Systems." FHGLP will own approximately 53% of the equity of New Falcon and will serve as the managing general partner of New Falcon. TCI will own approximately 47% of the equity of New Falcon. The respective ownership percentages of FHGLP and TCI in New Falcon are subject to possible adjustment pursuant to the Contribution Agreement. The actual ownership percentages of FHGLP and TCI will be based on the relative net fair market value of the capital contributions to be made by FHGLP and TCI to New Falcon. The values of the contributed Falcon Systems and the TCI Systems have been agreed to and are specified in the Contribution Agreement. To calculate the value of each partner's contribution, the value of its systems will be adjusted to reflect additional current assets to be contributed to New Falcon, the amount of certain capital expenditures made by the partner prior to the contribution, and the amount of liabilities to be assumed by New Falcon. A partner may also be required to contribute cash to New Falcon to offset any diminution in the value of its contributed systems from certain causes (such as casualty losses or certain undisclosed liabilities), but these contributions will not result in an adjustment to the partners' percentage interests. For a description of the principal steps involved in the TCI Transaction, see "The TCI Transaction." FHGI will continue to serve as the sole general partner of FHGLP. As such, subject to certain governance provisions set forth in the New Falcon Partnership Agreement, Falcon and its senior management will continue to manage the business and day-to-day operations of New Falcon. For additional information regarding the governance and management of New Falcon following consummation of the TCI Transaction, see "Description of the Partnership Agreements--New Falcon Partnership Agreement." The Company expects to benefit substantially from its partnership with TCI, one of the leading cable television operators in the world. The Company expects that it will derive numerous operational synergies from its partnership with TCI, including increased concentration of cable systems, purchasing discounts and other economies arising from more streamlined management of Company assets and those assets 63 contributed by TCI. The Company also expects that its partnership with TCI may increase the Company's access to and recognition in the capital markets. Furthermore, the Company expects to benefit from access to TCI's substantial resources in the areas of technical and engineering research. The Company believes that its partnership with TCI will result in increased availability of certain technological innovations, including state-of-the art digital converters, cable modems, and HITS digitally compressed cable television programming services. The Company will also benefit from the expertise and valuable industry knowledge of TCI's Leo J. Hindery, Jr. and William R. Fitzgerald, who will join New Falcon's Advisory Committee upon consummation of the TCI Transaction. See "Management" and "Certain Relationships and Related Transactions." The Company will redeem the approximately $34.4 million aggregate principal amount of remaining outstanding Notes prior to October 15, 1998, in accordance with the redemption provisions of the indenture governing the Notes. The Notes are redeemable at the option of the obligor, in whole or in part, at any time on or after September 15, 1998, at 105.5% of the outstanding principal amount, plus accrued interest to the redemption date. If the TCI Transaction is consummated before all of the Notes have been redeemed, New Falcon will initially assume (subject to a subsequent assumption by New Falcon II, as described below) the rights and obligations of FHGLP under the Notes. See "Capitalization" and "Description of Certain Indebtedness--11% Senior Subordinated Notes Due 2003." Management anticipates that, immediately following the consummation of the TCI Transaction, New Falcon will contribute substantially all of its assets, excluding the capital stock of FFC, to New Falcon II, subject to certain indebtedness to be assumed by New Falcon II, including any Notes that remain outstanding and indebtedness outstanding under the New Credit Facility, but excluding the Debentures. Thus, New Falcon II will be substituted for New Falcon as the obligor under the Notes and became the sole borrower under the New Credit Facility, and FFC will continue to be an obligor under the Debentures as a wholly-owned subsidiary of New Falcon. See "Risk Factors--Dependence Upon Receipt of Funds From Operating Subsidiaries to Service Debentures; Structural Subordination." The consummation of the TCI Transaction is also subject to, among other things, the satisfaction of customary closing conditions and the receipt of certain third-party and governmental approvals, including the consent of franchising authorities. Although there can be no assurances that such closing conditions will be satisfied or that the TCI Transaction will be consummated, management presently anticipates that the TCI Transaction will be completed in the third quarter of 1998. See "Risk Factors--Conditions of Closing the TCI Transaction." On June 24, 1998, AT&T Corp. and Tele-Communications, Inc. announced that they have entered into an agreement under which AT&T Corp. would acquire Tele-Communications, Inc. by merger. Although there can be no assurances as to whether this merger will be consummated, the Company does not anticipate that this proposed merger will have any material adverse effect upon the consummation of the TCI Transaction. 64 OVERVIEW OF THE FALCON SYSTEMS The following table sets forth certain operating statistics for the Falcon Systems as of the dates indicated.
AS OF DECEMBER 31, ---------------------------------------------------------- AS OF 1993(1) 1994 1995(2) 1996(3) 1997 MARCH 31, 1998 ---------- ---------- ---------- ---------- ---------- -------------- (AT END OF PERIOD, EXCEPT AVERAGE DATA) HOMES PASSED(4) Owned Systems.................... 546,702 562,616 691,941 924,030 937,786 1,007,614 Affiliated Systems*.............. 501,872 513,954 407,754 178,294 180,823 111,121 Enstar Systems................... 138,926 140,154 141,922 148,907 150,319 150,672 ---------- ---------- ---------- ---------- ---------- -------------- Total............................ 1,187,500 1,216,724 1,241,617 1,251,231 1,268,928 1,269,407 BASIC SUBSCRIBERS(5) Owned Systems.................... 342,406 360,835 442,166 570,708 562,984 606,937 Affiliated Systems*.............. 322,369 330,179 260,005 118,603 118,829 74,797 Enstar Systems................... 92,015 95,311 96,972 96,384 94,898 95,086 ---------- ---------- ---------- ---------- ---------- -------------- Total............................ 756,790 786,325 799,143 785,695 776,711 776,820 BASIC PENETRATION(6) Owned Systems.................... 62.6% 64.1% 63.9% 61.8% 60.0% 60.2% Affiliated Systems*.............. 64.2 64.2 63.8 66.5 65.7 67.3 Enstar Systems................... 66.2 68.0 68.3 64.7 63.1 63.1 Combined......................... 63.7% 64.6% 64.4% 62.8% 61.2% 61.2% PREMIUM SERVICE UNITS(7) Owned Systems.................... 154,846 165,137 186,477 203,679 165,960 183,234 Affiliated Systems*.............. 151,965 158,326 108,225 45,909 40,548 25,376 Enstar Systems................... 32,881 36,632 35,585 31,750 26,504 25,798 ---------- ---------- ---------- ---------- ---------- -------------- Total............................ 339,692 360,095 330,287 281,338 233,012 234,408 PREMIUM PENETRATION(8) Owned Systems.................... 45.2% 45.8% 42.2% 35.7% 29.5% 30.2% Affiliated Systems*.............. 47.1 48.0 41.6 38.7 34.1 33.9 Enstar Systems................... 35.7 38.4 36.7 32.9 27.9 27.1 Combined......................... 44.9% 45.8% 41.3% 35.8% 30.0% 30.2% AVERAGE MONTHLY REVENUE PER BASIC SUBSCRIBER(9) Owned Systems.................... $ 32.71 $ 32.43 $ 32.77 $ 34.22 $ 36.67 $ 36.56 Affiliated Systems*.............. 30.28 32.50 31.75 34.50 36.81 36.13 Enstar Systems................... 30.01 29.69 30.41 32.71 35.00 35.39 Combined......................... $ 31.36 $ 32.13 $ 32.15 $ 34.08 $ 36.49 $ 36.51
- ------------------------ * As of December 31, 1997, Affiliated Systems consisted of the cable systems owned by Falcon Classic and Falcon Video. Substantially all of the Falcon Classic systems became Owned Systems in March 1998, and, therefore, at March 31, 1998 the Affiliated Systems consisted of the Falcon Classic Somerset system and Falcon Video. The Falcon Somerset System became an Owned System in July 1998. Following the consummation of the TCI Transaction, the Falcon Video systems will become Owned Systems. (1) The December 31, 1993 data for the Affiliated Systems do not include the statistics for the systems owned by Vista Communications Limited Partnership III ("Vista"). Vista sold those systems on 65 December 23, 1994. Accordingly, in order to provide a comparable presentation, the statistics for the Vista systems have been removed from the table above for 1993. (2) On December 28, 1995, the Company acquired all of the direct and indirect ownership interests in Falcon First that it did not previously own, and, as a result, the systems of Falcon First became Owned Systems; previously they were reported as Affiliated Systems. On July 1, 1996, the Company sold certain of the Falcon First systems. As a result, comparisons of 1996 and 1995 to prior years must take these changes into account. At December 31, 1997, 1996 and 1995, respectively, Falcon First had approximately 97,549, 96,318 and 114,682 homes passed, 67,601, 68,212 and 77,258 basic subscribers and 22,230, 29,571 and 36,413 premium service units, respectively. At December 31, 1994, the corresponding totals for Falcon First were 113,403, 75,688 and 38,756, respectively. At July 1, 1996, the Falcon Systems that were sold had approximately 18,957 homes passed, 9,547 basic subscribers and 3,932 premium service units. (3) On July 12, 1996, the Company acquired the assets of FCSC, and, as a result, the systems of FCSC became Owned Systems; previously they were reported as Affiliated Systems. As a result, comparisons of 1996 to prior years must take this change into account. At December 31, 1997 and 1996, respectively, the FCSC systems had approximately 245,807 and 239,431 homes passed, 127,315 and 140,599 basic subscribers and 33,844 and 44,199 premium service units. At December 31, 1995 and 1994, the corresponding totals for the FCSC systems were 233,304 and 228,522 homes passed, 140,642 and 138,196 basic subscribers and 52,694 and 59,732 premium service units. (4) Homes passed refers to estimates by the Company of the approximate number of dwelling units in a particular community that can be connected to the distribution system without any further extension of principal transmission lines. Such estimates are based upon a variety of sources, including billing records, house counts, city directories and other local sources. (5) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts are included on a "basic customer equivalent" basis in which the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. (6) Basic subscribers as a percentage of homes passed. (7) Premium service units include only single channel services offered for a monthly fee per channel and do not include tiers of channels offered as a package for a single monthly fee. Prior to July 1, 1996, The Disney Channel was offered as a premium service. Effective July 1, 1996, it was offered as part of tiered services. As a result, the number of reported premium service units was artificially reduced by this service offering change. The number of Disney Channel premium service units at June 30, 1996, December 31, 1995 and at December 31, 1994 were: Owned Systems 19,124, Affiliated Systems 7,060; Owned Systems 22,613, Affiliated Systems 18,970; and Owned Systems 21,309, Affiliated Systems 29,641, respectively. (8) Premium service units as a percentage of basic subscribers. A customer may purchase more than one premium service, each of which is counted as a separate premium service unit. This ratio may be greater than 100% if the average customer subscribes for more than one premium service. (9) Average monthly revenue per basic subscriber for the one-year period ending on the respective dates indicated, except for 1994 data which reflects the fourth quarter of 1994 only and for the three months ended March 31, 1998. Management believes that the fourth quarter is more relevant for 1994 because the FCC's amended rate regulation rules became effective during the third quarter of 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legislation and Regulation." 66 THE OWNED SYSTEMS The Owned Systems are divided into 37 separate operating regions located in 23 states. The following is a brief description of the operating regions located in states that include at least 5% of the basic subscribers of the Owned Systems. In certain cases, operating regions serve customers in more than one state and, thus, totals by operating region may exceed basic subscriber totals for a given state. CALIFORNIA. As of March 31, 1998, the Company's six operating regions in California had 137,640 basic subscribers, which comprised approximately 23% of the basic subscribers of the Owned Systems. The systems in the California regions have an average channel capacity of 51, approximately 93% of which are currently utilized. Approximately 94% of the customers in the California regions are served by systems that utilize addressable technology. OREGON. As of March 31, 1998, the Company's eight Oregon operating regions had 98,490 basic subscribers, which comprised approximately 16% of the basic subscribers of the Owned Systems. The systems in the Oregon operating regions have an average channel capacity of 48, approximately 96% of which are currently utilized. Approximately 92% of the customers in these operating regions are served by systems that utilize addressable technology. MISSOURI. As of March 31, 1998, the Company's four operating regions in Missouri had 73,778 basic subscribers, which comprised approximately 12% of the basic subscribers of the Owned Systems. The Missouri systems have an average channel capacity of 46, approximately 95% of which are currently utilized. Approximately 94% of the customers in the Missouri regions are served by systems that utilize addressable technology. GEORGIA. As of March 31, 1998, the Company's Georgia systems had 44,362 basic subscribers, which comprised approximately 7% of the basic subscribers of the Owned Systems. The systems had average channel capacity of 54, of which 98% are utilized. Approximately 87% of the customers are served by addressable technology. NORTH CAROLINA. As of March 31, 1998, the Company's two North Carolina operating regions had 37,073 basic subscribers, which comprised approximately 6% of the basic subscribers of the Owned Systems. These systems have an average channel capacity of 39, approximately 99% of which are utilized. Addressable technology is currently being introduced in one of the North Carolina operating regions, and approximately 30% of the customers in the state had the technology available to them at March 31, 1998. TEXAS. As of March 31, 1998, the Company's three Texas operating regions had 31,857 basic subscribers, which comprised approximately 5% of the basic subscribers of the Owned Systems. These systems currently have an average channel capacity of 53, approximately 88% of which are currently utilized. Approximately 67% of the customers in the Texas regions are served by systems that utilize addressable technology. KENTUCKY. As of March 31, 1998, the Company's Kentucky systems had 29,902 basic subscribers which comprised 5% of the basic subscribers of the Owned Systems. The Kentucky systems have an average channel capacity of 38, approximately 96% of which are currently utilized. Approximately 62% of the customers are served by systems that utilize addressable technology. OTHER OPERATING REGIONS. The Company also owns and operates systems through eleven additional regional centers in Athens, Alabama; Benton, Arkansas; Plattsburgh, New York; Centreville, Maryland; Suffolk, Virginia; Colville, Washington; Shawnee, Oklahoma; Sebastian, Florida; St. George, Utah; Scottsburg, Indiana; and Au Gres, Michigan. None of these regions are in states that have basic subscribers that are in excess of 5% of the total basic subscribers of the Owned Systems. 67 The following is a summary of certain operating data, as of March 31, 1998, for the Owned Systems:
PREMIUM AVERAGE MONTHLY HOMES BASIC BASIC SERVICE PREMIUM REVENUE PER STATE PASSED SUBSCRIBERS PENETRATION UNITS PENETRATION BASIC SUBSCRIBER(1) - --------------------------- ---------- ----------- ------------- ------------ ------------- ------------------- Alabama.................... 39,528 25,658 64.9% 10,119 39.4% $ 36.09 Arkansas................... 45,926 21,203 46.2% 5,043 23.8% 37.68 California................. 241,256 137,639 57.1% 45,283 32.9% 37.33 Florida.................... 14,719 9,691 65.8% 1,979 20.4% 36.42 Georgia.................... 54,396 44,362 81.6% 11,675 26.3% 40.50 Illinois................... 3,424 1,842 53.8% 669 36.3% 35.03 Indiana.................... 7,180 4,785 66.6% 1,066 22.3% 36.86 Kansas..................... 3,512 2,455 69.9% 622 25.3% 35.69 Kentucky................... 33,898 29,902 88.2% 6,358 21.3% 34.18 Louisiana.................. 5,494 2,753 50.1% 1,546 56.2% 39.65 Maryland................... 27,103 15,123 55.8% 7,456 49.3% 38.67 Michigan................... 7,324 3,749 51.2% 892 23.8% 32.56 Missouri................... 116,348 73,778 63.4% 17,390 23.6% 35.70 Mississippi................ 1,911 1,142 59.8% 224 19.6% 36.63 No. Carolina............... 63,871 37,073 58.0% 10,964 29.6% 37.57 Nevada..................... 6,320 1,720 27.2% 1,340 77.9% 32.99 New York................... 26,092 15,887 60.9% 4,662 29.3% 32.08 Oklahoma................... 17,938 11,044 61.6% 4,717 42.7% 40.10 Oregon..................... 159,365 98,490 61.8% 24,430 24.8% 35.02 Texas...................... 50,611 31,857 62.9% 10,677 33.5% 36.02 Utah....................... 31,262 9,434 30.2% 4,869 51.6% 29.36 Virginia................... 35,097 16,700 47.6% 8,832 52.9% 41.84 Washington................. 15,039 10,650 70.8% 2,421 22.7% 34.35 ---------- ----------- ------------ 1,007,614 606,937 60.2% 183,234 30.2% $ 36.56 ---------- ----------- ------------ ---------- ----------- ------------
- ------------------------ (1) Average monthly revenue per basic subscriber has been computed based on revenue for the three months ended March 31, 1998. THE AFFILIATED SYSTEMS The Company controls and holds varying equity interests in the Affiliated Systems, which it manages pursuant to agreements that provide for fees generally based on revenues and the reimbursement of certain expenses. The Affiliated Systems are owned separately by several partnerships, namely, Falcon Classic, Falcon Video, as well as certain partnerships of which Enstar is an indirect, wholly owned subsidiary of FHGLP, is the corporate general partner (collectively, the "Affiliated Partnerships"). On December 28, 1995, FHGLP acquired the direct and indirect ownership interests in Falcon First that it did not previously own, and as a result, the systems of Falcon First became Owned Systems; previously they were reported as Affiliated Systems. On July 12, 1996, FHGLP acquired the assets of FCSC and, as a result, the systems of FCSC became Owned Systems; previously they were reported as Affiliated Systems. As a result, comparisons of 1996 and 1995 to prior years must take these changes into account. Due to the date of the acquisition of Falcon First, no operating results of Falcon First were included in the Company's 1995 results of operations. As a result, the management fees received by the Company from Falcon First similarly have not been eliminated in consolidation of the Company's 1995 results of operations and are treated as having been received from the Affiliated Systems. The operating results of the FCSC systems have been included from July 12, 1996. The management fees and reimbursed expenses received by the 68 Company from FCSC prior to July 12, 1996 have not been eliminated in consolidation and are also treated as having been received from the Affiliated Systems. As discussed elsewhere in this Prospectus, FHGLP acquired substantially all of the assets of Falcon Classic in March 1998 and will acquire all of the Falcon Video systems upon consummation of the TCI Transaction. Through the Affiliated Systems, the Company manages cable television systems which at March 31, 1998 served approximately 170,000 basic subscribers in 14 states, including South Carolina, Kentucky, Illinois, Washington and Tennessee. In 1995, 1996 and 1997, the Company recognized aggregate revenues of $8.6 million, $6.3 million and $5.2 million, respectively, from management agreements with the Affiliated Systems and its consulting agreements with NYNEX Cable Comms ("NYNEX") and Telecab (as described below). Subject to customary conditions, most of the management agreements continue for the lives of the respective managed entities. Falcon Classic and Falcon Video are scheduled to terminate in 2004 and 2007, respectively; however, the Company expects that the systems of these entities will become Owned Systems in 1998 and that the management agreements with these entities will be terminated. Additionally, as noted above, the Company manages the partnerships of which Enstar is the general partner. The partnership agreements of these partnerships are scheduled to terminate at various times from 2033 to 2037. The consulting agreement with NYNEX expired on September 12, 1997. The Company received $336,000, $343,000 and $248,000 under this agreement in 1995, 1996 and 1997, respectively. The consulting agreement with Telecab was assigned to an affiliate in February 1996. The Company received $270,000 and $37,000 under this agreement in 1995 and 1996, respectively. Certain of the credit agreements and partnership agreements of the Affiliated Partnerships restrict, in certain circumstances, the payment of cash management fees by the Affiliated Systems to the Company. In addition, the Company may provide additional financing to certain of the Affiliated Partnerships in the form of deferral of amounts owed to the Company. Marc B. Nathanson, certain members of management and FHGLP hold varying equity interests in the Affiliated Partnerships. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Certain Relationships and Related Transactions." OVERVIEW OF THE TCI SYSTEMS The following table sets forth certain operating statistics for the TCI Systems as of the dates indicated.
AS OF MARCH AS OF DECEMBER 31, 31, 1998 -------------------- -------------- 1996 1997 1998 --------- --------- -------------- Homes passed(1)......................................... 436,343 449,042 438,950 Basic subscribers(2).................................... 299,083 292,959 293,266 Basic penetration(3).................................... 68.5% 65.2% 66.8% Premium service units(4)................................ 130,004 101,977 96,753 Premium penetration(5).................................. 43.5% 34.8% 33.0% Average monthly revenue per basic subscriber(6)......... $ 29.18 $ 33.65 $ 34.20
- ------------------------ (1) Homes passed refers to estimates by TCI of the approximate number of dwelling units in a particular community that can be connected to the distribution system without any further extension of principal transmission lines. (2) A home with one or more television sets connected to a cable system is counted as one basic subscriber. Bulk accounts are included on a "basic customer equivalent" basis in which the total monthly bill for the account is divided by the basic monthly charge for a single outlet in the area. 69 (3) Basic subscribers as a percentage of homes passed. (4) Premium service units include single channel services offered for a monthly fee per channel and include tiers of channels offered as a package for a single monthly fee. (5) Premium service units as a percentage of basic subscribers. A customer may purchase more than one premium service, each of which is counted as a separate premium service unit. This ratio may be greater than 100% if the average customer subscribes for more than one premium service. (6) Average monthly revenue per basic subscriber for the one-year period ending on December 31, and for the three months ended March 31, 1998. The TCI Systems are divided into 16 separate operating regions located in five states. Subsequent to the TCI Transaction, four of the 16 TCI regions will be consolidated into and operated from existing Falcon operating regions. The following is a brief description of the operating regions. WASHINGTON. As of March 31, 1998 (and including the subscribers served by the Ellensburg systems), the five operating regions in Washington had 114,357 basic subscribers, which comprised approximately 39% of the basic subscribers of the TCI Systems. The systems in the Washington regions have an average analog channel capacity of 45, approximately 98% of which are currently utilized. Approximately 88% of the customers in Washington are served by systems that utilize addressable technology and approximately 82% of the customers are served by systems that offer digital video service. OREGON. As of March 31, 1998, the six operating regions in Oregon had 97,327 basic subscribers, which comprised approximately 33% of the basic subscribers of the TCI Systems. The systems in the Oregon regions have an average analog channel capacity of 42, approximately 91% of which are currently utilized. Approximately 96% of the customers in Oregon are served by systems that utilize addressable technology and approximately 63% of the customers are served by systems that offer digital video services. CALIFORNIA. As of March 31, 1998, the one operating region in California had 36,082 basic subscribers, which comprised approximately 12% of the basic subscribers of the TCI Systems. The systems in the California regions have an average analog channel capacity of 43, approximately 98% of which are currently utilized. All of the customers in California are served by systems that utilize addressable technology and approximately 96% of the customers are served by systems that offer digital video services. MISSOURI. As of March 31, 1998, the two operating regions in Missouri had 24,441 basic subscribers, which comprised approximately 8% of the basic subscribers of the TCI Systems. The systems in the Missouri regions have an average analog channel capacity of 39, all of which are currently utilized. All of the customers in Missouri are served by systems that utilize addressable technology and approximately 60% of the customers are served by systems that offer digital video services. ALABAMA. As of March 31, 1998, the two operating regions in Alabama had 21,059 basic subscribers, which comprised approximately 7% of the basic subscribers of the TCI Systems. The systems in the Alabama regions have an average analog channel capacity of 48, approximately 94% of which are currently utilized. Approximately 82% of the customers in Alabama are served by systems that utilize addressable technology. See "The TCI Transaction." INTERNATIONAL ACTIVITIES The international investments described below will not be contributed to New Falcon as part of the TCI Transaction and will continue to be held by FHGLP. In order to focus its limited capital resources on the upgrade and rebuild needs of the Owned Systems, FHGLP does not expect to pursue any further 70 international investments. See "Certain Relationships and Related Transactions." As of March 31, 1998, FHGLP held the following international investments: NYNEX CABLE COMMS. FHGLP holds a 1.1% carried interest in the results of certain systems operated under franchises that FHGLP contributed to NYNEX. NYNEX is operating and constructing advanced fiber optic cable and telephone networks in the United Kingdom. On October 22, 1996, NYNEX, Cable and Wireless plc. and Bell Canada International Inc. merged their respective interests to form Cable and Wireless Communications. FHGLP believes that NYNEX is now obligated to make the carried interest payment to FHGLP, and FHGLP is evaluating its rights and remedies in that regard. NYNEX has not provided FHGLP with information required to make the calculation of the carried interest and the amount of the carried interest, if any, is therefore unknown at this time. FHGLP also provided consulting services to NYNEX for an annual fee of $356,700. This consulting agreement expired on September 12, 1997. TELECAB. FHGLP has made a 5% equity investment of $2.5 million in Duhamel Falcon Cable Mexico L.L.C., a Delaware limited liability company ("DFC Mexico"). DFC Mexico was formed with Hellman & Friedman Capital Partners II, L.P. (which is also a partner in FHGLP), Mexican Duhamel Cable, Limited Partnership and Duhamel Cable Partners, Limited Partnership to make an investment in Telecab. Telecab is a large cable television operator in Mexico which owns and operates cable television systems in various Mexican cities, including Tijuana, Ensenada, Mexicali, Chihuahua and Ciudad Juarez. FHGLP 's investment is part of an investment of approximately $41 million by DFC Mexico for an ownership interest of 34% of Telecab. FHGLP entered into a consulting agreement with Telecab to provide it with certain services in connection with the operation of Telecab's cable television systems. On February 20, 1996, in connection with FHGLP's wind-up of its international activities, this agreement was assigned to FIC, a separately capitalized affiliated company whose members and management also include certain limited partners and management of FHGLP. DFC Mexico is presently in an arbitration proceeding (which includes FHGLP ) with the Mexican partners regarding the resolution of certain disagreements regarding the management policies of Telecab. The resolution of the arbitration proceeding may result in either DFC Mexico's shares being purchased by the Mexican partners or DFC Mexico purchasing the shares of the Mexican partners in Telecab. FHGLP's current carrying value of the investment in Telecab on its books is approximately $1.5 million. OTHER INVESTMENTS LAKE LAS VEGAS PROJECT. FHGLP is an equity owner in, and the general partner of, Falcon Lake Las Vegas Cablevision, L.P. ("Falcon Lake Las Vegas"). This limited partnership was formed in September 1993 to design, construct and operate an advanced fiber optic cable network in Lake Las Vegas, a master planned community being developed around a man-made lake southeast of Las Vegas, Nevada. FHGLP's partner in this project is an affiliate of Transcontinental Properties, Inc., which is controlled by Ronald Boeddeker of Las Vegas, Nevada and the Bass Family interests of Fort Worth, Texas. Upon its completion, Lake Las Vegas is targeted to have 5,000 dwelling units and up to 11,000 hotel units, although there are presently fewer than 50 homes occupied in the development. The Company recently completed building a fiber-to-the-curb cable television system, and the system is now operational. FALCON/CAPITAL CABLE. During 1988, one of the Owned Subsidiaries made a $1.3 million investment in, and became co-general partner of, Falcon/Capital Cable, which has approximately 29,000 basic subscribers in six midwestern states. FHGLP does not manage these systems and has not included the basic subscribers of these systems in the number of basic subscribers of the Falcon Systems. The terms of Falcon/ Capital Cable's senior bank debt and subordinated debt were refinanced on February 11, 1998, which resulted in a decrease in the percentage of equity of Falcon/Capital Cable owned by the Company. ENSTAR COMMUNICATIONS CORPORATION. Enstar, an indirect subsidiary of FHGLP, controls and holds varying equity interests in 15 limited partnerships. 71 ENSTAR FINANCE COMPANY, LLC. On June 6, 1997, FHGLP and Enstar formed EFC, an unrestricted subsidiary. On September 30, 1997, EFC obtained a secured bank facility of $35 million from two agent banks in order to provide funds that would be loaned to certain Enstar limited partnerships. The lenders advanced $7.5 million to EFC, which in turn advanced those funds to a number of Enstar limited partnerships. The EFC loan is non-recourse to FHGLP and matures on August 31, 2001, at which time all funds previously advanced will be due in full. The Company's interests in the Enstar entities described above will not be contributed to New Falcon as part of the TCI Transaction and will be held directly by FHGLP following the TCI Transaction. CUSTOMER RATES AND SERVICES The Company's cable television systems offer customers packages of services that include the local network, independent and educational television stations, a limited number of television signals from distant cities, numerous satellite-delivered, non-broadcast channels (such as CNN, MTV, USA, ESPN, TNT and The Disney Channel) and certain information and public access channels. For an extra monthly charge, the Falcon Systems provide certain premium television services, such as HBO and Showtime. The Company also offers other cable television services to its customers, including pay-per-view programming. For additional charges, in most of the Falcon Systems, the Company also rents remote control devices and VCR compatible devices (devices that make it easier for a customer to tape a program from one channel while watching a program on another). The service options offered by the Company vary from system to system, depending upon a system's channel capacity and viewer interests. Rates for services also vary from market to market and according to the type of services selected. Pursuant to the 1992 Cable Act, most cable television systems are subject to rate regulation of the basic service tier, the non-basic service tiers other than premium (per channel or program) services, the charges for installation of cable service, and the rental rates for customer premises equipment such as converter boxes and remote control devices. These rate regulation provisions affect all of the Company's systems not deemed to be subject to effective competition under the FCC's definition. See "Legislation and Regulation." At March 31, 1998, the Company's monthly rates for basic cable service for residential customers of the Owned Systems, excluding special senior citizen discount rates, ranged from $13.17 to $33.02 and premium service rates ranged from $5.00 to $11.95, excluding special promotions offered periodically in conjunction with the Company's marketing programs. A one-time installation fee, which the Company may wholly or partially waive during a promotional period, is usually charged to new customers. Commercial customers, such as hotels, motels and hospitals, are charged a negotiated, non-recurring fee for installation of service and monthly fees based upon a standard discounting procedure. Most multi-unit dwellings are offered a negotiated bulk rate in exchange for single-point billing and basic service to all units. These rates are also subject to regulation. For the years ended December 31, 1995, 1996 and 1997, and for the three months ended March 31, 1998 subscriber fees accounted for 84.9%, 86.9%, 87.4% and 87.8%, respectively, of the Company's revenues. Management fees accounted for 5.7%, 2.9%, 2.0% and 1.7%, respectively, of the Company's revenues, with other services, comprised of, among other things, installation fees, franchise fees and other charges, advertising and home shopping revenues, accounting for 9.4%, 10.2%, 10.6% and 10.6%,, respectively. EMPLOYEES As of May 1, 1998, the Company had approximately 1,080 full-time employees and 43 part-time employees. The Company considers its relations with its employees to be good. As of March 31, 1998, the 72 Affiliated Systems had approximately 136 full-time and 5 part-time employees. There are no collective bargaining agreements relating to any of such employees. TECHNOLOGICAL DEVELOPMENTS As part of its commitment to customer service, the Company emphasizes high technical standards and prudently seeks to apply technological advances in the cable television industry to the Owned Systems on the basis of cost effectiveness, capital availability, enhancement of product quality, service delivery and industry-wide acceptance. Currently, the Owned Systems have an average channel capacity of 48, substantially all of which is presently utilized. The Company believes that system upgrades would enable it to provide customers with greater programming diversity, better picture quality and alternative communications delivery systems made possible by the introduction of fiber optic technology and by the possible future application of digital compression. The implementation of the Company's capital expenditure plans is, however, dependent in part on the availability of adequate capital on terms satisfactory to the Company, of which there can be no assurance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The use of fiber optic cable as an alternative to coaxial cable is playing a major role in expanding channel capacity and improving the performance of cable television systems. Fiber optic cable is capable of carrying hundreds of video, data and voice channels and, accordingly, its utilization is essential to the enhancement of a cable television system's technical capabilities. The Company's current policy is to utilize fiber optic technology in substantially all rebuild projects which it undertakes. The benefits of fiber optic technology over traditional coaxial cable distribution plant include lower ongoing maintenance and power costs and improved picture quality and reliability. As of March 31, 1998, approximately 74% of the customers of the Owned Systems were served by systems that utilize addressable technology. Addressable technology permits the cable operator to activate from a central control point the cable television services to be delivered to a customer if that customer has also been supplied with an addressable converter. To date, the Company has supplied addressable converter boxes to customers of the Falcon Systems utilizing addressable technology who subscribe to one or more premium services and, in selected regions, to customers who subscribe to certain new product tiers. As a result, if the system utilizes addressable technology and the customer has been supplied with an addressable converter, the Company can upgrade or downgrade services immediately, without the delay or expense associated with dispatching a technician to the home. Addressable technology also reduces pay service theft, is an effective enforcement tool in collecting delinquent payments and allows the Company to offer pay-per-view services. DIGITAL COMPRESSION The Company has been closely monitoring developments in the area of digital compression, a technology that is expected to enable cable operators to increase the channel capacity of cable television systems by permitting a significantly increased number of video signals to fit in a cable television system's existing bandwidth. Depending on the technical characteristics of the existing system, the Company believes that the utilization of digital compression technology in the future could enable the Owned Systems to increase channel capacity in certain systems in a manner that could, in the short term, be more cost efficient than rebuilding such systems with higher capacity distribution plant. However, unless the system has sufficient unused channel capacity and bandwidth, the use of digital compression to increase channel offerings is not a substitute for the rebuild of the Falcon Systems, which will improve picture quality, system reliability and quality of service. The use of digital compression in the Owned Systems also could expand the number and types of services these systems offer and enhance the development of current and future revenue sources in these systems. The Company's management plans to introduce this technology in selected markets in 1998. This issue is under frequent management review. 73 PROGRAMMING The Company has various contracts to obtain basic and premium programming for its systems from program suppliers whose compensation is generally based on a fixed fee per customer or a percentage of the gross receipts for the particular service. Some program suppliers provide volume discount pricing structures or offer marketing support to the Company. Certain other new channels have also recently offered the Falcon Systems certain inducements in return for carrying their service. Due to a lack of channel capacity available for adding new channels, the Company's management cannot predict the impact of such potential benefits on its business. In addition, the FCC may require that certain such payments from programmers be offset against the programming fee increases which can be passed through to subscribers under the FCC's rate regulations. The Company's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. The Company does not have long-term programming contracts for the supply of a substantial amount of its programming. Accordingly, no assurance can be given that the Company's programming costs will not continue to increase substantially, or that other materially adverse terms will not be added to the Company's programming contracts. Management believes, however, that the Company's relations with its programming suppliers generally are good. The Company's cable programming costs have increased in recent years and are expected to continue to increase due to additional programming being provided to basic customers, the requirements to carry channels under retransmission carriage agreements entered into with certain programming sources, increased costs to produce or purchase cable programming generally (including sports programming), inflationary increases and other factors. The 1996 retransmission carriage agreement negotiations resulted in the Company agreeing to carry one new service in certain of its systems (serving approximately 49,000 basic subscribers), for which it will receive reimbursement of certain costs related to launching the service. All other negotiations were completed with essentially no change to the previous agreements. Under the FCC's rate regulations, increases in programming costs for regulated cable services occurring after the earlier of March 1, 1994, or the date a system's basic cable service became regulated, may be passed through to customers. See "Legislation and Regulation--Federal Regulation--Carriage of Broadcast Television Signals." FRANCHISES Cable television systems are generally constructed and operated under non-exclusive franchises granted by local governmental authorities. These franchises typically contain many conditions, such as time limitations on commencement and completion of construction; conditions of service, including number of channels, types of programming and the provision of free service to schools and certain other public institutions; and the maintenance of insurance and indemnity bonds. The provisions of local franchises are subject to federal regulation under the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. See "Legislation and Regulation." As of March 31, 1998, the Owned Systems held 482 franchises. These franchises, all of which are non-exclusive, provide for the payment of fees to the issuing authority. Annual franchise fees imposed on the Owned Systems range up to 5% of the gross revenues generated by a system. For the past three years, franchise fee payments made by the Owned Systems have averaged approximately 3.1% of total gross system revenues. The 1984 Cable Act prohibits franchising authorities from imposing franchise fees in excess of 5% of gross revenues and also permits the cable operator to seek renegotiation and modification of franchise requirements which have become commercially impracticable. 74 The following table groups the franchises of the Owned Systems by date of expiration and presents the number of franchises for each group of franchises and the approximate number and percentage of basic subscribers for each group as of March 31, 1998.
NUMBER OF BASIC PERCENTAGE OF BASIC YEAR OF FRANCHISE EXPIRATION FRANCHISES SUBSCRIBERS SUBSCRIBERS - -------------------------------------------------- ------------- ----------- ------------------- Prior to 1999..................................... 133 194,692 32.1% 1999-2003......................................... 147 152,410 25.1 2004 and after.................................... 202 224,294 37.0 --- ----------- --- Total............................................. 482 571,396 94.2% --- ----------- --- --- ----------- ---
The Company operates numerous cable television systems which serve multiple communities and, in some circumstances, portions of such systems extend into jurisdictions for which it believes no franchise is necessary. In the aggregate, approximately 35,541 basic subscribers, comprising approximately 5.8% of the Owned Systems' basic subscribers, are served by such portions of such systems. In general, the Company does not believe that the loss of any single franchise would cause a substantial reduction in the economies of scale discussed above. See "--Business Strategy." In certain instances, however, where a single franchise comprises a large percentage of the customers in an operating region, the loss of such franchise could decrease the economies of scale achieved by the Company's clustering strategy. The Company has never had a franchise revoked for any of its systems and believes that it has satisfactory relationships with substantially all of its franchising authorities. The 1984 Cable Act provides, among other things, for an orderly franchise renewal process in which franchise renewal will not be unreasonably withheld or, if renewal is denied and the franchising authority acquires ownership of the system or effects a transfer of the system to another person, the operator generally is entitled to the "fair market value" for the system covered by such franchise, but no value attributable to the franchise itself. In addition, the 1984 Cable Act, as amended by the 1992 Cable Act, establishes comprehensive renewal procedures which require that an incumbent franchisee's renewal application be assessed on its own merit and not as part of a comparative process with competing applications. See "Legislation and Regulation." COMPETITION Cable television systems compete with other communications and entertainment media, including over-the-air television broadcast signals which a viewer is able to receive directly using the viewer's own television set and antenna. The extent to which a cable system competes with over-the-air broadcasting depends upon the quality and quantity of the broadcast signals available by direct antenna reception compared to the quality and quantity of such signals and alternative services offered by a cable system. Cable systems also face competition from alternative methods of distributing and receiving television signals and from other sources of entertainment such as live sporting events, movie theaters and home video products, including videotape recorders and videodisc players. In recent years, the FCC has adopted policies providing for authorization of new technologies and a more favorable operating environment for certain existing technologies that provide, or may provide, substantial additional competition for cable television systems. The extent to which cable television service is competitive depends in significant part upon the cable television system's ability to provide an even greater variety of programming than that available over the air or through competitive alternative delivery sources. Individuals presently have the option to purchase home satellite dishes, which allow the direct reception of satellite-delivered broadcast and nonbroadcast program services formerly available only to cable television subscribers. Most satellite-distributed program signals are being electronically scrambled to permit reception only with authorized decoding equipment for which the consumer must pay a fee. The 75 1992 Cable Act enhances the right of cable competitors to purchase nonbroadcast satellite-delivered programming. See "Legislation and Regulation--Federal Regulation." Television programming is now also being delivered to individuals by high-powered DBS satellites utilizing video compression technology. This technology has the capability of providing more than 100 channels of programming over a single high-powered DBS satellite with significantly higher capacity available if, as is the case with DIRECTV, multiple satellites are placed in the same orbital position. Unlike cable television systems, however, DBS satellites are limited by law in their ability to deliver local broadcast signals. However, DBS provider, EchoStar, has announced plans to deliver a limited number of local broadcast signals in a limited number of markets and has initiated efforts to have the practice legalized. If DBS providers are ultimately permitted to deliver local broadcast signals, cable television systems would lose a significant competitive advantage. DBS service can be received virtually anywhere in the continental United States through the installation of a small rooftop or side-mounted antenna, and it is more accessible than cable television service where cable plant has not been constructed or where it is not cost effective to construct cable television facilities. DBS service is being heavily marketed on a nationwide basis by several service providers. In addition, medium-power fixed-service satellites can be used to deliver direct-to-home satellite services over small home satellite dishes, and one provider, PrimeStar, currently provides service to subscribers using such a satellite. Multichannel multipoint distribution systems ("wireless cable") deliver programming services over microwave channels licensed by the FCC received by subscribers with special antennas. Wireless cable systems are less capital intensive, are not required to obtain local franchises or to pay franchise fees, and are subject to fewer regulatory requirements than cable television systems. To date, the ability of wireless cable services to compete with cable television systems has been limited by channel capacity (35-channel maximum) and the need for unobstructed line-of-sight over-the-air transmission. Although relatively few wireless cable systems in the United States are currently in operation or under construction, virtually all markets have been licensed or tentatively licensed. The use of digital compression technology may enable wireless cable systems to deliver more channels. Private cable television systems compete to service condominiums, apartment complexes and certain other multiple unit residential developments. The operators of these private systems, known as satellite master antenna television ("SMATV") systems, often enter into exclusive agreements with apartment building owners or homeowners' associations which preclude franchised cable television operators from serving residents of such private complexes. However, the 1984 Cable Act gives franchised cable operators the right to use existing compatible easements within their franchise areas upon nondiscriminatory terms and conditions. Accordingly, where there are preexisting compatible easements, cable operators may not be unfairly denied access or discriminated against with respect to the terms and conditions of access to those easements. There have been conflicting judicial decisions interpreting the scope of the access right granted by the 1984 Cable Act, particularly with respect to easements located entirely on private property. Under the 1996 Telecom Act, SMATV systems can interconnect non-commonly owned buildings without having to comply with local, state and federal regulatory requirements that are imposed upon cable systems providing similar services, as long as they do not use public rights-of-way. The FCC has initiated a new interactive television service which will permit non-video transmission of information between an individual's home and entertainment and information service providers. This service will provide an alternative means for DBS systems and other video programming distributors, including television stations, to initiate the new interactive television services. This service may also be used by the cable television industry. The FCC has allocated spectrum in the 28 GHz range for a new multichannel wireless service that can be used to provide video and telecommunications services. The FCC recently completed the process of awarding licenses to use this spectrum via a market-by-market auction. It cannot be predicted at this time whether such a service will have a material impact on the operations of cable television systems. 76 The 1996 Telecom Act eliminates the restriction against ownership (subject to certain exceptions) and operation of cable systems by local telephone companies within their local exchange service areas. Telephone companies are now free to enter the retail video distribution business through any means, such as DBS, wireless cable, SMATV or as traditional franchised cable system operators. Alternatively, the 1996 Telecom Act authorizes local telephone companies to operate "open video systems" without obtaining a local cable franchise, although telephone companies operating such systems can be required to make payments to local governmental bodies in lieu of cable franchise fees. Up to two-thirds of the channel capacity on an "open video system" must be available to programmers unaffiliated with the local telephone company. The open video system concept replaces the FCC's video dialtone rules. The 1996 Telecom Act also includes numerous provisions designed to make it easier for cable operators and others to compete directly with local exchange telephone carriers. The cable television industry competes with radio, television, print media and the Internet for advertising revenues. As the cable television industry continues to develop programming designed specifically for distribution by cable, advertising revenues may increase. Premium programming provided by cable systems is subject to the same competitive factors which exist for other programming discussed above. The continued profitability of premium services may depend largely upon the continued availability of attractive programming at competitive prices. Advances in communications technology, as well as changes in the marketplace and the regulatory and legislative environment, are constantly occurring. Thus, it is not possible to predict the competitive effect that ongoing or future developments might have on the cable industry. See "Legislation and Regulation." PROPERTIES The Company owns substantially all of the assets related to the Owned Systems' cable television operations, including program production equipment, headend equipment (towers, antennae, electronic equipment and satellite earth stations), cable plant (distribution equipment, amplifiers, customer drops and hardware), converters, test equipment, tools and maintenance equipment and vehicles. The Company owns or leases parcels of real property for signal reception sites (antenna towers and headends), microwave facilities and business offices. The Company believes that its properties, both owned and leased, are in good condition and are suitable and adequate for the Company's business operations. The Company leases office space for both its corporate headquarters (located in Los Angeles, California) and its corporate financial center (located in Pasadena, California). The office building in which the Company leases space for the corporate financial center is owned by a partnership owned by Marc B. Nathanson and his wife, Jane Nathanson. The Company has increased the amount of space it leases from such partnership. The terms of the current lease for the corporate financial center have been negotiated on an arm's-length basis. The Company also assumed a lease for office space in a building owned by Marc B. Nathanson and his wife in connection with the acquisition of the assets of FCSC. The property will be purchased by the Company in 1998 for a purchase price determined by two independent appraisals. See "Certain Relationships and Related Transactions." LEGAL PROCEEDINGS The Company is periodically a party to various legal proceedings. Such legal proceedings are ordinary and routine litigation proceedings that are incidental to the Company's business, and management presently believes that the outcome of all pending legal proceedings will not, in the aggregate, have a material adverse effect on the financial condition of the Company. FHGLP, certain of its affiliates, and certain third parties have been named as defendants in an action entitled FRANK O'SHEA I.R.A. ET AL. V. FALCON CABLE SYSTEMS COMPANY, ET AL., Case No. BC 147386, pending in the Superior Court of the State of California, County of Los Angeles. Plaintiffs in this action are certain 77 former unitholders of FCSC purporting to represent a class consisting of former unitholders of FCSC other than those affiliated with FCSC and/or its controlling persons. The complaint in the action alleges, among other things, that defendants breached their fiduciary and contractual duties to unitholders, and acted negligently, with respect to the purchase from former unitholders of their interests in FCSC in 1996. In particular, the complaint in this action alleges, among other things, (a) that the appraisals conducted to determine the price at which the purchase of the former unitholders' interests would occur were "inadequate," "defective" and "unreasonable" and that the appraisal firms who conducted the appraisals (two out of three of which are named as defendants) acted negligently or recklessly in performing the appraisals; (b) that the price paid per unit was unfair and was intended to unfairly benefit the defendants at the expense of the public unitholders, in that allegedly the price paid did not fairly reflect the intrinsic value of the partnership assets, was not based on arms-length negotiation, and was less than the per unit value that could be derived from an alleged estimate of asset value submitted by FCSC to its lenders in connection with its borrowings and (c) that the sums paid the unitholders should not have been based on a calculation that reflected payment to the General Partner of a "sales fee" as defined in the FCSC partnership agreement. As relief, the complaint seeks damages (and prejudgment interest) in an unspecified amount, and/or the imposition of a constructive trust upon the FCSC partnership assets purchased by certain defendants, and/or rescission of the transaction. The defendants have filed answers denying the material allegations of the complaint in this action, and the action is currently in the pre-trial discovery stage. The court has set a trial date for October 1998 for this matter. FHGLP believes it has substantial and meritorious defenses to the claims. 78 LEGISLATION AND REGULATION The cable television industry is regulated by the FCC, some state governments and substantially all local governments. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past materially affected, and may in the future materially affect, the Company and the cable television industry. The following is a summary of federal laws and regulations affecting the growth and operation of the cable television industry and a description of certain state and local laws. The Company believes that the regulation of its industry remains a matter of interest to Congress, the FCC and other regulatory authorities. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on the Company. FEDERAL REGULATION The primary federal statute dealing with the regulation of the cable television industry is the Communications Act of 1934 (the "Communications Act"), as amended. The three principal amendments to the Communications Act that shaped the existing regulatory framework for the cable television industry were the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The FCC, the principal federal regulatory agency with jurisdiction over cable television, has promulgated regulations to implement the provisions contained in the Communications Act. The FCC has the authority to enforce these regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. A brief summary of certain of these federal regulations as adopted to date follows. RATE REGULATION The 1992 Cable Act replaced the FCC's previous standard for determining "effective competition," under which most cable systems were not subject to local rate regulation, with a statutory provision that resulted in nearly all cable television systems becoming subject to local rate regulation of basic service. The 1996 Telecom Act expanded the definition of effective competition to include situations where a local telephone company or its affiliate, or any multichannel video provider using telephone company facilities, offers comparable video service by any means except DBS. A finding of effective competition exempts both basic and nonbasic tiers from regulation. Additionally, the 1992 Cable Act required the FCC to adopt a formula, enforceable by franchising authorities, to assure that basic cable rates are reasonable; allowed the FCC to review rates for nonbasic service tiers (other than per-channel or per-program services) in response to complaints filed by franchising authorities and/or cable customers; prohibited cable television systems from requiring subscribers to purchase service tiers above basic service in order to purchase premium services if the system is technically capable of doing so; required the FCC to adopt regulations to establish, on the basis of actual costs, the price for installation of cable service, remote controls, converter boxes and additional outlets; and allowed the FCC to impose restrictions on the retiering and rearrangement of cable services under certain limited circumstances. The 1996 Telecom Act limits the class of complainants regarding nonbasic tier rates to franchising authorities only and ends FCC regulation of nonbasic tier rates on March 31, 1999. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulations, the Company expects Congress and the FCC to explore additional methods of addressing this issue, including deferral or repeal of the March 31, 1999 sunset of CPST rate regulations, and legislation recently was introduced in Congress to repeal the sunset provision. The FCC's regulations contain standards for the regulation of basic and nonbasic cable service rates (other than per-channel or per-program services). Local franchising authorities and/or the FCC are empowered to order a reduction of existing rates which exceed the maximum permitted level for either basic and/or nonbasic cable services and associated equipment, and refunds can be required. The rate 79 regulations adopt a benchmark price cap system for measuring the reasonableness of existing basic and nonbasic service rates. Alternatively, cable operators have the opportunity to make cost-of-service showings which, in some cases, may justify rates above the applicable benchmarks. The rules also require that charges for cable-related equipment (E.G., converter boxes and remote control devices) and installation services be unbundled from the provision of cable service and based upon actual costs plus a reasonable profit. The regulations also provide that future rate increases may not exceed an inflation-indexed amount, plus increases in certain costs beyond the cable operator's control, such as taxes, franchise fees and increased programming costs. Cost-based adjustments to these capped rates can also be made in the event a cable operator adds or deletes channels. In addition, new product tiers consisting of services new to the cable system can be created free of rate regulation as long as certain conditions are met, such as not moving services from existing tiers to the new tier. These provisions currently provide limited benefit to the Company's systems due to the lack of channel capacity previously discussed. There is also a streamlined cost-of-service methodology available to justify a rate increase on basic and regulated nonbasic tiers for "significant" system rebuilds or upgrades. Numerous franchising authorities have become certified by the FCC to regulate the rates charged by the Company for basic cable service and for associated basic cable service equipment. In addition, a number of the Company's customers and/or franchising authorities have filed complaints with the FCC regarding the rates charged for nonbasic cable service. The Company has adjusted its regulated programming service rates and related equipment and installation charges in substantially all of its systems so as to bring these rates and charges into compliance with the applicable benchmark or equipment and installation cost levels. FCC regulations adopted pursuant to the 1992 Cable Act require cable systems to permit customers to purchase video programming on a per channel or a per program basis without the necessity of subscribing to any tier of service, other than the basic service tier, unless the cable system is technically incapable of doing so. Generally, an exemption from compliance with this requirement for cable systems that do not have such technical capability is available until a cable system obtains the capability, but not later than December 2002. CARRIAGE OF BROADCAST TELEVISION SIGNALS The 1992 Cable Act adopted new television station carriage requirements. These rules allow commercial television broadcast stations which are "local" to a cable system, I.E., the system is located in the station's Area of Dominant Influence, to elect every three years whether to require the cable system to carry the station, subject to certain exceptions, or whether the cable system will have to negotiate for "retransmission consent" to carry the station. Local non-commercial television stations are also given mandatory carriage rights, subject to certain exceptions, within the larger of: (i) a 50-mile radius from the station's city of license; or (ii) the station's Grade B contour (a measure of signal strength). Unlike commercial stations, noncommercial stations are not given the option to negotiate retransmission consent for the carriage of their signal. In addition, cable systems will have to obtain retransmission consent for the carriage of all "distant" commercial broadcast stations, except for certain "superstations," I.E., commercial satellite-delivered independent stations, such as WGN. The Company has thus far not been required to pay cash compensation to broadcasters for retransmission consent or been required by broadcasters to remove broadcast stations from the cable television channel line-ups. The Company has, however, agreed to carry some services in specified markets pursuant to retransmission consent arrangements which it believes are comparable to those entered into by most other large cable operators, and for which it pays monthly fees to the service providers, as it does with other satellite providers. The second election between must-carry and retransmission consent for local commercial television broadcast stations was October 1, 1996, and the Company has agreed to carry one new service in specified markets pursuant to these retransmission consent arrangements. The next election between must-carry and retransmission consent for local commercial television broadcast stations will be October 1, 1999. 80 The FCC is currently conducting a rulemaking proceeding regarding the carriage responsibilities of cable television systems during the transition of broadcast television from analog to digital transmission. Specifically, the FCC is exploring whether to amend the signal carriage rules to accommodate the carriage of digital broadcast television signals. NONDUPLICATION OF NETWORK PROGRAMMING Cable television systems that have 1,000 or more customers must, upon the appropriate request of a local television station, delete the simultaneous or nonsimultaneous network programming of certain lower priority distant stations affiliated with the same network as the local station. DELETION OF SYNDICATED PROGRAMMING FCC regulations enable television broadcast stations that have obtained exclusive distribution rights for syndicated programming in their market to require a cable system to delete or "black out" such programming from certain other television stations which are carried by the cable system. The extent of such deletions will vary from market to market and cannot be predicted with certainty. However, it is possible that such deletions could be substantial and could lead the cable operator to drop a distant signal in its entirety. PROGRAM ACCESS The 1992 Cable Act contains provisions that are intended to foster the development of competition to traditional cable systems by regulating the access of competing video providers to vertically integrated, satellite-distributed cable programming services. The FCC has commenced a rulemaking proceeding to seek comment on proposed modifications to its existing rules implementing the statute, including: (1) establishing specific deadlines for resolving program access complaints; (2) improving the discovery process, such as requiring the disclosure of the rates that vertically integrated programmers charge cable operators; (3) imposing monetary damages for program access violations; (4) possibly applying the program access rules to certain situations in which programming is moved from satellite delivery to terrestrial delivery; and (5) revising the manner in which the rules apply to program buying cooperatives. It is not clear to what extent, if any, the provisions of the 1992 Cable Act cover programming distributed by means other than satellite or by programmers unaffiliated with MSOs. Legislation has recently been introduced in Congress to strengthen the program access provisions of the 1992 Cable Act. FRANCHISE FEES Franchising authorities may impose franchise fees, but such payments cannot exceed 5% of a cable system's annual gross revenues. Under the 1996 Telecom Act, franchising authorities may not exact franchise fees from revenues derived from telecommunications services. RENEWAL OF FRANCHISES The 1984 Cable Act established renewal procedures and criteria designed to protect incumbent franchisees against arbitrary denials of renewal. While these formal procedures are not mandatory unless timely invoked by either the cable operator or the franchising authority, they can provide substantial protection to incumbent franchisees. Even after the formal renewal procedures are invoked, franchising authorities and cable operators remain free to negotiate a renewal outside the formal process. Nevertheless, renewal is by no means assured, as the franchisee must meet certain statutory standards. Even if a franchise is renewed, a franchising authority may impose new and more onerous requirements such as upgrading facilities and equipment, although the municipality must take into account the cost of meeting such requirements. 81 The 1992 Cable Act makes several changes to the process under which a cable operator seeks to enforce his renewal rights which could make it easier in some cases for a franchising authority to deny renewal. While a cable operator must still submit its request to commence renewal proceedings within thirty to thirty-six months prior to franchise expiration to invoke the formal renewal process, the request must be in writing and the franchising authority must commence renewal proceedings not later than six months after receipt of such notice. The four-month period for the franchising authority to grant or deny the renewal now runs from the submission of the renewal proposal, not the completion of the public proceeding. Franchising authorities may consider the "level" of programming service provided by a cable operator in deciding whether to renew. For alleged franchise violations occurring after December 29, 1984, franchising authorities are no longer precluded from denying renewal based on failure to substantially comply with the material terms of the franchise where the franchising authority has "effectively acquiesced" to such past violations. Rather, the franchising authority is estopped if, after giving the cable operator notice and opportunity to cure, it fails to respond to a written notice from the cable operator of its failure or inability to cure. Courts may not reverse a denial of renewal based on procedural violations found to be "harmless error." CHANNEL SET-ASIDES The 1984 Cable Act permits local franchising authorities to require cable operators to set aside certain channels for public, educational and governmental access programming. The 1984 Cable Act further requires cable television systems with thirty-six or more activated channels to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. While the 1984 Cable Act allowed cable operators substantial latitude in setting leased access rates, the 1992 Cable Act requires leased access rates to be set according to a formula determined by the FCC. The FCC has recently changed the formula in order to produce lower rates and thereby encourage the use of leased access. COMPETING FRANCHISES The 1992 Cable Act prohibits franchising authorities from unreasonably refusing to grant franchises to competing cable television systems and permits franchising authorities to operate their own cable television systems without franchises. OWNERSHIP The 1996 Telecom Act repealed the 1984 Cable Act's prohibition against local exchange telephone companies ("LECs") providing video programming directly to customers within their local telephone exchange service areas. However, with certain limited exceptions, a LEC may not acquire more than a 10% equity interest in an existing cable system operating within the LEC's service area. The 1996 Telecom Act also authorized LECs and others to operate "open video systems" without obtaining a local cable franchise. See "Business--Competition." The 1984 Cable Act and the FCC's rules prohibit the common ownership, operation, control or interest in a cable system and a local television broadcast station whose predicted grade B contour (a measure of a television station's signal strength as defined by the FCC's rules) covers any portion of the community served by the cable system. The 1996 Telecom Act eliminates the statutory ban and directs the FCC to review its rule within two years, and the FCC recently initiated such a review. Finally, in order to encourage competition in the provision of video programming, the FCC adopted a rule prohibiting the common ownership, affiliation, control or interest in cable television systems and wireless cable facilities having overlapping service areas, except in very limited circumstances. The 1992 Cable Act codified this restriction and extended it to co-located SMATV systems. Permitted arrangements in effect as of October 5, 1992 are grandfathered. The 1996 Telecom Act exempts cable systems facing effective competition from the wireless cable and SMATV restriction. In addition, a cable operator can purchase a SMATV system serving the same area and technically integrate it into the cable system. The 1992 Cable 82 Act permits states or local franchising authorities to adopt certain additional restrictions on the ownership of cable television systems. Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of cable systems which a single cable operator can own. In general, no cable operator can have an attributable interest in cable systems which pass more than 30% of all homes nationwide. Attributable interests for these purposes include voting interests of 5% or more (unless there is another single holder of more than 50% of the voting stock), officerships, directorships, general partnership interests and limited partnership interests (unless the limited partners have no material involvement in the limited partnership's business.) The FCC has stayed the effectiveness of these rules pending the outcome of the appeal from a U.S. District Court decision holding the multiple ownership limit provision of the 1992 Cable Act unconstitutional. In the event the stay is lifted, and the court decision is reversed, TCI may need to assess, based on its other attributable interests then existing, its compliance with the multiple ownership limits. See "Risk Factors-- Conditions of Closing the TCI Transaction" and "Description of the Partnership Agreements--New Falcon Partnership Agreement--Cross-Ownership Provisions." The FCC has also adopted rules which limit the number of channels on a cable system which can be occupied by programming in which the entity which owns the cable system has an attributable interest. The limit is 40% of the first 75 activated channels. The FCC also recently commenced a rulemaking proceeding to examine, among other issues, whether any limitations on cable-DBS cross-ownership are warranted in order to prevent anticompetitive conduct in the video services market. FRANCHISE TRANSFERS The 1992 Cable Act requires franchising authorities to act on any franchise transfer request submitted after December 4, 1992 within 120 days after receipt of all information required by FCC regulations and by the franchising authority. Approval is deemed to be granted if the franchising authority fails to act within such period. TECHNICAL REQUIREMENTS The FCC has imposed technical standards applicable to the cable channels on which broadcast stations are carried, and has prohibited franchising authorities from adopting standards which are in conflict with or more restrictive than those established by the FCC. Those standards are applicable to all classes of channels which carry downstream National Television System Committee (the "NTSC") video programming. The FCC also has adopted additional standards applicable to cable television systems using frequencies in the 108-137 MHz and 225-400 MHz bands in order to prevent harmful interference with aeronautical navigation and safety radio services and has also established limits on cable system signal leakage. Periodic testing by cable operators for compliance with the technical standards and signal leakage limits is required and an annual filing of the results of these measurements is required. The 1992 Cable Act requires the FCC to periodically update its technical standards to take into account changes in technology. Under the 1996 Telecom Act, local franchising authorities may not prohibit, condition or restrict a cable system's use of any type of subscriber equipment or transmission technology. The FCC has adopted regulations to implement the requirements of the 1992 Cable Act designed to improve the compatibility of cable systems and consumer electronics equipment. Among other things, these regulations generally prohibit cable operators from scrambling their basic service tier. The 1996 Telecom Act directs the FCC to set only minimal standards to assure compatibility between television sets, VCRs and cable systems, and to rely on the marketplace. Pursuant to the 1992 Cable Act, the FCC has adopted rules to assure the competitive availability to consumers of customers premises equipment, such as converters, used to access the services offered by 83 cable television systems and other multichannel video programming distributions ("MVPD"). Pursuant to those rules, consumers are given the right to attach compatible equipment to the facilities of their MVPD so long as the equipment does not harm the network, does not interfere with the services purchased by other customers, and is not used to receive unauthorized services. As of July 1, 2000, MVPDs (other than DBS operators) are required to separate security from non-security functions in the customer premises equipment which they sell or lease to their customers and offer their customers the option of using component security modules obtained from the MVPD with set-top units purchased or leased from retail outlets. As of January 1, 2005, MVPDs will be prohibited from distributing new set-top equipment integrating both security and non-security functions to their customers. POLE ATTACHMENTS The FCC currently regulates the rates and conditions imposed by certain public utilities for use of their poles unless state public service commissions are able to demonstrate that they regulate the rates, terms and conditions of cable television pole attachments. The states of California, Illinois, Kentucky, Louisiana, Michigan, New York, Oregon, Utah and Washington, where the Company operates cable systems, have certified to the FCC that they regulate the rates, terms and conditions for pole attachments. In the absence of state regulation, the FCC administers such pole attachment rates through use of a formula which it has devised. As directed by the 1996 Telecom Act, the FCC has adopted a new rate formula for any attaching party, including cable systems, which offer telecommunications services. This new formula will result in significantly higher attachment rates for cable systems which choose to offer such services, but does not begin to take effect until 2001. OTHER MATTERS Other matters subject to FCC regulation include certain restrictions on a cable system's carriage of local sports programming; rules governing political broadcasts; customer service standards; obscenity and indecency; home wiring; EEO; privacy; closed captioning; sponsorship identification; system registration; and limitations on advertising contained in nonbroadcast children's programming. COPYRIGHT Cable television systems are subject to federal copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals. The amount of this royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried, and the location of the cable system with respect to over-the-air television stations. Any future adjustment to the copyright royalty rates will be done through an arbitration process supervised by the U.S. Copyright Office. Cable operators are liable for interest on underpaid and unpaid royalty fees, but are not entitled to collect interest on refunds received for overpayment of copyright fees. Copyrighted music performed in programming supplied to cable television systems by pay cable networks (such as HBO) and basic cable networks (such as USA Network) is licensed by the networks through private agreements with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"), the two major performing rights organizations in the United States. As a result of extensive litigation, both ASCAP and BMI now offer "through to the viewer" licenses to the cable networks which cover the retransmission of the cable networks' programming by cable systems to their customers. Copyrighted music performed by cable systems themselves, E.G., on local origination channels or in advertisements inserted locally on cable networks, must also be licensed. Cable industry negotiations with ASCAP, BMI and SESAC, Inc. (a third and smaller performing rights organization) are in progress. 84 LOCAL REGULATION Because a cable television system uses local streets and rights-of-way, cable television systems generally are operated pursuant to nonexclusive franchises, permits or licenses granted by a municipality or other state or local government entity. Franchises generally are granted for fixed terms and in many cases are terminable if the franchise operator fails to comply with material provisions. Although the 1984 Cable Act provides for certain procedural protections, there can be no assurance that renewals will be granted or that renewals will be made on similar terms and conditions. Upon receipt of a franchise, the cable system owner usually is subject to a broad range of obligations to the issuing authority directly affecting the business of the system. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction, and even from city to city within the same state, historically ranging from reasonable to highly restrictive or burdensome. The specific terms and conditions of a franchise and the laws and regulations under which it was granted directly affect the profitability of the cable television system. Cable franchises generally contain provisions governing charges for basic cable television services, fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and the number and types of cable services provided. The 1996 Telecom Act prohibits a franchising authority from either requiring or limiting a cable operator's provision of telecommunications services. The 1984 Cable Act places certain limitations on a franchising authority's ability to control the operation of a cable system operator, and the courts have from time to time reviewed the constitutionality of several general franchise requirements, including franchise fees and access channel requirements, often with inconsistent results. On the other hand, the 1992 Cable Act prohibits exclusive franchises, and allows franchising authorities to exercise greater control over the operation of franchised cable television systems, especially in the area of customer service and rate regulation. Moreover, franchising authorities are immunized from monetary damage awards arising from regulation of cable television systems or decisions made on franchise grants, renewals, transfers and amendments. The foregoing describes all material regulations and legislation relevant to the Issuers as part of the cable television industry, but it does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the cable television industry. Other existing federal regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements, currently are the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable television industry can be predicted at this time. 85 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF FHGI FHGI serves as the sole general partner of FHGLP which, in turn, will serve as the managing general partner of New Falcon. The directors and executive officers of FHGI are as follows:
NAME AGE POSITION - ------------------------ --- ------------------------------------------------ Marc B. Nathanson....... 53 Chairman of the Board, Chief Executive Officer and a Director Frank J. Intiso......... 51 President and Chief Operating Officer Stanley S. Itskowitch... 59 Executive Vice President, General Counsel and a Director Michael K. Menerey...... 46 Executive Vice President, Chief Financial Officer and Secretary Joe A. Johnson.......... 53 Executive Vice President--Operations Thomas J. Hatchell...... 49 Executive Vice President--Operations Jon W. Lunsford......... 38 Executive Vice President--Finance
Pursuant to certain management rights agreements with FHGLP, Hellman & Friedman Capital Partners and Hellman & Friedman Capital Partners II, L.P. have the right until December 31, 1999 to designate an aggregate of two directors of FHGI. To date, such entities have concurred in the designation of Marc B. Nathanson and Stanley S. Itskowitch as the sole directors of FHGI. In the event such entities did not so concur, Mr. Nathanson, through his voting control of FHGI, would have the option of increasing the size of the Board of Directors of FHGI to a maximum of nine members. Upon consummation of the TCI Transaction, the foregoing management rights agreements will terminate. The following sets forth certain biographical information with respect to the directors and executive officers of Falcon. MARC B. NATHANSON, 53, has been Chairman of the Board and Chief Executive Officer of FHGI and its predecessors since 1975, and prior to September 19, 1995 also served as President. Prior to 1975, Mr. Nathanson was Vice President of Marketing for Teleprompter Corporation, then the largest MSO in the United States. He also held executive positions with Warner Cable and Cypress Communications Corporation. He is a former President of the California Cable Television Association and a member of Cable Pioneers. He is currently a director and a member of the Executive Committee of the National Cable Television Association ("NCTA"). At the 1986 NCTA convention, Mr. Nathanson was honored by being named the recipient of the Vanguard Award for outstanding contributions to the growth and development of the cable television industry. Mr. Nathanson is a 30-year veteran of the cable television industry. He is a founder of the Cable Television Administration and Marketing Society ("CTAM") and the Southern California Cable Television Association. Mr. Nathanson has served as Chairman of the Board, Chief Executive Officer and President of Enstar since October 1988. Mr. Nathanson is a Director of T.V. Por Cable Nacional, S.A. de C.V., an Advisory Board member of TVA, (Brazil) and a director of GRB Entertainment. Mr. Nathanson is also Chairman of the Board and Chief Executive Officer of Falcon International Communications LLC. Mr. Nathanson was appointed by President Clinton and confirmed by the U.S. Senate on August 14, 1995 for a three-year term on the Board of Governors of International Broadcasting of the United States Information Agency. He also serves on the Board of Radio Free Asia, Radio Free Europe and Radio Liberty. Mr. Nathanson is a trustee of the Annenburg School of Communications at the University of Southern California and a member of the Board of Visitors of the Anderson School of Management at UCLA. In addition, he serves on the Board of the UCLA Foundation and the UCLA Center for Communications Policy and is on the Board of Governors of AIDS Project Los Angeles and Cable Positive. 86 FRANK J. INTISO, 51, was appointed President and Chief Operating Officer of FHGI in September 1995. Between 1982 and September 1995, Mr. Intiso held the positions of Executive Vice President and Chief Operating Officer, with responsibility for the day-to-day operations of all cable television systems under the management of Falcon. Mr. Intiso has also served as Executive Vice President and as a Director of Enstar since October 1988. Mr. Intiso has a Masters Degree in Business Administration from UCLA and is a Certified Public Accountant. He currently serves as Immediate Past Chair of the California Cable Television Association and is on the boards of the Cable Advertising Bureau, Cable in the Classroom, Community Antenna Television Association and California Cable Television Association. He is a member of the American Institute of Certified Public Accountants, the American Marketing Association, the American Management Association and the Southern California Cable Television Association. STANLEY S. ITSKOWITCH, 59, has been a Director of FHGI and its predecessors since 1975. He served as Senior Vice President and General Counsel of FHGI from 1987 to 1990 and has been Executive Vice President and General Counsel since February 1990. He has been President and Chief Executive Officer of F.C. Funding, Inc. (formerly Fallek Chemical Company), which is a marketer of chemical products, since 1980. He is a Certified Public Accountant and a former tax partner in the New York office of Touche Ross & Co. (now Deloitte & Touche LLP). He has a J.D. Degree and an L.L.M. Degree in Tax from New York University School of Law. Mr. Itskowitch has also served as Senior Vice President or Executive Vice President and as a director of Enstar since October 1988. Mr. Itskowitch is also Executive Vice President and General Counsel of FIC. MICHAEL K. MENEREY, 46, has been Executive Vice President, Chief Financial Officer and Secretary of FHGI since February 1998 and was Chief Financial Officer and Secretary of its predecessors between 1984 and 1998. Mr. Menerey is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants, and he was formerly associated with BDO Seidman. Mr. Menerey has also served as Chief Financial Officer, Secretary and as a director of Enstar since October 1988. JOE A. JOHNSON, 53, has been Executive Vice President of Operations of FHGI since September 1995, and was a Divisional Vice President of Falcon between 1989 and 1992. From 1982 to 1989, he held the positions of Vice President and Director of Operations for Sacramento Cable Television, Group W Cable of Chicago and Warner Amex. From 1975 to 1982, Mr. Johnson held Cable System and Regional Manager positions with Warner Amex and Teleprompter. Mr. Johnson is also a member of the Cable Pioneers. THOMAS J. HATCHELL, 49, has been Executive Vice President of Operations of FHGI since February 1998. From October 1995 to February 1998, he was Senior Vice President of Operations of Falcon International Communications, L.P. and its predecessor company and was a Senior Vice President of FHGI from January 1992 to September 1995. Mr. Hatchell was a Divisional Vice President of FHGI between 1989 and 1992. From 1981 to 1989, he served as Vice President and Regional Manager for Falcon's San Luis Obispo, California region. He was Vice President of Construction of an affiliate of Falcon from June 1980 to June 1981. In addition, he served as a General Manager of the cable system in Tulare County, California from 1977 to 1980. Prior to that time, Mr. Hatchell served as a cable executive with the Continental Telephone Company. JON W. LUNSFORD, 38, has been Executive Vice President--Finance of FHGI since February 1998, and was Vice President--Finance of Falcon between 1994 and 1998. From 1991 to 1994, he served as Director of Corporate Finance at Continental Cablevision, Inc. Prior to 1991, Mr. Lunsford was a Vice President with Crestar Bank. 87 OTHER OFFICERS OF FALCON The following sets forth certain biographical information with respect to certain additional members of FHGI management. LYNNE A. BUENING, 44, has been Vice President of Programming of Falcon since November 1993. From 1989 to 1993, she served as Director of Programming for Viacom Cable, a division of Viacom International Inc. Prior to that, Ms. Buening held programming and marketing positions in the cable, broadcast and newspaper industries. OVANDO COWLES, 44, has been Vice President of Advertising Sales and Production of Falcon since January 1992. From 1988 to 1991, he served as a Director of Advertising Sales and Production at Cencom Cable Television in Pasadena, California from 1985 to 1988. He was an Advertising Sales Account Executive at Choice TV, an affiliate of Falcon. ABEL C. CRESPO, 38, has been Controller of Falcon since January 1997. Mr. Crespo joined Falcon in December 1984, and has held various accounting positions during that time, most recently Senior Assistant Controller. Mr. Crespo holds a Bachelor of Science degree in Business Administration from California State University, Los Angeles. HOWARD J. GAN, 51, has been Vice President of Regulatory Affairs of Falcon and its predecessors since 1988. He was General Counsel at Malarkey-Taylor Associates, a Washington, D.C.-based telecommunications consulting firm, from 1986 to 1988. Mr. Gan was Vice President and General Counsel at the Cable Television Information Center from 1978 to 1983. In addition, he was an attorney and an acting Branch Chief of the Federal Communications Commission's Cable Television Bureau from 1975 to 1978. R.W. ("SKIP") HARRIS, 50, has been Vice President of Marketing of Falcon since June 1991. He is a member of the CTAM Premium Television Committee. Mr. Harris was National Director of Affiliate Marketing for The Disney Channel from 1985 to 1991. He was also a sales manager, regional marketing manager and director of marketing for Cox Cable Communications from 1978 to 1985. JOAN SCULLY, 63, has been Vice President of Human Resources of FHGI and its predecessors since May 1988. From 1987 to May 1988, she was self-employed as a management consultant to cable and transportation companies. She served as Director of Human Resources of a Los Angeles-based cable company from 1985 through 1987. Prior to that time, she served as a human resource executive in the entertainment and aerospace industries. Ms. Scully holds a Masters Degree in Human Resources Management from Pepperdine University. RAYMOND J. TYNDALL, 50, has been Vice President of Engineering of Falcon since October 1989. From 1975 to September 1989, he held various technical positions with Choice TV and its predecessors. From 1967 to 1975, he held various technical positions with Sammons Communications. He is a certified National Association of Radio and Television Engineering ("NARTE") engineer in lightwave, microwave, satellite and broadband and is a member of the Cable Pioneers. In addition, Falcon has six Divisional Vice Presidents who are based in the field. They are Donald L. Amick, Daniel H. DeLaney, Ron L. Hall, Michael E. Kemph, Michael D. Singpiel and Robert S. Smith. BOARD OF REPRESENTATIVES OF FHGLP The Existing FHGLP Partnership Agreement provides for the establishment of a Board of Representatives of FHGLP, which has the authority to approve annual budgets and whose approval is required in order for FHGLP to undertake certain actions specified in the Existing FHGLP Partnership Agreement. The Board of Representatives consists of eleven members, six of whom are appointed by Falcon (of whom a minimum of two must be outsiders since they may not be members of Falcon management), two of whom are appointed by Hellman & Friedman Capital Partners II, L.P., one of whom is appointed by Hellman & Friedman Capital Partners, one of whom is appointed by Boston Ventures Limited Partnership II and one 88 of whom is appointed by Madison Dearborn Partners VI. Pursuant to the Existing FHGLP Partnership Agreement, the size of the Board of Representatives and the identity of the partners appointing its members will change if certain current partners cease to be partners. Upon consummation of the TCI Transaction, FHGLP will be governed by the New FHGLP Partnership Agreement which does not provide for a Board of Representatives. See "Description of the Partnership Agreements--New FHGLP Partnership Agreement." As of March 15, 1998, the members of the Board of Representatives of FHGLP who also are members of Falcon management are: Marc B. Nathanson, Frank J. Intiso, Stanley S. Itskowitch and Michael K. Menerey. The other members of the Board of Representatives of FHGLP are: Leonard J. Baxt(1)(2) Joseph M. Niehaus John L. Bunce, Jr.(1)(2) Steven Rattner(2) Roy F. Coppedge, Lawrence M. Unrein III(1)(2) Paul J. Finnegan
- ------------------------ (1) Member of Audit Committee (2) Member of Compensation Committee The following sets forth certain biographical information with respect to the members of the Board of Representatives of FHGLP who are not members of management. Each of such persons has been a member of the Board of Representatives since the formation of FHGLP except for Messrs. Finnegan, Unrein and Niehaus, who were first appointed in 1995, 1996 and 1997, respectively. LEONARD J. BAXT, 50, has been a member of the Washington, D.C. office of the law firm of Dow, Lohnes & Albertson, PLLC ("DL&A") since 1980. Mr. Baxt heads the Corporate Department of DL&A and specializes in the acquisition and financing of media and telecommunications companies. JOHN L. BUNCE, JR., 39, is a General Partner of Hellman & Friedman. Prior to joining Hellman & Friedman in 1988, Mr. Bunce was a Vice President with the venture capital firm of TA Associates. Previously, he was employed in the Mergers & Acquisitions and Corporate Finance Departments of Lehman Brothers Kuhn Loeb. Mr. Bunce is a director of Western Wireless Corporation, MobileMedia Corporation and T.V. Por Cable Nacional, S.A. de C.V. and numerous private companies. Mr Bunce is also a director of FIC. ROY F. COPPEDGE, III, 50, has been a General Partner of Boston Ventures and a director of Boston Ventures Management, Inc. since August 1983. Prior to that date, he was a First Vice President of The First National Bank of Boston and headed the bank's U.S. Merchant Banking group. He is currently a director of American Media, Inc. and Sinclair Broadcast Group, Inc. Mr. Coppedge is also a director of FIC. PAUL J. FINNEGAN, 45, has been a Vice President of Madison Dearborn Partners, Inc., the general partner of Madison Dearborn Capital Partners, L.P. since January 1993. Previously, he served in various positions at First Capital Corporation of Chicago and its affiliates. Mr. Finnegan currently serves a director of Omnipoint Corporation and as a member of the Board of Trustees of The Skyline Fund. JOSEPH M. NIEHAUS, 35, is a General Partner of Hellman & Friedman. Prior to joining Hellman & Friedman in 1989, Mr. Niehaus was employed in the Merchant Banking and Mergers & Acquisitions Departments of Morgan Stanley & Co. Incorporated. Mr. Niehaus is a director of Hoyts Cinemas Limited, Hoyts Cinemas America Limited and numerous private companies. Mr. Niehaus is also a director of FIC. STEVEN RATTNER, 45, is Deputy Chief Executive of Lazard Freres & Co. LLC, which he joined in 1989 as a General Partner. Between 1986 and 1989, Mr. Rattner was a Managing Director at Morgan Stanley & Co. Incorporated. 89 LAWRENCE M. UNREIN, 42, is a Vice President at J.P. Morgan Investment Management ("JPMIM"). Mr. Unrein is head of the Private Equity Group. Prior to joining JPMIM in 1997, Mr. Unrein spent 17 years with AT&T Investment Management Corp., an investment management subsidiary of AT&T, where he was responsible for managing the public and private equity and fixed income portion of $80 billion in corporate employee benefit funds. He serves on the Board of Directors at Hamilton Services Corp. He is the Treasurer at Malcolm Baldridge, Quality Award Foundation. He is also on numerous Private Equity Advisory Boards such as Morgan Stanley Capital Partners, New Enterprises Associates, APA Excelsior, Accel, Asian Infrastructure, Butler Capital, Hellman & Friedman, TA Associates, Saunders, Karp, Megrue, North Bridge Ventures and Prudential Asia. ADVISORY COMMITTEE OF NEW FALCON The New Falcon Partnership Agreement provides for an Advisory Committee consisting of six individual representatives of the partners, three of whom are to be appointed by FHGLP, two of whom are to be appointed by TCI and one of whom is to be appointed by joint designation of FHGLP and TCI. FHGLP must consult with the Advisory Committee on certain partnership matters and must obtain the Advisory Committee's approval before taking certain other actions on behalf of New Falcon. For additional information regarding the governance and management of New Falcon following consummation of the TCI Transaction, see "Description of the Partnership Agreements--New Falcon Partnership Agreement." FHGLP has appointed Marc B. Nathanson (Chairman), Frank J. Intiso and Stanley S. Itskowitch as its initial representatives; TCI has appointed Leo J. Hindery, Jr. and William R. Fitzgerald as its initial representatives; and FHGLP and TCI have designated John S. Evans as their initial joint representative. The following sets forth certain biographical information with respect to the members of the Advisory Committee of New Falcon who are not members of Falcon management. LEO J. HINDERY, JR., 50, has served as the President and Chief Operating Officer and a Director of Tele-Communications, Inc. ("TCI Parent") since March 1997 and has been a director of TCI Parent since May 1997. Mr. Hindery is also President and Chief Executive Officer of TCI Communications, Inc. and is Chairman of the Board of TCI Ventures Group. Mr. Hindery was previously founder, Managing General Partner and Chief Executive Officer of InterMedia Partners, a cable TV operator, and its affiliated entities since 1988. Mr. Hindery is Chairman, a director and a member of the Executive Committee of the NCTA, and is also a director of Cablevision Systems Corporation, Lenfest Group, TCI Music, Inc., Telecommunications International, Inc., USA Networks, Inc. and the @ Home Network. Mr. Hinderey is also Chairman and a director of C-SPAN. WILLIAM R. FITZGERALD, 41, is Executive Vice President of Corporate Development for TCI Communications, Inc. and has served as a Director of TCI Communications, Inc. since January 30, 1998. Prior to joining TCI Communications, Inc. in March 1996, he was a Senior Vice President and Partner with Daniels & Associates, a leading brokerage and investment banking firm to the communications industry. Before joining Daniels & Associates, Mr. Fitzgerald was Vice President at The First National Bank of Chicago. JOHN S. EVANS, 54, is Chairman and Chief Executive Officer of Evans Telecommunications Company, an investment, consulting and operating company in the cable television and telecommunications industries. From 1983 to 1994, he was President and Chief Operating Officer of Hauser Communications and was co- founder of C-SPAN. Mr. Evans serves as a trustee of the C-SPAN Educational Foundation and is a director of C-SPAN, the NCTA, the Virginia Cable Television Association, The Eisenhower World Affairs Institute and The Hollings Cancer Center. 90 DIRECTORS AND EXECUTIVE OFFICERS OF FFC The following persons are the sole directors and officers of FFC:
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------- Marc B. Nathanson......................... 53 Chief Executive Officer and a Director Frank J. Intiso........................... 51 President and a Director Stanley S. Itskowitch..................... 59 General Counsel and a Director Michael K. Menerey........................ 46 Chief Financial Officer, Secretary and a Director
EXECUTIVE COMPENSATION The following table summarizes the compensation paid or accrued by FHGLP to the Chief Executive Officer of FHGI and to each of the four other most highly compensated executive officers of FHGI for services rendered during the three years ended December 31, 1997. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------------- ALL OTHER SALARY BONUS COMPENSATION(1) ---------- ---------- ---------------- Marc B. Nathanson, Chairman and Chief Executive Officer 1997................................................................ $ 615,424(2) $ 122,460(2) $ 2,400 1996................................................................ 291,020(2) 56,998(2) 2,610 1995................................................................ 619,619(2) 123,952(2) 2,174 Frank J. Intiso, President and Chief Operating Officer 1997................................................................ 588,432 111,072 2,400 1996................................................................ 587,923 106,800 2,610 1995................................................................ 539,085 98,753 2,530 Stanley S. Itskowitch, Executive Vice President and General Counsel 1997................................................................ 309,976(2) 52,530(2) 2,047 1996................................................................ 191,962(2) 32,845(2) 2,140 1995................................................................ 95,154(2) 14,287(2) 461 Michael K. Menerey, Executive Vice President, Chief Financial Officer and Secretary 1997................................................................ 255,548(2) 47,754(2) 1,721 1996................................................................ 247,023(2) 45,806(2) 1,725 1995................................................................ 227,938 42,642 1,564 Jon W. Lunsford, Executive Vice President--Finance 1997................................................................ 200,769 40,000 1,440 1996................................................................ 191,461 38,000 1,425 1995................................................................ 170,000 34,000 1,255
- ------------------------ (1) These amounts relate to term life insurance premiums paid by FHGLP. (2) Net of reimbursement for salary and bonus FHGLP received from FIC related to the time of Mr. Nathanson ($204,000 and $41,000, $500,000 and $100,002, and $107,216 and $21,448), Mr. Itskowitch ($71,000 and $18,000, $175,000 and $35,000, and $242,640 and $48,513) and Mr. Menerey ($431 and $86, $968 and $194), spent on international activities in 1997, 1996 and in 1995, respectively. 91 PROFIT SHARING PLAN FHGLP maintains a cash or deferred profit sharing plan referred to as the Smart 401K Plan (the "Plan"), covering substantially all of its employees. The Plan allows participants to elect to make a contribution in an amount up to 20% of their annual compensation, which otherwise would have been payable to the participant as salary. Additionally, subject to certain limitations, FHGLP can contribute to the Plan on a discretionary basis, as determined by management, an amount that does not exceed 15% of the annual aggregate compensation, as defined, paid to participating employees. In general, participants in the Plan vest in any FHGLP contributions according to the following schedule:
YEARS OF SERVICE PERCENTAGE VESTED - ---------------------------------------------------------------------------- ------------------- Less than 3 years........................................................... 0% 3........................................................................... 20 4........................................................................... 40 5........................................................................... 60 6........................................................................... 80 7........................................................................... 100
The following executive officers named in the Summary Compensation Table are participants in the Plan and, as of December 31, 1997 were 100% vested: Marc B. Nathanson, Frank J. Intiso, Stanley S. Itskowitch and Michael K. Menerey. There were no contributions charged against operations for the Plan in 1995, 1996, 1997 or for the three months ended March 31, 1998. 1993 INCENTIVE PERFORMANCE PLAN On December 30, 1993, FHGLP assumed the obligations of FHGI for its 1993 Incentive Performance Plan (the "Incentive Plan"). The value of the interests in the Incentive Plan is tied to the equity value of certain Partnership Units in FHGLP held by FHGI. In connection with the assumption by FHGLP, FHGI agreed to fund any benefits payable under the Incentive Plan through additional capital contributions to FHGLP, the waiver of its rights to receive all or part of certain distributions from FHGLP and a contribution of a portion of its Partnership Units to FHGLP. The benefits which are payable under the Incentive Plan are equal to the amount of distributions which FHGI would have otherwise received with respect to 3,780.14 of the Units of FHGLP held by FHGI, 237.98 of the Class A Units of FHGLP held by FHGI and a portion of FHGI's interest in certain of the partnerships that are the general partners of the Affiliated Partnerships. Benefits are payable under the Incentive Plan only when distributions would otherwise be paid to FHGI with respect to the above-described Units and interests. The Incentive Plan is scheduled to terminate on January 5, 2003, at which time FHGLP is required to distribute the Units described above to the participants in the Incentive Plan. At such time, FHGI is required to contribute the Units to FHGLP to fund such distributions. The participants in the Incentive Plan are present and former employees of FHGLP and its operating affiliates, all of whom are 100% vested. Prior to the closing of the TCI Transaction, FHGLP will amend the Incentive Plan to provide for payments by FHGLP at the closing of the TCI Transaction to participants in an aggregate amount of approximately $6.6 million and to reduce by such amount FHGLP's obligations to make future payments to participants under the Incentive Plan. At the closing of the TCI Transaction, New Falcon will assume the obligations of FHGLP under the Incentive Plan, as so amended, other than the obligation to make the payments at closing of the TCI Transaction. See "The TCI Transaction." Following consummation of the TCI Transaction, the Company intends to consider and adopt one or more new management incentive plans. 92 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended December 31, 1997 and for the three months ended March 31, 1998, Marc B. Nathanson, Chairman of the Board and Chief Executive Officer, Frank J. Intiso, President and Chief Operating Officer, Stanley S. Itskowitch, Executive Vice President and General Counsel, and Michael K. Menerey, Executive Vice President, Chief Financial Officer and Secretary, participated in deliberations with the Board of Representatives of FHGLP with respect to executive officer compensation. The Company leases certain office space for its corporate financial center (located in Pasadena, California) from a partnership owned by Marc B. Nathanson and his wife (the "Pasadena Lease"). The Pasadena Lease commenced on October 1, 1990 and was for a term of five years. The Company has negotiated a new lease expiring September 30, 2005. The base rent is currently approximately $31,000 per month, and increased to approximately $35,000 per month in the first quarter of 1998 due to additional space required in connection with the TCI Transaction. The Company believes that the terms of the new Pasadena lease are consistent with leases between unaffiliated parties involving similarly situated properties. The Company also assumed a lease for office space in a building owned by Marc B. Nathanson and his wife in connection with the acquisition of the assets of FCSC. The rent on this property is less than $60,000 per year. This property will be purchased by the Company in 1998 for a purchase price determined by the average of two independent appraisals. In addition, the Company provides certain accounting, bookkeeping and clerical services to Marc B. Nathanson. Mr. Nathanson pays for a portion of the costs relating to these services, and the Company pays the balance. The net amount paid by the Company in 1995, 1996, 1997 and for the three months ended March 31, 1998 was approximately $180,000, $118,300, $163,000 and $51,000, respectively. COMPENSATION OF DIRECTORS The directors of FHGI receive no compensation for their services as directors thereof. The members of the Board of Representatives of the Company receive no compensation for their service on the Board of Representatives other than reimbursement of expenses. Following consummation of the TCI Transaction, members of the Advisory Committee who are not affiliated with the Company will receive $10,000 per year and will be reimbursed for expenses. 93 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS FHGLP and its affiliates, including Marc B. Nathanson and other members of Falcon's senior management team, currently own varying interests in, and FHGLP controls the general partners of, the Affiliated Partnerships and certain other entities engaged in the cable television business. FHGLP receives management fees from the Affiliated Partnerships, and receives additional reimbursement of certain expenses from Falcon Classic. FALCON CABLE SYSTEMS COMPANY. On July 12, 1996, FHGLP acquired the assets of FCSC. See "Business--The Affiliated Systems." In connection with this transaction, FCSC paid a $6.2 million disposition fee to Falcon Cable Investors Group, its general partner ("FCIG"), which in turn distributed the fee, along with cash on hand of approximately $1.6 million, to its partners. As a result, FCIG distributed funds as follows: Marc B. Nathanson, approximately $3.9 million; Hellman and Friedman Capital Partners, II, L.P., approximately $2.3 million; Frank J. Intiso, approximately $759,000; Steven Rattner, approximately $68,000; and FHGLP, approximately $758,000. FCSC also paid FHGLP approximately $5.2 million of previously deferred fees. FALCON CLASSIC CABLE INCOME PROPERTIES, L.P. In March 1998, FHGLP acquired substantially all of the assets of Falcon Classic. In connection with this sale, Falcon Classic made a distribution of approximately $587,000 to Falcon Classic Cable Investors Group ("FCCIG"), its general partner, in respect of its ownership interest in Falcon Classic. After repaying its $221,000 note payable to Falcon Classic, FCCIG distributed $365,600 as follows: Marc B. Nathanson, approximately $103,800; Hellman and Friedman Capital Partners II, L.P., approximately $193,900; Frank J. Intiso, approximately $6,700; Stanley S. Itskowitch, approximately $14,600; Michael K. Menerey, approximately $6,700; Leonard Baxt, approximately $1,400; Steven Rattner, approximately $5,300; and FHGLP, approximately $33,200. The remaining distribution relates to the July 16, 1998 sale of the City of Somerset system, which will result in proceeds of approximately $63,200 to FCCIG, which proceeds will be distributed to the FCCIG partners in essentially the same proportion as the payments enumerated above. FALCON VIDEO COMMUNICATIONS, L.P. The partners of Falcon Video have agreed to combine Falcon Video's assets with those of FHGLP concurrent with the closing of the TCI Transaction. See "The TCI Transaction." If the TCI Transaction has not occurred, then at any time subsequent to May 15, 1999, either FHGLP or certain limited partners of Falcon Video may initiate the sale of the partnership based on an appraised value. In such a circumstance, FHGLP may submit a bid for the assets of Falcon Video at or above their appraised value. If a limited partner initiates the sale process, then the limited partners may agree to either (i) sell the assets to FHGLP at its bid, (ii) sell such assets to an unaffiliated third party at a price equal to at least 105% of the price which FHGLP agreed to pay or (iii) not effect a sale of the assets. If FHGLP initiates the sale process, any such sale to an unaffiliated third party must be at a price equal to at least 102.5% of the price which FHGLP agreed to pay. The limitations on the price at which sales may be made described above terminate on May 15, 2001. In addition, the Amended and Restated Partnership Agreement of Falcon Video prohibits any Falcon entity from directly or indirectly acquiring, managing, operating or otherwise participating in any business or operation which (i) constitutes a media property or provides the same or equivalent services as a media property (including, by way of example, a satellite master antenna television system, multi-point distribution service or direct broadcast service), and is conducted wholly or partially within any community or other area served by the cable television systems owned by Falcon Video or (ii) which otherwise competes in any material respect with any investments of Falcon Video. FALCON INTERNATIONAL COMMUNICATIONS LLC. On October 4, 1995, FHGLP sold its investments and loans in the Philippines and India to FIC, a newly-formed, separately capitalized entity, the members of which include members of FHGLP's management and certain of its limited partners. The sales price of approximately $6.3 million in cash was determined to be the fair market value of the assets and was supported by an appraisal conducted by an independent third party. In addition, FHGLP received an 94 additional $1.9 million, $1.1 million and $398,000 in cash as reimbursement for 1995, 1996 and 1997 operating costs, respectively, related to international investments. There is also an insurance cost allocation agreement between FHGLP and FIC. In order to focus its limited capital resources on the upgrade and rebuild needs of the Owned Systems, FHGLP does not expect to pursue any further international investments. See "Business--International Activities." INDEMNIFICATION OF THE GENERAL PARTNER. The Existing FHGLP Partnership Agreement provides that FHGI, as the general partner of FHGLP (the "General Partner") will be indemnified by FHGLP for acts performed within the scope of its authority under the Existing FHGLP Partnership Agreement if such General Partner (i) acted in good faith and in a manner that it reasonably believed to be in, or not opposed to, the best interests of FHGLP and the partners and (ii) had no reasonable grounds to believe that its conduct was negligent. In addition, the Existing FHGLP Partnership Agreement provides that the General Partner will not be liable to FHGLP or its limited partners for errors in judgment or other acts or omissions not amounting to negligence or misconduct. Therefore, limited partners will have a more limited right of action than they would have absent such provisions. In addition, FHGLP maintains, at its expense and in such reasonable amounts as its management shall determine, insurance on behalf of the General Partner, and such other persons as the General Partner shall determine, against any liability that may be asserted against or expense that may be incurred by such person and against which FHGLP would be entitled to indemnify such person pursuant to the Partnership Agreement for certain wrongful or allegedly wrongful acts, including certain errors, misstatements, misleading statements, omissions, neglect or breaches of duty. To the extent that the exculpatory provisions purport to include indemnification for liabilities arising under the Securities Act, it is the opinion of the Commission that such indemnification is contrary to public policy and therefore unenforceable. MANAGEMENT LOANS In September 1994, FHGLP loaned Jon W. Lunsford, Executive Vice President--Finance, an aggregate of $125,000 pursuant to a promissory note secured by a second trust deed on real property. This loan bears interest at the rate of 7.05% per annum, payable annually, and the unpaid principal and related accrued interest is due and payable on December 31, 2002. Effective December 31, 1994 and continuing until the loan is repaid, two-thirds of each annual bonus payment, if any, payable to Mr. Lunsford will be applied first as payment against accrued interest payable and secondly as a principal payment against the loan balance. OTHER The Company has leased certain office space for its corporate financial center (located in Pasadena, California) from a partnership owned by Marc B. Nathanson and his wife, Jane Nathanson. The lease commenced on October 1, 1990 and has been extended through September 30, 2005. The rent is currently approximately $31,000 per month, increased to approximately $35,000 per month in the first quarter of 1998 due to additional space required in connection with the TCI Transaction and is indexed for inflation. The terms of the current lease have been negotiated on an arms' length basis. It is expected that any future modifications to the leasing agreement will be approved by the members of the Board of Representatives of FHGLP other than Marc B. Nathanson. The Company also assumed a lease for office space in a building owned by Marc B. Nathanson and his wife in connection with the acquisition of the assets of FCSC. The rent on this property is less than $60,000 per year. This property will be purchased by FHGLP in 1998 for $282,500, a price determined by two independent appraisals. As noted herein, certain executive officers of FHGLP have ownership interests in the Affiliated Partnerships and in other domestic and international cable operations in addition to their equity interests in FHGLP. Conflicts of interest may arise at various times in respect of the allocation of time, personnel and other resources as between the Owned Systems the Affiliated Systems and other ventures. However, 95 the Affiliated Partnerships each have Advisory Committees or similar bodies which, among other things, act in the case of conflicts of interest. Leonard J. Baxt is a member of the Board of Representatives and a limited partner of FHGLP. Mr. Baxt is also a member of DL&A, which has served as counsel to FHGLP in connection with the Exchange Offer, the Offering, the TCI Transaction, the Notes Tender and the Notes Redemption. DL&A has provided other legal services to FHGLP from time to time and received customary fees for such services. For a description of certain other transactions involving management, see "Management--Compensation Committee Interlocks and Insider Participation." TRANSACTIONS WITH TCI Pursuant to the New Falcon Partnership Agreement, TCI Communications, Inc., an affiliate of TCI and the direct or indirect owner, of substantially all of the cable television systems wholly-owned and operated in the continental United States by TCI Parent, has agreed to use commercially reasonable efforts to (i) cause to be offered to New Falcon and its subsidiaries equipment, billing services, the At Home Internet access service, HITS and other goods and services that are made available to TCI Communications, Inc. or the cable television systems owned by TCI Communications, Inc., at a cost equal to the direct cost incurred by TCI Communications, Inc. for such goods and services and (ii) make available to New Falcon on a royalty-free basis any technological innovations that TCI Communications, Inc. develops, or becomes aware of and has access to, for other cable television systems owned by or otherwise affiliated with TCI Communications, Inc. As a result of its relationship with TCI, the Company has the ability to purchase its programming at rates approximating those available to TCI. The Company has a contract with Satellite Services, Inc. ("SSI"), a subsidiary of TCI, to obtain basic and premium programming. SSI contracts with various programmers to purchase programming. Following consummation of the TCI Transaction, the Company has the option (but is not required) to purchase programming for the Company's systems through its contract with SSI for which it will pay SSI's cost plus an administrative fee. 96 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table and footnotes set forth, as of March 31, 1998, the beneficial ownership of general partnership interests and Class A and Class B limited partnership interests of FHGLP by (i) each person who is known to FHGLP to own beneficially more than 5% of such partnership interests of FHGLP and (ii) all executive officers of FHGLP and the members of the Board of Representatives of FHGLP.
NUMBER OF UNITS TYPE OF ASSIGNED TO PARTNERSHIP PARTNERSHIP PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNERS INTEREST INTEREST OWNERSHIP - ----------------------------------------- ------------------ ------------------- ----------- Marc B. Nathanson(1)(2).................. General Partner -- 100.0% Limited Partner 36,107 36.1% Hellman & Friedman(3).................... Limited Partner 35,446 35.4% Leeway & Co.(4).......................... Limited Partner 10,732 10.7% Boston Ventures(5)....................... Limited Partner 6,816 6.8% Falcon First Communications, LLC(6)(7)... Limited Partner 2,043 2.1% Frank J. Intiso(1)(8).................... Limited Partner 1,808 1.8% Stanley S. Itskowitch(1)(9).............. Limited Partner 645 * Michael K. Menerey(1)(10)................ Limited Partner 67 * Steven Rattner(11)....................... Limited Partner 310 * Leonard J. Baxt(12)...................... Limited Partner 82 * All executive officers and members of the Board of Representatives of FHGLP as a group (13 persons)(13)................. General Partner 39,019 100.0% Limited Partner 39.0%
- ------------------------ * Less than 1% (1) The address for each of such persons is c/o Falcon Cable TV, 10900 Wilshire Blvd., 15th Floor, Los Angeles, California 90024. (2) Marc B. Nathanson individually holds of record no partnership units of FHGLP. However, by virtue of Mr. Nathanson's ownership of a majority of the voting securities of FHGI, the general partner of FHGLP, he has voting and investment power as to the 11,195 limited partnership units of FHGLP held of record by FHGI. Although FHGI has equity ownership, and therefore investment power, over 11.2% of the partnership units of FHGLP, pursuant to the Existing FHGLP Partnership Agreement, this constitutes only a 9.1% voting power percentage. In addition, because Mr. Nathanson is co-trustee of two irrevocable trusts that own a majority of the voting securities of Advance TV of California Inc., he shares voting and investment power as to the 3,308 limited partnership units of FHGLP held of record by such entity. Mr. Nathanson also is the general partner of Advance Company, Ltd. and therefore has voting and investment power as to the 1,254 limited partnership units of FHGLP held of record by such limited partnership. As the owner of a majority of the voting securities of Blackhawk Holding Company, Inc., Mr. Nathanson has voting and investment power as to the 6,472 limited partnership units of FHGLP held by such corporation. Also, as trustee of a revocable trust, the Falcon Cable Trust, Mr. Nathanson has voting and investment power as to the 13,878 limited partnership units of FHGLP held by such trust. Mr. Nathanson also beneficially owns 0.46% of Falcon Classic Cable Income Properties, L.P. and 2.58% of Falcon Video Communications, L.P., each an Affiliated Partnership. (3) Of such 35,446 limited partnership units, 8,924 are held of record by Hellman & Friedman Capital Partners and 26,522 are held of record by Hellman & Friedman Capital Partners II, L.P., both of which 97 entities are controlled by Hellman & Friedman. Hellman & Friedman has equity ownership, and therefore investment power over 35.4% of the partnership units of FHGLP pursuant to the Existing FHGLP Partnership Agreement; Hellman & Friedman Capital Partners has an 8.9% voting power percentage and Hellman & Friedman Capital Partners II, L.P. has a 28.7% voting power percentage, which results in Hellman & Friedman having voting power over 37.6% of the partnership units of FHGLP. The address is One Maritime Plaza, 12th Floor, San Francisco, California 94111. (4) Of such 10,732 limited partnership units, 5,342 are held of record by Leeway & Co. An additional 5,390 are held of record by MLC Investors, L.P., of which Leeway & Co. is the general partner. The address is c/o State Street Bank and Trust Company, Master Trust Division-W6C, One Enterprise Drive, North Quincy, Massachusetts 02171. (5) Of such 6,816 limited partnership units, 6,644 are held of record by Boston Ventures Limited Partnership II and 172 are held of record by Boston IIA Investment Corporation, both of which entities are controlled by Boston Ventures. The address is 21 Custom House Street, Boston, Massachusetts 02110. (6) Represents Class B partnership interests held of record by Falcon First Communications, LLC ("FFC LLC"). Madison Dearborn Partners VI, of which Mr. Finnegan is a general partner, is the sole manager of FFC LLC. Excludes the Class C partnership units held of record by FFC LLC, which generally do not have voting rights and are entitled to participate in the profits of FHGLP under limited circumstances after receipt of a preferred return as described in the Existing FHGLP Partnership Agreement. Except for its partnership interest in FHGLP, FFC LLC is otherwise unaffiliated with any other Falcon entity. The address is c/o Madison Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago, Illinois 60670-0501. (7) All information in this table excludes Class C partnership interests, which generally do not have voting rights and participate in the profits of FHGLP under limited circumstances after receipt of a preferred return as described in the Existing FHGLP Partnership Agreement. All such Class C partnership interests are held of record by FFC LLC. (8) Frank J. Intiso beneficially owns 0.04% of Falcon Classic and 0.35% of Falcon Video, each an Affiliated Partnership. (9) Stanley S. Itskowitch beneficially owns 0.09% of Falcon Classic and 0.35% of Falcon Video, each an Affiliated Partnership. (10) Michael K. Menerey beneficially owns 0.04% of Falcon Classic and 0.15% of Falcon Video, each an Affiliated Partnership. (11) The address is c/o Lazard Freres & Co. LLC, Thirty Rockefeller Plaza, New York, New York 10020. (12) The address is c/o Dow, Lohnes & Albertson, PLLC, 1200 New Hampshire Avenue, N.W., Washington, D.C. 20036-6802. (13) Each of John L. Bunce, Roy F. Coppedge, III, Paul J. Finnegan, Joseph M. Niehaus and Lawrence M. Unrein serves on the Board of Representatives of FHGLP as the designee of an affiliated partner of FHGLP. Each such person disclaims beneficial ownership of the partnership interest owned by the related entity. Except as otherwise identified in the table, no member of the Board of Representatives is the record owner of any partnership interests in FHGLP. 98 DESCRIPTION OF THE PARTNERSHIP AGREEMENTS The following is a summary of the material terms of the Existing FHGLP Partnership Agreement, the Fourth Amended and Restated Agreement of Limited Partnership of Falcon Holding Group, L.P. (the "New FHGLP Partnership Agreement") and the Amended and Restated Agreement of Limited Partnership of Falcon Communications, L.P. (the "New Falcon Partnership Agreement") (collectively, the "Partnership Agreements"). Copies of the Partnership Agreements have been filed with the Commission. The statements under this caption are summaries, and investors are encouraged to read the full text of the Partnership Agreements. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the respective Partnership Agreements. EXISTING FHGLP PARTNERSHIP AGREEMENT ORGANIZATION AND DURATION. FHGLP was organized on February 11, 1993 as a Delaware limited partnership to assume the cable management and operations of FHGI. Unless sooner terminated in accordance with the terms of the Existing FHGLP Partnership Agreement, FHGLP will continue until January 1, 2015. GENERAL PARTNER. FHGI is the sole general partner of FHGLP and, except for certain partnership matters specified in the Existing FHGLP Partnership Agreement requiring the approval of the Board of Representatives or the limited partners, FHGI has the exclusive authority to manage the business, operations and affairs of FHGLP and the exclusive right to exercise all rights incident to the ownership of all partnership and other interests held by FHGLP. BOARD OF REPRESENTATIVES. The Existing FHGLP Partnership Agreement provides for a Board of Representatives consisting of up to eleven individual representatives of the partners, as follows: (1) Four members are designated by FHGI in its sole discretion. FHGI's current designees are Marc B. Nathanson, Frank J. Intiso, Stanley S. Itskowitch and Michael Menerey. (2) Two additional "independent" members are designated by FHGI with the approval of a majority of the members of the Board of Representatives (other than the four FHGI representatives). The current "independent" designees are Leonard J. Baxt and Steven Rattner. (3) So long as any of the Group II Partners continues to be a partner of FHGLP, two members are designated by Hellman & Friedman Capital Partners II, L.P. and one member is designated by Hellman & Friedman Capital Partners, a California Limited Partnership, subject to approval by FHGI in certain circumstances. The current Group II designees are John L. Bunce, Jr., Lawrence M. Unrein and Joseph M. Niehaus. (4) So long as any of the Group I Partners continues to be partner of FHGLP, one member is designated by Boston Ventures Limited Partnership II, subject to approval by FHGI in certain circumstances. The current Group I designee is Roy F. Coppedge, III. (5) So long as any of the Group III Partners continues to be a partner in FHGLP and none of the Group I partners continues to be a partner in FHGLP, one member of the Board of Representatives is designated by Leeway & Co., subject to certain permitted FHGI approval rights. So long as any of the Group III partners continues to be a partner in FHGLP and none of the Group II partners continues to be a partner in FHGLP, two members of the Board of Representatives are designated by Leeway & Co., subject to certain permitted FHGI approval rights. There are currently no Group III designees. (6) So long as the Group IV Partner and the Original Group IV Members continue to beneficially own a certain specified minimum ownership percentage in FHGLP or its corporate successor, 99 one member is designated by Madison Dearborn Partners VI, subject to approval by FHGI in certain circumstances. The current Group IV designee is Paul J. Finnegan. See "Management" for additional biographical information regarding the members of the Board of Representatives. The Existing FHGLP Partnership Agreement prohibits FHGLP and its subsidiaries from taking certain actions without the approval of at least a majority of the members of the Board of Representatives, including:(1) making any expenditures inconsistent with the annual operating budget or capital expenditure budget, with certain permitted exceptions; (2) sale or other disposition of assets in a single transaction having an aggregate value in excess of $15 million; (3) purchase or other acquisition of assets in a single transaction having an aggregate value in excess of $15 million or that are not reasonably related to the business of FHGLP; (4) incurrence of any indebtedness, with certain permitted exceptions; (5) issuance of any equity interest in FHGLP or a subsidiary, with certain permitted exemptions; (6) making any voluntary or optional prepayment on any indebtedness, except pursuant to any revolving credit arrangements; (7) purchase or redemption of any partnership interest in FHGLP or any subsidiary, with certain permitted exceptions; (8) making any distributions of cash or property to the partners of FHGLP with respect to their partnership interest in FHGLP, with certain permitted exceptions; (9) entering into any transaction or agreement with the general partner or its affiliates, with certain permitted exceptions; and (10) making certain amendments to any agreement pursuant to which FHGLP manages cable television systems. In addition, the Board of Representatives must approve, under procedures set forth in the Existing FHGLP Partnership Agreement, an annual operating budget and an annual capital expenditure budget for FHGLP and its subsidiaries and the aggregate compensation of the Partnership's designated senior management. LIMITED PARTNERS. The Existing FHGLP Partnership Agreement provides for three different classes of limited partnership interests: Class A, Class B and Class C. The Class C partnership interests are non-voting interests (with the exception of certain permitted approval rights). Each non-management limited partner is designated as a Group I Partner, a Group II Partner, a Group III Partner or a Group IV Partner. See "--Partner Liquidity." The Group I Partners, the Group II Partners and the Group III Partners principally hold Class B partnership interests and the Group IV Partner holds Class B and Class C partnership interests. APPROVAL RIGHTS OF LIMITED PARTNERS. The Existing FHGLP Partnership Agreement prohibits FHGLP and its subsidiaries from taking certain actions without the approval of limited partners holding at least a two-thirds voting interest, including: (1) effecting a merger or consolidation, with certain permitted exceptions, (2) sale or other disposition of assets in a single transaction having an aggregate value in excess of $15 million; (3) purchase or other acquisition of assets in a single transaction having an aggregate value in excess of $15 million or that are not reasonably related to the business of FHGLP; (4) incurrence of any indebtedness, with certain permitted exceptions; (5) issuance of any equity interest in FHGLP or any subsidiary, with certain permitted exemptions; (6) making any voluntary or optional prepayment on any indebtedness, except pursuant to any revolving credit arrangements; (7) purchase or redemption of any partnership interest in FHGLP or any subsidiary, with certain permitted exceptions; (8) making any distributions of cash or property to the partners of FHGLP with respect to their partnership interest in FHGLP, with certain permitted exceptions; (9) entering into any transaction or agreement with the general partner or its affiliates, with certain permitted exceptions; (10) making certain amendments to any agreement pursuant to which FHGLP manages cable television systems; and (11) paying any compensation to any member of the Board of Representatives, with certain permitted exceptions. The Existing FHGLP Partnership Agreement also prohibits FHGLP and its subsidiaries from incurring any indebtedness, which would restrict FHGLP's ability to satisfy its obligations with respect to the partners' liquidity rights. This restriction is materially more limiting than the corresponding provisions of the Company's debt agreements in effect on December 28, 1995 (including the bank credit agreement, as then in place, and the Debentures), and requires the consent of the partner designee of the partners whose liquidity rights would be affected. 100 CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS. Other than the capital contributions already made by the partners to FHGLP, the Existing FHGLP Partnership Agreement does not require any additional capital contributions. The Class C partnership interests have certain preferences over the Class A and Class B partnership interests with respect to the allocation of income and distributions by FHGLP. Otherwise, all distributions made by FHGLP are generally made in proportion to the partners' percentage interests. Distributions prior to liquidation of FHGLP are made at the discretion of FHGI, except that FHGLP is required to make annual distributions of available cash (subject to contractual restrictions on distributions by FHGLP) to the extent of the partners' aggregate estimated tax liabilities as a result of the allocation to them of FHGLP's income and gain. No such distributions have been made since the formation of FHGLP. PARTNER LIQUIDITY. In contemplation of the TCI Transaction, by agreement of the Group I, Group II, Group III and Group IV partners, the dates on which the partners may exercise certain put rights and the dates by which FHGLP is required to redeem certain partnership interests (either as a result of a partner exercising a put right or pursuant to the existing mandatory redemption provisions) were tolled in accordance with the Contribution Agreement. The new dates are determined by adding to the original date the number of days in the period (the "tolling period") beginning on December 1, 1997 and ending ninety days after the earlier of December 31, 1998 or the date that the Contribution Agreement is terminated in accordance with its terms. As of the date of the Prospectus, the number of days in the tolling period cannot be finally determined. Assuming that the Contribution Agreement is not terminated prior to December 31, 1998, the tolling period will be approximately sixteen months. The various dates included in the discussion below assume a tolling period equal to approximately sixteen months. If the Contribution Agreement is terminated prior to December 31, 1998, the tolling period would be less than sixteen months and FHGLP may be required to redeem certain partnership interests earlier than the dates set forth below. Subject to certain customary exceptions, the Contribution Agreement may not be terminated without the consent of FHGLP prior to December 31, 1998. The Group I Partners may require FHGLP to redeem all of their partnership interests on or before January 2000 (subject to a shorter tolling period as described above). Subject to certain conditions, FHGLP is required to redeem, and the Group II Partners are required to sell, the partnership interests held by the Group II Partners between November 1999 and October 2000 (subject to a shorter tolling period as described above). If the Group I Partners exercise their put right (the election is required to be made between December and March prior to the above effective date), the partnership interests held by the Group II Partners may not be redeemed until the partnership interests held by the Group I Partners have been redeemed. The partnership interests held by the Group III Partners must be redeemed concurrently with the redemption of the partnership interests held by the Group II Partners unless the Group III Partners exercise an option to not be so redeemed. If the Group III Partners exercise their option not to be so redeemed, on the earlier of July 2001 (subject to a shorter tolling period as described above) or approximately nine months after FHGLP redeems the partnership interests held by the Group II Partners (and on each second anniversary thereafter), there will be a 90-day period during which FHGLP may elect to redeem the partnership interests held by the Group III Partners, on the one hand, and the Group III Partners may require FHGLP to redeem their partnership interests, on the other hand (which redemption shall be effective within 180 days after the election). The Class C partnership interests held by the Group IV Partner may be repurchased by FHGLP at any time, and from time to time, at a price equal to the redemption value thereof, and are subject to mandatory redemption in July 2005 (subject to a shorter tolling period as described above). The Group IV Partner has the option to require FHGLP to redeem its Class B partnership interests at any time after July 2005 (subject to a shorter tolling period as described above). Under certain circumstances, the Group IV Partner may elect to participate in a redemption of the partnership interests held by the Group II Partners. The redemption values of the Class B partnership interests will generally be determined through negotiation or a third party appraisal mechanism, as specified in the Existing FHGLP Partnership Agreement, at the time the interests are redeemed. The redemption value of the Class C partnership interests will be equal to its stated value, as determined in accordance with the Existing FHGLP Partnership Agreement. The purchase price for the 101 redeemed interests must be paid in cash, or under certain circumstances, may be paid through the issuance of debt or equity securities. If FHGLP fails to purchase certain of the limited partnership interests within a specified period after FHGLP's purchase obligations arise, absent an alternative arrangement with the partners, FHGLP may be required to liquidate. See "Risk Factors--Obligations of FHGLP to Redeem Limited Partnership Interests." The liquidity rights described above will be terminated in connection with the consummation of the TCI Transaction and be replaced by certain liquidity rights provided to the non- management partners in the New FHGLP Partnership Agreement. See "New FHGLP Partnership Agreement." CONVERSION OF FHGLP INTO A CORPORATION. With the approval of limited partners holding greater than a fifty percent voting interest, the limited partners may elect at any time to require that FHGLP be converted into a corporation (a "Corporate Conversion"), except that if the conversion into a corporation is for the purpose of effecting an initial public offering (a "Public Corporate Conversion"), only the consent of each of FHGI, a specified Group I Partner, a specified Group II Partner and a specified Group III Partner is required. The Existing FHGLP Partnership Agreement does not afford the Group IV Partner a separate right to approve a Corporate Conversion but contains provisions that preserve certain substantive rights and preferences of the partners following a Corporate Conversion and generally require that the Group IV Partner be treated no less favorably than the Group II Partners with respect to certain aspects of a Corporate Conversion. In the event of a Public Corporate Conversion, the Class C partnership interests will be converted into that number of shares of common stock of the successor corporation that have a value equal to the redemption value of the Class C interests immediately prior to the Public Corporate Conversion, and the Class A and Class B partnership interests will be converted pro rata into the remaining shares of common stock of the successor corporation allocated for distribution to the partners of FHGLP, subject to a Class A holder's election to receive super-voting stock. In the event of a Corporate Conversion, the Class C partnership interests will be converted into shares of preferred stock of the successor corporation with a redemption preference equal to the redemption value of the Class C interests immediately prior to the Corporate Conversion, and the Class A and Class B partnership interests will be converted pro rata into all the shares of common stock allocated for distribution to the partners of FHGLP. In addition, upon any Corporate Conversion, the successor corporation shall enter into a Registration Rights Agreement with the FHGLP partners pursuant to which the partners would have certain rights to elect to register their stock in the successor corporation under the Securities Act. Generally, the put and call rights applicable to the limited partnership interests are tolled or terminated during or following an effective registration of the successor interests following a Corporate Conversion. AMENDMENTS. In general, the Existing FHGLP Partnership Agreement may not be amended without the approval of FHGI and limited partners holding at least a two-thirds voting interest. Certain amendments require unanimous approval by the limited partners or the approval of specified limited partners. WITHDRAWAL OF PARTNERS AND ASSIGNMENT OF PARTNERSHIP INTERESTS. With certain permitted exceptions, without the approval of limited partners holding at least a two-thirds voting interest, the Existing FHGLP Partnership Agreement prohibits FHGI from withdrawing as general partner of FHGLP or assigning its partnership interest. The Existing FHGLP Partnership Agreement also prohibits any limited partner of FHGLP from assigning its partnership interest without the consent of FHGI, subject to certain permitted exceptions. DISSOLUTION AND LIQUIDATION. The principal events upon which FHGLP will dissolve are: (1) the expiration of the term of FHGLP (January 1, 2015); (2) the sale or other disposition of all or substantially all of the assets of FHGLP; (3) subject to contractual restrictions, with the consent of FHGI and limited partners holding at least a two-thirds voting interest; (4) an election to dissolve FHGLP made by limited partners holding greater than a fifty percent voting interest if Marc B. Nathanson voluntarily ceases to be active in the business of FHGLP (subject to certain permitted exceptions) or Marc B. Nathanson involuntarily ceases to be active in the business of FHGLP and a successor has not been designated by 102 FHGI and approved by limited partners holding greater than a fifty percent voting interest within one year; (5) the withdrawal of FHGI as the general partner unless the partners of FHGLP vote to continue FHGLP; and (6) the happening of any event that, under applicable law, causes the dissolution of a limited partnership. In the event of liquidation, the Class C partnership interests have priority in liquidation over the other partnership interests in the amount of its then stated value. NEW FHGLP PARTNERSHIP AGREEMENT ORGANIZATION AND DURATION. The New FHGLP Partnership Agreement will become effective concurrently with the Closing of the TCI Transaction. Unless sooner terminated in accordance with the terms of the New FHGLP Partnership Agreement, FHGLP will continue until January 1, 2025. GENERAL PARTNER. FHGI will remain the sole general partner of FHGLP and, except for certain partnership matters specified in the New FHGLP Partnership Agreement requiring the approval of the limited partners, FHGI will have the exclusive authority to manage the business, operations and affairs of FHGLP and the exclusive right to exercise all rights incident to the ownership of all partnership or corporate interests held by FHGLP. Under the New FHGLP Partnership Agreement, FHGLP will be prohibited from entering into certain transactions with Marc B. Nathanson or any Nathanson Controlled Entity without the consent of (1) limited partners (excluding Nathanson Controlled Entities) which hold more than 50% of the outstanding limited partnership interests (excluding these held by Nathanson Controlled Entities) and (2) so long as the Hellman Partners have not disposed of any of the partnership interests in FHGLP held by the Hellman Partners, the Hellman Partners. CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS. Other than the capital contributions already made by the partners to FHGLP and the contributions to be made pursuant to the Contribution Agreement, the New FHGLP Partnership Agreement will not require any additional capital contributions. Distributions prior to liquidation of FHGLP will be made at the discretion of FHGI, except that FHGLP will be required to make annual distributions of available cash (subject to contractual restrictions on distributions by FHGLP) to the extent of distributions from New Falcon with respect to the partners' aggregate estimated tax liabilities as a result of the allocation to them of New Falcon's income and gain. Profits and losses will be allocated, and distributions will be made, in proportion to the partners' percentage interests, except that following a dissolution of FHGLP, distributions will be made first to the two holders of certain Preferred Interests until such partners have received the Preferred Return; second, to all other partners (excluding the holders of the Preferred Interests) until all partners (including the holders of the Preferred Interests) have received distributions in proportion to their percentage interests; and thereafter, to all partners (including the holders of the Preferred Interests) in proportion to their percentage interests. The Preferred Return equals $6 million plus a 10% return from the date of the closing of the TCI Transaction. PUT/CALL RIGHTS. For purposes of the following put/call provisions, (1) New Falcon is the "Purchaser" if FHGLP has not purchased TCI's entire interest in New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership Agreement, and (2) FHGLP is the "Purchaser" if FHGLP has purchased TCI's entire interest in New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership Agreement. See "--New Falcon Partnership Agreement." LIMITED PARTNERS' PUT RIGHTS. If the non-management limited partners of FHGLP have made an election (which election may not be made earlier than 7 1/2 years after consummation of the TCI Transaction) to require FHGLP to effect an Incorporation (as defined herein) of FHGLP or an election to require FHGLP to make an election to require New Falcon to effect an Incorporation of New Falcon, then (regardless of whether TCI approves such election), at any time after the date that is six months after the non-management limited partners' election and prior to the date on which the successor corporation has consummated a Qualified Public Offering, the non-management limited partners of FHGLP (other than 103 Belo Ventures, Inc.) (by a vote of non-management limited partners holding an aggregate partnership interest equal to at least 51% of the aggregate limited partnership interest held by them, other than Belo Ventures, Inc., on the date of the closing of the TCI Transaction) will have the right to elect to require that the Purchaser purchase all of the non-management partners' partnership interests in FHGLP (including the partnership interest held by Belo Ventures, Inc.). At any time prior to the date on which the successor corporation to FHGLP or New Falcon, as applicable, consummates a Qualified Public Offering and after (A) if the non-management limited partners of FHGLP have made an election to require FHGLP to effect an Incorporation of FHGLP or an election to require FHGLP to make an election to require New Falcon to effect an Incorporation of New Falcon, the date that is six months after such election, or (B) if the non-management limited partners of FHGLP have not made such an election, but FHGI has made an election to require FHGLP to effect an Incorporation of FHGLP or FHGLP has made an election to require New Falcon to effect an Incorporation of New Falcon, the later of the date that is six months after such election or the date that is eight years and nine months after the closing of the TCI Transaction, or (C) in all other events, the date that is eight years and nine months after the closing of the TCI Transaction, the non-management limited partners of FHGLP (other than Belo Ventures, Inc.) (by a vote of non-management limited partners holding partnership interests representing an aggregate percentage interest at least equal to the aggregate percentage interest represented by the partnership interests held by the Specified Investors on the date of the closing of the TCI Transaction) will have the right to elect to require that the Purchaser purchase all of the non-management partners' partnership interests in FHGLP (including the partnership interest held by Belo Ventures, Inc.). Any non-management limited partner of FHGLP that did not join in an election by the non-management limited partners to require the Purchaser to purchase the partnership interests of the non-management limited partners may elect to exclude its partnership interest in FHGLP from the purchase and sale and, upon such election, all put and call rights with respect to such partner's partnership interest in FHGLP will automatically terminate. Under specified circumstances, following an election by the non-management limited partners of FHGLP to require the Purchaser to purchase all of their partnership interests in FHGLP, the Purchaser will have the right to request that the purchase and sale be deferred for sixty days to permit the consummation of a Qualified Public Offering. See "Risk Factors--Obligations of FHGLP to Redeem Limited Partnership Interests." PURCHASER'S CALL RIGHT. At any time prior to the date on which the successor corporation to FHGLP or New Falcon, as applicable, consummates a Qualified Public Offering and after (A) if the non-management limited partners of FHGLP have made an election to require FHGLP to effect an Incorporation of FHGLP or an election to require FHGLP to make an election to require New Falcon to effect an Incorporation of New Falcon, the date that is six months after such election, or (B) if the non-management limited partners of FHGLP have not made such an election, the date that is eight years and nine months after the closing of the TCI Transaction, the Purchaser will have the right to elect to require each of the non-management limited partners of FHGLP to sell its entire interest in FHGLP to the Purchaser. If the Incorporation of FHGLP occurs without the concurrent consummation of a Qualified Public Offering, the corporate successor to FHGLP will succeed to all rights and assume all obligations of FHGLP pursuant to the put/call provisions of the New FHGLP Partnership Agreement, which rights and obligations (and if FHGLP has not purchased TCI's entire interest in New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership Agreement, the rights and obligations of New Falcon) will survive the Incorporation of FHGLP and the dissolution and liquidation of FHGLP. If the Incorporation of FHGLP occurs concurrently with the consummation of a Qualified Public Offering and the liquidation of FHGLP, the put/call provisions of the New FHGLP Partnership Agreement will terminate upon the Incorporation of FHGLP. If the Incorporation of New Falcon occurs without the concurrent consummation of a Qualified Public Offering, the corporate successor to New Falcon will succeed to all rights and assume all obligations of New Falcon pursuant to the put/call provisions of the New FHGLP Partnership 104 Agreement, which rights and obligations will survive the Incorporation of New Falcon and the dissolution and liquidation of FHGLP. If the Incorporation of New Falcon occurs concurrently with the consummation of a Qualified Public Offering and the liquidation of FHGLP, the put/call provisions of the New FHGLP Partnership Agreement will terminate upon the Incorporation of New Falcon. CONVERSION OF FHGLP INTO A CORPORATION. FHGI will have the right to elect at any time, without the approval of FHGLP's limited partners, to convert FHGLP to a corporation for the purpose of effecting an initial public offering (an "Incorporation"). The non-management limited partners of FHGLP (by a vote of at least 51% of the aggregate limited partnership interests held by them on the date of the closing of the TCI Transaction) will have the right to elect to require that FHGLP effect an Incorporation at any time after the purchase by FHGLP of TCI's entire interest in New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership Agreement (see "--New Falcon Partnership Agreement--Partner Liquidity-- Buy/Sell Rights"), but in no event earlier than seven years and six months after the closing of the TCI Transaction. Consummation of an Incorporation of FHGLP shall be conditioned on the concurrent public offering and sale of equity securities in the successor corporation on such terms and conditions as FHGI deems appropriate, and the successor corporation shall offer to enter into a Registration Rights Agreement pursuant to which the partners of FHGLP could elect to register their stock in the successor corporation under the Securities Act. As part of an Incorporation of FHGLP, FHGI will have the right to require, at its sole discretion, (1) that FHGI retain control of the successor corporation and have exclusive authority to manage the operations and affairs of the successor corporation, and/or (2) that FHGLP and New Falcon be consolidated such that the owners of FHGLP immediately prior to the Incorporation of FHGLP, on the one hand, and TCI (or one or more direct or indirect owners of TCI), on the other hand, shall be the owners of the successor corporation immediately after the Incorporation of FHGLP. The relative ownership interests of the owners of the successor corporation immediately after the Incorporation of FHGLP shall be the same as their relative ownership interests immediately prior to the Incorporation of FHGLP. CONVERSION OF NEW FALCON INTO A CORPORATION. At any time after the date that is seven years and six months after the closing of the TCI Transaction, the non-management limited partners of FHGLP (by a vote of non-management limited partners holding at least 51% of the aggregate limited partnership interests held by them on the date of the closing of the TCI Transaction) will have the right to require that FHGLP make an election pursuant to the New Falcon Partnership Agreement to require New Falcon to effect an Incorporation, which election shall be subject to the approval of TCI as provided in the New Falcon Partnership Agreement See "--New Falcon Partnership Agreement--Conversion of New Falcon to Corporation." At any time after the date that is eight years and six months after the closing of the TCI Transaction, the non-management limited partners of FHGLP (by a vote of non-management limited partners holding partnership interests representing an aggregate percentage interest at least equal to the aggregate percentage interest represented by the partnership interests held by the Specified Investors on the date of the closing of the TCI Transaction), will have the right to require that FHGLP make an election pursuant to the New Falcon Partnership Agreement to require New Falcon to effect an Incorporation, which election shall be subject to the approval of TCI as provided in the New Falcon Partnership Agreement. The non-management limited partners will not be permitted to require FHGLP to make such election at any time that FHGLP is prohibited from making such an election under the New Falcon Partnership Agreement. Upon any Incorporation of New Falcon that involves the receipt by FHGLP of shares of capital stock in a successor corporation to New Falcon, FHGLP will dissolve in accordance with the liquidation provisions of the New FHGLP Partnership Agreement and distribute such shares in kind to the partners of FHGLP. AMENDMENTS. With certain specified exceptions, the New FHGLP Partnership Agreement may be amended by FHGI in its sole discretion. Among the specified exceptions, if an amendment would treat any limited partner differently from FHGI or any Nathanson Controlled Entity and would adversely affect such partner, a majority in interest of the affected limited partners would have to approve the amendment, 105 and if such limited partners included any of the Hellman Partners (and the Hellman Partners had not disposed of any of their partnership interests since the date of the New FHGLP Partnership Agreement) each affected Hellman Partner would have to approve such amendment. WITHDRAWAL OF PARTNERS AND ASSIGNMENT OF PARTNERSHIP INTERESTS. The New FHGLP Partnership Agreement will prohibit FHGI from withdrawing as the general partner of FHGLP, assigning its interest, or taking certain other actions, if the withdrawal by FHGI, the assignment by FHGI of its interest or such other action would violate the New Falcon Partnership Agreement. The withdrawal of FHGI, the assignment by FHGI of its interest and other actions that would result in FHGI no longer having management control over FHGLP would violate the New Falcon Partnership Agreement unless TCI consented. Subject to certain permitted exceptions, the New FHGLP Partnership Agreement will prohibit any limited partner from assigning its partnership interest without the approval of FHGI. DISSOLUTION AND LIQUIDATION. The principal events upon which FHGLP will dissolve are: (1) the withdrawal of FHGI as general partner unless the partners vote to continue the partnership; (2) the expiration of the term of FHGLP (January 1, 2025); (3) the sale or other disposition of all or substantially all of the assets of FHGLP, including a sale of all of FHGLP's partnership interest in New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership Agreement (see "--New Falcon Partnership Agreement--Partner Liquidity--Buy/Sell Rights"); (4) the consummation of an Incorporation of New Falcon; (5) the dissolution and liquidation of New Falcon, other than upon a purchase by FHGLP of all of TCI's interest in New Falcon pursuant to the buy/sell provisions of the New Falcon Partnership Agreement (see "--New Falcon Partnership Agreement--Partner Liquidity--Buy/Sell Rights"); (6) an election by FHGI to dissolve the partnership and cause to be distributed to the partners in kind interests in New Falcon; (7) an election to liquidate and dissolve the partnership made by FHGI with the approval of (A) limited partners (excluding Nathanson Controlled Entities) which hold more than 50% of the outstanding limited partnership interests (excluding interests held by Nathanson Controlled Entities) and (B) so long as the Hellman Partners have not disposed of any of their partnership interests in FHGLP, the Hellman Partners. NEW FALCON PARTNERSHIP AGREEMENT ORGANIZATION AND DURATION. New Falcon was formed on October 23, 1997 as a California limited partnership in connection with the TCI Transaction and will conduct substantially all of the business currently conducted by FHGLP following consummation of the TCI Transaction. See "The TCI Transaction." Unless sooner terminated in accordance with the terms of the New Falcon Partnership Agreement, New Falcon will continue until July 1, 2013. See "--Partner Liquidity--Buy/Sell Rights." GENERAL PARTNERS. FHGLP is the managing general partner and a limited partner of New Falcon, and TCI is a general partner of New Falcon. Other than with respect to certain partnership matters that require the approval of New Falcon's Advisory Committee (see "--Advisory Committee") and certain additional partnership matters that require the approval of TCI (see "--Approval Rights of TCI"), FHGLP will have the exclusive authority to manage the business, operations and affairs of New Falcon and the exclusive right to exercise all rights incident to the ownership of all partnership or corporate interests held by New Falcon. FHGI, in turn, is the sole general partner of FHGLP and will have the exclusive authority to manage the business, operations and affairs of FHGLP, subject to certain limitations. See "--New FHGLP Partnership Agreement." ADVISORY COMMITTEE. The New Falcon Partnership Agreement provides for an Advisory Committee consisting of six individual representatives of the partners, three of whom are to be appointed by FHGLP, two of whom are to be appointed by TCI and one of whom is to be appointed by joint designation of FHGLP and TCI. FHGLP has appointed Marc B. Nathanson (Chairman), Frank J. Intiso and Stanley S. Itskowitch as its initial representatives; TCI has appointed Leo J. Hindery, Jr. and William R. Fitzgerald as its initial representatives; and FHGLP and TCI have designated John S. Evans as their initial joint 106 representative. See "Management" for additional biographical information regarding the members of the Advisory Committee. The New Falcon Partnership Agreement will prohibit Falcon and FHGLP from causing New Falcon or its subsidiaries (including the Owned Subsidiaries) to take certain actions without the affirmative vote of a majority of the members of the Advisory Committee, including: (1) the acquisition or disposition of assets in any one transaction having an aggregate value in excess of $15 million, with certain permitted exceptions; and (2) conducting or entering into any line of business other than the ownership and operation of cable television systems and related and ancillary businesses that involve the distribution of video programming or data to subscribers (including businesses engaged in the production of cable television programming and the provision of Internet access, but excluding other related or ancillary businesses, such as personal communications, alternative access, and other telephony-related investments or businesses). In addition, FHGLP must consult with the Advisory Committee before entering into any agreement pursuant to which New Falcon or any of its subsidiaries (including the Owned Subsidiaries) would incur indebtedness in excess of $1 million, although the approval of the Advisory Committee is not required for such agreement. APPROVAL RIGHTS OF TCI. The New Falcon Partnership Agreement will prohibit FHGI and FHGLP from causing New Falcon or its subsidiaries (including the Owned Subsidiaries) to take certain actions without the approval of TCI. The following is a summary of certain material actions or events, in addition to those described elsewhere in this Prospectus, that require TCI's approval: (1) any merger, consolidation, recapitalization or other reorganization, with certain permitted exceptions; (2) any sale or disposition of assets in any one transaction having an aggregate value in excess of $30 million (or, in excess of $500,000 if the cumulative aggregate value of all assets sold in dispositions of over $500,000 exceeds $100 million (subject to certain adjustments); (3) any sale or disposition of assets that would result in the allocation of income or gain to TCI pursuant to Internal Revenue Code Section 704(c); (4) any purchase or acquisition of assets in any one transaction having an aggregate value in excess of $30 million (or, in excess of $500,000 if the cumulative aggregate value of all assets purchased in acquisitions of over $500,000 exceeds $100 million); (5) the exercise of New Falcon's call right under the New FHGLP Partnership Agreement or any other action that is within the discretion of New Falcon pursuant to the put/call provisions of the New FHGLP Partnership Agreement (see "--New FHGLP Partnership Agreement--Put/Call Rights"); (6) the incurrence of Indebtedness if, after giving effect to such Indebtedness, New Falcon's Operating Cash Flow Ratio would exceed 7.5:1; (7) the issuance or redemption of any partnership interest or convertible interest, with certain permitted exceptions; (8) any transaction with FHGLP or any affiliate of FHGLP, with certain permitted exceptions; (9) the adoption or amendment of any Management Incentive Plan; (10) the incurrence of Net Overhead Expenses in any fiscal year beginning after the closing of the TCI Transaction that exceed 4.5% of the Gross Revenues of New Falcon and its subsidiaries; or (11) the liquidation or dissolution of New Falcon, except in accordance with the provisions of the New Falcon Partnership Agreement. TCI has agreed to increase the debt incurrence test in connection with the transactions described in the Prospectus. OTHER APPROVAL RIGHTS. On December 30, 1997, New Falcon entered into an agreement with Belo, a partner of Falcon Video, prohibiting any sale or disposition of assets by New Falcon or its Subsidiaries (including the Owned Subsidiaries) without Belo's approval that would result in the allocation of income or gain to Belo pursuant to Internal Revenue Code Section 704(c), with specified exceptions. CAPITAL CONTRIBUTIONS AND DISTRIBUTIONS. FHGLP and TCI will contribute to New Falcon those assets described above under "The TCI Transaction." Under certain circumstances, FHGLP and/or TCI may be required under the Contribution Agreement to contribute cash to New Falcon after the closing of the TCI Transaction in order to make the actual value of their respective asset contributions as determined after the closing equal the value of their respective asset contributions as estimated at closing. TCI may be required under the Contribution Agreement to contribute certain assets to the partnership that were not 107 contributed at closing pending receipt of certain necessary approvals and consents. FHGLP will be required to contribute to New Falcon cash in the amount of any payments made by New Falcon after the closing of the TCI Transaction under the Incentive Plan to be assumed by New Falcon at the closing. Other than as described above, neither FHGLP nor TCI will be required to make any additional capital contributions to New Falcon. All distributions by New Falcon will be made in proportion to the partners' percentage interests. Distributions prior to liquidation of New Falcon will be made at the discretion of FHGLP, except that New Falcon will be required to make annual distributions of cash (subject to contractual restrictions on distributions by New Falcon) to the extent of the estimated tax liabilities of the partners as a result of the allocation to them of New Falcon's income and gain. PARTNER LIQUIDITY-BUY/SELL RIGHTS. At any time after the seventh anniversary of the closing of the TCI Transaction (other than at certain times specified in the New Falcon Partnership Agreement), either TCI or FHGLP (the "Offering Partner") will have the right to offer to sell (an "Offer") to the other partner (the "Responding Partner") the Offering Partner's entire partnership interest in New Falcon for a price per partnership unit equal to the Offering Partner's good faith estimate of the amount per partnership unit that would be distributed to the partners if New Falcon were liquidated in accordance with the New Falcon Partnership Agreement, subject to certain special assumptions (the "Offer Unit Price"). The Responding Partner will have the right to accept or reject the Offering Partner's Offer. If the Responding Partner accepts the Offering Partner's Offer, the Responding Partner will have the right under certain circumstances to require New Falcon (in lieu of the Responding Partner) to purchase the Offering Partner's entire partnership interest in New Falcon. If the Responding Partner accepts the Offering Partner's Offer but defaults in its obligation to purchase the Offering Partner's entire partnership interest in New Falcon, the Offering Partner will have the right to elect either (1) to purchase, or to require New Falcon to purchase, the Responding Partner's entire partnership interest in New Falcon at a price per partnership unit equal to 95% of the Offer Unit Price or (2) to cause New Falcon to be liquidated and dissolved in accordance with the liquidation provisions of the New Falcon Partnership Agreement. If the Responding Partner rejects the Offering Partner's Offer, the Offering Partner will have the right to elect to cause New Falcon to be liquidated and dissolved in accordance with the liquidation provisions of the New Falcon Partnership Agreement. If the price per partnership unit that the partners would receive pursuant to the general liquidation provisions of the New Falcon Partnership Agreement (the "Liquidation Unit Price") is less than the Offer Unit Price, the Responding Partner will have the right to elect to purchase, or under certain circumstances to require that New Falcon purchase, the Offering Partner's entire partnership interest in New Falcon at a price per partnership unit equal to the Liquidation Unit Price. The partners may agree at any time to abandon the purchase and sale of a partner's partnership interest in New Falcon or the liquidation and dissolution of New Falcon pursuant to a subsequent election by the Offering Partner. Neither partner will be permitted to make an Offer (1) during the pendency of a purchase and sale of partnership interests pursuant to a previous Offer or any subsequent election pursuant to the New Falcon Partnership Agreement's buy/sell provisions or (2) during the pendency of an Incorporation of New Falcon pursuant to a previous election by FHGLP. See "--Conversion of New Falcon to Corporation." CONVERSION OF NEW FALCON TO CORPORATION. FHGLP will have the right to elect at any time (other than certain times specified in the New Falcon Partnership Agreement), with the approval of TCI, which shall not be unreasonably withheld, to convert New Falcon to a corporation for the purpose of effecting an initial public offering (an "Incorporation"). FHGLP and TCI have agreed that adverse, uncompensated tax consequences to TCI would be a reasonable basis for TCI to withhold its approval. Under current tax law, an Incorporation would likely result in adverse tax consequences to TCI. Consummation of an Incorporation of New Falcon shall be conditioned on the concurrent public offering and sale of equity 108 securities in the successor corporation on such terms and conditions as FHGLP deems appropriate, with the approval of TCI, which shall not be unreasonably withheld, and the successor corporation shall offer to enter into a Registration Rights Agreement pursuant to which FHGLP, TCI and the partners of FHGLP, as applicable, could elect to register their stock in the successor corporation under the Securities Act. As part of an Incorporation of New Falcon, FHGLP will have the right to require, at its sole discretion, (1) that FHGI retain control of the successor corporation and have exclusive authority to manage the operations and affairs of the successor corporation, and/or (2) that FHGLP and New Falcon be consolidated such that the owners of FHGLP immediately prior to the Incorporation of New Falcon, on the one hand, and TCI (or one or more direct or indirect owners of TCI), on the other hand, shall be the owners of the successor corporation immediately after the Incorporation of New Falcon. The relative ownership interests of the owners of the successor corporation immediately after the Incorporation of New Falcon shall be the same as their relative ownership interests immediately prior to the Incorporation of New Falcon. Upon any Incorporation of New Falcon that involves the receipt by FHGLP of shares of capital stock in a successor corporation to New Falcon, FHGLP shall dissolve in accordance with the liquidation provisions of the New FHGLP Partnership Agreement and distribute such shares in kind to the partners of FHGLP. FHGLP will not be permitted to make an election to effect an Incorporation of New Falcon (1) within one year of making a previous election to effect an Incorporation of New Falcon that was not approved by TCI, or (2) during the pendency of a purchase and sale of partnership interests pursuant to an Offer or any subsequent election pursuant to the New Falcon Partnership Agreement's buy/sell provisions. See "--Partner Liquidity--Buy/Sell Rights." LIMITATIONS ON THE ACTIVITIES OF NEW FALCON. Following the closing of the TCI Transaction, the New Falcon Partnership Agreement will prohibit New Falcon and its subsidiaries from: (1) immediately engaging in wireless communications services that use radio spectrum for cellular, PCS, SMR, paging, mobile telecommunications, or other voice data or wireless services, with certain permitted exceptions; (2) prior to January 1, 1999, engaging in Restricted Telephony Activities, with certain permitted exceptions; and (3) acquiring an equity interest in Enstar or any of its subsidiaries. CROSS-OWNERSHIP PROVISIONS. The New Falcon Partnership Agreement contains provisions relating to cross-ownership restrictions under the Communications Act, any rule, regulation or policy of the FCC under the Communications Act or any subsequent law ("Ownership Restrictions"). If a partner's interest in New Falcon causes a violation by New Falcon or its subsidiaries of any Ownership Restriction, then such partner is to take steps to cure the violation subject to certain exceptions. In addition, the New Falcon Partnership Agreement provides that the managing general partner will not permit New Falcon or its subsidiaries to enter into an agreement to acquire an interest in any business that it knows would cause either of the partners to be in violation of an Ownership Restriction. ADMISSION OF ADDITIONAL PARTNERS AND AMENDMENTS. New Falcon will be able to issue additional equity interests in New Falcon, and admit new persons as additional partners of New Falcon, only with the approval of TCI and, if such approval is required and received, only in accordance with the terms of such approval. The New Falcon Partnership Agreement may be amended only by FHGLP with the approval of TCI, except that certain specified ministerial amendments may be made by FHGLP without the approval of TCI. REMOVAL. Under certain very limited circumstances specified in the New Falcon Partnership Agreement where FHGLP's conduct has resulted in material harm to New Falcon or TCI, TCI may elect to purchase all of FHGLP's partnership interest in New Falcon (at a price determined in accordance with the New Falcon Partnership Agreement) and, upon consummation of such purchase, remove FHGLP as a partner. WITHDRAWAL OF PARTNERS AND ASSIGNMENT OF PARTNERSHIP INTERESTS. Without TCI's consent, the New Falcon Partnership Agreement will prohibit (1) FHGLP from withdrawing as the managing general partner of New Falcon, (2) FHGI from withdrawing as the general partner of FHGLP, and (3) FHGLP and FHGI 109 from taking certain actions if, as a result of such actions, FHGLP would no longer have management control over New Falcon or FHGI would no longer have management control over FHGLP. Subject to certain permitted exceptions, the New Falcon Partnership Agreement will prohibit FHGLP from assigning its partnership interest without the approval of TCI and will prohibit TCI from assigning its partnership interest without the approval of FHGLP. DISSOLUTION AND LIQUIDATION. The principal events upon which New Falcon will dissolve are: (1) the withdrawal of FHGLP as managing general partner unless the partners vote to continue the partnership; (2) the expiration of the term of New Falcon (July 1, 2013); (3) an election to liquidate and dissolve the partnership made by the Offering Partner pursuant to the buy/sell provisions of the New Falcon Partnership Agreement (see "--Partner Liquidity--Buy/Sell Rights"); (4) the sale or other disposition of all or substantially all of the assets of New Falcon; (5) subject to any contractual restrictions on the dissolution of New Falcon, an election to liquidate and dissolve the partnership made by FHGLP with the approval of TCI; (6) an election to liquidate and dissolve the partnership made by TCI if Marc B. Nathanson ceases to be active in the business of New Falcon on a regular and consistent basis and a successor shall not have been designated by FHGLP and approved by TCI within nine months; and (7) the termination of the Contribution Agreement in accordance with its terms prior to the closing of the TCI Transaction. 110 DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a summary of certain debt instruments to which FHGLP is a party. The statements under this caption are summaries of the material terms of such agreements. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the respective agreements governing the debt instruments. 11% SENIOR SUBORDINATED NOTES DUE 2003 FHGLP issued $175 million aggregate principal amount of the Notes on March 29, 1993 in connection with its formation and capitalization. The Notes represent unsecured general obligations of FHGLP, subordinated in right of payment to all senior indebtedness of FHGLP in the manner and to the extent set forth in the indenture governing the Notes (the "Notes Indenture"). In addition, the Notes are effectively subordinated to the claims of creditors of FHGLP's subsidiaries, including the Owned Subsidiaries. FHGLP completed the Notes Tender on May 19, 1998 and will redeem the approximately $34.4 million aggregate principal amount of remaining outstanding Notes prior to October 15, 1998 in accordance with the redemption provisions of the Notes Indenture. In connection with the Notes Tender, FHGLP solicited the consent of holders of the Notes to certain amendments to the Notes Indenture (the "Proposals") eliminating certain events of default under and substantially all of the covenants in the Notes Indenture, except the covenant to pay interest on and principal of the Notes when due. FHGLP received sufficient consents to approve the Proposals, and FHGLP and the Trustee executed a Supplemental Indenture, dated as of May 5, 1998, giving effect to the Proposals. The Notes mature on September 15, 2003 and bear interest at 11% per annum from the date of issuance or from the most recent interest payment date to which interest has been paid or provided for. Interest payment dates are semi-annual, commencing September 15, 1993. Through September 15, 2000, FHGLP, at its option, may pay all or any portion of accrued interest on the Notes by delivering to the holders thereof, in lieu of cash, additional Notes having an aggregate principal amount equal to the amount of accrued interest not paid in cash. Additional Notes amounting to $8.9 million for 1993, $20.8 million for 1994, $23.1 million for 1995, $25.7 million for 1996 and $28.7 million for 1997 were issued as payment-in-kind for interest. As a result of the issuance of these additional Notes, the aggregate principal amount of the Notes outstanding as of March 31, 1998 was $282.2 million. FHGLP elected to make the interest payment due March 15, 1998 in cash, and under the terms of the Debentures, is required to continue to make cash payments. FHGLP obtained an amendment to the Bank Credit Agreement on February 6, 1998 to permit FHGLP to pay interest on the Debentures in cash prior to September 30, 2000. The Notes are redeemable at the option of FHGLP, in whole or in part, (i) at any time on or after September 15, 1998, at 105.5% of the outstanding principal amount, plus accrued interest to the redemption date, (ii) at any time on or after September 15, 1999, at 102.75% of outstanding principal amount, plus accrued interest to the redemption date, and (iii) at any time on or after September 15, 2000, at 100% of outstanding principal amount, plus accrued interest to the redemption date. NEW CREDIT FACILITY On June 30, 1998, the Company entered into the New Credit Facility with BankBoston, N.A. as Documentation Agent, The Chase Manhattan Bank as Co-Syndication Agent, NationsBank, N.A. as Syndication Agent, Toronto Dominion (Texas) Inc. as Administrative Agent, Bank of America, N.T. & S.A. as Agent, and the other lenders signatory thereto. Until the TCI Closing, the Owned Subsidiaries, other than Falcon Video, will be the co-borrowers under the New Credit Facility and the Restricted Companies under the New Credit Facility will be all of the subsidiaries of FHGLP (but not including FHGLP itself and also excluding New Falcon, Falcon Video, Video Investors and subsidiaries of FHGLP that are designated by the Company as Excluded Companies from time to time). Immediately prior to the TCI Closing, Falcon Video will become a borrower for a portion of Facility A (as defined) but will not become a Restricted 111 Company until after the TCI Closing and the discharge of Falcon Video's existing senior indebtedness. Immediately after the TCI Closing, New Falcon II will assume all of the obligations of the Owned Subsidiaries, including Falcon Video, under the New Credit Facility and become the sole borrower thereunder, and the Restricted Companies will be New Falcon II and all of its subsidiaries (excluding subsidiaries of FHGLP that are designated by the Company as Excluded Companies from time to time and excluding, until Falcon Video's existing senior indebtedness is discharged immediately after the TCI Closing, Falcon Video and Falcon Video Communications Investors, L.P.). The New Credit Facility provides for three committed credit facilities: a $650 million reducing revolving credit facility maturing in December 2006 ("Facility A"); a $200 million amortizing term loan maturing in June 2007 ("Facility B"); and a $300 million amortizing term loan maturing in December 2007 ("Facility C"). The lenders under the New Credit Facility may also make available in their discretion as requested by the Company up to $350 million in additional revolving credit and/or term loans pursuant to one or more supplemental credit facilities (the terms of which will be negotiated at the time the Company makes a request to draw on such facility). The New Credit Facility provides for prime-based and LIBOR-based interest rate options. Facility A's base margin ranges from 0% to 0.375%, and its LIBOR margin ranges from 0.5% to 1.375%. Facility B's base margin ranges from 0.5% to 1.0%, and its LIBOR margin ranges from 1.5% to 2.0%. Facility C's base margin ranges from 0.75% to 1.25%, and its LIBOR margin ranges from 1.75% to 2.25%. The actual margins are based on the ratio of the borrowers' total consolidated debt to annualized consolidated cash flow (each as calculated in accordance with the provisions of the New Credit Facility). Prior to the closing of the TCI Transaction, Facility A's LIBOR margin is set at a minimum of 1.0%. Facility C's base rate margin is set at a minimum of 1.0%, and its LIBOR margin is set at a minimum of 2.0%. If the TCI Transaction does not close by December 31, 1998, each of the stated margins is increased by 0.25% for all three facilities, but will automatically revert to the stated margins upon closing of the TCI Transaction. The Company must also pay a commitment fee, ranging from 0.25% to 0.375%, depending on the applicable leverage ratio, on the unused portion of the available borrowings under Facility A and a commitment fee of 0.375% on the unused portion of the available borrowings under Facility B. At the closing of the New Credit Facility on June 30, 1998, the Company borrowed approximately $126 million under Facility B and all $300 million available under Facility C. Thus, as of June 30, 1998, the aggregate amount outstanding under the New Credit Facility was approximately $425.8 million and, subject to covenant compliance, approximately $125 million in additional funds was available to the Company under the New Credit Facility for borrowing (excluding the supplemental facilities). As of June 30, 1998, borrowings under the New Credit Facility bore interest at an average rate of 9.4% (including the effect of interest rate hedging agreements). The Company used approximately $329 million of the aggregate proceeds from the borrowings under Facility B and Facility C to repay the remaining indebtedness outstanding under the Bank Credit Agreement. The remaining proceeds resulted in an excess cash balance of approximately $90 million (after payment of approximately $4.5 million in fees and expenses related to the New Credit Facility). The Company is required to borrow the remaining approximately $74 million available under Facility B no later than September 30, 1998. Immediately prior to the TCI Closing, the lenders will make a loan to Falcon Video (and not to any other borrower and without recourse to any other borrower) sufficient to permit Falcon Video to satisfy in part its obligations under certain financing notes. See "The TCI Transaction." Prior to the TCI Closing, Falcon Video will not be responsible for any other borrowings under the New Credit Facility and the other borrowers will not be responsible for the Falcon Video borrowings. Upon closing the TCI Transaction, the loan to Falcon Video will be discharged and become part of Facility A. Upon the TCI Closing, the Company will use proceeds from additional borrowings under the New Credit Facility to refinance any other senior indebtedness of the Company, including without limitation certain existing senior indebtedness of Falcon Video, the initial borrowings of Falcon Video under the New Credit Facility, and the indebtedness of TCI to be assumed by New Falcon at the TCI Closing. The Company also intends to fund 112 the redemption of the remaining outstanding Notes with proceeds from borrowings under the New Credit Facility. See "Prospectus Summary--Recent Developments." The aggregate borrowing availability under Facility A is subject to quarterly principal reductions, commencing on the last day of the quarter beginning June 30, 2001, amortized as follows: 10% in years four and five, 15% in year six, 22.5% in year seven, 27.5% in year eight, and 15% in year nine. Facility B requires quarterly principal installments of $500,000 commencing March 31, 1999, with the principal balance due at final maturity. Facility C requires quarterly principal installments of $750,000 commencing March 31, 1999, with the principal balance due at final maturity. The New Credit Facility also provides for other mandatory principal reductions with proceeds arising from asset sales and other financings, subject to certain exceptions permitting the Company to use such proceeds to fund certain permitted investments and acquisitions. The Company may prepay the loans outstanding under the New Credit Facility at any time without premium or penalty (except for LIBOR breakage costs). The Company's obligations under the New Credit Facility are collateralized by all of the partnership interests and other equity interests of the Restricted Companies (as described above) under the New Credit Facility, including a pledge of New Falcon's membership interest in New Falcon II. The Company also granted a negative pledge on all of the Restricted Companies' assets, subject to a subsequent grant of a security interest in the Restricted Companies' assets if the TCI Transaction has not closed by December 31, 1998. The New Credit Facility also contains various financial covenants which, among other things, limit the amount of indebtedness the Restricted Companies may incur. The New Credit Facility also contains various other restrictions (subject to permitted exceptions), including limits on distributions, investments, acquisitions, and capital expenditures. The New Credit Facility does permit the Company to make scheduled interest payments on the Debentures and to fund the Notes Redemption. SUBORDINATED NOTES On October 21, 1991, one of the Owned Subsidiaries issued $15 million aggregate principal amount of 11.56% Subordinated Notes due 2001 to refinance certain outstanding indebtedness. At December 31, 1997, the aggregate principal amount outstanding under these notes was $15 million. These notes mature on March 31, 2001. The agreement governing these notes contains certain covenants which are substantially the same as the covenants under the New Credit Facility. OTHER INDEBTEDNESS Other Notes payable consist primarily of $7.5 million owed by Enstar Finance Company, LLC. On June 6, 1997, FHGLP and Enstar formed EFC, an unrestricted subsidiary. On September 30, 1997, EFC obtained a secured bank facility of $35 million from two agent banks in order to provide funds that would be loaned to certain Enstar partnerships. The lenders advanced $7.5 million to EFC, which in turn advanced those funds to a number of Enstar partnerships. The EFC loan is non-recourse to FHGLP and matures on August 31, 2001, at which time all funds previously advanced will be due in full. INTEREST RATE HEDGING AGREEMENTS The Company utilizes interest rate hedging agreements to establish long-term fixed interest rates on a portion of its variable-rate debt. The New Credit Facility requires the Company to maintain hedging arrangements with respect to at least 50% of its total outstanding indebtedness, excluding the Debentures, for a two-year period at rates satisfactory to the Administrative Agent in order to manage the interest rate sensitivity on its borrowings. At March 31, 1998, the Company participated in interest rate hedging contracts with an aggregate notional principal amount of $565 million, under which the Company pays interest at fixed rates ranging from 5.22% to 6.55% (weighted average rate of 5.81%) and receives interest at variable LIBOR rates. Certain of these contracts relating to approximately $25 million of aggregate 113 notional principal amount were not yet effective at March 31, 1998, but are scheduled to go into effect during 1998 as certain of the existing contracts mature. The hedging contracts expire at various dates through July 2001. In addition to these swaps, the Company has an interest rate swap contract with a notional amount of $25 million under which it pays variable LIBOR rates and receives fixed rate payments, and one $25 million interest rate cap contract under which the Company pays variable LIBOR rates subject to a cap of 5.49%. In connection with the decision to make interest payments on the Notes in cash and the Notes Tender and Notes Redemption, the Company entered into various interest rate swap agreements with three banks on February 10, 1998 in order to reduce interest costs. The agreements call for the Company to receive payments at 11% and to make payments at 7.625% for the period September 16, 1997 through September 15, 1998 on a notional principal amount of $282.2 million. The contracts further call for the Company to pay at a fixed rate of 7.625% and receive interest at variable LIBOR rates for the period September 16, 1998 through September 15, 2003 on a notional principal amount of $297.7 million. 114 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Old Debentures were originally sold by the Issuers on April 3, 1998 to the Placement Agents pursuant to the Purchase Agreement. The Placement Agents subsequently placed the Old Debentures with (i) qualified institutional buyers in reliance on Rule 144A under the Securities Act and (ii) qualified buyers outside the United States in reliance upon Regulation S under the Securities Act. As a condition of the Purchase Agreement, the Issuers entered into the Registration Rights Agreement with the Placement Agents pursuant to which the Issuers have agreed, for the benefit of the holders of the Old Debentures, at the Issuers' cost, to file a registration statement for the Exchange Offer (the "Exchange Offer Registration Statement") (of which this Prospectus is a part) with the Commission with respect to the Exchange Offer for the Exchange Debentures. Upon the Exchange Offer Registration Statement being declared effective, the Issuers will offer the Exchange Debentures in exchange for surrender of the Old Debentures. For each Old Debenture surrendered to the Issuers pursuant to the Exchange Offer, the holder of such Old Debenture will receive an Exchange Debenture having an original Principal Amount at Maturity equal to that of the surrendered Old Debenture. Based upon interpretations by the staff of the Commission set forth in certain no-action letters to third parties (including EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter (April 13, 1989); MORGAN STANLEY & CO. INC., SEC No-Action Letter (June 5, 1991); and SHEARMAN & STERLING, SEC No-Action Letter (July 2, 1993)), the Issuers believe that the Exchange Debentures issued pursuant to the Exchange Offer in exchange for Old Debentures will in general be freely tradeable after the Exchange Offer without compliance with the registration and prospectus delivery requirements of the Securities Act. However, any purchaser of Old Debentures who is an "affiliate" of the Issuers (within the meaning of Rule 405 under the Securities Act), who does not acquire the Exchange Debentures in the ordinary course of business or who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Debentures could not rely on the position of the staff of the Commission enunciated in such no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Failure to comply with such requirements in such instance may result in such holder incurring liability under the Securities Act for which the holder is not indemnified by the Issuers. As contemplated by the above-mentioned no-action letters and the Registration Rights Agreement, each holder accepting the Exchange Offer is required to represent to the Issuers in the Letter of Transmittal that (i) the Exchange Debentures are to be acquired by the holder or the person receiving such Exchange Debentures, whether or not such person is the holder, in the ordinary course of business, (ii) the holder or any such other person is not engaging in the distribution of the Exchange Debentures, (iii) the holder or any such other person has no arrangement or understanding with any person to participate in the distribution of the Exchange Debentures, (iv) neither the holder nor any such other person is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act, and (v) the holder or any such other person acknowledges that if such holder or any other person participates in the Exchange Offer for the purpose of distributing the Exchange Debentures it must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the Exchange Debentures and cannot rely on the above-mentioned no-action letters. As indicated above, each Participating Broker-Dealer that receives an Exchange Debenture for its own account in exchange for Old Debentures must acknowledge that it (i) acquired the Old Debentures for its own account as a result of market-making activities or other trading activities, (ii) has not entered into any arrangement or understanding with the Issuers or any "affiliate" of the Issuers (within the meaning of Rule 405 under the Securities Act) to distribute the Exchange Debentures to be received in the Exchange Offer and (iii) will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Debentures. For a description of the procedures for resales by Participating Broker-Dealers, see "Plan of Distribution." 115 In the event that changes in the law or the applicable interpretations of the staff of the Commission do not permit the Issuers to effect such an Exchange Offer, the Exchange Offer is not consummated by September 30, 1998 or the Exchange Offer has been completed and in the opinion of counsel for the Placement Agents a Registration Statement must be filed and a Prospectus delivered by the Placement Agents in connection with any offering or sale of the Old Debentures, the Issuers will (i) file the Shelf Registration Statement covering resales of the Old Debentures; (ii) use their best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act and (iii) use their best efforts to keep effective the Shelf Registration Statement until the earlier of (i) two years after the date of the original issuance of the Old Debentures or (ii) such time as all of the applicable Old Debentures have been sold thereunder. The Issuers will, in the event of the filing of the Shelf Registration Statement, provide to each applicable holder of the Old Debentures copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement has become effective and take certain other actions as are required to permit unrestricted resale of the Old Debentures. A holder of the Old Debentures that sells such Old Debentures pursuant to the Shelf Registration Statement generally will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such a holder (including certain indemnification obligations). The Registration Rights Agreement provides that the Issuers will file an Exchange Offer Registration Statement with the Commission. In the event that Exchange Offer is not consummated and the Shelf Registration Statement is not declared effective on or prior to September 30, 1998, the interest rate on the Old Senior Debentures will be increased by 0.5% per annum and interest on the Old Senior Discount Debentures (in addition to accrual of original issue discount during the period ending April 15, 2003 and in addition to interest otherwise due on such Debentures after such date) will accrue at a rate of 0.5% per annum of the Accreted Value thereof on the preceding semi-annual accrual date, and be payable in cash semi-annually, commencing October 15, 1998, until (i) the Exchange Offer is consummated, (ii) the Shelf Registration Statement is declared effective by the Commission or (iii) the Old Debentures become freely tradable without registration under the Securities Act, at which time, in any such case, the interest rate with respect to the Old Debentures shall return to the rate established on the date such Debentures were originally issued, as adjusted by any other provision of the Indenture subsequent to such date. Holders of Old Debentures will be required to make certain representations to the Issuers (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement, if required, and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Old Debentures included in the Shelf Registration Statement and benefit from the provisions regarding Additional Interest set forth above. Following the consummation of the Exchange Offer, holders of the Old Debentures who were eligible to participate in the Exchange Offer but who did not tender their Old Debentures will not have any further registration rights and such Old Debentures will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Old Debentures could be adversely affected. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Issuers will accept any and all Old Debentures validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Issuers will issue (i) $1,000 principal amount of Senior Exchange Debentures for $1,000 principal amount Old Senior Debentures, and (ii) $1,000 original principal amount at maturity of Senior Exchange Discount Debentures in exchange for each $1,000 original principal amount at maturity of outstanding Old Senior Discount Debentures accepted in 116 the Exchange Offer. Holders may tender some or all of their Old Debentures pursuant to the Exchange Offer. However, Old Debentures may be tendered only in integral multiples of $1,000. The form and terms of the Exchange Debentures are the same as the form and terms of the Old Debentures except that (i) the Exchange Debentures have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof and (ii) the holders of the Exchange Debentures will not be entitled to certain rights under the Registration Rights Agreement, including the provisions providing for an increase in the interest rate on the Old Debentures in certain circumstances relating to the timing of the Exchange Offer, all of which rights will terminate when the Exchange Offer is terminated. The Exchange Debentures will evidence the same debt as the Old Debentures and will be entitled to the benefits of the Indenture. As of the date of this Prospectus, $325,000,000 aggregate original principal amount of the Old Senior Debentures are outstanding, and $435,250,000 aggregate original principal amount at maturity of the Old Senior Discount Debentures are outstanding. The Issuers have fixed the close of business on , 1998 as the record date for the Exchange Offer for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Holders of Old Debentures do not have any appraisal or dissenters' rights under Delaware law, California law or the Indenture in connection with the Exchange Offer. The Issuers intend to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder. The Issuers shall be deemed to have accepted validly tendered Old Debentures when, as and if the Issuers have given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders for the purpose of receiving the Exchange Debentures from the Issuers. If any tendered Old Debentures are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Old Debentures will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders who tender Old Debentures in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Debentures pursuant to the Exchange Offer. The Issuers will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the Exchange Offer. See "--Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The Issuers shall keep the Exchange Offer open for at least 20 business days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to holders of Old Debentures. The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 1998, unless the Issuers, in their sole discretion, extend the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Issuers will notify the Exchange Agent of any extension by oral or written notice and will mail to the registered holders an announcement thereof, each prior to 11:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. The Issuers reserve the right, in their sole discretion, (i) to delay accepting any Old Debentures, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under "--Conditions" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner. 117 Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the registered holders. PROCEDURES FOR TENDERING Only a holder of Old Debentures may tender such Old Debentures in the Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal or transmit an Agent's Message in connection with a book-entry transfer, and mail or otherwise deliver such Letter of Transmittal or such facsimile, or Agent's Message, together with the Old Debentures and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In addition, either (i) certificates for such Old Debentures must be received by the Exchange Agent prior to the Expiration Date along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Debentures into the Exchange Agent's account at The Depository Trust Company ("DTC" or the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date or (iii) the holder must comply with the guaranteed delivery procedures described below. To be tendered effectively, the Old Debentures, or Book-Entry Confirmation, as the case may be, the Letter of Transmittal and other required documents must be received by the Exchange Agent at the address set forth below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO THE BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURE DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. DTC has authorized DTC participants that hold Old Debentures on behalf of beneficial owners of Old Debentures through DTC to tender their Old Debentures as if they were holders. To effect a tender of Old Debentures, DTC participants should either (i) complete and sign the Letter of Transmittal (or a manually signed facsimile thereof), have the signature thereon guaranteed if required by the instructions to the Letter of Transmittal, and mail or deliver the Letter of Transmittal (or such manually signed facsimile) to the Exchange Agent pursuant to the procedure set forth in "Procedures for Tendering" or (ii) transmit their acceptance to DTC through the DTC Automated Tender Offer Program ("ATOP") for which the transaction will be eligible and follow the procedure for book-entry transfer set forth in "--Book-Entry Transfer." By executing the Letter of Transmittal or Agent's Message, each holder will make to the Issuers the representations set forth above in the third paragraph under the heading "--Purpose and Effect of the Exchange Offer." The tender by a holder and the acceptance thereof by the Issuers will constitute agreement between such holder and the Issuers in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal or Agent's Message. THE METHOD OF DELIVERY OF OLD DEBENTURES, THE LETTER OF TRANSMITTAL OR AGENT'S MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD DEBENTURES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Old Debentures are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered 118 holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. See "Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner" included with the Letter of Transmittal. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined below) unless the Old Debentures tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of the Medallion System (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered holder of any Old Debentures listed therein, such Old Debentures must be endorsed or accompanied by a properly completed bond power, signed by such registered holder as such registered holder's name appears on such Old Debentures with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Old Debentures or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, offices of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to the Issuers of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Old Debentures and withdrawal of tendered Old Debentures will be determined by the Issuers in their sole discretion, which determination will be final and binding. The Issuers reserve the absolute right to reject any and all Old Debentures not properly tendered or any Old Debentures the Issuers' acceptance of which would, in the opinion of counsel for the Issuers, be unlawful. The Issuers also reserve the right in their sole discretion to waive any defects, irregularities or conditions of tender as to particular Old Debentures. The Issuers' interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Debentures must be cured within such time as the Issuers shall determine. Although the Issuers intend to notify holders of defects or irregularities with respect to tenders of Old Debentures, neither the Issuers, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Old Debentures will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Debentures received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. ACCEPTANCE OF OLD DEBENTURES FOR EXCHANGE; DELIVERY OF EXCHANGE For each Old Debenture accepted for exchange, the holder of such Old Debenture will receive an Exchange Debenture having a Principal Amount at Maturity equal to that of the surrendered Old Debenture. For purposes of the Exchange Offer, the Issuers shall be deemed to have accepted properly tendered Old Debentures for exchange when, as and if the Issuers have given oral or written notice thereof to the Exchange Agent. In all cases, the issuance of Exchange Debentures for Old Debentures that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Debentures or a timely Book-Entry Confirmation of such Old Debentures into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal or Agent's Message and all other required documents. If any tendered Old Debentures are not accepted for any reason set forth in the terms and conditions of the Exchange Offer, such unaccepted or non-exchanged Old Debentures will be returned without expense to the tendering 119 holder thereof (or, in the case of Old Debentures tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, such non-exchanged Old Debentures will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the Expiration Date. BOOK-ENTRY TRANSFER The Exchange Agent will establish a new account or utilize an existing account with respect to the Old Debentures at DTC promptly after the date of this Prospectus, and any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Old Debentures may make a book-entry tender of Old Debentures by causing DTC to transfer such Old Debentures into the Exchange Agent's account in accordance with DTC's procedures for such transfer. However, although tender of Old Debentures may be effected through book- entry transfer into the Exchange Agent's account at DTC, the Letter of Transmittal (or a manually signed facsimile thereof), properly completed and validly executed, with any required signature guarantees, or an Agent's Message in lieu of the Letter of Transmittal, and any other required documents, must, in any case, be received by the Exchange Agent at its address set forth below under the caption "Exchange Agent" on or prior to the Expiration Date, or the guaranteed delivery procedures described below must be complied with. The confirmation of book-entry transfer of Old Debentures into the Exchange Agent's account at DTC as described above is referred to herein as a "Book-Entry Confirmation." Delivery of documents to DTC in accordance with DTC's procedures does not constitute delivery to the Exchange Agent. The term "Agent's Message" means a message transmitted by DTC to, and received by, the Exchange Agent and forming a part of a Book-Entry Confirmation, which states that DTC has received an express acknowledgment from the participant in DTC tendering the Old Debentures stating (i) the aggregate principal amount of Old Debentures which have been tendered by such participant, (ii) that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and (iii) that the Issuers may enforce such agreement against the participant. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Debentures and (i) whose Old Debentures are not immediately available, (ii) who cannot deliver their Old Debentures, the Letter of Transmittal or any other required documents to the Exchange Agent or (iii) who cannot complete the procedures for book-entry transfer, prior to the Expiration Date, may effect a tender if: (a) the tender is made through a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States (an "Eligible Institution"); (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder, the certificate number(s) of such Old Debentures and the principal amount of Old Debentures tendered, stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) (or in the case of a book-entry transfer, an Agent's Message) together with the certificate(s) representing the Old Debentures (or a confirmation of book-entry transfer of such Debentures into the Exchange Agent's account at the Book-Entry Transfer Facility), and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) the certificate(s) representing all tendered Old Debentures in proper form for transfer (or a confirmation of book-entry transfer of such Old Debentures into the Exchange Agent's account 120 at the Book-Entry Transfer Facility), together with a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message) and all other documents required by the Letter of Transmittal are received by the Exchange Agent upon five New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who wish to tender their Old Debentures according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old Debentures may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date; otherwise such tenders are irrevocable. To withdraw a tender of Old Debentures in the Exchange Offer, a telegram, telex, letter or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Debentures to be withdrawn (the "Depositor"), (ii) identify the Old Debentures to be withdrawn (including the certificate number(s) and principal amount of such Old Debentures, or, in the case of Old Debentures transferred by book-entry transfer, the name and number of the account at the Book-Entry Transfer Facility to be credited), (iii) be signed by the holder in the same manner as the original signature on the Letter of Transmittal by which such Old Debentures were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Old Debentures register the transfer of such Old Debentures into the name of the person withdrawing the tender and (iv) specify the name in which any such Old Debentures are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Issuers, whose determination shall be final and binding on all parties. Any Old Debentures so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Debentures will be issued with respect thereto unless the Old Debentures so withdrawn are validly retendered. Any Old Debentures which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Debentures may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Issuers shall not be required to accept for exchange, or exchange Exchange Debentures for, any Old Debentures, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Debentures, if: (a) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the sole judgment of the Issuers, might materially impair the ability of the Issuers to proceed with the Exchange Offer or any material adverse development has occurred in any existing action or proceeding with respect to the Issuers or any of their subsidiaries; or (b) any law, statute, rule, regulation or interpretation by the staff of the Commission is proposed, adopted or enacted, which, in the sole judgment of the Issuers, might materially impair the ability of the Issuers to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Issuers; or 121 (c) any governmental approval has not been obtained, which approval the Issuers shall, in their sole discretion, deem necessary for the consummation of the Exchange Offer as contemplated hereby. If the Issuers determine in their sole discretion that any of the conditions are not satisfied, the Issuers may (i) refuse to accept any Old Debentures and return all tendered Old Debentures to the tendering holders, (ii) extend the Exchange Offer and retain all Old Debentures tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of holders to withdraw such Old Debentures (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Old Debentures which have not been withdrawn. The Issuers shall keep the Exchange Offer open for at least 20 business days (or longer if required by applicable law, including in connection with any material modification or waiver of the terms or conditions of the Exchange Offer that requires such extension under applicable law) after the date notice of the Exchange Offer is mailed to holders of Old Debentures. EXCHANGE AGENT U.S. Trust Company of New York has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER: U.S. Trust Company of New York U.S. Trust Company of New York P.O. Box 844 770 Broadway Cooper Station New York, New York 10003 New York, New York 10276-0844 Attn: Corporate Trust, 13th Floor BY HAND: BY FACSIMILE: U.S. Trust Company of New York (212) 780-0592 111 Broadway, Lower Level Corporation Trust Window Confirm by telephone: New York, New York 10006 (800) 548-6565
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Issuers. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telecopy, telephone or in person by officers and regular employees of the Issuers and their affiliates. The Issuers have not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers, or others soliciting acceptances of the Exchange Offer. The Issuers, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Issuers. Such expenses include fees and expenses of the Exchange Agent and Trustee, accounting and legal fees and printing costs, among others. 122 ACCOUNTING TREATMENT The Exchange Debentures will be recorded at the same carrying value as the Old Debentures, which is face value, as reflected in the Issuers' accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized by the Issuers. The expenses of the Exchange Offer will be expensed over the term of the Exchange Debentures. CONSEQUENCES OF FAILURE TO EXCHANGE The Old Debentures that are not exchanged for Exchange Debentures pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Old Debentures may be resold only (i) to the Issuers (upon redemption thereof or otherwise), (ii) so long as the Old Debentures are eligible for resale pursuant to Rule 144A, to a person inside the United States whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A, in accordance with Rule 144 under the Securities Act, or pursuant to another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel reasonably acceptable to the Issuers), (iii) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, or (iv) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. RESALE OF THE EXCHANGE DEBENTURES With respect to resales of Exchange Debentures, based upon interpretations by the staff of the Commission set forth in certain no-action letters issued to third parties (including EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter (April 13, 1989); MORGAN STANLEY & CO. INC., SEC No-Action Letter (June 5, 1991); and SHEARMAN & STERLING, SEC No-Action Letter (July 2, 1993)), the Issuers believe that a holder or other person who receives Exchange Debentures, whether or not such person is the holder (other than a person that is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act) who receives Exchange Debentures in exchange for Old Debentures in the ordinary course of business and who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of the Exchange Debentures, will be allowed to resell the Exchange Debentures to the public without further registration under the Securities Act and without delivering to the purchasers of the Exchange Debentures a prospectus that satisfies the requirements of Section 10 of the Securities Act. However, if any holder acquires Exchange Debentures in the Exchange Offer for the purpose of distributing or participating in a distribution of the Exchange Debentures, such holder cannot rely on the position of the staff of the Commission enunciated in the above mentioned no-action letters or any similar interpretive letters, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Further, each Participating Broker-Dealer that receives Exchange Debentures for its own account in exchange for Old Debentures, where such Old Debentures were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Debentures. As contemplated by the above mentioned no-action letters and the Registration Rights Agreement, each holder accepting the Exchange Offer is required to represent to the Issuers in the Letter of Transmittal that (i) the Exchange Debentures are to be acquired by the holder or the person receiving such Exchange Debentures, whether or not such person is the holder, in the ordinary course of business, (ii) the holder or any such other person is not engaging in the distribution of the Exchange Debentures, (iii) the holder or any such other person has no arrangement or understanding with any person to participate in the distribution of the Exchange Debentures, (iv) neither the holder nor any such other person is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act, and (v) the holder or any such 123 other person acknowledges that if such holder or other person participates in the Exchange Offer for the purpose of distributing the Exchange Debentures it must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the Exchange Debentures and cannot rely on the above mentioned no-action letters. As indicated above, each Participating Broker-Dealer that receives Exchange Debentures for its own account in exchange for Old Debentures must acknowledge that it (i) acquired the Old Debentures for its own account as a result of market-making activities or other trading activities, (ii) has not entered into any arrangement or under- standing with the Issuers or any "affiliate" of the Issuers (within the meaning of Rule 405 under the Securities Act) to distribute the Exchange Debentures to be received in the Exchange Offer and (iii) will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Debentures. For a description of the procedures for resales by Participating Broker-Dealers, see "Plan of Distribution." 124 DESCRIPTION OF THE DEBENTURES The form and terms of the Exchange Debentures are the same as the form and terms of the Old Debentures (which they replace) except that (i) the issuance of the Exchange Debentures have been registered under the Securities Act and, therefore, the Exchange Debentures will not bear legends restricting the transfer thereof, and (ii) the holders of Exchange Notes will not be entitled to certain rights under the Registration Rights Agreement, including the provisions providing for an increase in the interest rate on the Old Debentures in certain circumstances relating to the timing of the Exchange Offer, which rights will terminate when the Exchange Offer is consummated. A copy of the Indenture has been filed as an exhibit to the Exchange Offer Registration Statement of which this Prospectus forms a part. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. Whenever particular defined terms of the Indenture not otherwise defined herein are referred to, the definitions ascribed to such terms in the Indenture are incorporated herein by reference. For definitions of certain capitalized terms used in the following summary, see "--Certain Definitions." GENERAL The Debentures are joint and several senior unsecured obligations of the Issuers and will mature on April 15, 2010. The Senior Debentures are limited to $375.0 million aggregate principal amount and the Senior Discount Debentures are limited to $435.25 million aggregate principal amount at maturity. Each Senior Debenture bears interest at 8.375% per annum from the Issue Date or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually (to holders of record at the close of business on the April 1 or October 1 immediately preceding the Interest Payment Date) on April 15 and October 15 of each year, commencing on October 15, 1998. The Senior Discount Debentures were sold at a substantial discount from their principal amount at maturity. See "Federal Income Tax Considerations--United States Holders--Original Issue Discount." Until April 15, 2003, no interest will accrue on the Senior Discount Debentures, but the Accreted Value (representing the amortization of original issue discount) will accrete at an annual rate of 9.285% between the Issue Date and April 15, 2003, on a semiannual bond equivalent basis using a 360-day year comprised of twelve 30-day months such that the Accreted Value of a Senior Discount Debenture shall equal the full principal amount of such Senior Discount Debenture on April 15, 2003; PROVIDED, HOWEVER, that at any time prior to April 15, 2003, the Issuers may elect to commence the accrual of cash interest on a Semiannual Accrual Date (from and after such Semiannual Accrual Date), in which case the outstanding principal amount at Stated Maturity of each Senior Discount Debenture will on such Semiannual Accrual Date be reduced to the Accreted Value of such Senior Discount Debenture as of such Semiannual Accrual Date and cash interest shall be payable on such Senior Discount Debenture on each Interest Payment Date thereafter. The initial Accreted Value per $1,000 principal amount of Senior Discount Debentures was $633.29 (representing the original price at which Senior Discount Debentures were sold). Beginning on April 15, 2003, cash interest on the Senior Discount Debentures will accrue at the rate of 9.285% per annum and will be payable semiannually in arrears on April 15 and October 15, commencing October 15, 2003, to Holders of record at the close of business on the April 1 or October 1 immediately preceding the Interest Payment Date. The Indenture provides that, if the TCI Contribution is not consummated on or before June 30, 1999, (a) effective July 1, 1999, the interest rate on the Senior Debentures will increase by 0.75% per annum, (b) from July 1, 1999 until April 15, 2003, the Company will pay cash interest on the Senior Discount Debentures (in addition to accretion of principal), semiannually in arrears on each April 15 and October 15, commencing October 15, 1999, equal to 0.75% per annum of the then outstanding Accreted Value of the Senior Discount Debentures and (c) from April 15, 2003 until the maturity of the Senior Discount 125 Debentures, the interest rate on the Senior Discount Debentures will increase by 0.75% per annum; PROVIDED, that such additional interest will no longer be payable if the TCI Contribution is consummated on or before December 31, 1999. In the event that the Issuers have not consummated a registered exchange offer for the Debentures or have caused a shelf registration statement with respect to the Debentures to be declared effective on or prior to September 30, 1998, (i) the annual interest rate borne by the Senior Debentures will be increased by 0.5%, (ii) prior to April 15, 2003, the Senior Discount Debentures will bear annual cash interest equal to 0.5% of the Accreted Value of the Senior Discount Debentures and (iii) on and after April 15, 2003, the annual interest rate borne by the Senior Discount Debentures will be increased by 0.5%. Such additional interest amounts will be payable in cash, semiannually in arrears on each April 15 and October 15, until (i) the Exchange Offer is consummated, (ii) the Issuers cause a shelf registration with respect to resales of the Debentures to become effective under the Securities Act or (iii) the date that the Debentures become freely tradeable without registration under the Securities Act, at which time, in any such case, the interest rate with respect to the Debentures shall return to the rate set forth on the cover page of this Prospectus, as adjusted by any other provision of the Indenture. Principal of, premium, if any, and interest on the Debentures will be payable, and the Debentures may be exchanged or transferred, at the office or agency of the Issuers in the Borough of Manhattan, the City of New York (which initially will be the corporate trust office of the Trustee); PROVIDED that, at the option of the Issuers, payment of interest may be made by check mailed to the holders of the Debentures (the "Holders") at their addresses as they appear in the Security Register. The Debentures will be issued only in fully registered form, without coupons, in denominations of $1,000 of principal amount and any integral multiple thereof. See "--Book Entry; Delivery and Form." No service charge will be made for any registration of transfer or exchange of Debentures, but the Issuers may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. The Company is a holding company that conducts substantially all of its business through subsidiaries. The Debentures will be the obligations of the Issuers only, and the Issuers' subsidiaries will not have any obligation to pay any amounts due under the Debentures. Therefore, the Debentures will be effectively subordinated to all existing and future liabilities of the Issuers' subsidiaries. As of March 31, 1998, after giving pro forma effect to the Offering, the refinancing of the Bank Credit Agreement with proceeds from the New Credit Facility, the repurchase of all of the Notes pursuant to the Notes Tender and the consummation of the TCI Transaction, (i) the Issuers (excluding indebtedness of their subsidiaries) would not have had any indebtedness outstanding other than the Debentures (representing aggregate indebtedness of approximately $650.6 million as of the date of issuance) and (ii) the Issuers' subsidiaries would have had approximately $936.5 million of indebtedness outstanding, all of which would have been effectively senior to the Debentures. Subject to the covenants described below under "Covenants" and applicable law, the Issuers may issue additional Debentures under the Indenture. The Senior Debentures offered hereby and any additional Senior Debentures subsequently issued would be treated as a single class for all purposes under the Indenture. The Senior Discount Debentures offered hereby and any additional Senior Discount Debentures subsequently issued would be treated as a single class for all purposes under the Indenture. OPTIONAL REDEMPTION The Debentures will be redeemable, at the Issuers' option, in whole or in part, at any time on or after April 15, 2003 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register. The Senior Debentures are redeemable at the redemption prices set forth below (expressed in percentages of principal amount), 126 plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve-month period beginning on April 15 of the years set forth below:
YEAR PERCENTAGE - ---------------------------------------------------------------------------------- ----------- 2003.............................................................................. 104.188% 2004.............................................................................. 102.792% 2005.............................................................................. 101.396% 2006 and thereafter............................................................... 100.000%
The Senior Discount Debentures are redeemable at the redemption prices set forth below (expressed in percentages of Accreted Value), plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve-month period beginning on April 15 of the years set forth below:
YEAR PERCENTAGE - ---------------------------------------------------------------------------------- ----------- 2003.............................................................................. 104.643% 2004.............................................................................. 103.095% 2005.............................................................................. 101.548% 2006 and thereafter............................................................... 100.000%
In addition, prior to April 15, 2001, the Issuers may redeem up to 35% of the aggregate principal amount or Accreted Value, as applicable, of the Debentures with the net cash proceeds of one or more sales by the Company of its Capital Stock (other than Redeemable Capital Stock), at any time or from time to time in part, at a redemption price, in the case of Senior Debentures, equal to 108.375% of the principal amount thereof and, in the case of Senior Discount Debentures, equal to 109.285% of the Accreted Value thereof, in each case plus accrued and unpaid interest, if any, to the date of redemption (subject to the rights of Holders of record on the relevant record date that is prior to the redemption date to receive interest due on an Interest Payment Date); PROVIDED, that at least $195.0 million in aggregate principal amount of Senior Debentures remains outstanding immediately after each such redemption (excluding any Senior Debentures owned by the Issuers or any of their Affiliates) and at least 65% in aggregate principal amount at maturity of the Senior Discount Debentures originally issued remains outstanding immediately after each such redemption (excluding any Senior Discount Debentures owned by the Issuers or any of their Affiliates). In the case of any partial redemption, selection of the Debentures for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Debentures are listed, or if the Debentures are not listed on a national securities exchange, by lot or by such other method as the Trustee in its sole discretion shall deem fair and appropriate; PROVIDED that no Debenture of $1,000 in principal amount or less shall be redeemed in part. If any Debenture is to be redeemed in part only, the notice of redemption relating to such Debenture shall state the portion of the principal amount thereof to be redeemed. A new Debenture in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Debenture. SINKING FUND There will be no sinking fund payments for the Debentures. The Issuers have agreed with the Placement Agents, for the benefit of the Holders, that the Issuers will use their best efforts, at their cost, to file and cause to become effective a registration statement with respect to a registered offer to exchange (the "Exchange Offer Registration Statement") the Old Debentures for the Exchange Debentures. The Exchange Offer will remain open for not less than 20 business days after the date notice of the Exchange Offer is mailed to Holders. For each old Debenture 127 surrendered to the Issuers under the Exchange Offer, the Holder thereof will receive a corresponding Exchange Debenture of equal principal amount or principal amount at maturity, as applicable. In the event that applicable interpretations of the staff of the Commission do not permit the Issuers to effect the Exchange Offer, or under certain other circumstances, the Issuers will, at their cost, use their best efforts to cause to become effective a shelf registration statement (the "Shelf Registration Statement") with respect to resales of the Debentures and to keep the Shelf Registration Statement effective until the expiration of the time period referred to in Rule 144(k) under the Securities Act after the Issue Date, or such shorter period that will terminate when all Debentures covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Issuers will, in the event of such a shelf registration, provide to each Holder copies of the prospectus, notify each Holder when the Shelf Registration Statement for the Debentures has become effective and take certain other actions as are required to permit resales of the Debentures. A Holder that sells its Debentures pursuant to the Shelf Registration Statement generally will be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement that are applicable to such a Holder (including certain indemnification obligations). In the event that the Exchange Offer is not consummated on or prior to the date that is 180 days after the Issue Date, (i) the annual interest rate borne by the Senior Debentures will be increased by 0.5%, (ii) prior to April 15, 2003, the Senior Discount Debentures will bear annual cash interest equal to 0.5% of the Accreted Value of the Senior Discount Debentures and (iii) on and after April 15, 2003, the annual interest rate borne by the Senior Discount Debentures will be increased by 0.5%. Such additional interest amounts be payable in cash, semiannually in arrears on each April 15 and October 15, until (i) the Exchange Offer is consummated, (ii) the Issuers cause a shelf registration with respect to resales of the Debentures to become effective under the Securities Act or (iii) the date that the Debentures become freely tradeable without registration under the Securities Act, at which time, in any such case, the interest rate with respect to the Debentures shall return to the rate set forth on the cover page of this Prospectus, as adjusted by any other provision of the Indenture. This summary of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement. 128 CERTAIN DEFINITIONS "Accreted Value" means with respect to any Senior Discount Debenture, as of any specified date on or prior to April 15, 2003, the amount provided below for each $1,000 principal amount at maturity of Senior Discount Debentures: (i) if the specified date occurs on one of the following dates after the Issue Date (each a "Semiannual Accrual Date"), the Accreted Value will equal the amount set forth below for such Semiannual Accrual Date:
ACCRETED SEMIANNUAL ACCRUAL DATE VALUE - --------------------------------------------------------------------------------- ---------- Issue Date....................................................................... $ 633.29 October 15, 1998................................................................. $ 664.70 April 15, 1999................................................................... $ 695.56 October 15, 1999................................................................. $ 727.85 April 15, 2000................................................................... $ 761.64 October 15, 2000................................................................. $ 797.00 April 15, 2001................................................................... $ 834.00 October 15, 2001................................................................. $ 872.72 April 15, 2002................................................................... $ 913.23 October 15, 2002................................................................. $ 955.63 April 15, 2003................................................................... $ 1,000.00
(ii) if the specified date occurs before October 15, 1998, the Accreted Value will equal the sum of (a) $633.29 and (b) an amount equal to the product of (1) the Accreted Value on October 15, 1998 less $633.29 MULTIPLIED BY (2) a fraction, the numerator of which is the number of days from the Issue Date to the specified date, using a 360-day year of twelve 30-day months, and the denominator of which is the number of days from the Issue Date to the first Semiannual Accrual Date, using a 360-day year of twelve 30-day months; or (iii) if the specified date occurs between two Semiannual Accrual Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the Semiannual Accrual Date immediately preceding such specified date and (b) an amount equal to the product of (1) the Accreted Value for the immediately following Semiannual Accrual Date less the Accreted Value for the immediately preceding Semiannual Accrual Date MULTIPLIED BY (2) a fraction, the numerator of which is the number of days from the immediately preceding Semiannual Accrual Date to the specified date, using a 360-day year of 12 30-day months; PROVIDED, HOWEVER, that, for any date after April 15, 2003, the Accreted Value with respect to each $1,000 principal amount at maturity of Senior Discount Debentures will be $1,000; PROVIDED, FURTHER, that, notwithstanding any other provision of this definition, if the Issuers elect to commence the accrual of cash interest on a Semiannual Accrual Date, the Accreted Value of a Senior Discount Debenture will thereafter be the Accreted Value of such Senior Discount Debenture as specified in clause (i) above on such Semiannual Accrual Date. "Acquired Indebtedness" means Indebtedness of a Person (a) existing at the time such Person is merged with or into the Company or a Subsidiary of the Company or becomes a Subsidiary of the Company or (b) assumed in connection with the acquisition of assets from such Person, and not Incurred by such Person in connection with, or in anticipation of, such Person becoming a Subsidiary or such acquisition of assets. "Annualized Operating Cash Flow" means for any Person, for any fiscal quarter, an amount equal to Operating Cash Flow of such Person for such quarter multiplied by four. 129 "Affiliate" means, as applied to any specified Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Asset Disposition" means the sale or other disposition by the Company or any of its Restricted Subsidiaries (other than to the Company or another Restricted Subsidiary) (i) of all or substantially all of the Capital Stock of any Restricted Subsidiary, or (ii) of all or substantially all of the assets that constitute a division or line of business of the Company or of any Restricted Subsidiary, or (iii) of any cable television system. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction but excluding any exchange of assets (including an exchange of assets in which no more than 30% of the value of the consideration paid or received by the Company or a Restricted Subsidiary in connection therewith consists of cash or Cash Equivalents); PROVIDED that the fair market value of the consideration received by the Company in connection with such exchange of assets is at least equal to the fair market value of the assets transferred by the Company in connection with such exchange) in one transaction or a series of related transactions by the Company or any of its Restricted Subsidiaries to any Person other than the Company or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the property and assets of an operating unit or business of the Company or any of its Restricted Subsidiaries or (iii) any other property and assets of the Company or any of its Restricted Subsidiaries (other than the Capital Stock or other Investment in an Unrestricted Subsidiary) outside the ordinary course of business of the Company or such Restricted Subsidiary and, in each case, that is not governed by the provisions of the Indenture applicable to mergers, consolidations and sales of assets of the Company; PROVIDED that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current assets, (b) sales, transfers or other dispositions of assets with a fair market value not in excess of $1.0 million in any transaction or series of related transactions, (c) sales, transfers or other dispositions of assets constituting a Restricted Payment permitted to be made under the "Limitation on Restricted Payments" covenant, (d) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, to the extent that the consideration received would satisfy clause (B) of the "Limitation on Asset Sales" covenant or (e) sales, transfers or other dispositions of property or equipment that has become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Company or its Restricted Subsidiaries. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (A) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (B) the amount of such principal payment by (ii) the sum of all such principal payments. "Bank Credit Agreement" means that certain Amended and Restated Credit Agreement, dated as of July 12, 1996, among Falcon Cable Media, a California Limited Partnership, Falcon Cable Systems Company II, L.P., Falcon Cablevision, a California Limited Partnership, Falcon Community Cable, L.P., Falcon Community Ventures I Limited Partnership, Falcon First, Inc., Falcon Telecable, a California Limited Partnership, Falcon Telecom, L.P., the First National Bank of Boston, as Managing Agent, Toronto-Dominion (Texas) Inc., as Administrative Agent, and NationsBank of Texas, N.A., as Syndication Agent, including any deferrals, renewals, extensions, restatements, replacements, restructurings, refinancings or refundings thereof or amendments, modifications or supplements thereto, and any agreement or agreements providing therefor, whether involving one or more members of the Restricted Group, whether by or with the same or any other lender, creditor, group or groups of lenders or group or groups of 130 creditors, and including related Debentures, guarantee and security agreements and other instruments and agreements executed in connection therewith. "Board of Directors" means (i) subject to clause (iv) below, in the case of a Person that is a partnership, the board of directors of such Person's corporate general partner (or if such general partner is itself a partnership, the board of directors of such general partner's corporate general partner), (ii) in the case of a Person that is a corporation, the board of directors of such Person, (iii) in the case of any other Person, the board of directors, management committee or similar governing body or any authorizing committee thereof responsible for the management of the business and affairs of such Person and (iv) in the case of FHGLP, the Board of Representatives of FHGLP established pursuant to Section 11.4 of the Partnership Agreement (but only for so long as such Board of Representatives remains in existence). "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's capital stock or other equity interests, including, without limitation, partnership interests, whether now outstanding or issued after the Issue Date. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligation" means the discounted present value of the rental obligations under a Capitalized Lease. "Cash Equivalents" means (i) any security maturing not more than six months after the date of acquisition issued by the United States of America or an instrumentality or agency thereof and guaranteed fully as to principal, premium, if any, and interest by the United States of America, (ii) any certificate of deposit, time deposit, money market account or bankers' acceptance maturing not more than six months after the date of acquisition issued by any commercial banking institution that is a member of the Federal Reserve System and that has combined capital and surplus and undivided profits of not less than $500.0 million whose debt has a rating, at the time as of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard & Poor's Rating Services, or any successor rating agency and (iii) commercial paper maturing not more than three months after the date of acquisition issued by any corporation (other than an Affiliate of the Issuers) organized and existing under the laws of the United States of America with a rating, at the time of which any investment therein is made, of "P-1" (or higher) according to Moody's Investors Service, Inc. or any successor rating agency, or "A-1" (or higher) according to Standard & Poor's Rating Services or any successor rating agency. "Cash Flow Ratio" means, as at any date, the ratio of (i) the sum of the aggregate outstanding principal amount of all Indebtedness (or, if the terms of such Indebtedness provide that an amount less than the principal amount thereof shall be due upon any declaration of acceleration thereof, the aggregate outstanding accreted value of such Indebtedness at the date of determination) of the Company and the Restricted Subsidiaries determined on a consolidated basis, but excluding all obligations under Interest Rate Agreements entered into by the Company or any Restricted Subsidiary outstanding on such date, plus (but without duplication of Indebtedness supported by letters of credit) the aggregate undrawn face amount of all letters of credit outstanding on such date to (ii) Annualized Operating Cash Flow of the Company and its Restricted Subsidiaries determined as at the last day of the most recently completed fiscal quarter. In calculating the "Cash Flow Ratio" as of any particular date (the "Determination Date") Annualized Operating Cash Flow shall be determined on the basis of the most recently completed fiscal quarter (the "Measurement Period"). For purposes of calculating Annualized Operating Cash Flow for the Measurement Period associated with a Determination Date, (i) any Person that is a Restricted Subsidiary on the Determination Date (or would become a Restricted Subsidiary on such Determination Date in connection with the transaction that requires the determination of such Annualized Operating Cash Flow) 131 will be deemed to have been a Restricted Subsidiary at all times during such Measurement Period, (ii) any Person that is not a Restricted Subsidiary on such Determination Date (or would cease to be a Restricted Subsidiary on such Determination Date in connection with the transaction that requires the determination of such Annualized Operating Cash Flow) will be deemed not to have been a Restricted Subsidiary at any time during such Measurement Period and (iii) if the Company or any Restricted Subsidiary shall have in any manner (x) acquired (including through the commencement of activities constituting such operating business) or (y) disposed of (including by way of an Asset Disposition or the termination or discontinuance of activities constituting such operating business) any operating business during such Measurement Period or after the end of such period and on or prior to such Determination Date, such calculation will be made on a pro forma basis in accordance with GAAP as if, in the case of an acquisition or the commencement of activities constituting such operating business, all such transactions had been consummated on the first day of such Measurement Period and, in the case of an Asset Disposition or termination or discontinuance of activities constituting such operating business, all such transactions had been consummated prior to the first day of such Measurement Period. "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than the Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the total voting power of the outstanding Voting Stock of the Company or Falcon, as the case may be, and such ownership represents a greater percentage of the total voting power of the Voting Stock of the Company or Falcon, as the case may be, on a fully diluted basis, than is held by the Permitted Holders in the aggregate on such date and, in the case of the Company (if the Company is then a partnership), any Person other than a Permitted Holder is a managing general partner of the Company; (b) the Company or Falcon, as the case may be, consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company or Falcon, as the case may be, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company or Falcon, as the case may be, is converted into or exchanged for cash, securities or other property and, immediately after such transaction, the Permitted Holders in the aggregate or the holders of the Voting Stock of the Company or Falcon, as the case may be, immediately prior thereto own, directly or indirectly, less than 35% of the total voting power of the outstanding Voting Stock of the surviving or transferee Person and, in the case of the Company (if the Company is then a partnership), any Person other than a Permitted Holder is a managing general partner of the Company; (c) the sale, lease or transfer, conveyance or other disposition (other than by way of a merger, consolidation, liquidation or dissolution), in one or a series of transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any "person" (as such term is used in Section 13(d)(e) of the Exchange Act) other than to one or more Permitted Holders, (e) the first day on which the Company or any successor thereto pursuant to the covenant under "Mergers" fails to own 100% of the issued and outstanding Capital Stock of FFC, (f) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company or Falcon, as the case may be (together with any new directors whose election to such Board of Directors was approved by the Permitted Holders or by a vote of at least a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason (other than by action of the Permitted Holders) to constitute a majority of the Board of Directors of the Company or Falcon, as the case may be, then in office in any such case in connection with any actual or threatened solicitation of proxies or consents. "Company" means FHGLP or any Person that is a successor to FHGLP pursuant to, and in accordance with, the covenant set forth below under "Mergers." 132 "Consolidated Interest Expense" means, with respect to any Person for any period, the aggregate amount of interest in respect of Indebtedness (including amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; and the net costs associated with Interest Rate Agreements, but excluding interest and fees on any letter of credit, bond, performance bond, performance guarantee or similar obligation incurred in connection with the day-to-day operations of its business to secure the performance of a cable television franchise, pole attachment agreement, lease or other similar agreement incurred in the ordinary course of such business) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by such Person and its consolidated subsidiaries during such period, all as determined on a consolidated basis in conformity with GAAP. "Consolidated Net Tangible Assets" of any Person means, as of any date, (a) all amounts that would be shown as assets on a consolidated balance sheet of such Person and its Restricted Subsidiaries prepared in accordance with GAAP, less (b) the amount thereof constituting goodwill and other intangible assets as calculated in accordance with GAAP. "Contribution Agreement" means that certain Contribution and Purchase Agreement, dated as of December 30, 1997, by and among FHGLP, New Falcon, Falcon, TCI Falcon Holdings, LLC, Belo Ventures, Inc. and the other parties that are signatories thereto, as amended and in effect on the Issue Date. "Cumulative Cash Flow Credit" means cumulative Operating Cash Flow during the period commencing on the Issue Date and ending on the last day of the most recent month preceding the date of the proposed Restricted Payment for which financial information is available or, if cumulative Operating Cash Flow for such period is negative, minus the amount by which cumulative Operating Cash Flow is less than zero. "Cumulative Interest Expense" means, for the period commencing on the Issue Date and ending on the last day of the most recent month preceding the proposed Restricted Payment for which financial information is available, the aggregate of the interest expense of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, including interest expense attributable to Capitalized Lease Obligations. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. "Fair Market Value" means, with respect to any asset, the price (after taking into account any liabilities relating to such assets) which could be negotiated in an arm's length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of which is under pressure or compulsion to complete the transaction; PROVIDED, HOWEVER, that the Fair Market Value of any such asset or assets shall be determined by the Board of Directors of the Company, acting in good faith. "Falcon" means Falcon Holding Group, Inc., a California corporation and the managing general partner of FHGLP, and, as the context may require, its successors and assigns. "Falcon Investors Partnership" means the limited partnership, if any, created by the partners of FHGLP under Section 7.8 of the Partnership Agreement as in effect on the Issue Date. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements 133 and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business or obligations assuring the performance of an obligor in connection with a letter of credit, bond, performance bond, performance guarantee or similar obligation incurred in connection with the day-to-day operations of its business to secure the performance of a cable television franchise, pole attachment agreement, lease or other similar agreement incurred in the ordinary course of such business. The term "Guarantee" used as a verb has a corresponding meaning. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that neither the accrual of interest (whether such interest is payable in cash or kind) nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person, without duplication, (a) debt of such Person for borrowed money, debt of such Person that represents the deferred purchase price of property, and similar monetary obligations of such Person that are evidenced by bonds, Debentures, debentures, or other instruments and Capitalized Lease Obligations, but excluding liabilities or obligations with respect to subscriber deposits, obligations under Interest Rate Agreements, accrued interest, other accrued expenses, trade accounts payable, and other similar items, (b) guarantees, endorsements, and other contingent obligations of such Person, whether direct or indirect, in respect of liabilities of any other Person of any of the types described in clause (a) above (other than endorsements for collection or deposit in the ordinary course of business), and (c) liabilities of any other Person of any of the types described in clause (a) above to the extent secured by a Lien on any asset of such Person but, if such liabilities are otherwise non-recourse to such Person, only to the extent of the lesser of (x) the Fair Market Value of such asset at the time of determination and (y) the amount of such liabilities; provided, however, that Indebtedness of any Person shall not include liabilities or obligations arising under any letter of credit, bond, performance bond, performance guarantee or similar obligation securing the obligations of such Person under any cable television franchise, pole attachment agreement, lease, or other similar agreement incurred in the ordinary course of its business entered into in connection with the day-to-day operations of such business. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement designed to protect the Company or any of its Restricted Subsidiaries against fluctuations in interest rates. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers, suppliers or contractors in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable, prepaid expenses or deposits on the balance sheet of the Company or its Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, Debentures, debentures or other similar instruments issued by, such 134 Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the Fair Market Value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary. "Issue Date" means the date of original issuance of the Debentures under the Indenture. "Lien" means any lien, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature of a security interest and any agreement to give any security interest). A Person shall be deemed to own subject to a lien any property which such Person has acquired or holds subject to the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement. "Nathanson Family Investors" means Marc B. Nathanson, Greg Nathanson (the brother of Marc B. Nathanson), Liliane Vladimirschi (the sister-in-law of Marc B. Nathanson), any of their respective spouses, estates, lineal descendants (including adoptive children), heirs, executors, personal representatives, administrators, trusts for any of their benefit, and charitable foundations to which Voting Stock of the Company or any successor thereto beneficially owned by any of the foregoing have been transferred and corporations and partnerships in which one or more of the foregoing own more than 51% of the Voting Stock. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or Cash Equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable), including without limitation, distributions by the Company or a Restricted Subsidiary pursuant to clause (iv) of the third paragraph set forth under the covenant "Limitation on Restricted Payments" below as a result of such Asset Sale, without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP. "New Credit Facility" means that certain revolving and term loan credit facility, in an aggregate principal amount of $1.3 billion and the related acquisition facility, in an aggregate principal amount of $200.0 million, described in that certain Commitment Letter, dated as of March 12, 1998, among FHGLP, BankBoston, N.A., NationsBank of Texas, N.A., Toronto Dominion (Texas) Inc., Bank of America NT&SA, The Chase Manhattan Bank, BancBoston Securities, Inc., NationsBanc Montgomery Securities, LLC, TD Securities (USA) Inc., BancAmerica Robertson Stephens and Chase Securities, Inc., including any deferrals, renewals, extensions, restatements, replacements, refinancings, restructurings or refundings thereof or amendments, modifications or supplements thereto, and any agreement or agreements providing therefor, whether involving one or members of the Restricted Group, whether by or with the same or any other lender, creditor, group or groups of lenders or group or groups of creditors, and including related Debentures, guarantee and security agreements and other instruments and agreements executed in connection therewith. "New Falcon" means Falcon Communications, L.P., a California limited partnership. 135 "New Falcon II" means Falcon Communications, LLC, a limited liability company to which New Falcon will contribute substantially all of its assets immediately following the consummation of the TCI Transaction. "Notes" means the 11% Senior Subordinated Notes due 2003 of the Company. "Notes Indenture" means the Indenture dated as of March 29, 1993, between the Company and United States Trust Company of New York, as trustee, relating to the Notes, as amended as of the Issue Date. "Offer to Purchase" means an offer by the Company to purchase Debentures from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Debentures validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Debenture not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless the Company defaults in the payment of the purchase price, any Debenture accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest or accrete Accreted Value, as appropriate, on and after the Payment Date; (v) that Holders electing to have a Debenture purchased pursuant to the Offer to Purchase will be required to surrender the Debenture, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Debenture completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Debentures delivered for purchase and a statement that such Holder is withdrawing his election to have such Debentures purchased; and (vii) that Holders whose Debentures are being purchased only in part will be issued new Debentures equal in principal amount or Accreted Value, as applicable, to the principal amount or Accreted Value, as applicable, of the unpurchased portion of the Debentures surrendered; PROVIDED that each Debenture purchased and each new Debenture issued shall be in a principal amount of $1,000 or integral multiples thereof. On the Payment Date, the Company shall (i) accept for payment on a pro rata basis Debentures or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Debentures or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Debentures or portions thereof so accepted together with an Officers' Certificate specifying the Debentures or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of Debentures so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Debenture equal in principal amount to any unpurchased portion of the Debenture surrendered; PROVIDED that each Debenture purchased and each new Debenture issued shall be in a principal amount of $1,000 or integral multiples thereof. The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Debentures pursuant to an Offer to Purchase. "Operating Cash Flow" means, for any Person, for any period, an amount equal to (i) the net income (or loss) of such Person (exclusive of any extraordinary gain or loss and of any gain or loss realized in such period upon an Asset Disposition), plus (ii) the sum of depreciation, amortization, income tax expense, Consolidated Interest Expense and other non-cash charges, in each case to the extent deducted in determining such net income, and any one-time payments under deferred compensation plans or arrangements (PROVIDED that such payments are not made under such plans or arrangements more than three times), minus (iii) all non-cash items increasing such net income for such period, all as determined on a consolidated basis in accordance with GAAP consistently applied, except that with respect to the Restricted Group, each of the foregoing shall be determined on a consolidated basis with respect to the 136 Company and its Restricted Subsidiaries only; PROVIDED, HOWEVER, that (A) the portion of net income (or loss) attributable to minority interests in Persons shall be included in such net income (or loss) only to the extent that cash dividends or distributions have actually been received by such Person or one of its Restricted Subsidiaries and (B) the net income (or loss) of the Company shall include the amount of all cash dividends received by the Company or any of its Restricted Subsidiaries from an Unrestricted Subsidiary. "Partnership Agreement" means the Third Amended and Restated Agreement of Limited Partnership of the Company, dated as of December 28, 1995, as amended and in effect as of the Issue Date. "Permitted Holders" means any of (a) Falcon for so long as a majority of the voting power of the voting Capital Stock of such Person is beneficially owned by any of the Persons listed in the other clauses of this definition, (b) any Nathanson Family Investor, (c) TCI and TCI Communications, Inc., a Delaware corporation, (d) any Person in which TCI is the owner, directly or indirectly, of at least 25% of the outstanding equity of such Person, and (e) any Person controlling, controlled by or under common control with any other Person described in clauses (a)-(d) of this definition; provided, that for purposes of calculating the amount of Voting Stock in any Person held by Permitted Holders, Voting Stock held by directors and executive officers of Falcon shall be deemed to be held by Permitted Holders. "Permitted Investments" means (a) Cash Equivalents, (b) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits, (c) loans and advances to employees made in the ordinary course of business not to exceed $10.0 million in the aggregate at any one time outstanding, (d) Interest Rate Agreements, (e) transactions with officers, directors and employees of the Company, Falcon or any Restricted Subsidiary entered into in the ordinary course of business (including compensation or employee benefit arrangements with any such director or employee), (f) Investments existing as of the Issue Date and any amendment, extension, renewal or modification thereof to the extent that any such amendment, extension, renewal or modification does not require the Company or any Restricted Subsidiary to make any additional cash or non-cash payments or provide additional services in connection therewith, (g) Investments in any Restricted Subsidiary and (h) the deposit of proceeds from an asset sale or other disposition with a "qualified intermediary," "qualified trustee" or similar person for purposes of facilitating a like kind exchange under applicable provisions of the Internal Revenue Code of 1986, as amended. "Permitted Liens" means the following types of Liens: (a) Liens existing on the Issue Date; (b) Liens on shares of the capital stock of an entity that is not a Restricted Subsidiary, which Liens solely secure a guarantee by the Company or a Restricted Subsidiary, or both, of Indebtedness of such entity; (c) Liens on Receivables and Related Assets (and proceeds thereof) securing only Indebtedness otherwise permitted to be incurred by a Restricted Subsidiary; (d) Liens on shares of the Capital Stock or assets of a Subsidiary of the Company securing Indebtedness under the Bank Credit Agreement, the New Credit Facility or any renewal, replacement or restructuring of the Bank Credit Agreement or New Credit Facility or with respect to any other Indebtedness that a Subsidiary is permitted to incur pursuant to the provisions of the Indenture; (e) Liens granted in favor of the Company or any Restricted Subsidiary; (f) Liens securing the Debentures; (g) Liens securing Acquired Indebtedness created prior to (and not in connection with or in contemplation of) the incurrence of such Indebtedness by the Company or a Restricted Subsidiary; PROVIDED, that such Lien does not extend to any property or assets of the Company or any Restricted 137 Subsidiary other than the assets acquired in connection with the incurrence of such Acquired Indebtedness; (h) Liens securing obligations under Interest Rate Agreements or "margin stock", as defined in Regulations G and U of the Board of Governors of the Federal Reserve System; (i) Statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other like Liens arising in the ordinary course of business of the Company or any Restricted Subsidiary and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings; (j) Liens of taxes, assessments, government charges or claims not yet due or that are being contested in good faith by appropriate proceedings; (k) Zoning restrictions, easements, rights-of-way, restrictions under cable television franchises or other governmental licenses or authorizations, restrictions and other similar charges or encumbrances or minor defects in title not interfering in any material respect with the business of the Company or any Restricted Subsidiary; (l) Liens arising by reason of any judgment, decree or order of any court, arbitral tribunal or similar entity so long as any appropriate legal proceedings that may have been initiated for the review of such judgment, decree or order shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (m) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security or similar legislation; (n) Liens securing the performance of bids, tenders, leases, contracts, franchises, public or statutory obligations, surety, stay or appeal bonds, or other similar obligations arising in the ordinary course of business; (o) Leases under which the Company or any Restricted Subsidiary is the lessee or the lessor in the ordinary course of business; (p) Purchase money mortgages or other purchase money liens (including without limitation any Capitalized Lease Obligations) upon any fixed or capital assets acquired after the Issue Date or purchase money mortgages (including without limitation Capitalized Lease Obligations) on any such assets, whether or not assumed, existing at the time of acquisition of such assets, whether or not assumed, so long as (i) such mortgage or lien does not extend to or cover any other asset of the Company or any Restricted Subsidiary and (ii) such mortgage or lien secures the obligation to pay the purchase price of such asset, interest thereon and other charges incurred in connection therewith (or the obligation under such Capitalized Lease Obligation) only; (q) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (r) Liens encumbering deposits made to secure obligations arising under statutory, regulatory, contractual, or warranty requirements of the Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (s) Liens to secure other Indebtedness; PROVIDED, HOWEVER, that the principal amount of any Indebtedness secured by such Liens, together with the principal amount of any Indebtedness incurred under this clause (s) as permitted by clause (t) below (and successive refinancings thereof), may not exceed 15% of the Company's Consolidated Net Tangible Assets as of the last day of the Company's most recently completed fiscal year for which financial information is available; and 138 (t) any extension, renewal or replacement, in whole or in part, of any Lien described in the foregoing clauses (a) through (s); provided that any such extension, renewal or replacement shall be no more restrictive in any material respect than the Lien so extended, renewed or replaced and shall not extend to any additional property or assets. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, limited liability company, limited liability partnership, trust, unincorporated organization or government or any agency or political subdivision thereof. "Purchase Money Indebtedness" means Indebtedness of the Company or any Restricted Subsidiary Incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of any property, provided that the aggregate principal amount of such Indebtedness does not exceed the lesser of the Fair Market Value of such property or such purchase price or cost. "Receivables and Related Assets" means (i) accounts receivable, instruments, chattel paper, obligations, general intangibles, equipment and other similar assets, including interests in merchandise or goods, the sale or lease of which gives rise to the foregoing, related contractual rights, guarantees, insurance proceeds, collections and other related assets, (ii) equipment, (iii) inventory and (iv) proceeds of all of the foregoing. "Redeemable Capital Stock" means any class or series of Capital Stock of any Person that, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, is or upon the happening of an event or passage of time would be, required to be redeemed (in whole or in part) prior to the Stated Maturity of the Debentures or is redeemable (in whole or in part) at the option of the holder thereof at any time prior to the Stated Maturity of the Debentures. "Restricted Group" means, collectively, the Company and its Restricted Subsidiaries. "Restricted Payment" means (subject to the provisions of the covenant set forth in "Covenants-- Limitation on Restricted Payments"): (a) any Stock Payment by the Company or any Restricted Subsidiary; (b) any direct or indirect payment to redeem, purchase, defease or otherwise acquire or retire for value, or permit any Restricted Subsidiary to redeem, purchase, defease or otherwise acquire or retire for value, prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company that is subordinate in right of payment to the Debentures; or (c) any direct or indirect payment to redeem, purchase, defease or otherwise acquire or retire for value any Redeemable Capital Stock at its mandatory redemption date or other maturity date; PROVIDED, HOWEVER, that the redemption, purchase, defeasance or other acquisition or retirement of Redeemable Capital Stock at its mandatory redemption or other maturity date shall not be a Restricted Payment if and to the extent any Indebtedness incurred to finance all or a portion of the purchase or redemption price does not have a final scheduled maturity date, or permit redemption at the option of the holder thereof, earlier than the final scheduled maturity of such Debenture. Notwithstanding the foregoing, Restricted Payments shall not include (x) payments by any Restricted Subsidiary to the Company or any other Restricted Subsidiary or (y) any Investment or designation of a Restricted Subsidiary as an Unrestricted Subsidiary permitted under the covenant set forth in "Covenants--Limitation on Investments in Unrestricted Subsidiaries and Affiliates." "Restricted Subsidiary" means any subsidiary of the Company which is not designated an Unrestricted Subsidiary. 139 "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "Stated Maturity," when used with respect to any Debenture or any installment of interest thereon, as the context may require, means the date specified in such Debenture as the fixed date on which the principal of such Debenture or such installment of interest, as the context may require, is due and payable. "Stock Payment" means, with respect to any Person, the payment or declaration of any dividend, either in cash or in property (except dividends payable in shares of Capital Stock of such Person (other than Redeemable Capital Stock)), or the making by such Person of any other distribution, on account of any shares of any class of its Capital Stock, now or hereafter outstanding, or the redemption, purchase, retirement or other acquisition for value by such Person, directly or indirectly, of any shares of any class of its Capital Stock or any direct or indirect parent of such Person, now or hereafter outstanding. "Subsidiary" means, with respect to any Person, any corporation more than 50% of the voting stock of which is owned directly or indirectly by such Person, and any partnership, limited liability company, limited liability partnership, association, joint venture or other entity in which such Person owns more than 50% of the voting equity interests or has the power to elect a majority of the Board of Directors or other governing body; PROVIDED that a partnership of which the Company or any of its Subsidiaries is the managing general partner shall be deemed to be a Subsidiary of the Company. "Tax Amount" means, with respect to any period, without duplication, the increase in the cumulative United States federal, state and local tax liability of holders of equity interests in the Company or a Restricted Subsidiary, as applicable (or, if such holder is a pass-through entity for United States income tax purposes, holders of its equity interests) in respect of their interests in the Company or such Restricted Subsidiary for such period plus any additional amounts payable to such holders to cover taxes arising from ownership of such equity interests, but excluding any increase in tax liability or additional amounts payable in respect of a gain realized by a partner in the Company or a Restricted Subsidiary upon the sale or other disposition by such partner of any of its partnership interests, including, without limitation, any redemption thereof by the Company, in the Company or a Restricted Subsidiary. "TCI" means Tele-Communications, Inc., a Delaware corporation. "TCI Contribution" means the closing of the contribution by TCI Falcon Holdings, LLC to New Falcon, substantially in accordance with the Contribution Agreement, of cable television systems serving at least 230,000 basic subscribers. "TCI Transaction" means the transactions defined as the "TCI Transaction" in the Prospectus dated as of March 31, 1998, of the Issuers, with respect to the Debentures. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits maturing within one year of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50.0 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types 140 described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's Rating Services, (v) securities with maturities of one year or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by to Standard & Poor's Rating Services or Moody's Investors Service, Inc. and (vi) other dollar denominated securities issued by any Person incorporated in the United States rated at least "A" or the equivalent by to Standard & Poor's Rating Services or at least "A2" or the equivalent by Moody's Investors Service, Inc. and in each case either (A) maturing not more than one year after the date of acquisition or (B) which are subject to a repricing arrangement (such as a Dutch auction) not more than one year after the date of acquisition (and reprices at least yearly thereafter) which the Person making the investment believes in good faith will permit such Person to sell such security at par in connection with such repricing mechanism. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly organized Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; PROVIDED that such designation would be permitted under the covenant described under "Covenants--Limitation on Investments in Unrestricted Subsidiaries and Affiliates." The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that immediately after giving effect to such designation (x) the Company could incur $1.00 of additional Indebtedness under the first paragraph of the covenant described under "Covenants--Limitation on Indebtedness" below and (y) no Default or Event of Default shall have occurred and be continuing or shall result as a consequence thereof. Any such designation by the Company shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. Notwithstanding the above, as of the Issue Date, each of the following shall be an "Unrestricted Subsidiary": (i) Enstar Communications Corporation and its Subsidiaries, (ii) Enstar Finance Company, LLC and its Subsidiaries, (iii) Falcon Lake Las Vegas Cablevision, L.P. and its Subsidiaries, (iv) Falcon Video Communications, L.P. and its Subsidiaries and (v) Falcon/Capital Cable and its Subsidiaries. "Voting Stock" means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) by such Person or one or more Wholly Owned Subsidiaries of such Person. COVENANTS LIMITATION ON INDEBTEDNESS (a) The Company will not, and will not permit any of its Restricted Subsidiaries to Incur any Indebtedness unless, immediately thereafter and after giving effect thereto, the Cash Flow Ratio of the Restricted Group will be less than or equal to 9 to 1. 141 Notwithstanding the foregoing limitations, regardless of the amount of Indebtedness of the Restricted Group, the Company and any Restricted Subsidiary may Incur each and all of the following (collectively, "Permitted Indebtedness"): (i) Indebtedness under the Debentures; (ii) Indebtedness of the Company and its Restricted Subsidiaries outstanding on the Issue Date; PROVIDED that the Debentures shall not be permitted to be outstanding pursuant to this subparagraph (ii) at any time after October 14, 1998; (iii) Indebtedness of the Company and its Restricted Subsidiaries under the Bank Credit Agreement or the New Credit Facility in an aggregate principal amount at any one time outstanding, including all Indebtedness incurred to refinance or replace any Indebtedness incurred pursuant to this subparagraph (iii), not to exceed $1.5 billion, less (x) the aggregate amount of all permanent principal repayments, optional or mandatory, made from time to time after the date of the Indenture with respect to such Indebtedness (other than repayments made in connection with a refinancing thereof); PROVIDED, HOWEVER, that the maximum principal amount of Indebtedness that may be outstanding under the Bank Credit Agreement or the New Credit Facility pursuant to this subparagraph (iii) may be increased pursuant to the incurrence of Indebtedness thereunder for the purposes and subject to the maximum amounts and other limitations set forth in subparagraph (ix) of this paragraph; PROVIDED that for any amount of such Indebtedness incurred under this subparagraph (iii), the amount of Indebtedness permitted to be incurred under paragraph (ix) will be correspondingly decreased; (iv) Indebtedness owed by the Company to any Restricted Subsidiary (but only so long as such Indebtedness is held by such Restricted Subsidiary) and Indebtedness owed by any Restricted Subsidiary to the Company or any other Restricted Subsidiary (but only so long as such Indebtedness is held by the Company or such other Restricted Subsidiary); (v) Any guarantee of Indebtedness of the Company by any Restricted Subsidiary permitted by the covenant set forth below under "--Limitation on Issuances of Guarantees by Restricted Subsidiaries;" (vi) Indebtedness the net proceeds of which are used to refinance outstanding Indebtedness incurred under subparagraphs (ii), (vii) and (ix) of this paragraph in an amount (or, if such new Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, with an original issue price) not to exceed the amount so refinanced (plus premiums, accrued interest, fees and expenses); PROVIDED that Indebtedness the proceeds of which are used to refinance the Debentures or Indebtedness that is PARI PASSU with, or subordinated in right of payment to, the Debentures will be permitted under this clause (vii) only if (A) in case the Debentures are refinanced in part or other Indebtedness that is PARI PASSU with the Debentures is refinanced, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued, is expressly made PARI PASSU with, or subordinate in right of payment to, the remaining Debentures, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Debentures, such Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Debentures at least to the extent that the Indebtedness to be refinanced is subordinated to the Debentures and (C) such new Indebtedness, determined as of the date of the Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced and the Average Life of such new Indebtedness is equal to or greater than the sum of the remaining Average Life of the Indebtedness to be refinanced; PROVIDED, FURTHER, that in no event may Indebtedness of the Company that is PARI PASSU with, or subordinated in right of payment to, the Debentures be refinanced by means of Indebtedness of any Restricted Subsidiary pursuant to this clause (vi); PROVIDED, that the foregoing shall not limit the 142 ability of the Company to conduct a tender offer or redeem the Debentures with the proceeds of the Bank Credit Agreement or the New Credit Facility; (vii) Indebtedness of the Company or any of its Restricted Subsidiaries under Purchase Money Indebtedness or Capitalized Lease Obligations in an aggregate amount outstanding at any time of not more than $25.0 million; and (viii) in addition to the items referred to in clauses (i) through (vii) above, Indebtedness of the Company or any Restricted Subsidiary in an aggregate amount not to exceed two times the aggregate net cash proceeds to the Company from the issuance of any Capital Stock of the Company (other than Redeemable Capital Stock) after the Issue Date; PROVIDED that the amount of such net cash proceeds with respect to which Indebtedness is incurred pursuant to this subparagraph (viii) shall not be deemed net cash proceeds from the issue and sale of Capital Stock for purposes of subparagraph (iii) of the first paragraph of the covenant under "--Limitation on Restricted Payments"; and (ix) in addition to the items referred to in clauses (i) through (viii) above, Indebtedness of the Company or any of its Restricted Subsidiaries in an aggregate principal amount not to exceed $25.0 million at any time outstanding. Indebtedness specified in clauses (iv), (v) and (vii) shall not under any circumstances be included in Indebtedness in the application of the covenant described in the first paragraph of the covenant under "--Limitation on Indebtedness." (b) For purposes of determining compliance with this "Limitation on Indebtedness" covenant, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in clause (a) above, the Issuers, in their sole discretion, shall classify, and from time to time may reclassify, such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. LIMITATION ON RESTRICTED PAYMENTS The Company will not, and will not permit any of its Restricted Subsidiaries to, make any Restricted Payment if (a) at the time of such proposed Restricted Payment, a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence of such Restricted Payment or (b) immediately after giving effect to such Restricted Payment, the aggregate of all Restricted Payments that shall have been made on or after the Issue Date would exceed the sum of (without duplication): (i) $25.0 million, plus (ii) an amount equal to the difference between (A) the Cumulative Cash Flow Credit and (B) 1.2 multiplied by Cumulative Interest Expense, plus (iii) 100% of the aggregate net cash proceeds and 70% of the Fair Market Value of the aggregate non-cash net proceeds received by the Company either (x) as capital contributions to the Company after the Issue Date or (y) from the issue and sale (other than to a Restricted Subsidiary) of, or from the exercise of any options, warrants or other rights to acquire its, Capital Stock (other than Redeemable Capital Stock and other than net proceeds from the issue and sale of Capital Stock with respect to which Indebtedness is incurred pursuant to subparagraph (viii) of the covenant under "--Limitation on Indebtedness" after the Issue Date), plus (iv) 100% of the aggregate net cash proceeds and 70% of the Fair Market Value of the aggregate non-cash net proceeds received by the Company or any Restricted Subsidiary after the Issue Date from the Incurrence of Indebtedness that has been converted into or exchanged for Capital Stock of the Company (other than Redeemable Capital Stock). 143 If the Company or any Restricted Subsidiary makes a Restricted Payment which, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of this covenant, such Restricted Payment shall be deemed to have been made in compliance with this covenant notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Cumulative Cash Flow Credit or Cumulative Interest Expense for any period. The foregoing provisions shall not prohibit: (i) the repurchase, redemption or other acquisition of Capital Stock of the Company, or the acquisition of Indebtedness of the Company that is subordinated in right of payment to the Debentures, in each case, in exchange for, or out of the net cash proceeds of a substantially concurrent offering (other than to a Restricted Subsidiary) of, Capital Stock of the Company (other than Redeemable Capital Stock); PROVIDED that the amount of any such net cash proceeds that are utilized for any such repurchase, redemption or other acquisition shall be excluded from clause (iii) of the first paragraph of this covenant; (ii) the payment of any dividend or distribution on, or redemption of, Capital Stock within 60 days after the date of declaration of such dividend or distribution or the giving of formal notice of such redemption if, at the date of such declaration or giving of such formal notice, such payment or redemption would comply with the foregoing provisions; (iii) the redemption, repurchase, defeasance or other acquisition or retirement for value of the Debentures with the proceeds of Indebtedness Incurred in compliance with the covenant described under "--Limitation on Indebtedness" above; (iv) for so long as the Company or any Restricted Subsidiary is treated as a pass-through entity for United States federal income tax purposes, distributions to equity holders of the Company or any Restricted Subsidiary in an amount not to exceed the Tax Amount for such period; (v) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Debentures, including premium, if any, and accrued and unpaid interest, with the proceeds of Indebtedness Incurred under clause (vi) of the second paragraph of the covenant described under "--Limitation on Indebtedness" above; (vi) any payment or distribution made by the Company or any Restricted Subsidiary in order to purchase, or fund the purchase by the Falcon Investors Partnership, if any, of the interests in the Capital Stock of the Company or the Falcon Investors Partnership, if any, held by any of the Group I Partners, the Group II Partners, the Group III Partners or the Group IV Partner (as such terms are defined in the Partnership Agreement as in effect on the Issue Date) pursuant to the provisions of Article 15 of the Partnership Agreement (or pursuant to such modifications to such provisions as may be agreed to by the Company, the Falcon Investors Partnership, the Group I Partners, the Group II Partners, the Group III Partners or the Group IV Partner; PROVIDED no such modification shall result in such payment or distribution being made in either a larger amount or at an earlier date than as provided for in Article 15 of the Partnership Agreement as in effect on the Issue Date); (vii) any purchase, redemption, acquisition, cancellation or other retirement for value of Capital Stock of the Company or any Restricted Subsidiary or any other transaction that is undertaken in connection with the consummation of the TCI Transaction and the other transactions contemplated under the Contribution Agreement; (viii) the purchase, redemption, acquisition, cancellation or other retirement for value of Capital Stock of the Company, options on any such Capital Stock or related equity appreciation rights or similar securities held by officers or employees or former officers or employees of the Company, any Restricted Subsidiary (or their estates or beneficiaries under their estates), upon death, disability, 144 retirement or termination of employment; PROVIDED that the aggregate consideration paid for such purchase, redemption, acquisition, cancellation or other retirement after the Issue Date does not in any one fiscal year of the Company exceed an aggregate amount of $7.5 million; (ix) the payment of any dividend or distribution on Capital Stock of a Restricted Subsidiary out of such Restricted Subsidiary's net income from the Issue Date to Persons other than the Company or a Restricted Subsidiary; PROVIDED that such dividend or distribution is paid pro rata to all holders of such Capital Stock; (x) any payment or distribution made by the Company or any Restricted Subsidiary in order to purchase or fund the purchase by the Company of the interests in the Capital Stock of FHGLP held by the non-management partners in FHGLP (including the partnership interest held by Belo Ventures, Inc.) pursuant to the provisions of Article 9 of the New FHGLP Partnership Agreement (or pursuant to such modifications to such provisions as may be agreed to by the Company, New Falcon or such non-management partners; PROVIDED no such modification shall result in such payment or distribution being made in either a larger amount or at an earlier date than as provided in Article 9 of the New FHGLP Partnership Agreement as in effect on the Issue Date); and (xi) the distribution under the FHGLP 1993 Incentive Performance Plan, as amended, of amounts in connection with the TCI Transaction. PROVIDED, that in the case of each of clauses (i) through (xi), no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof. In determining the amount of Restricted Payments permissible under this covenant, the amounts expended pursuant to subparagraphs (ii), (v), (viii) and (ix) of the immediately preceding paragraph shall be included as Restricted Payments. The amount of any non-cash Restricted Payment shall be deemed to be equal to the Fair Market Value thereof at the date of the making of such Restricted Payment. LIMITATION ON INVESTMENTS IN UNRESTRICTED SUBSIDIARIES AND AFFILIATES The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, (i) make any Investment (other than Permitted Investments) or (ii) allow any Restricted Subsidiary to become an Unrestricted Subsidiary (a "redesignation of a Restricted Subsidiary"), in each case unless (a) no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence of such Investment or such redesignation of a Restricted Subsidiary and (b) after giving effect thereto, the Cash Flow Ratio shall be less than or equal to 9 to 1. The foregoing provisions of this covenant shall not prohibit (i) any renewal or reclassification of any Investment existing on the Issue Date or (ii) trade credit extended on usual and customary terms in the ordinary course of business. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Company or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Issue Date in the Bank Credit Agreement, the Indenture or any other agreements in effect on the Issue Date, and any modifications, extensions, refinancings, renewals, restructurings, substitutions or replacements of such agreements; PROVIDED that the encumbrances and restrictions in any such modifications, extensions, refinancings, renewals, restructurings, substitutions or replacements (a) do not prevent the Company or 145 any of its Restricted Subsidiaries from paying interest on the Debentures and (b) will be no more restrictive in any material respect than encumbrances and restrictions which could be obtained by a Person comparable to the Company or such Restricted Subsidiary under then prevailing market conditions; or (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that (1) is a lease, license, conveyance or contract or similar property or asset or (2) is a cable television franchise or other governmental license or authorization, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary; (v) with respect to the Company or a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, the Company or such Restricted Subsidiary; or (vi) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction applies only in the event of a payment default or a default with respect to a financial covenant contained in such Indebtedness or agreement, (B) the encumbrance or restriction is not materially more disadvantageous to the Holders than is customary in comparable financings (as determined by the Company) and (C) the Company determines that any such encumbrance or restriction will not materially affect the Company's ability to make principal or interest payments on the Debentures. Nothing contained in this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2) restricting the sale or other disposition of property or assets of the Company or any of its Restricted Subsidiaries that secure Indebtedness of the Company or any of its Restricted Subsidiaries. LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES The Company will not permit any Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU with or subordinate in right of payment to the Debentures ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Debentures by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; PROVIDED that this paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not Incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the Debentures, then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the Debentures, then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Debentures. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, 146 exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's and each Restricted Subsidiary's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. TENDER AND REDEMPTION OF THE NOTES FHGLP will, as promptly as reasonably practicable, but in any event within 45 days after the Issue Date, offer to each holder of Notes to purchase all of the outstanding Notes held by such holder. In addition, prior to October 15, 1998, the Company will redeem any Notes outstanding on such date in accordance with the provisions of the Notes Indenture. TRANSACTIONS WITH AFFILIATES The Company will not, and will not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to or purchase any property or assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, an Affiliate of the Company that is not a Restricted Subsidiary (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, a resolution of the Board of Directors set forth in an Officers' Certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $25.0 million (other than any transaction related to or arising out of the sale or exchange of cable television systems between the Company or any of its Restricted Subsidiaries and (i) TCI or any of its Affiliates, (ii) Enstar Communications Corporation and its Subsidiaries or (iii) Falcon or any of its Affiliates, an opinion as to the fairness to the Holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. This provision shall not apply to Restricted Payments or other distributions permitted under the covenant described under "--Limitation on Restricted Payments." In addition, this provision shall not apply to: (i) customary directors' fees, indemnification and similar arrangements, consulting fees, employee salaries, bonuses, or employment agreements, compensation or employee benefit arrangements, and incentive arrangements with any officer, director or employee of the Company entered into in the ordinary course of business (including customary benefits thereunder) and payments under any indemnification arrangements permitted by applicable law, (ii) the Contribution Agreement, the Partnership Agreement or the partnership agreement of New Falcon, including any amendments or extensions thereof that do not otherwise violate any other covenant set forth in the Indenture, and any transactions undertaken or to be undertaken pursuant to any of such agreements, or pursuant to any other contractual obligations in existence on the Issue Date (as in effect on the Issue Date), (iii) the issue and sale by the Company to its partners or stockholders of Capital Stock (other than Redeemable Capital Stock), (iv) loans and advances to officers, directors and employees of the Company and the Restricted Subsidiaries in the ordinary course of business, (v) customary commercial banking, investment banking, underwriting, placement agent or financial advisory fees paid in connection with services rendered to the Company and its Subsidiaries in the ordinary course, (vi) the Incurrence of intercompany Indebtedness permitted pursuant to clause (iv) under the definition of "Permitted Indebtedness" set forth under "Covenants--Limitation on Indebtedness," (vii) the pledge of Capital Stock of Unrestricted Subsidiaries to support the Indebtedness thereof and (viii) programming agreements, marketing and promotional agreements and other billing services, equipment agreements and agreements for 147 other goods and services related to the Company's business entered into between TCI or its Affiliates and the Company or any Subsidiary of the Company. LIMITATION ON LIENS The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind to secure Indebtedness of the Company, except for Permitted Liens, on or with respect to any of its property or assets, whether owned at the Issue Date or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (x) in the case of any Lien securing Indebtedness of the Company that is subordinated in right of payment to the Debentures, the Debentures are secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien and (y) in the case of any other Lien securing Indebtedness of the Company that is PARI PASSU in right of payment with the Debentures, the Debentures are equally and ratably secured. MERGERS The Indenture provides that the Company may not consolidate or merge with, or transfer all or substantially all of its assets to, any Person unless (i) the successor is organized under the laws of the United States or any state thereof or the District of Columbia, (ii) the successor assumes all the obligations of the Company under the Debentures, the Indenture and the Registration Rights Agreement, (iii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing, and (iv) immediately after giving effect to such transaction, the successor could incur at least $1.00 of additional Indebtedness under the covenant described under "--Limitation on Indebtedness" above; PROVIDED that a pledge pursuant to the Bank Credit Agreement or the New Credit Facility by the Company of its partnership interests in the Owned Subsidiaries shall not be deemed to constitute a transfer of all or substantially all of the Company's assets for purposes of this covenant. Notwithstanding the foregoing limitations, (a) in connection with the consummation of the TCI Transaction and FHGLP's transfer of all or substantially all its assets to New Falcon, New Falcon shall be substituted for FHGLP as an obligor under the Debentures and the Indenture and thereupon FHGLP shall be released and discharged from any further obligation or liability with respect to the Debentures and the Indenture, and (b) in connection with the subsequent transfer by New Falcon of all or substantially all of its assets to New Falcon II in connection with the TCI Transaction, New Falcon shall remain as an obligor under the Debentures and the Indentures and New Falcon II shall have no obligation to assume or otherwise be liable for any of the obligations of New Falcon under the Debentures and the Indentures. LIMITATION ON ASSET SALES FHGLP will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Company or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received consists of cash or Temporary Cash Investments or the assumption of senior Indebtedness of the Company or Indebtedness of a Restricted Subsidiary, PROVIDED that the Company or such Restricted Subsidiary is irrevocably released from all liability under such Indebtedness. In the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Issue Date in any period of 12 consecutive months exceed 15% of Operating Cash Flow of the Restricted Group (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of the Company and its Subsidiaries has been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant), then the Company shall or shall cause the relevant Restricted Subsidiary to (i) within twelve months after the date Net Cash Proceeds so received exceed 15% of such Operating Cash Flow (the "Application Period") (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay 148 senior Indebtedness of the Company, or any Restricted Subsidiary providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement (the "Contract Period")), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the Application Period or the Contract Period, as applicable, referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraph of this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this "Limitation on Asset Sales" covenant totals at least $10.0 million, the Issuers must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate principal amount or aggregate Accreted Value, as applicable, of Debentures equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount thereof in the case of Senior Debentures and a purchase price equal to 100% of the Accreted Value thereof in the case of Senior Discount Debentures, plus, in each case, accrued interest (if any) to the date of payment. LIMITATIONS ON ACTIVITIES OF FFC FFC will not hold any material assets, become liable for any obligations or engage in any business activities; PROVIDED that FFC may be a co-obligor of the Debentures pursuant to the terms of the Indenture and may engage in any activities directly related thereto or necessary in connection therewith. COMMISSION REPORTS AND REPORTS TO HOLDERS Whether or not the Issuers are then required to file reports with the Commission, the Issuers shall file with the Commission all such reports and other information as would be required to be filed with the Commission by Sections 13(a) or 15(d) under the Exchange Act if it were subject thereto, PROVIDED that, if filing such documents by the Issuers with the Commission is not permitted under the Exchange Act, the Issuers shall provide such documents to the Trustee and upon written request supply copies of such documents to any prospective Holder. The Issuers shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. REPURCHASE OF DEBENTURES UPON A CHANGE OF CONTROL The Issuers must commence, within 30 days of the occurrence of a Change of Control, and consummate an Offer to Purchase for all Debentures then outstanding, at a purchase price equal to 101% of the principal amount thereof in the case of Senior Debentures, and 101% of the Accreted Value thereof in the case of Senior Discount Debentures, in each case plus accrued interest (if any) to the Payment Date. There can be no assurance that the Issuers will have sufficient funds available at the time of any Change of Control to make any debt payment (including repurchases of Debentures) required by the foregoing covenant (as well as under covenants that may be contained in other securities of the Issuers which might be outstanding at the time). The above covenant requiring the Issuers to repurchase the 149 Debentures will, unless consents are obtained, require the Issuers to repay all indebtedness then outstanding which by its terms would prohibit such Debenture repurchase, including indebtedness outstanding under the Bank Credit Agreement, the New Credit Facility and the Debentures, either prior to or concurrently with such Debenture repurchase. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Company. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of the holders of Debentures to require the Company to repurchase such Debentures as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its subsidiaries to another party may be uncertain. The Issuers are not required to make an Offer to Purchase pursuant to this covenant if a third party makes an Offer to Purchase in compliance with this covenant and repurchases all Debentures validly tendered and not withdrawn under such Offer to Purchase. EVENTS OF DEFAULT The following are defined as "Events of Default" in the Indenture: (i) default in the payment of principal of or premium, if any, on the Debentures when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (ii) default in the payment of interest on any Debenture when the same becomes due and payable, and such default continues for a period of 30 days, (iii) default in the performance or breach of the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the assets of the Company or limitations on the activities of FFC or the failure to make or consummate an Offer to Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of Debentures upon a Change of Control" covenant; (iv) the Issuers default in the performance of or breach any other covenant or agreement in the Indenture or under the Debentures (other than a default specified in clause (i), (ii) or (iii) above) and such default or breach continues for a period of 30 days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount of the outstanding Senior Debentures or in Accreted Value of the outstanding Senior Discount Debentures, as the case may be; (v) default by the Company or any Significant Subsidiary in the payment when due at maturity of indebtedness for borrowed money in excess of $25.0 million (individually or in the aggregate), and such defaulted payment shall not have been made, waived, or extended within 30 days of such payment default; (vi) the acceleration of the maturity of any indebtedness for borrowed money issued under an indenture or other instrument of the Company or any Significant Subsidiary in excess of $25.0 million (individually or in the aggregate), and such indebtedness shall not have been discharged in full or such acceleration shall not have been rescinded or annulled within 30 days of such acceleration; (vii) the entry of a final judgment or order (not subject to appeal) for the payment of money in excess of $25.0 million (individually or in the aggregate) (net of any amounts covered by reputable and creditworthy insurance companies) against the Company or any Significant Subsidiary which remains undischarged or unstayed for a period of 60 days after the date on which the right to appeal such final judgment or order has expired; (viii) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (ix) the Company or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or 150 taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors. If an Event of Default (other than as specified in clause (viii) or (ix)) occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Senior Debentures or Senior Discount Debentures, as the case may be, may, and the Trustee, upon the request of the holders of not less than 25% in aggregate principal amount of the Senior Debentures or Senior Discount Debentures, as the case may be, outstanding, shall, by notice in writing to the Company (and to the Trustee if declaration is made by the holders) declare the entire unpaid principal or Accreted Value of, as applicable, premium, if any, and accrued interest on, all such Debentures to be due and payable immediately. If an Event of Default specified in clause (viii) or (ix) above occurs and is continuing, then all unpaid principal or Accreted Value of, as applicable, premium, if any, and accrued interest on, all the Debentures then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Trustee may withhold notice to the Holders of any Default or Event of Default (except in payment of principal of, or premium, if any, or interest on, the Debentures) if the Trustee considers it in the interest of the holders of the Debentures to do so. The Indenture provides that at any time after a declaration of acceleration, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in principal amount of the outstanding Senior Debentures or Senior Discount Debentures, as the case may be, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if all Events of Default, other than the non-payment of the principal of, premium, if any, and interest on, all such Debentures that have become due solely by such declaration of acceleration, have been cured or waived and the rescission would not conflict with any judgment, order or decree of any court of competent jurisdiction. The Indenture provides that no Holder of any Debentures shall have any right to institute any proceeding, judicial or otherwise, with respect to such Indenture, or for the appointment for a receiver or trustee, or for any other remedy hereunder, unless (i) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (ii) the holders of not less than 25% in principal amount of the outstanding Senior Debentures or in Accreted Value of the outstanding Senior Discount Debentures, as the case may be, shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee; (iii) such holder or holders shall have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (iv) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such proceeding; and (v) no direction inconsistent with such written request shall have been given to the Trustee during such 60-day period by the holders of a majority in principal amount of such outstanding Senior Debentures or Senior Discount Debentures, as the case may be. The Indentures provides that the holders of not less than a majority in aggregate principal amount of the outstanding Senior Debentures or Senior Discount Debentures, as the case may be, shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (a) such direction shall not be in conflict with any rule of law or with such respective Indenture or expose the Trustee to personal liability; and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. The Indenture provides that the holders of not less than a majority in aggregate principal amount of the outstanding Senior Debentures or Senior Discount Debentures, as the case may be, may on behalf of the holders of such Debentures waive any past default thereunder and its consequences, except a default in 151 the payment of the principal of, premium, if any, or interest on any Debentures, or in respect of a covenant or provision of such Indenture which cannot be modified or amended without the consent of the holder of each outstanding Debenture affected. The Issuers are required to deliver to the Trustee annually, on or before a date that is not more than 90 days after the end of each fiscal year, an Officer's Certificate stating whether or not the officer signing such certificate knows of any Default or Event of Default that has occurred. If such officer is aware of a Default or an Event of Default, such certificate will specify each such Default or Event of Default and the nature and status thereof. The Issuers also are obligated to notify the Trustee of any Default or Event of Default in the performance of any covenants or agreements under the Indenture. DEFEASANCE DEFEASANCE AND DISCHARGE. The Indenture provides that the Issuers will be deemed to have paid and will be discharged from any and all obligations in respect of the Senior Debentures and Senior Discount Debentures on the 123rd day after the deposit referred to below, and the provisions of the Indenture will no longer be in effect with respect to the Senior Debentures and Senior Discount Debentures, as the case may be, (except for, among other matters, certain obligations to register the transfer or exchange of the Debentures, to replace stolen, lost or mutilated Debentures, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) the Issuers have deposited with the Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Senior Debentures and Senior Discount Debentures on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Debentures, (B) the Issuers have delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders of the Senior Debentures or the Senior Discount Debentures, as the case may be, will not recognize income, gain or loss for federal income tax purposes solely as a result of the Issuers' exercise of their option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law after the Issue Date such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving effect to such deposit on a PRO FORMA basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound and (D) if at such time such Debentures are listed on a national securities exchange, the Issuers have delivered to the Trustee an Opinion of Counsel to the effect that the Debentures will not be delisted as a result of such deposit, defeasance and discharge. DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The Indenture further provides that the provisions of the Indenture will no longer be in effect with respect to clauses (iii) and (iv) under "Mergers" and all the covenants described herein under "Covenants," clause (iii) under "Events of Default" with respect to such clauses (iii) and (iv) under "Mergers," clause (iv) under "Events of Default" with respect to such other covenants and clause (vi) under "Events of Default" shall be deemed not to be Events of Default upon, among other things, the deposit with the Trustee, in trust, of money and/or U.S. 152 Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Debentures on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Debentures, the satisfaction of the provisions described in clauses (B)(ii), (C), (D) and (E) of the preceding paragraph and the delivery by the Issuers to the Trustee of an Opinion of Counsel to the effect that, among other things, the Holders will not recognize income, gain or loss for federal income tax purposes solely as a result of such deposit and defeasance of certain covenants and Events of Default and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Issuers exercise their option to omit compliance with certain covenants and provisions of the Indenture with respect to the Debentures as described in the immediately preceding paragraph and the Debentures are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on the Debentures at the time of their Stated Maturity but may not be sufficient to pay amounts due on the Debentures at the time of the acceleration resulting from such Event of Default. However, the Issuers will remain liable for such payments. MODIFICATIONS AND AMENDMENTS The Indenture provides that the Issuers and the Trustee may, without the consent of holders of the Senior Debentures or Senior Discount Debentures, as the case may be, amend the Indenture or the Debentures or supplement the Indenture for certain specified purposes, including providing or making any other change that does not materially and adversely affect the rights of any Holder. Modifications and amendments of the Indenture may be made by the Issuer and the Trustee with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding Senior Debentures and Senior Discount Debentures; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the holder of each outstanding Debenture affected thereby: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Debenture or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which any Debenture or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (ii) reduce the percentage of the outstanding Senior Debentures or Senior Discount Debentures, as the case may be, the consent of whose holders is required to modify or amend the Indenture or the consent of whose holders is required for any waiver of compliance with certain provisions of the Indenture or certain defaults thereunder and their consequences provided for in the Indenture; (iii) modify any of the provisions of the Indenture requiring the consent of holders or relating to the waiver of past defaults or relating to the waiver of certain covenants, except to increase any such percentage of outstanding Senior Debentures or Senior Discount Debentures, as the case may be, required for such actions or to provide that certain other provisions of the Indentures cannot be modified or waived without the consent of the holder of each Debenture affected thereby. NO PERSONAL LIABILITY OF PARTNERS, EQUITYHOLDERS, DIRECTORS, OFFICERS OR EMPLOYEES The Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the Debentures, or for the performance of any obligation contained in the Indentures or the Debentures, or for any claim based on, in respect of, or by reason of, such obligations, shall be had against any past, present or future partner, equityholder, director, officer, employee or controlling person, as such, of the Issuers or any successor. Each holder of the Debentures by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Debentures. 153 BOOK-ENTRY; DELIVERY AND FORM The certificates representing the Debentures will be issued in fully registered form without interest coupons. Debentures sold in offshore transactions in reliance on Regulation S under the Securities Act will initially be represented by one or more permanent global Debentures in definitive, fully registered form without interest coupons (each a "Regulation S Global Debenture") and will be deposited with the Trustee as custodian for, and registered in the name of a nominee of, DTC for the accounts of Euroclear and Cedel Bank. Prior to the 40th day after the Closing Date, beneficial interests in a Regulation S Global Debenture may only be held through Euroclear or Cedel Bank, and any resale or transfer of such interests to U.S. persons shall not be permitted during such period unless such resale or transfer is made pursuant to Rule 144A or Regulation S. Debentures sold in reliance on Rule 144A will be represented by one or more permanent global Debentures in definitive, fully registered form without interest coupons (each a "Restricted Global Debenture"; and together with the Regulation S Global Debenture, the "Global Debentures") and will be deposited with the Trustee as custodian for, and registered in the name of a nominee of, DTC. Each Global Debenture (and any Debentures issued for exchange therefor) will be subject to certain restrictions on transfer set forth therein as described under "Transfer Restrictions." Debentures originally purchased by or transferred to Institutional Accredited Investors who are not qualified institutional buyers ("Non-Global Purchasers") will be in registered form without interest coupons ("Certificated Debentures"). Upon the transfer of Certificated Debentures initially issued to a Non-Global Purchaser to a qualified institutional buyer or in accordance with Regulation S, such Certificated Debentures will, unless the applicable Restricted Global Debenture has previously been exchanged in whole for Certificated Debentures, be exchanged for an interest in such Restricted Global Debenture. For a description of the restrictions on the transfer of Certificated Debentures, see "Transfer Restrictions." Ownership of beneficial interests in a Global Debenture will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in a Global Debenture will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Qualified institutional buyers may hold their interests in a Restricted Global Debenture directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. Investors may hold their interests in a Regulation S Global Debenture directly through Cedel Bank or Euroclear, if they are participants in such systems, or indirectly through organizations that are participants in such system. On or after the 40th day following the Closing Date, investors may also hold such interests through organizations other than Cedel Bank or Euroclear that are participants in the DTC system. Cedel Bank and Euroclear will hold interests in the Regulation S Global Debentures on behalf of their participants through DTC. So long as DTC, or its nominee, is the registered owner or holder of a Global Debenture, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Debentures represented by such Global Debenture for all purposes under the Indenture and the Debentures. No beneficial owner of an interest in a Global Debenture will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture and, if applicable, those of Euroclear and Cedel Bank. Payments of the principal of, and interest on, a Global Debenture will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Issuers, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments 154 made on account of beneficial ownership interests in a Global Debenture or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Issuers expect that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Debenture, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Debenture as shown on the records of DTC or its nominee. The Issuers also expect that payments by participants to owners of beneficial interests in such Global Debenture held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. Transfers between participants in Euroclear and Cedel Bank will be effected in the ordinary way in accordance with their respective rules and operating procedures. The Issuers expect that DTC will take any action permitted to be taken by a holder of Debentures (including the presentation of Debentures for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a Global Debenture is credited and only in respect of such portion of the aggregate principal amount of Debentures as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Debentures, DTC will exchange the applicable Global Debenture for Certificated Debentures, which it will distribute to its participants and which may be legended as set forth under the heading "Transfer Restrictions." The Issuers understand that: DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing procedures in order to facilitate transfers of interests in a Global Debenture among participants of DTC, Euroclear and Cedel Bank, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuers nor the Trustee will have any responsibility for the performance by DTC, Euroclear or Cedel Bank or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. If DTC is at any time unwilling or unable to continue as a depositary for the Global Debentures and a successor depositary is not appointed by the Issuers within 90 days, the Issuers will issue Certificated Debentures, which may bear the legend referred to under "Transfer Restrictions," in exchange for the Global Debentures. Holders of an interest in a Global Debenture may receive Certificated Debentures, which may bear the legend referred to under "Transfer Restrictions," in accordance with the DTC's rules and procedures in addition to those provided for under the Indenture. 155 FEDERAL INCOME TAX CONSIDERATIONS GENERAL The following is a summary of the material United States federal income tax consequences of the purchase, ownership and disposition of the Debentures, but is not purported to be a complete analysis of all potential tax effects. This summary is based upon the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations thereunder, published rulings and court decisions, all as in effect and existing on the date hereof and all of which are subject to change at any time, which change may be retroactive. Unless otherwise specifically noted, this summary applies only to those persons who are the initial Holders of Debentures, who acquired the Debentures for cash at the issue price as defined below and who hold Debentures as capital assets, and does not address the tax consequences to taxpayers who are subject to special rules (such as financial institutions, tax-exempt organizations, insurance companies, S corporations, regulated investment companies, real estate investment trusts, broker-dealers, taxpayers subject to the alternative minimum tax and persons that will hold the Debentures as part of a position in a "straddle" or as part of a "hedging" or "conversion" transaction) or aspects of federal income taxation that might be relevant to a prospective investor based upon such investor's particular tax situation. Accordingly, prospective purchasers of Debentures should consult their own tax advisors with respect to the particular consequences to them of the purchase, ownership and disposition of the Debentures, including the applicability of any state or local laws to which they may be subject, as well as with respect to the possible effects of changes in federal and other tax laws. EFFECT OF EXCHANGE OF OLD SENIOR DISCOUNT DEBENTURES FOR SENIOR DISCOUNT EXCHANGE DEBENTURES The Issuers believe that the exchange of Old Senior Discount Debentures for Senior Discount Exchange Debentures pursuant to the Exchange Offer will not be treated as an "exchange" for federal income tax purposes because the Senior Discount Exchange Debentures will not be considered to differ materially in kind or extent from the Old Senior Discount Debentures. Rather, the Senior Discount Exchange Debentures received by a holder will be treated as a continuation of the Old Senior Discount Debentures in the hands of such holder. As a result, holders will not recognize any taxable gain or loss or any interest income as a result of exchanging Old Senior Discount Debentures for Senior Discount Exchange Debentures pursuant to the Exchange Offer, the holding period of the Senior Discount Exchange Debentures will include the holding period of the Old Senior Discount Debentures, and the basis of the Senior Discount Exchange Debentures will equal the basis of the Old Senior Discount Debentures immediately before the exchange. UNITED STATES HOLDERS The following is a general discussion of certain United States federal income tax consequences of the ownership and sale or other disposition of the Debentures by a Holder that, for United States federal income tax purposes, is a "United States person". For purposes of this discussion, a "United States person" means a citizen or individual resident (as determined for U.S. federal income tax purposes) of the United States; a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof; an estate the income of which is includible in gross income for U.S. federal income tax purposes, regardless of its source; or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. Resident alien individuals will be subject to United States federal income tax with respect to the Debentures as if they were United States citizens. 156 TAXABLE INTEREST Holders of the Senior Debentures will be taxed at ordinary income tax rates on interest received during the taxable year in accordance with such Holders' regular method of accounting for federal income tax purposes. ORIGINAL ISSUE DISCOUNT Because the Senior Discount Debentures are being issued at a discount from their "stated redemption price at maturity," they will bear original issue discount ("OID") for federal income tax purposes. For federal income tax purposes, OID on a Senior Discount Debenture is the excess of the stated redemption price at maturity of the Senior Discount Debenture over its "issue price." The issue price of the Senior Discount Debentures will be the price paid by the first purchaser, including the aggregate payments made by the purchaser under the purchase agreement (including modifications thereof). For purposes of this discussion, it is assumed that all initial holders will purchase their Senior Discount Debentures at the issue price. The stated redemption price at maturity of a Senior Discount Debenture will be the sum of all payments to be made on such Senior Discount Debenture, including all stated interest payments, other than payments of "qualified stated interest." Qualified stated interest is stated interest that is unconditionally payable at least annually at a single fixed rate that appropriately takes into account the length of the interval between payments. Because there will be no required payment of interest on the Senior Discount Debentures (assuming there has been no election by the Issuers to start the earlier accrual of cash interest) until October 15, 2003, none of the interest payments on the Senior Discount Debentures will constitute qualified stated interest. Because the stated redemption price at maturity of the Senior Discount Debentures will exceed their issue price by more than a DE MINIMIS amount, each Senior Discount Debenture will bear OID in an amount equal to the excess of (i) the sum of its principal amount and all stated interest payments over (ii) its issue price. A Holder will be required to include OID in income periodically over the term of a Senior Discount Debenture before receipt of the cash or other payment attributable to such income, regardless of the Holder's method of tax accounting. The amount of OID required to be included in a Holder's gross income for any taxable year is the sum of the "daily portions" of OID with respect to the Senior Discount Debenture for each day during the taxable year (or portion of the taxable year) during which such Holder holds the Senior Discount Debenture. In general, the includible amount is computed using the "constant yield method". Under the constant yield method, the daily portion is determined by allocating to each day of any "accrual period" within a taxable year a pro rata portion of an amount equal to the excess of (i) the product of the "adjusted issue price" of the debt instrument at the beginning of the accrual period and the "yield-to-maturity" of the debt instrument, over (ii) the total amounts payable as interest on the debt instrument during that accrual period. For purposes of computing OID, the Company will use six-month accrual periods that end on the days in the calendar year corresponding to the maturity date of the Senior Discount Debentures and the date six months prior to such maturity date, with the exception of an initial short accrual period. A Holder is permitted to use different accrual periods, provided that each accrual period is no longer than one year, and each scheduled payment of interest or principal occurs on either the first or last day of an accrual period. The adjusted issue price of a debt instrument at the beginning of any accrual period is the issue price of the debt instrument increased by the amount of OID previously includible in the gross income of the Holder, and decreased by any payments previously made to the Holder on the debt instrument. The original yield-to-maturity is the discount rate that, when used in computing the present value of all payments of principal and interest to be made on a debt instrument, produces an amount equal to the issue price of the debt instrument. The Treasury Regulations explain that (i) if a debt instrument provides for an alternative payment schedule or schedules where the timing and amount of the payments that comprise each schedule are 157 known as of the issue date, and (ii) if any particular payment schedule for a debt instrument is significantly more likely than not to occur, the yield and maturity of the debt instrument are to be computed by assuming that payments will be made according to that schedule. Accordingly, a prepayment assumption would apply (that is, the Company would be deemed to exercise its option to redeem the Senior Discount Debentures prior to their stated maturity date) only if the Company's exercise of its prepayment option would lower the yield-to-maturity of the instruments. Because the Company's exercise of its prepayment option would result in the same or a higher yield-to-maturity, depending upon the date of exercise, the Company believes that it would not be presumed under these rules to exercise its right to redeem the Debentures prior to their stated maturity date. However, if the Company does in fact exercise its prepayment option, then for purposes of the OID rules, a Senior Discount Debenture will be treated as retired and then reissued on the date of the Company's exercise of its prepayment option for an amount equal to the adjusted issue price on that date. In that event, another OID computation would have to be made with respect to the constructively issued new debt instrument. Under these rules and the stated payment schedule, Holders of Senior Discount Debentures will be required to include in gross income increasingly greater amounts of OID in each successive accrual period. A Holder's tax basis in a Senior Discount Debenture will be increased by the amount of any OID includible in the Holder's income under these rules and decreased by the amount of any payment to the Holder (including payments of stated interest) with respect to the Senior Discount Debenture. On any Interest Payment Date prior to April 15, 2003, the Company may elect to commence the accrual of cash interest on the Senior Discount Debentures, in which case cash interest will be payable on each Interest Payment Date thereafter. Under the OID rules, solely for purposes of determining the amount of OID that is includible in income by a Holder of a Senior Discount Debenture, it is presumed that the Company will exercise an option to pay cash interest early if such exercise would lower the yield-to-maturity of the Senior Discount Debenture. The Company believes that the exercise of its option to pay interest early would not lower the yield-to-maturity of the Senior Discount Debentures. Under the OID rules, therefore, the Company would be presumed not to exercise its option to pay interest early. However, if, contrary to that presumption, the Company exercises such option, then solely for purposes of the accrual of OID, the yield and maturity of the Senior Discount Debentures will be redetermined by treating the Senior Discount Debentures as reissued on such date for an amount equal to the adjusted issue price on that date. The Company is obligated to pay additional interest ("Additional Interest") to the Holders under certain circumstances described under "Description of the Debentures--General" and "--Registration Rights." No amount of Additional Interest is being included in computing the yield-to-maturity of the Senior Discount Debentures because it is assumed that the Company will take all steps reasonably necessary to avoid incurring the obligation to pay Additional Interest. However, if the Company becomes obligated to pay Additional Interest, then solely for purposes of the accrual of OID, the yield-to-maturity of the Senior Discount Debentures will be redetermined by treating the Debentures as reissued on the date the Company becomes obligated to pay Additional Interest for an amount equal to the adjusted issue price on that date. SALE, EXCHANGE OR REDEMPTION OF DEBENTURES Generally, a sale, exchange or redemption of Debentures will result in taxable gain or loss equal to the difference between the amount of cash or other property received and the Holder's adjusted tax basis in the Debenture. A Holder's adjusted tax basis for determining gain or loss on the sale or other disposition of a Debenture will initially equal the cost of the Debenture to such Holder, and will be increased by any amounts included in income as OID and decreased by the amount of any cash payments received by such Holder, except Additional Interest, regardless of whether such payments are denominated as principal or interest. Gain or loss upon a sale, exchange, or redemption of a Debenture will be capital gain or loss if the Debenture is held as a capital asset. 158 Individuals will generally be taxed on net capital gain at a maximum rate of (i) 28% for property held for 18 months or less but more than one year, (ii) 20% for property held more than 18 months, and (iii) 18% for property acquired after December 31, 2000 and held for more than five years. Special rules (and generally lower maximum rates) apply to individuals in lower tax brackets. Neither an exchange of the Debentures for Exchange Debentures of the Company with terms identical to those of the Debentures, nor the filing of a registration statement with respect to the resale of the Debentures should be a taxable event to the Holders of the Debentures, and Holders should not recognize any taxable gain or loss or any interest income as a result of such an exchange or such a filing. BACKUP WITHHOLDING AND INFORMATION REPORTING Under current United States federal income tax law, information reporting requirements apply to interest (including OID) paid to, and to the proceeds of sales or other dispositions before maturity by, certain non-corporate persons. In addition, a 31% backup withholding tax applies if a non-corporate person (i) fails to furnish such person's Taxpayer Identification Number ("TIN") (which, for an individual, is his or her Social Security Number) to the payor in the manner required, (ii) furnishes an incorrect TIN and the payor is so notified by the Internal Revenue Service (the "Service"), (iii) is notified by the Service that such person has failed properly to report payments of interest and dividends, or (iv) in certain circumstances, fails to certify, under penalties of perjury, that such person has not been notified by the Service that such person is subject to backup withholding for failure properly to report interest and dividend payments. Backup withholding does not apply to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. Backup withholding tax is not an additional tax. Rather, any amounts withheld from a payment to a person under the backup withholding rules are allowed as a refund or a credit against such person's United States federal income tax, provided that the required information is furnished to the Service. NON-UNITED STATES HOLDERS STATED INTEREST Interest paid (including OID) by the Company to any beneficial owner of a Debenture that is not a United States person ("Non-United States Holder") will not be subject to United States federal income or withholding tax if such interest is not effectively connected with the conduct of a trade or business within the United States by such Non-United States Holder and (a) such Non-United States Holder (i) does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company; (ii) is not a controlled foreign corporation with respect to which the Company is a "related person" within the meaning of the Code; and (iii) satisfies certain certification requirements or (b) such Non-United States Holder is entitled to the benefits of an income tax treaty under which the interest is exempt from United States withholding tax, and such Non-United States Holder provides a properly executed IRS Form 1001 claiming the exemption (or, after December 31, 1998, IRS Form W-8, which may require obtaining a Taxpayer Identification Number and making certain certifications). SALE, EXCHANGE OR RETIREMENT OF THE DEBENTURES A Non-United States Holder will generally not be subject to United States federal income tax on gain recognized on a sale, redemption, retirement at maturity or other disposition of a Debenture unless (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder or (ii) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Debenture as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other requirements are met. 159 FEDERAL ESTATE TAXES If interest on the Debentures is exempt from withholding of United States federal income tax under clause (a) of the rules described under "Stated Interest," the Debentures will not be included in the estate of a deceased Non-United States Holder for United States federal estate tax purposes. BACKUP WITHHOLDING AND INFORMATION REPORTING The Company will, where required, report to the holders of Debentures and the Internal Revenue Service the amount of any interest paid on the Debentures in each calendar year and the amounts of tax withheld, if any, with respect to such payments. In the case of payments of interest (including OID) to Non-United States Holders, Treasury Regulations provide that the 31% backup withholding tax and certain information reporting will not apply to such payment with respect to which either the requisite certification has been received or an exemption has otherwise been established; provided that neither the Company nor its payment agent has actual knowledge that the holder is a United States person or that the conditions of any other exemption are not in fact satisfied. Under the Treasury Regulations, these information reporting and backup withholding requirements will apply, however, to the gross proceeds paid to a Non-United States Holder on the disposition of the Debentures by or through a United States office of a United States or foreign broker, unless certain certification requirements are met or the holder otherwise establishes an exemption. Information reporting requirements, but not backup withholding, will also apply to a payment of the proceeds of a disposition of the Debentures by or through a foreign office of a United States broker or foreign broker with certain types of relationships to the United States unless the holder is an exempt recipient (as demonstrated through appropriate certification) or such broker has documentary evidence in its file that the holder of the Debentures is not a United States person and has no actual knowledge to the contrary and certain other conditions are met. Neither information reporting nor backup withholding generally will apply to a payment of the proceeds of a disposition of the Debentures by or through a foreign office of a foreign broker not subject to the preceding sentence. Backup withholding does not apply to payments made to certain exempt recipients, such as tax-exempt organizations. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against the Non-United States Holder's United States federal income tax liability, provided that the required information is furnished to the Service. Non-United States Holders are urged to consult their tax advisors with respect to the application of these final regulations. Recently, the Treasury Department has promulgated final regulations regarding the withholding and information reporting rules discussed above. In general, the proposed regulations do not significantly alter the substantive withholding and information requirements but unify current certification procedures and forms and clarify reliance standards. Under the final regulations, special rules apply which permit the shifting of primary responsibility for withholding to certain financial intermediaries acting on behalf of beneficial owners. The final regulations would generally be effective for payments made after December 31, 1998, subject to certain transition rules. 160 PLAN OF DISTRIBUTION Each Participating Broker-Dealer that receives Exchange Debentures for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Debentures. This Prospectus, as it may be amended or supplemented from time to time, may be used by any Participating Broker-Dealer subject to the prospectus delivery requirements of the Securities Act (other than an Excluded Participating Broker-Dealer). Until , 1998 (90 days after the commencement of the Exchange Offer), all dealers effecting transactions in the Exchange Debentures may be required to deliver a prospectus. The Issuers will not receive any proceeds from any sales of the Exchange Debentures by Participating Broker-Dealers. Exchange Debentures received by Participating Broker-Dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the- counter market, in negotiated transactions, through the writing of options on the Exchange Debentures or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such Participating Broker-Dealer and/or the purchasers of any such Exchange Debentures. Any Participating Broker-Dealer that resells the Exchange Debentures that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Debentures may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Debentures and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Issuers will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any Participating Broker-Dealer that has provided the Issuers, pursuant to the Letter of Transmittal, with notice of its status as a Participating Broker-Dealer. The Debentures will not be listed on any stock exchange. The Debentures are designated for trading in the PORTAL market, and application is being made to list the Debentures on the Luxembourg Stock Exchange. However, there can be no assurance that an active trading market will exist for the Debentures or that such trading market will be liquid. See "Risk Factors--Lack of Public Market for the Debentures." Affiliates of BancAmerica Robertson Stephens, BancBoston Securities Inc., Chase Securities Inc., CIBC Oppenheimer, NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc. were lenders under the Bank Credit Agreement and are lenders under the New Credit Facility. See "Description of Certain Indebtedness." Lazard Freres & Co. LLC, one of the Placement Agents, has from time to time provided investment banking services to the Company and received customary compensation for such services. In connection with the TCI Transaction, Mr. Steven Rattner, a limited partner of FHGLP and a member of its Board of Representatives, will receive certain distributions. Mr. Rattner is Deputy Chief Executive of Lazard Freres & Co. LLC. 161 LEGAL MATTERS The validity of the Exchange Debentures will be passed upon by Dow, Lohnes & Albertson, PLLC, Washington, D.C. EXPERTS The consolidated financial statements of Falcon Holding Group, L.P. as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 and the balance sheet of Falcon Funding Corporation as of March 27, 1998 included in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The combined financial statements of TCI Falcon Systems as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997 have been included herein and in this Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION FHGLP has filed with the Commission a Registration Statement (of which this Prospectus is a part and which term shall encompass any amendments thereto) on Form S-4, pursuant to the Securities Act, with respect to the Exchange Debentures offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus does not contain all of the information set forth in the Registration Statement, and the exhibits and schedules thereto. For further information about the Issuers and the Debentures, reference is hereby made to the Registration Statement and to such exhibits and schedules. In addition, FHGLP files reports with the Commission and, as a result of the Exchange Offer, will be subject to the informational requirements of the Exchange Act. In addition, under the Indenture governing the Debentures, FHGLP is required to furnish to the Trustee and to registered holders of the Debentures audited annual consolidated financial statements, unaudited quarterly consolidated financial reports and certain other reports. The Registration Statement, the exhibits and schedules forming a part thereof and the reports and other information filed by FHGLP with the Commission pursuant to the informational requirements of the Exchange Act may be inspected without charge and copied upon payment of certain fees at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048, and Chicago Regional Office, Northwestern Atrium, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports and other information regarding registrants that file electronically with the Commission. 162 INDEX TO FINANCIAL STATEMENTS
PAGE --------- FALCON HOLDING GROUP, L.P. Report of Ernst & Young LLP, Independent Auditors........................................................ F-2 Consolidated Balance Sheets at December 31, 1996 and 1997................................................ F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997................................................................................................... F-4 Consolidated Statements of Partners' Deficit for each of the three years in the period ended December 31, 1997................................................................................................... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997................................................................................................... F-6 Notes to Consolidated Financial Statements............................................................... F-7 Condensed Consolidated Balance Sheet at March 31, 1998 (unaudited)....................................... F-33 Condensed Consolidated Statements of Operations for the three months ended March 31, 1997 and 1998 (unaudited)............................................................................................ F-34 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1998 (unaudited)............................................................................................ F-35 Notes to Condensed Consolidated Financial Statements (unaudited)......................................... F-36 TCI FALCON SYSTEMS Independent Auditors' Report............................................................................. F-38 Combined Balance Sheets at December 31, 1996 and 1997.................................................... F-39 Combined Statements of Operations and Parent's Investment for each of the three years in the period ended December 31, 1997...................................................................................... F-40 Combined Statements of Cash Flows for each of the three years in the period ended December 31, 1997...... F-41 Notes to Combined Financial Statements................................................................... F-42 Combined Balance Sheets at December 31, 1997 and March 31, 1998 (unaudited).............................. F-48 Combined Statements of Operations and Parent's Investment for the three months ended March 31, 1997 and 1998 (unaudited)....................................................................................... F-49 Combined Statements of Cash Flows for the three months ended March 31, 1997 and 1998 (unaudited)......... F-50 Notes to Combined Financial Statements (unaudited)....................................................... F-51 FALCON FUNDING CORPORATION Report of Ernst & Young LLP, Independent Auditors........................................................ F-55 Balance Sheet at March 27, 1998.......................................................................... F-56 Note to Balance Sheet.................................................................................... F-57
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Partners Falcon Holding Group, L.P. We have audited the accompanying consolidated balance sheets of Falcon Holding Group, L.P. as of December 31, 1996 and 1997, and the related consolidated statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Falcon Holding Group, L.P. at December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Los Angeles, California March 17, 1998 F-2 FALCON HOLDING GROUP, L.P. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1996 1997 ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents............................... $ 13,633 $ 13,917 Receivables: Trade, less allowance of $907,000 and $825,000 for possible losses..................................... 10,942 13,174 Affiliates............................................ 6,458 11,254 Other assets............................................ 10,555 14,576 Other investments....................................... 3,446 1,776 Property, plant and equipment, less accumulated depreciation and amortization......................... 309,128 324,559 Franchise cost, less accumulated amortization of $173,742,000 and $203,700,000......................... 256,461 222,281 Goodwill, less accumulated amortization of $12,454,000 and $18,531,000....................................... 72,956 66,879 Customer lists and other intangible costs, less accumulated amortization of $8,793,000 and $25,517,000........................................... 76,448 59,808 Deferred loan costs, less accumulated amortization of $5,755,000 and $7,144,000............................. 14,296 12,134 ------------ ------------ $ 774,323 $ 740,358 ------------ ------------ ------------ ------------ LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable........................................... $ 885,786 $ 911,221 Accounts payable........................................ 10,561 9,169 Accrued expenses........................................ 47,228 52,789 Customer deposits and prepayments....................... 1,627 1,452 Deferred income taxes................................... 10,301 7,553 Minority interest....................................... 193 354 Equity in losses of affiliated partnerships in excess of investment............................................ 3,224 3,202 ------------ ------------ TOTAL LIABILITIES......................................... 958,920 985,740 ------------ ------------ COMMITMENTS AND CONTINGENCIES REDEEMABLE PARTNERS' EQUITY............................... 271,902 171,373 ------------ ------------ PARTNERS' DEFICIT: General partner......................................... (12,591) (13,200) Limited partners........................................ (443,908) (403,555) ------------ ------------ TOTAL PARTNERS' DEFICIT................................... (456,499) (416,755) ------------ ------------ $ 774,323 $ 740,358 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-3 FALCON HOLDING GROUP, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1995 1996 1997 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) REVENUES.................................................. $ 151,208 $ 217,320 $ 255,886 ------------ ------------ ------------ EXPENSES: Service costs........................................... 41,626 60,302 75,643 General and administrative expenses..................... 30,026 36,878 46,437 Depreciation and amortization........................... 54,386 100,415 118,856 ------------ ------------ ------------ Total expenses........................................ 126,038 197,595 240,936 ------------ ------------ ------------ Operating income...................................... 25,170 19,725 14,950 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense........................................ (58,326) (72,641) (81,326) Interest income......................................... 549 1,039 2,189 Equity in net income (loss) of investee partnerships.... (5,705) (44) 443 Other income, net....................................... 13,077 814 885 Income tax benefit...................................... -- 1,122 2,021 ------------ ------------ ------------ NET LOSS.................................................. $ (25,235) $ (49,985) $ (60,838) ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-4 FALCON HOLDING GROUP, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
UNREALIZED GAIN ON AVAILABLE- GENERAL LIMITED FOR-SALE PARTNER PARTNERS SECURITIES TOTAL ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) PARTNERS' DEFICIT, January 1, 1995......................................... $ (11,839) $ (257,770) $ 12,851 $ (256,758) Acquisition of Falcon First, Inc...................... -- 61,268 -- 61,268 Reclassification to redeemable partners' equity....... -- (177,938) -- (177,938) Net loss for year..................................... (252) (24,983) -- (25,235) Sale of marketable securities......................... -- -- (12,133 ) (12,133) Unrealized loss on available-for-sale securities (included in other investments)..................... -- -- (885 ) (885) ------------ ------------ ------------ ------------ PARTNERS' DEFICIT, December 31, 1995....................................... (12,091) (399,423) (167 ) (411,681) Net loss for year..................................... (500) (49,485) -- (49,985) Sale of marketable securities......................... -- -- 167 167 Capital contribution.................................. -- 5,000 -- 5,000 ------------ ------------ ------------ ------------ PARTNERS' DEFICIT, December 31, 1996....................................... (12,591) (443,908) -- (456,499) Reclassification from redeemable partners' equity..... -- 100,529 -- 100,529 Net loss for year..................................... (609) (60,229) -- (60,838) Capital contribution.................................. -- 53 -- 53 ------------ ------------ ------------ ------------ PARTNERS' DEFICIT, December 31, 1997....................................... $ (13,200) $ (403,555) $ -- $ (416,755) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. F-5 FALCON HOLDING GROUP, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1996 1997 ----------- ----------- --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss................................................................... $ (25,235) $ (49,985) $ (60,838) Adjustments to reconcile net loss to net cash provided by operating activities: Payment-in-kind interest expense......................................... 27,127 26,580 20,444 Depreciation and amortization............................................ 54,386 100,415 118,856 Amortization of deferred loan costs...................................... 5,840 2,473 2,192 Gain on sale of securities............................................... (13,267) (2,264) -- Gain on casualty losses.................................................. -- -- (3,476) Equity in net losses of investee partnerships............................ 5,705 44 (443) Provision for losses on receivables, net of recoveries................... 3,076 2,417 5,714 Deferred income taxes.................................................... -- (2,684) (2,748) Other.................................................................... (17) 764 1,319 Increase (decrease) from changes in: Receivables................................................................ (348) (2,420) (9,703) Other assets............................................................... (1,269) (274) (4,021) Accounts payable........................................................... (214) 4,750 (1,357) Accrued expenses........................................................... (12,542) 10,246 13,773 Customer deposits and prepayments.......................................... (80) 569 (175) ----------- ----------- --------- Net cash provided by operating activities.................................. 43,162 90,631 79,537 ----------- ----------- --------- Cash flows from investing activities: Capital expenditures....................................................... (37,149) (57,668) (76,323) Proceeds from sale of available-for-sale securities........................ 13,487 9,502 -- Increase in intangible assets.............................................. (2,631) (4,847) (1,770) Acquisitions of cable television systems................................... -- (247,397) -- Cash acquired in connection with the acquisition of Falcon First, Inc........................................................ 2,655 -- -- Proceeds from sale of cable system......................................... -- 15,000 -- Other...................................................................... 964 1,163 1,806 ----------- ----------- --------- Net cash used in investing activities.................................... (22,674) (284,247) (76,287) ----------- ----------- --------- Cash flows from financing activities: Borrowings from notes payable.............................................. 408,707 700,533 37,500 Repayment of debt.......................................................... (418,573) (509,511) (40,722) Deferred loan costs........................................................ (6,320) (3,823) (29) Capital contributions...................................................... -- 5,000 93 Minority interest capital contributions.................................... 280 -- 192 ----------- ----------- --------- Net cash provided by (used in) financing activities...................... (15,906) 192,199 (2,966) ----------- ----------- --------- Increase (decrease) in cash and cash equivalents............................. 4,582 (1,417) 284 Cash and cash equivalents, at beginning of year.............................. 10,468 15,050 13,633 ----------- ----------- --------- Cash and cash equivalents, at end of year.................................... $ 15,050 $ 13,633 $ 13,917 ----------- ----------- --------- ----------- ----------- ---------
See accompanying notes to consolidated financial statements. F-6 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF ACCOUNTING POLICIES FORM OF PRESENTATION Falcon Holding Group, L.P., a Delaware limited partnership (the "Partnership" or "FHGLP"), owns and operates cable television systems serving small to medium-sized communities and the suburbs of certain cities in 23 states (the "Owned Systems") as of December 31, 1997. The Partnership also controls, holds varying equity interests in and manages certain other cable television systems for a fee (the "Affiliated Systems" and, together with the Owned Systems, the "Systems"). As of December 31, 1997, the Affiliated Systems operated cable television systems in 16 states. FHGLP is a limited partnership, the sole general partner of which is Falcon Holding Group, Inc., a California corporation ("FHGI"). The consolidated financial statements include the consolidated accounts of FHGLP, its subsidiary cable television operating partnerships and corporations (the "Owned Subsidiaries") and those operating partnerships' general partners, which are owned by FHGLP. The consolidated financial statements include the accounts of Enstar Communications Corporation, ("ECC"), a wholly-owned subsidiary of one of the operating partnerships, which is the general partner of the 15 limited partnerships operating under the name "Enstar" (the "Enstar Systems", which are Affiliated Systems). The consolidated financial statements also include the accounts of Enstar Finance Company, LLC ("EFC"), which ECC and the Partnership formed on June 6, 1997 in order to provide financing to certain of the Enstar limited partnerships. See Note 7. All significant inter-company accounts and transactions have been eliminated in consolidation. The consolidated financial statements do not give effect to any assets that the partners may have outside their interests in the Partnership, nor to any obligations, including income taxes, of the partners. On December 28, 1995, the Partnership completed the acquisition of all of the direct and indirect ownership interests in Falcon First, Inc. ("Falcon First") which it did not previously own. Falcon First was previously managed by the Partnership and, as such, classified as an "Affiliated Partnership" in prior periods. Due to the proximity of the acquisition date to December 31, 1995, no operating results were included for Falcon First for 1995, except for the management fees received by FHGLP pursuant to its management agreement with Falcon First. On July 12, 1996, the Partnership acquired the assets of Falcon Cable Systems Company ("FCSC"), an Affiliated Partnership. The results of operations of these Systems have been included in the consolidated financial statements of FHGLP from July 12, 1996. Management fees and reimbursed expenses received by the Partnership from FCSC for the period of January 1, 1996 through July 11, 1996 are also included in the consolidated financial statements and have not been eliminated in consolidation. See Note 3. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Partnership considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 1996 and 1997 included $4.1 million and $4.5 million of investments in commercial paper and short-term investment funds of major financial institutions. INVESTMENTS IN AFFILIATED PARTNERSHIPS The Partnership is the general partner of certain entities, which in turn act as general partner of related partnerships which own, directly or through subsidiaries, cable television systems managed by the Partnership (the "Affiliated Partnerships"). The Partnership's effective ownership interests in the Affiliated F-7 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SUMMARY OF ACCOUNTING POLICIES (CONTINUED) Partnerships are less than one percent. The Affiliated Partnerships are accounted for using the equity method of accounting. Equity in net losses are recorded to the extent of the investments in and advances to the partnerships plus obligations for which the Partnership, as general partner, is responsible. The liabilities of the Affiliated Partnerships, other than amounts due the Partnership, principally consist of debt for borrowed money and related accrued interest. OTHER INVESTMENTS Certain investments in which the Partnership exercises significant influence over the operations of the investee are carried on the equity method. Other investments are carried at cost. PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION Property, plant and equipment are stated at cost. Direct costs associated with installations in homes not previously served by cable are capitalized as part of the distribution system, and reconnects are expensed as incurred. For financial reporting, depreciation and amortization is computed using the straight-line method over the following estimated useful lives.
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
FRANCHISE COST AND GOODWILL The excess of cost over the fair values of tangible assets and customer lists of cable television systems acquired represents the cost of franchises and goodwill. In addition, franchise cost includes capitalized costs incurred in obtaining new franchises and in the renewal of existing franchises. These costs are amortized using the straight-line method over the lives of the franchises, ranging up to 25 years (composite 12 year average). Goodwill is amortized over 20 years. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. CUSTOMER LISTS AND OTHER INTANGIBLE COSTS Customer lists and other intangible costs include customer lists, covenants not to compete and organization costs which are amortized using the straight-line method over two to five years. DEFERRED LOAN COSTS Costs related to borrowings are capitalized and amortized to interest expense over the life of the related loan. F-8 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SUMMARY OF ACCOUNTING POLICIES (CONTINUED) RECOVERABILITY OF ASSETS The Partnership assesses on an ongoing basis the recoverability of intangible assets (including goodwill) and capitalized plant assets based on estimates of future undiscounted cash flows compared to net book value. If the future undiscounted cash flow estimates were less than net book value, net book value would then be reduced to estimated fair value, which generally approximates discounted cash flows. The Partnership also evaluates the amortization periods of assets, including goodwill and other intangible assets, to determine whether events or circumstances warrant revised estimates of useful lives. REVENUE RECOGNITION Revenues from cable services are recognized as the services are provided. Management fees are recognized on the accrual basis based on a percentage of gross revenues of the respective cable television systems managed. DERIVATIVE FINANCIAL INSTRUMENTS As part of the Partnership's management of financial market risk and as required by certain covenants in its Amended and Restated Credit Agreement, the Partnership enters into various transactions that involve contracts and financial instruments with off-balance-sheet risk, including interest rate swap and interest rate cap agreements. The Partnership enters into these agreements in order to manage the interest-rate sensitivity associated with its variable-rate indebtedness. The differential to be paid or received in connection with interest rate swap and interest rate cap agreements is recognized as interest rates change and is charged or credited to interest expense over the life of the agreements. Gains or losses for early termination of those contracts are recognized as an adjustment to interest expense over the remaining portion of the original life of the terminated contract. INCOME TAXES The Partnership and its direct and indirect subsidiaries, except for Falcon First and ECC, are limited partnerships or limited liability companies and pay no income taxes as entities. All of the income, gains, losses, deductions and credits of the Partnership are passed through to its partners. Nominal taxes are assessed by certain state jurisdictions. The basis in the Partnership's assets and liabilities differs for financial and tax reporting purposes. At December 31, 1997, the book basis of the Partnership's net assets exceeded its tax basis by $58.8 million. Falcon First and ECC are corporations and are subject to federal and state income taxes, which have not been significant. Deferred taxes relate principally to the difference between book and tax basis of the cable television assets of Falcon First, partially offset by the tax effect of related net operating loss carryforwards. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1997 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-9 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--PARTNERSHIP MATTERS In connection with the acquisition of Falcon First, the Third Amended and Restated Partnership Agreement (the "Existing FHGLP Partnership Agreement") became effective on December 28, 1995. The Existing FHGLP Partnership Agreement provides for Class A, Class B and Class C partnership interests. At December 31, 1997, there were 6,237.05 Class A partnership units and 93,762.95 Class B partnership units. Class C partnership interests are generally not expressed in units but are carried at liquidation value. Income and losses of the Partnership are generally allocated to the General Partner and limited partners in proportion to the partnership interest held by each Partner. The Class C partnership interests have certain preferences with respect to the allocation of income and distributions of the Partnership. On August 1, 1996, the Partnership received $5.0 million from certain existing limited partners who purchased additional partnership interests, the proceeds of which were used to temporarily repay outstanding debt under the Amended and Restated Credit Agreement. These limited partners also entered into an option agreement to acquire additional partnership interests in the future for a purchase price of $10 million. Holders of Class A and B partnership units have voting rights in all partnership matters requiring a vote; the votes of the holder of Class C partnership interests are required for certain transactions, generally related to distributions. Class C partnership interests have a stated value of approximately $51.4 million which will increase at the annual rate of 8% from December 28, 1997 to December 27, 1999, 10% from December 28, 1999 to December 27, 2001, and 12% from December 28, 2001 until redemption. The Class C partnership interests must be redeemed by the Partnership in March 2004 at their then stated value. Class C partnership interests also have priority in liquidation over other partnership units in the amount of stated value. The Existing FHGLP Partnership Agreement provides for certain groups of holders of partnership units to have certain rights and priorities with respect to other holders of partnership units. Among these rights are stated obligations of the Partnership to redeem partnership units at fair value for Class A and B partnership units, or in the case of Class C partnership interests, as described above, at stated value. As more fully described below, partnership interests held by specified groups are subject to mandatory redemption and/or have the option to require redemption ("puts") of such partnership interests. As discussed in more detail below, these rights and priorities will be significantly revised and partially satisfied upon the closing of the TCI Transaction (as described below). Set forth below is a description of the rights and priorities contained in the Existing FHGLP Partnership Agreement. The following table sets forth the holdings and the estimated redemption rights of each of these groups of holders.
CLASS A CLASS B ESTIMATED PARTNERSHIP PARTNERSHIP REDEMPTION REDEMPTION VALUE AT UNITS UNITS RIGHTS DECEMBER 31, 1997 ----------- ----------- ------------ ------------------- Group I Partners.................................... -- 8,658.02 Put $ 17,446,000 Group II Partners................................... 1,368.13 36,748.96 Mandatory 76,809,000 Group III Partners.................................. -- 10,732.30 Put 21,627,000 Group IV Partner (Class B).......................... -- 2,043.33 Put 4,118,000 Group IV Partner (Class C).......................... -- -- Mandatory 51,373,000 ----------- ----------- ------------------- Redeemable Partners' Equity......................... 1,368.13 58,182.61 $ 171,373,000 ----------- ----------- ------------------- ----------- ----------- -------------------
F-10 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--PARTNERSHIP MATTERS (CONTINUED) The estimated redemption values at December 31, 1997 were based on management's estimate of the relative fair value of such interests under current market conditions. The actual redemption value of all partnership interests (other than Class C partnership interests) will generally be determined through negotiation or a third party appraisal mechanism at the time such units are put, and the appraisers will not be bound by historical estimates. Accordingly, such appraised valuations may be greater than or less than management's estimates and any such variations could be significant. The redemption value of the Class C partnership interests will generally be determined based on a formula due to the preferred status of such Class C interests. Group I holders have the option to require redemption of one-third of their partnership units at fair value effective September 1996; two-thirds of their partnership units effective September 1997; and all of their partnership units effective September 1998. The September 1996 and 1997 put rights were not exercised. Subject to certain conditions, the Partnership is required to redeem the Group II partnership units at fair value during the period July 1, 1998 through June 30, 1999. If Group I holders exercise their put rights (election is required to be made between December and March prior to the above effective dates), the Group II partnership units cannot be redeemed until the Group I redemption has been completed. The Group III partnership units must be redeemed concurrently with the redemption of the Group II partnership units unless the Group III holders exercise an option to not be so redeemed. If the Group III holders exercise their option not to be so redeemed, on the earlier of March 31, 2000 or approximately nine months after the Partnership's purchase of the Group II partnership units and for every two years thereafter, there will be a 90-day period during which the Partnership may elect to redeem the Group III partnership units and the Group III holders may elect to put their Group III partnership units (which redemption or put shall be effective within 180 days after the election to redeem or put, as applicable). The Class C partnership interests held by the Group IV holder may be repurchased by the Partnership at any time, and from time to time, at a price equal to the stated value thereof, and are subject to mandatory redemption at stated value in March 2004. The Group IV holder has the option to require redemption of its Class B partnership units at fair value at any time after June 30, 2004. Under certain circumstances, the Group IV holder may elect to share in the existing liquidity rights of the Group II holders. Certain of the Partnership's debt agreements (including the Amended and Restated Credit Agreement and the Notes) restrict the Partnership's ability to: (i) make distributions to fund the purchase of partnership units pursuant to the redemption provisions described above, (ii) incur indebtedness or issue debt securities in connection with such purchase, and (iii) sell a substantial amount of its assets. Absent the TCI Transaction discussed below, there can be no assurance that the Partnership would be able to satisfy the above obligations without a recapitalization of the Partnership and a renegotiation of its debt obligations. If the Partnership fails to purchase certain of the limited partnership interests within a specified period after the Partnership's purchase obligations arise, absent an alternative arrangement with the partners, liquidation of the Partnership's assets would be necessary. In the event of liquidation, the Partnership is required to distribute assets and/or the proceeds from liquidation first, to pay all debts and liabilities outstanding; second, to the holder of the Class C partnership interests; and finally, to holders of the Class A and Class B partnership interests in proportion to their respective percentage interests. In contemplation of the TCI Transaction, by agreement of the Group I, Group II, Group III and Group IV partners, the dates on which the partners may exercise certain put rights and the dates by which F-11 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--PARTNERSHIP MATTERS (CONTINUED) FHGLP is required to redeem certain partnership interests were tolled in accordance with the Contribution Agreement. The new dates are determined by adding to the original date the number of days in the period beginning on December 1, 1997 and ending ninety days after the earlier of December 31, 1998 or the date that the Contribution Agreement is terminated in accordance with its terms. As a result, assuming that the TCI Transaction has not closed and the Contribution Agreement is not terminated prior to December 31, 1998, the tolling period will be approximately sixteen months and the Partnership would not be required to purchase the partnership interests held by the Group I, Group II and Group III partners until the period of January 2000 to October 2000, with the Class C partnership interests held by the Group IV partner not becoming mandatorily redeemable until July 2005. If the Contribution Agreement is terminated prior to December 31, 1998, these new dates would be pushed forward accordingly and FHGLP may be required to redeem certain partnership interests earlier than the dates set forth above. Subject to certain customary exceptions, the Contribution Agreement may not be terminated without the consent of FHGLP prior to December 31, 1998. Upon completion of the TCI Transaction, the existing liquidity rights will be terminated and be replaced by certain new liquidity rights provided to the non-management limited partners in the new FHGLP Partnership Agreement. TCI TRANSACTION On December 30, 1997 FHGLP entered into a Contribution and Purchase Agreement (as it may be amended, the "Contribution Agreement") with Falcon Communications, L.P., a California limited partnership ("New Falcon"), TCI Falcon Holdings, LLC, a Delaware limited liability company ("TCI"), an affiliate of Tele-Communications, Inc., the existing partners of FHGLP and certain other persons (the transactions contemplated by the Contribution Agreement being referred to collectively as the "TCI Transaction"). The parties to the Contribution Agreement have agreed to consolidate under the ownership and control of New Falcon substantially all of the Systems and all of the TCI systems. The Systems to be contributed to New Falcon include the Systems owned by Falcon Video Communications, L.P. ("Falcon Video"), an Affiliated Partnership, which had revenues of $32.1 million for the year ended December 31, 1997. The contributed Systems will represent all of the Owned Systems and all of the Affiliated Systems currently under the control of FHGLP except for the Enstar Systems. The TCI systems will be contributed to New Falcon subject to $429.7 million of existing debt, which will be refinanced. The TCI systems, which had revenues of $119.5 million for the year ended December 31, 1997, are located in California, Oregon, Washington, Missouri and Alabama. Following completion of the TCI Transaction (the "Closing"), the TCI systems will be consolidated into and operated by the Owned Subsidiaries of the Partnership. F-12 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2--PARTNERSHIP MATTERS (CONTINUED) New Falcon was organized as a California limited partnership in October 1997. Concurrently with the execution of the Contribution Agreement, FHGLP and TCI entered into an Amended and Restated Agreement of Limited Partnership of New Falcon (the "New Falcon Partnership Agreement"). FHGLP will own, subject to possible adjustment pursuant to the Contribution Agreement, approximately 53% of the equity of New Falcon and will serve as the managing general partner of New Falcon. TCI will own, subject to possible adjustment pursuant to the Contribution Agreement, approximately 47% of the equity of New Falcon (which equity interest includes the purchase of interests in New Falcon by TCI from certain limited partners of FHGLP, as described below). FHGI will continue to serve as the sole general partner of FHGLP. As such, subject to certain governance provisions set forth in the New Falcon Partnership Agreement, FHGI and its senior management will manage the business and day-to-day operations of New Falcon. As a result of the TCI Transaction, it is contemplated that New Falcon will initially assume (subject to a subsequent assumption by New Falcon II, as described below) the rights and obligations of FHGLP under the indenture (the "Indenture") governing FHGLP's 11% Senior Subordinated Notes due 2003 (the "Notes"). Accordingly, New Falcon will be substituted for FHGLP as an obligor under the Notes (subject to such subsequent assumption by New Falcon II). As of December 31, 1997, the aggregate principal amount of the Notes outstanding was $282.2 million. In addition, New Falcon will assume certain other indebtedness of FHGLP and TCI. The TCI Transaction is conditioned upon New Falcon's obtaining new financing in an amount sufficient to refinance its then existing indebtedness to be assumed by New Falcon as a result of the TCI Transaction. The Contribution Agreement provides that immediately following the consummation of the TCI Transaction, New Falcon will contribute substantially all of its assets to Falcon Communications, LLC, a newly-formed limited liability company wholly-owned by New Falcon ("New Falcon II"), subject to certain indebtedness to be assumed by New Falcon II, including the Notes and the indebtedness resulting from New Falcon's new financing. Thus, New Falcon II will be substituted for New Falcon as the obligor under the Notes (which the Partnership expects to repurchase or redeem prior to October 15, 1998--See Note 7) and the new financing. Any of the Notes then outstanding (see Note 7) will be redeemed in full by FHGLP (or New Falcon II if the TCI Transaction has closed) prior to October 15, 1998 in accordance with the redemption provisions of the Indenture. Although there can be no assurances, the Partnership expects that it will receive the necessary approvals from its senior lenders to effect such redemption. The Notes are redeemable at the option of the obligor, in whole or in part, at any time on or after September 15, 1998, at 105.5% of the outstanding principal amount, plus accrued interest to the redemption date. As part of the TCI Transaction, FHGLP will redeem a specified portion of the partnership interests in FHGLP currently held by certain of the non-management limited partners of FHGLP (the "Redeemed Partners") in exchange for a portion of FHGLP's limited partnership interest in New Falcon (the "New Falcon Interests"). Following the redemption, TCI will purchase the New Falcon Interests from the Redeemed Partners for cash in the approximate aggregate amount of $154.7 million. The consummation of the TCI Transaction is also subject to, among other things, the satisfaction of customary closing conditions and the receipt of certain third-party or governmental approvals, including the consent of franchising authorities. Although there can be no assurance that such closing conditions will be satisfied, that the Partnership will be able to obtain new financing on acceptable terms or that the TCI F-13 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--PARTNERSHIP MATTERS (CONTINUED) Transaction will be consummated, management presently anticipates that the TCI Transaction will be completed in the third quarter of 1998. THE AMENDED PARTNERSHIP AGREEMENT OF FHGLP Concurrently with the closing of the TCI Transaction, the existing partners of the Partnership will enter into a Fourth Amended and Restated Agreement of Limited Partnership of Falcon Holding Group, L.P. (the "New FHGLP Partnership Agreement"), and two additional persons will be admitted to the Partnership as limited partners (by virtue of their contribution to the Partnership at the closing of their interests in Falcon Video). FHGI will remain the general partner of the Partnership. The New FHGLP Partnership Agreement will substantially alter the rights and preferences of the partnership interests held by the Group I, Group II, Group III and Group IV limited partners. Among other changes, the New FHGLP Partnership Agreement will (1) provide for only one class of limited partnership interests; (2) eliminate the existing repurchase/put and conversion rights that currently apply to the partnership interests held by the Group I, Group II, Group III and Group IV limited partners and substitute a right of certain partners under certain circumstances to require that the Partnership or New Falcon purchase their interests and a right of the Partnership or New Falcon to purchase those interests; and (3) substantially alter the existing partnership governance provisions, including eliminating the Board of Representatives and substantially reducing the scope of partnership matters that require limited partnership approval and the percentage-in-interest required for such approval. The New FHGLP Partnership Agreement will also alter the allocation and distribution preferences that currently exist. Profits and losses will be allocated, and distributions will be made, in proportion to the partners' percentage interests, except that following a dissolution of the Partnership, distributions will be made first, to the two holders of certain interests which are entitled to the Preferred Return (the "Preferred Interests") until such partners have received the Preferred Return; second, to all other partners (excluding the holders of the Preferred Interests) until all partners (including the holders of the Preferred Interests) have received distributions in proportion to their percentage interests; thereafter, to all partners (including the holders of the Preferred Interests) in proportion to their percentage interests. "Preferred Return" will equal $6 million, plus a 10% return from the date of the closing of the TCI Transaction. Prior to closing, the Partnership intends to amend its existing Incentive Plan to provide for payments by the Partnership at closing to Participants (as defined under the Plan) in an aggregate amount of approximately $6.6 million and to reduce by such amount the Partnership's obligations to make future payments to Participants under the Plan. At closing, New Falcon will assume the obligations of the Partnership under the Incentive Plan, as so amended, other than the obligation to make payments at closing. Other than additional contributions by the General Partner in the amount of payments made by New Falcon under the Incentive Plan, the partners will not be required to make any additional capital contributions to the Partnership. The Partnership is the managing general partner and a limited partner of New Falcon, and TCI will be a general partner of New Falcon. Other than with respect to certain partnership matters that require the approval of New Falcon's Advisory Committee and certain additional partnership matters that require the approval of TCI, the Partnership has the exclusive authority to manage the business and operations of New Falcon. F-14 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--PARTNERSHIP MATTERS (CONTINUED) The Amended and Restated Agreement of Limited Partnership of New Falcon generally provides that profits and losses will be allocated, and distributions will be made, in proportion to the partners' percentage interests. Other than the contributions contemplated by the Contribution Agreement and certain additional contributions that may be required by the Partnership in connection with payments by New Falcon under the Incentive Plan, neither the Partnership nor TCI will be required to make any additional capital contributions to New Falcon. NOTE 3--ACQUISITIONS AND SALES FALCON FIRST Falcon First, through wholly-owned subsidiaries, owns cable television systems in Georgia, Alabama, Mississippi and New York. Prior to the acquisition of Falcon First on December 28, 1995, the Partnership had managed the Falcon First Systems for a fee and held an indirect, minority interest in its former parent company, Falcon First Communications, L.P. ("FFCLP"). As a result of the acquisition, the Falcon First Systems became Owned Systems; previously they were Affiliated Systems. The holders of the direct and indirect partnership interests in FFCLP, excluding the Partnership's affiliates, received newly issued partnership interests (Class B partnership interests) in the Partnership. In addition, certain holders of subordinated notes of FFCLP, through a newly-established holding company, received Class C partnership interests in the Partnership. The Class C partnership interests are entitled to a stated preference on liquidation and are mandatorily redeemable in 2004, subject to certain liquidity sharing rights. As of the closing of the Falcon First acquisition, the Class C partnership interests were entitled to an aggregate liquidation preference of approximately $51.4 million. See Note 2. FALCON CABLE SYSTEMS COMPANY The Systems of FCSC, acquired through a newly-formed subsidiary operating partnership on July 12, 1996, serve customers in California and Oregon and were previously managed by the Partnership as Affiliated Systems. As a result of the acquisition, the FCSC Systems became Owned Systems. The assets were acquired at a price determined by an appraisal process defined in the FCSC partnership agreement. Various legal challenges have been filed and are pending regarding the appraisal valuations. See Note 8. The acquisitions of Falcon First and FCSC were accounted for by the purchase method of accounting, whereby the purchase price of Falcon First was allocated to the assets and liabilities assumed based on the F-15 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--ACQUISITIONS AND SALES (CONTINUED) estimated fair values at the date of acquisition, and the purchase price of the FCSC assets was allocated based on an appraisal, as follows:
FALCON FIRST FCSC ----------- ---------- (DOLLARS IN THOUSANDS) PURCHASE PRICE: Class B partnership interests issued................................. $ 9,895 $ -- Class C partnership interests issued................................. 51,373 -- Debt assumed......................................................... 120,621 -- Other liabilities assumed............................................ 3,274 -- Transaction costs.................................................... 5,278 5,625 Asset purchase price determined by appraisal......................... -- 247,397 ----------- ---------- 190,441 253,022 ----------- ---------- FAIR MARKET VALUE OF ASSETS AND LIABILITIES ACQUIRED: Property, plant and equipment........................................ 33,992 81,941 Franchise costs...................................................... 88,003 69,936 Customer lists and other intangible assets........................... 3,411 75,840 Other assets......................................................... 5,705 7,060 Deferred taxes related to step-up of intangible assets............... 9,048 -- ----------- ---------- 140,159 234,777 ----------- ---------- Excess of Purchase Price over Fair Value of Assets and Liabilities Acquired......................................................... $ 50,282 $ 18,245 ----------- ---------- ----------- ----------
The excess of purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized using the straight-line method over 20 years. The Class B partnership interests issued in the Falcon First transaction were valued in proportion to the Partnership's estimated fair value, which was agreed upon by all holders of Partnership interests in the Third Amended and Restated Partnership Agreement, which became effective December 28, 1995. See Note 2. The Class C partnership interests were valued at current stated liquidation value which was equivalent to the unpaid amounts due on the subordinated notes of FCC. In connection with the Falcon First transaction, the Partnership entered into a $435 million Senior Secured Reducing Revolver (the "Bank Credit Agreement") in order to refinance its existing indebtedness and Falcon First's existing indebtedness, repay other notes, fund capital expenditures and provide for general liquidity requirements. On July 12, 1996, in connection with the acquisition of the FCSC assets, the Partnership further amended the terms of the Bank Credit Agreement and increased the available borrowings to $775 million (the "Amended and Restated Credit Agreement") in order to acquire the FCSC assets, repay other notes, pay transaction and financing costs, and provide future working capital. See Note 7. F-16 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3--ACQUISITIONS AND SALES (CONTINUED) Sources and uses of funds for each of the transactions were as follows:
FALCON FIRST FCSC ----------- ---------- (DOLLARS IN THOUSANDS) SOURCES OF FUNDS Cash in Owned Systems................................................ $ 5,325 $ 7,757 Advance under bank credit facilities................................. 379,000 616,500 ----------- ---------- Total sources of funds............................................. $ 384,325 $ 624,257 ----------- ---------- ----------- ---------- USES OF FUNDS Repay existing bank debt of the Partnership and of First, including accrued interest................................................... $ 376,611 $ 370,285 Purchase price of FCSC assets........................................ -- 247,397 Transaction fees and expenses........................................ 5,278 5,625 Available funds...................................................... 2,436 950 ----------- ---------- Total uses of funds................................................ $ 384,325 $ 624,257 ----------- ---------- ----------- ----------
The following unaudited condensed consolidated pro forma statements of operations present the consolidated results of operations of the Partnership as if the acquisitions had occurred at the beginning of the periods presented and are not necessarily indicative of what would have occurred had the acquisitions been made as of those dates or of results which may occur in the future.
YEAR ENDED DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Revenues.............................................................. $ 231,498 $ 244,905 Expenses.............................................................. 230,913 237,956 ---------- ---------- Operating income.................................................... 585 6,949 Other expenses........................................................ 74,554 82,728 ---------- ---------- Loss before income tax benefits..................................... (73,969) (75,779) Income tax benefit.................................................... 5,994 1,122 ---------- ---------- Net loss.............................................................. $ (67,975) $ (74,657) ---------- ---------- ---------- ----------
On July 1, 1996, the Partnership sold certain of the Falcon First assets for $15 million, the proceeds being used to temporarily repay outstanding debt under the former Bank Credit Agreement. The cable assets sold generated approximately 1.9% of consolidated revenues for the six months ended June 30, 1996. Given the proximity of the sale date to the December 28, 1995 acquisition date, the resulting gain on sale of $3.6 million was recorded as a reduction to goodwill. NOTE 4--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: F-17 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) CASH AND CASH EQUIVALENTS The carrying amount approximates fair value due to the short maturity of those instruments. NOTES PAYABLE The fair value of the Partnership's subordinated notes payable is based on quoted market prices for similar issues of debt with similar remaining maturities. The carrying amount of the Partnership's remaining debt outstanding approximates fair value due to its variable rate nature. INTEREST RATE HEDGING AGREEMENTS The fair value of interest rate hedging agreements is estimated by obtaining quotes from brokers as to the amount either party would be required to pay or receive in order to terminate the agreement. The following table depicts the fair value of each class of financial instruments for which it is practicable to estimate that value as of December 31:
1996 1997 ----------------------- ----------------------- CARRYING CARRYING VALUE(1) FAIR VALUE VALUE(1) FAIR VALUE ----------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) Cash and cash equivalents........................................ $ 13,633 $ 13,633 $ 13,917 $ 13,917 Notes Payable (Note 7): 11% Senior subordinated notes(2)............................... 253,537 225,648 282,193 299,125 Amended and Restated Bank Credit Agreement(3).................. 616,000 616,000 606,000 606,000 Other subordinated notes(2).................................... 15,000 16,266 15,000 16,202 Capitalized lease obligations.................................. 141 141 10 10 Other.......................................................... 1,108 1,108 8,018 8,018 ----------- ---------- ----------- ---------- NOTIONAL FAIR NOTIONAL FAIR AMOUNT(4) VALUE(5) AMOUNT(4) VALUE(5) ----------- ---------- ----------- ---------- Interest Rate Hedging Agreements (Note 7): Interest rate swaps............................................ $ 690,000 $ 79 $ 585,000 $ (371) Interest rate caps............................................. 70,000 (305) 25,000 (148)
The carrying value of interest rate swaps and caps was $865,000 and $402,000 at December 31, 1996 and 1997, respectively. See Note 7(e). - ------------------------ (1) Carrying amounts represent cost basis. (2) Determined based on quoted market prices of individual trades for those or similar notes. Accordingly, no inference may be drawn that such valuation would apply to the entire issue. (3) Due to the variable rate nature of the indebtedness, the fair value is assumed to approximate the carrying value. (4) The amount of debt on which current interest expense has been affected is $495 million and $520 million for swaps and $45 million and $25 million for caps, respectively, at December 31, 1996 F-18 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) and 1997. The balance of the contract totals presented above reflect contracts entered into as of December 31 which do not become effective until 1998, at which time effective contracts expire. (5) The amount that the Partnership estimates it would receive (pay) to terminate the hedging agreements. This amount is not recognized in the consolidated financial statements. NOTE 5--INVESTMENTS IN AFFILIATED PARTNERSHIPS FHGLP is the general partner of the Affiliated Partnerships shown below. FHGLP's effective ownership interest in the respective Affiliated Partnerships is less than one percent. FHGLP's investment in net losses in excess of equity of the Affiliated Partnerships was approximately $3.2 million at December 31, 1996 and 1997. FHGLP has the right, under certain circumstances, to acquire the assets of certain of the Affiliated Partnerships. See Notes 2 and 12. Investments in affiliated partnerships include: Falcon Classic Cable Investors, L.P., general partner of Falcon Classic Cable Income Properties, L.P. ("Falcon Classic" or "Classic"). Falcon Video Communications Investors, L.P., general partner of Falcon Video. Enstar Partnerships, 15 limited partnerships of which ECC is the corporate general partner. Falcon Cable Investors Group, L.P., general partner of FCSC (through July 11, 1996 only. See Note 3). Falcon First Investors, L.P., general partner of Falcon First Communications, L.P. (through December 28, 1995 only. See Note 3). Investments in these partnerships are accounted for on the equity method of accounting. Equity in net losses are recorded to the extent of FHGLP's obligations as the general partner of the partnerships, except when the Partnership, as general partner or through subsidiaries, has guaranteed obligations of the partnerships. Summarized financial information of these partnerships is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) AT PERIOD END Total assets............................................. $ 333,422 $ 216,352 $ 203,885 Total liabilities........................................ 367,383 178,448 171,607 Partners' equity (deficit)............................... (33,961) 37,904 32,278 FOR THE PERIOD Revenues................................................. $ 164,671 $ 116,241 $ 92,613 Depreciation and amortization............................ 70,994 41,363 32,506 Operating income......................................... 4,460 13,117 9,266 Net loss................................................. (36,648) (7,658) (3,678)
F-19 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
DECEMBER 31, ------------------------ 1996 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Cable television systems................................................................ $ 500,697 $ 555,253 Furniture and equipment................................................................. 17,915 19,067 Vehicles................................................................................ 10,861 12,067 Land, buildings and improvements........................................................ 10,575 10,723 ----------- ----------- 540,048 597,110 Less accumulated depreciation and amortization.......................................... (230,920) (272,551) ----------- ----------- $ 309,128 $ 324,559 ----------- ----------- ----------- -----------
NOTE 7--NOTES PAYABLE Notes payable consist of:
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- (DOLLARS IN THOUSANDS) FHGLP Only: 11% Senior Subordinated Notes(a)........................................................ $ 253,537 $ 282,193 Capitalized lease obligations........................................................... 141 10 Owned Subsidiaries: Amended and Restated Credit Agreement(b)................................................ 616,000 606,000 Other Subordinated Notes(c)............................................................. 15,000 15,000 Other(d)................................................................................ 1,108 8,018 ---------- ---------- $ 885,786 $ 911,221 ---------- ---------- ---------- ----------
(A) 11% SENIOR SUBORDINATED NOTES On March 29, 1993, FHGLP issued $175 million aggregate principal amount of 11% Senior Subordinated Notes due 2003. Interest payment dates are semi-annual on each March 15 and September 15 commencing September 15, 1993. Through September 15, 2000 FHGLP, at its option, may pay all or any portion of accrued interest on the Notes by delivering to the holders thereof, in lieu of cash, additional Notes having an aggregate principal amount equal to the amount of accrued interest not paid in cash. Through December 31, 1997, the Partnership has elected to issue $107.2 million additional notes as payment-in kind for interest. The Partnership has elected to pay the interest payment due March 15, 1998 in cash, and under the terms of the Notes is required to continue to make cash payments. The Partnership obtained an amendment to the Amended and Restated Credit Agreement to permit payment of interest on the Notes in cash. The Notes represent unsecured general obligations of FHGLP, subordinated in right of payment to all senior indebtedness of FHGLP in the manner and to the extent set forth in the Indenture governing the Notes. In addition, the Notes are effectively subordinated to the claims of creditors of FHGLP's subsidiaries, including the Owned Partnerships. The Indenture contains, among others, covenants with respect to: (i) the incurrence of additional indebtedness, (ii) the making of investments, (iii) the making of restricted payments (as defined therein), (iv) transactions with affiliates, (v) asset sales (as F-20 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--NOTES PAYABLE (CONTINUED) defined) and (vi) mergers, consolidations and sales of substantially all assets. The Indenture's limitation on the incurrence of additional indebtedness limits the ratio of the total debt of the Partnership to Operating Cash Flow (as defined in the Indenture) to 7.5 to 1 if such indebtedness is incurred through December 31, 1999 and to 6.5 to 1 thereafter. Management believes that the Partnership was in compliance with such covenants as of December 31, 1997. The Notes are redeemable at the option of the Partnership, in whole or in part, at any time on or after September 15, 1998, initially at 105.5% of the outstanding principal amount, plus accrued interest, to the redemption date. The Partnership is presently pursuing a sale of $300 million of Senior Debentures due 2010 and of $200 million gross proceeds of Senior Discount Debentures due 2010 (collectively the "Senior Debentures"). If the Partnership is successful in selling the Senior Debentures, of which there can be no assurance, the net proceeds would be used to temporarily repay debt outstanding under the Amended and Restated Credit Agreement, and the Partnership would commence a tender offer for the Notes shortly thereafter. (B) AMENDED AND RESTATED CREDIT AGREEMENT The Partnership has a $775 million senior secured Amended and Restated Credit Agreement that matures on July 11, 2005 (see Note 3). The Amended and Restated Credit Agreement requires the Partnership to make annual reductions of $1.0 million on the Term Loan commencing December 31, 1997 and requires the Partnership to make quarterly reductions on the Reducing Revolver commencing March 31, 1999. Maximum available borrowings under the Amended and Restated Credit Agreement are $774 million at December 31, 1997 reducing to $185 million at December 31, 2004. The Amended and Restated Credit Agreement also includes a $75 million Acquisition Facility that the Partnership may, prior to December 31, 1998, request the Lenders to fund for the sole purpose of acquiring other businesses or assets and paying the applicable costs of such transactions, subject to certain terms and conditions. If any borrowings are advanced under this facility, quarterly repayments shall commence March 31, 1999 or later, (based on the amounts outstanding under the Reducing Revolver and Term Loan) and will not have a maturity date earlier than July 11, 2005. The Amended and Restated Credit Agreement requires interest on the amount outstanding under the Reducing Revolver to be tied to the ratio of consolidated total debt (as defined) to consolidated annualized cash flow (as defined). Interest rates are based on LIBOR or prime rates at the option of the Partnership. The LIBOR margin under the Reducing Revolver ranges from 0.75% to 1.625%, while interest on the Term Loan will be the LIBOR rate plus 2.375%. At December 31, 1997, the weighted average interest rate on borrowings outstanding under the Amended and Restated Credit Agreement (including the effects of the interest rate hedging agreements) was 7.69%. The Partnership is also required to pay a commitment fee per annum on the unused portion. The commitment fee is computed at 0.375% if the ratio of consolidated total debt to consolidated annualized operating cash flow is greater than or equal to 4.75x; if the ratio is less than 4.75x, the fee is computed at 0.25%. As of December 31, 1997, subject to covenant limitations, the Partnership had available borrowings under the Amended and Restated Credit Agreement of $38.3 million. Borrowings are collateralized by substantially all of the borrowers' assets (i.e. substantially all of the operating assets of the Partnership). In addition, FHGLP pledged certain of its assets to secure the borrowings, including its stock and partnership interests in its subsidiaries. However, the lending banks do not have recourse against the assets of FHGI or the limited partners of FHGLP. F-21 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--NOTES PAYABLE (CONTINUED) The Amended and Restated Credit Agreement contains various restrictions relating to, among other items, mergers and acquisitions, investments, indebtedness, contingent liabilities and sale of property and also contains restrictions regarding distributions and a change of management or a change in control (as defined). Additionally, the Amended and Restated Credit Agreement contains financial covenants which may, among other things, limit the amount the Partnership may borrow. The Amended and Restated Credit Agreement currently contains, among others, the following covenants, which provide that (i) consolidated cash flow to consolidated cash interest expense (as defined) shall exceed 2.00x; (ii) consolidated total debt (as defined, which definition does not include the Notes) to consolidated annualized cash flow (as defined) shall not exceed 5.50 prior to June 29, 1999 reducing to 2.50 after June 30, 2002 and thereafter; and (iii) consolidated annualized cash flow to consolidated pro forma debt service (as defined) shall be greater than 110%. Management believes that the Partnership was in compliance with all financial covenants as of December 31, 1997. Substantially all of the assets of the Partnership are held by the Owned Subsidiaries. The Amended and Restated Credit Agreement contains restrictions that prohibit the Owned Subsidiaries from transferring assets or making distributions to FHGLP except for payments on account of management services provided by FHGLP, which were limited by the former Bank Credit Agreement based on the lesser of FHGLP's cash flow shortfall (as defined) or 3.75% of consolidated cable revenues (as defined). The 3.75% limit was raised to 4.25% under the Amended and Restated Credit Agreement, effective July 12, 1996. For 1996 and 1997 the permitted amount of distributions to FHGLP was $8.4 and $10.4 million; the actual amounts distributed were $3.5 and $6.8 million, respectively. Accordingly, at December 31, 1997, FHGLP faces a liquidity risk if it were to experience liquidity requirements in excess of the permitted distributions. The Partnership is presently negotiating a new Bank Credit Agreement which would replace the Amended and Restated Credit Agreement and provide funds for the Partnership's tender offer for the Notes and the closing of the TCI Transaction. There can be no assurance that the Partnership will be able to negotiate a new Bank Credit Facility on acceptable terms. (C) OTHER SUBORDINATED NOTES Other Subordinated Notes consist of 11.56% Subordinated Notes due March 2001. The subordinated note agreement contains certain covenants which are substantially the same as the covenants under the Amended and Restated Credit Agreement described in (b) above. At December 31, 1997, management believes that the Partnership was in compliance with such covenants. (D) OTHER Other notes payable consist of $7.5 million owed by EFC. On September 30, 1997, EFC obtained a secured bank facility with $35 million of availability from two agent banks in order to obtain funds that would be loaned to certain Enstar limited partnerships. The lenders advanced $7.5 million to EFC, which in turn advanced those funds to a number of Enstar limited partnerships at closing. The notes bear interest at LIBOR or prime rates at the option of EFC, plus margin add-ons as defined. The EFC bank facility is non-recourse to the Partnership and matures on August 31, 2001 at which time all funds previously advanced will be due in full. The Enstar partnerships utilized these funds to refinance existing debt and pay deferred management fees due ECC. F-22 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--NOTES PAYABLE (CONTINUED) (E) INTEREST RATE HEDGING AGREEMENTS The Partnership utilizes interest rate hedging agreements to establish long-term fixed interest rates on a portion of its variable-rate debt. The Amended and Restated Credit Agreement requires that the Partnership maintain hedging arrangements with respect to at least 50% of its total outstanding indebtedness, excluding the Notes, for a two year period at rates satisfactory to the Administrative Agent in order to manage the interest rate sensitivity on its borrowings. At December 31, 1997, the Partnership participated in interest rate hedging contracts with an aggregate notional amount of $560 million under which the Partnership pays interest at fixed rates ranging from 5.22% to 6.55%, (weighted average rate of 5.79%), and receives interest at variable LIBOR rates. $40 million of these contracts were not yet effective at December 31, 1997, but are scheduled to go into effect during 1998 as certain of the existing contracts mature. The Partnership has reduced this position by entering into an interest rate hedging contract with a notional amount of $25 million under which it receives a fixed interest payment at 5.49% and pays interest at a variable LIBOR rate. The hedging contracts expire between January 1998 and July 2001. Certain of these contracts with an aggregate notional amount of $145 million provide the counterparties with an option to extend the maturity of the contracts for one year on substantially similar terms. The Partnership has also entered into one LIBOR interest rate cap agreement aggregating $25 million as of December 31, 1997. The hedging agreements resulted in additional interest expense of $729,000, $1.0 million and $350,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The Partnership does not believe that it has any significant risk of exposure to non-performance by any of its counterparties. In connection with the decision to make interest payments on the Notes in cash, the Partnership entered into various interest rate swap agreements with three banks on February 10, 1998 in order to reduce its interest cost. The agreements call for the Partnership to receive payments at 11%; and to make payments at 7.625% for the period September 16, 1997 through September 15, 1998 on a notional principal amount of approximately $282.2 million. The contracts further call for the Partnership to pay at a fixed rate of 7.625% and receive interest at variable LIBOR rates for the period September 16, 1998 through September 15, 2003 on a notional principal amount of approximately $297.7 million. The interest rate benefit received by the Partnership will be recognized over the life of the second interest rate swap agreement. F-23 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--NOTES PAYABLE (CONTINUED) (F) DEBT MATURITIES The Partnership's notes payable outstanding at December 31, 1997 mature as follows:
11% SENIOR OTHER SUBORDINATED NOTES TO SUBORDINATED YEAR NOTES BANKS NOTES OTHER TOTAL - ------------ ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) 1998 $ -- $ 1,000 $ -- $ 527 $ 1,527 1999 -- 1,000 -- 1 1,001 2000 -- 1,000 -- -- 1,000 2001 -- 67,000 15,000 7,500 89,500 2002 -- 96,000 -- -- 96,000 Thereafter 282,193 440,000 -- -- 722,193 ------------ ------------ ------------ ------ ------------ $ 282,193 $ 606,000 $ 15,000 $ 8,028 $ 911,221 ------------ ------------ ------------ ------ ------------ ------------ ------------ ------------ ------ ------------
The maturity date of notes payable may be accelerated upon the occurrence of certain events. See Note 2. NOTE 8--COMMITMENTS AND CONTINGENCIES The Partnership leases land, office space and equipment under operating leases expiring at various dates through the year 2039. See Note 10. Future minimum rentals for operating leases at December 31, 1997 are as follows:
YEAR - ---------------------------------------------------------- TOTAL ------------ (DOLLARS IN THOUSANDS) 1998...................................................... $ 1,954 1999...................................................... 1,798 2000...................................................... 1,651 2001...................................................... 1,488 2002...................................................... 1,386 Thereafter................................................ 2,841 ------------ $ 11,118 ------------ ------------
In most cases, management expects that, in the normal course of business, these leases will be renewed or replaced by other leases. Rent expense amounted to $1.8 million in 1995, $2.1 million in 1996 and $2.4 million in 1997. In addition, the Partnership rents line space on utility poles in some of the franchise areas it serves. These rentals amounted to $1.9 million for 1995, $2.8 million for 1996 and $3.1 million for 1997. Generally, such pole rental agreements are short-term; however, the Partnership anticipates such rentals will continue in the future. Beginning in August 1997, the General Partner elected to self-insure the Partnership's cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to significant increases in the cost of F-24 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED) insurance coverage and decreases in the amount of insurance coverage available. Management believes that the relatively small size of the Partnership's markets in any one geographic area coupled with their geographic separation will mitigate the risk that the Partnership could sustain losses due to seasonal weather conditions or other events that, in the aggregate, could have a material adverse effect on the Partnership's liquidity and cash flows. There can be no assurance that future self-insured losses will not exceed prior costs of maintaining insurance for these risks. The Partnership continues to purchase insurance coverage in amounts management views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. FHGLP holds a general partnership interest in each of the limited partnerships which are the general partners of the Affiliated Partnerships, excluding the Enstar Partnerships. Although all the indebtedness for borrowed money owed by these Affiliated Partnerships to third party institutions is non-recourse, and each of their respective partnership agreements provide for indemnification of its general partner, FHGLP may have liability, as a result of its position as a general partner, with respect to all other obligations of the Affiliated Partnerships. The Partnership believes, however, that based on current values of the Affiliated Partnerships, the likelihood of any potential loss from such obligations is remote. Other commitments include approximately $29 million at December 31, 1997 to rebuild certain existing cable systems. The Partnership is regulated by various federal, state and local government entities. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), provides for among other things, federal and local regulation of rates charged for basic cable service, cable programming service tiers ("CPSTs") and equipment and installation services. Regulations issued in 1993 and significantly amended in 1994 by the Federal Communications Commission (the "FCC") have resulted in changes in the rates charged for the Partnership's cable services. The Partnership believes that compliance with the 1992 Cable Act has had a negative impact on its operations and cash flow. It also presently believes that any potential future liabilities for refund claims or other related actions would not be material. The Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As it pertains to cable television, the 1996 Telecom Act, among other things, (i) ends the regulation of certain CPSTs in 1999; (ii) expands the definition of effective competition, the existence of which displaces rate regulation; (iii) eliminates the restriction against the ownership and operation of cable systems by telephone companies within their local exchange service areas; and (iv) liberalizes certain of the FCC's cross-ownership restrictions. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulations, the Partnership expects Congress and the FCC to explore additional methods of regulating cable service rate increases, including deferral or repeal of the March 31, 1999 sunset of CPST regulation. The Partnership has various contracts to obtain basic and premium programming for its Systems from program suppliers whose compensation is generally based on a fixed fee per customer or a percentage of the gross receipts for the particular service. Some program suppliers provide volume discount pricing structures or offer marketing support to the Partnership. The Partnership's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. The Partnership does not have long-term programming contracts for the supply of a substantial amount of its programming. Accordingly, no assurances can be given that the Partnership's programming costs will not continue to increase substantially or that other materially adverse terms will not be added to the Partnership's programming F-25 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED) contracts. Management believes, however, that the Partnership's relations with its programming suppliers generally are good. The Partnership, certain of its affiliates, and certain third parties have been named as defendants in an action entitled FRANK O'SHEA I.R.A. ET AL. v. FALCON CABLE SYSTEMS COMPANY, ET AL., Case No. BC 147386, pending in the Superior Court of the State of California, County of Los Angeles (the "Action"). Plaintiffs in the Action are certain former unitholders of FCSC purporting to represent a class consisting of former unitholders of FCSC other than those affiliated with FCSC and/or its controlling persons. The complaint in the Action alleges, among other things, that defendants breached their fiduciary and contractual duties to unitholders, and acted negligently, with respect to the purchase from former unitholders of their interests in FCSC in 1996. In particular, the complaint in the Action alleges, among other things, (a) that the appraisals conducted to determine the price at which the purchase of the former unitholders' interests would occur were "inadequate", "defective" and "unreasonable" and that the appraisal firms who conducted the appraisals (two out of three of which are named as defendants) acted negligently or recklessly in performing the appraisals; (b) that the price paid per unit was unfair and was intended to unfairly benefit the defendants at the expense of the public unitholders, in that allegedly the price paid did not fairly reflect the intrinsic value of the partnership assets, was not based on arms-length negotiation, and was less than the per unit value that could be derived from an alleged estimate of asset value submitted by FCSC to its lenders in connection with its borrowings; and (c) that the sums paid the unitholders should not have been based on a calculation that reflected payment to the General Partner of a "sales fee" as defined in the partnership agreement. As relief, the complaint seeks damages (and prejudgment interest) in an unspecified amount, and/or the imposition of a constructive trust upon the partnership assets purchased by certain defendants, and/or rescission of the transaction. The defendants have filed answers denying the material allegations of the complaint in the Action, and the Action is currently in the pre-trial discovery stage. The Court has set a trial date for October 1998 in this matter. The Partnership believes it has substantial and meritorious defenses to the claims. The Partnership is periodically a party to various legal proceedings. Such legal proceedings are ordinary and routine litigation proceedings that are incidental to the Partnership's business, and management presently believes that the outcome of all pending legal proceedings (including the Action) will not, in the aggregate, have a material adverse effect on the financial condition or results of operations of the Partnership. NOTE 9--EMPLOYEE BENEFIT PLANS The subsidiaries of the Partnership have a cash or deferred profit sharing plan (the "Profit Sharing Plan") covering substantially all of their employees. FHGLP joined in the adoption of the FHGI cash or deferred profit sharing plan as of March 31, 1993. The provisions of this plan were amended to be substantially identical to the provisions of the Profit Sharing Plan. The Profit Sharing Plan provides that each participant may elect to make a contribution in an amount up to 20% of the participant's annual compensation which otherwise would have been payable to the participant as salary. The Partnership's contribution to the Profit Sharing Plan, as determined by management, is discretionary but may not exceed 15% of the annual aggregate compensation (as defined) paid to all participating employees. There were no contributions for the Profit Sharing Plan in 1995, 1996 or 1997. F-26 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9--EMPLOYEE BENEFIT PLANS (CONTINUED) On December 30 1993, the Partnership assumed the obligations of FHGI for its 1993 Incentive Performance Plan (the "Incentive Plan"). The value of the interests in the Incentive Plan is tied to the equity value of certain partnership units in FHGLP held by FHGI. In connection with the assumption by the Partnership, FHGI agreed to fund any benefits payable under the Incentive Plan through additional capital contribution to the Partnership, the waiver of its rights to receive all or part of certain distributions from the Partnership and/or a contribution of a portion of its partnership units to the Partnership. The benefits which are payable under the Incentive Plan are equal to the amount of distributions which FHGI would have otherwise received with respect to 3,780.14 of the Class B units of the Partnership and 237.98 of the Class A units of the Partnership held by FHGI and a portion of FHGI's interest in certain of the general partners of the Affiliated Partnerships. Benefits are payable under the Incentive Plan only when distributions would otherwise be paid to FHGI with respect to the above-described units and interests. The Incentive Plan is scheduled to terminate on January 5, 2003, at which time the Partnership is required to distribute the units described above to the participants in the Incentive Plan. At such time, FHGI is required to contribute the units to the Partnership to fund such distributions. The participants in the Incentive Plan are present and former employees of the Partnership and its operating affiliates, all of whom are 100% vested. Prior to the closing of the TCI Transaction, FHGLP expects to amend the Incentive Plan to provide for payments by FHGLP at the closing of the TCI Transaction to participants in an aggregate amount of approximately $6.6 million and to reduce by such amount FHGLP's obligations to make future payments to participants under the Incentive Plan. At the closing of the TCI Transaction, New Falcon will assume the obligations of FHGLP under the Incentive Plan, as so amended, other than the obligation to make the payments at closing of the TCI Transaction. NOTE 10--RELATED PARTY TRANSACTIONS The Partnership (I.E., FHGLP) is a separate, stand-alone holding company which employs all of the management personnel. In addition, prior to October 1995, the Partnership conducted certain international investment and development activities. In October 1995, the Partnership sold certain of its international investments and loans to cable ventures in India and the Philippines to Falcon International Communications, LLC ("FIC"), a newly-formed, separately capitalized entity (or FIC's affiliates), for approximately $6.3 million in cash. FHGLP was reimbursed approximately $1.9 and $1.1 million by FIC for 1995 and 1996 operating costs related to these investments. The Partnership expects to incur no further liquidity obligations in respect of international investments, although the amount of reimbursement FHGLP receives from FIC with respect to the salaries of certain of its employees has been significantly reduced for 1997. Certain members of the Partnership's management also are officers of, and hold equity interests in, FIC. F-27 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--RELATED PARTY TRANSACTIONS (CONTINUED) FHGLP is financially dependent on the receipt of permitted payments from the Owned Systems, management and consulting fees from domestic cable ventures, and the reimbursement of specified expenses by certain of the Affiliated Systems to fund its operations. Expected increases in the funding requirements of the Partnership combined with limitations on its sources of cash may create liquidity issues for the Partnership in the future. Specifically, the Amended and Restated Credit Agreement permits the subsidiaries of the Partnership to remit to FHGLP no more than 4.25% of their net cable revenues, as defined, in any year, effective July 12, 1996. As a result of the 1998 acquisition by FHGLP of the Falcon Classic Systems, FHGLP will no longer receive management fees and reimbursed expenses from Classic. The management and consulting fees and expense reimbursements earned from the Affiliated Partnerships amounted to approximately $8.6 million and $5.5 million, $6.3 million and $3.7 million (including the $1.9 and $1.1 million mentioned above related to international expenses) and $5.2 million and $2.1 million for the years ended December 31, 1995, 1996 and 1997, respectively. The fees of $8.6 million earned in 1995 include $1.6 million from Falcon First (based on 5% of its net cable revenues, as defined). The fees and expense reimbursements of $6.3 million and $3.7 million earned in 1996 included $1.5 million and $1.0 million earned from FCSC from January 1, 1996 through July 11, 1996. Subsequent to these acquisitions, the amounts payable to FHGLP in respect of its management of the former Falcon First and FCSC Systems became subject to the 4.25% limitation contained in the Amended and Restated Credit Agreement. Receivables from the Affiliated Partnerships for services and reimbursements described above amounted to approximately $6.5 million and $11.3 million (which, in 1997, includes $7.5 million of notes receivable from the Enstar Systems) at December 31, 1996 and 1997. The amount due at December 31, 1996 includes approximately $3.6 million related to fees and reimbursements deferred as a result of the liquidity constraints experienced by the Affiliated Partnerships, or decisions made by the Partnership. Included in Commitments and Contingencies (Note 8) are two facility lease agreements with the Partnership's Chief Executive Officer and his wife, or entities owned by them, requiring annual future minimum rental payments aggregating $2.1 million through 2001, one facility being assumed by an Owned Subsidiary as part of the assets acquired on July 12, 1996 from FCSC. That Owned Subsidiary intends to acquire the property for $282,500, a price determined by two independent appraisals. During the years ended December 31, 1995, 1996 and 1997 rent expense on the first facility amounted to $416,000, $397,000 and $383,000, respectively. The rent paid for the second facility for the period July 12, 1996 through December 31, 1996 amounted to approximately $18,000, and the amount paid in 1997 was approximately $41,000. In addition, the Partnership provides certain accounting, bookkeeping and clerical services to the Partnership's Chief Executive Officer. The costs of services provided were determined based on allocations of time plus overhead costs (rent, parking, supplies, telephone, etc.). Such services amounted to $180,000, $118,300 and $163,000 for the years ended December 31, 1995, 1996 and 1997, respectively. These costs were net of amounts reimbursed to the Partnership by the Chief Executive Officer amounting to $66,000, $75,000 and $55,000 for the years ended December 31, 1995, 1996 and 1997, respectively. F-28 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--OTHER INCOME (EXPENSE) Other income (expense) is comprised of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Gain on sale of Available-for-Sale Securities................. $ 13,267 $ 2,264 $ -- Gain on insured casualty losses............................... -- -- 3,476 Write down of investment...................................... -- (1,000) -- Loss on sale of investment.................................... -- -- (1,360) Lawsuit settlement costs, net of $500,000 insurance recovery.................................................... -- -- (1,030) Other, net.................................................... (190) (450) (201) --------- --------- --------- $ 13,077 $ 814 $ 885 --------- --------- --------- --------- --------- ---------
NOTE 12--SUBSEQUENT EVENTS In March 1998 the Partnership paid to Classic $76.8 million, including $1.1 million of interest as required by an agreement settling certain litigation arising from the acquisition by the Partnership of substantially all of the assets of Falcon Classic, other than the system serving the City of Somerset, Kentucky. The Partnership also paid approximately $1.2 million to the settlement fund, a portion of which will be reimbursed by insurance. The acquisition of the City of Somerset assets will be completed as soon as regulatory approvals can be obtained, of which there can be no assurance. Falcon Classic had revenue of approximately $32.1 million for the year ended December 31, 1997, including approximately $1.5 million from the City of Somerset. NOTE 13--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION OPERATING ACTIVITIES During the years ended December 31, 1995, 1996 and 1997, the Partnership paid cash interest amounting to approximately $30.8 million, $39.7 million and $48.1 million, respectively. INVESTING ACTIVITIES See Note 3 regarding the non-cash investing activities related to the acquisitions of Falcon First and the cable systems of FCSC. FINANCING ACTIVITIES See Note 3 regarding the non-cash financing activities relating to the acquisitions of Falcon First and the cable systems of FCSC. See Note 2 regarding the reclassification to redeemable partners' equity. NOTE 14--FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) The following parent-only condensed financial information presents Falcon Holding Group, L.P.'s balance sheets and related statements of operations and cash flows by accounting for the investments in F-29 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED) the Owned Subsidiaries on the equity method of accounting. The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto. CONDENSED BALANCE SHEET INFORMATION
DECEMBER 31 ------------------------ 1996 1997 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents............................................................. $ 6,706 $ 8,177 Receivables: Intercompany notes and accrued interest receivable.................................. 203,827 226,437 Due from affiliates and other entities, of which $17,839,000 and $23,374,000 are contractually restricted or otherwise deferred (see Note 10)...................... 20,944 25,340 Prepaid expenses and other............................................................ 202 711 Investments in affiliated partnerships................................................ 12,830 12,827 Other investments..................................................................... 3,580 1,519 Property, plant and equipment, less accumulated depreciation and amortization......... 1,180 1,323 Deferred loan costs, less accumulated amortization.................................... 5,721 4,846 ----------- ----------- $ 254,990 $ 281,180 ----------- ----------- ----------- ----------- LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable......................................................................... $ 141 $ 10 11% Senior Subordinated Notes......................................................... 253,537 282,193 Accounts payable...................................................................... 266 179 Accrued expenses...................................................................... 11,702 14,025 Equity in net losses of Owned Subsidiaries in excess of investment.................... 173,941 230,155 ----------- ----------- TOTAL LIABILITIES....................................................................... 439,587 526,562 REDEEMABLE PARTNERS' EQUITY............................................................. 271,902 171,373 PARTNERS' DEFICIT....................................................................... (456,499) (416,755) ----------- ----------- $ 254,990 $ 281,180 ----------- ----------- ----------- -----------
F-30 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED) CONDENSED STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) REVENUES: Management fees: Affiliated Partnerships................................................... $ 6,196 $ 3,962 $ 2,873 Owned Subsidiaries........................................................ 8,509 12,020 13,979 International and other................................................... 639 413 281 ---------- ---------- ---------- Total revenues.......................................................... 15,344 16,395 17,133 ---------- ---------- ---------- EXPENSES: General and administrative expenses......................................... 10,309 9,096 11,328 Depreciation and amortization............................................... 608 375 274 ---------- ---------- ---------- Total expenses.......................................................... 10,917 9,471 11,602 ---------- ---------- ---------- Operating income........................................................ 4,427 6,924 5,531 OTHER INCOME (EXPENSE): Interest income............................................................. 17,623 19,884 22,997 Interest expense............................................................ (24,796) (27,469) (30,485) Equity in net losses of Owned Subsidiaries.................................. (16,392) (50,351) (56,422) Equity in net losses of investee partnerships............................... (5,843) (73) (4) Other, net.................................................................. (254) 1,100 (2,455) ---------- ---------- ---------- NET LOSS...................................................................... $ (25,235) $ (49,985) $ (60,838) ---------- ---------- ---------- ---------- ---------- ----------
F-31 FALCON HOLDING GROUP, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14--FALCON HOLDING GROUP, L.P. (PARENT COMPANY ONLY) (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- (DOLLARS IN THOUSANDS) Net cash provided by (used in) operating activities................................. $ 1,427 $ (8,969) $ 1,478 --------- --------- --------- Cash flows from investing activities: Distributions from affiliated partnerships........................................ -- 773 -- Capital expenditures.............................................................. (444) (242) (417) Investments in affiliated partnerships and other investments...................... (666) (9,000) (254) Proceeds from sale of investments and other assets................................ 1,856 3 702 Proceeds from sale of available-for-sale securities............................... -- 9,502 -- --------- --------- --------- Net cash provided by investing activities........................................... 746 1,036 31 --------- --------- --------- Cash flows from financing activities: Repayment of debt................................................................. (121) (120) (131) Capital contributions............................................................. -- 5,000 93 --------- --------- --------- Net cash provided by (used in) financing activities................................. (121) 4,880 (38) --------- --------- --------- Net increase (decrease) in cash and cash equivalents................................ 2,052 (3,053) 1,471 Cash and cash equivalents, at beginning of year..................................... 7,707 9,759 6,706 --------- --------- --------- Cash and cash equivalents, at end of year........................................... $ 9,759 $ 6,706 $ 8,177 --------- --------- --------- --------- --------- ---------
F-32 FALCON HOLDING GROUP, L.P. CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 ------------ (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents......................................................................... $ 11,162 Receivables: Trade, less allowance of $781,000 for possible losses........................................... 12,291 Affiliates...................................................................................... 11,309 Other assets...................................................................................... 15,647 Other investments................................................................................. 1,555 Property, plant and equipment, less accumulated depreciation and amortization of $275,806,000..... 358,074 Franchise cost, less accumulated amortization of $211,870,000..................................... 218,844 Goodwill, less accumulated amortization of $20,010,000............................................ 71,487 Customer lists and other intangible costs, less accumulated amortization of $28,578,000........... 88,360 Deferred loan costs, less accumulated amortization of $7,681,000.................................. 11,597 ------------ $ 800,326 ------------ ------------ LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable..................................................................................... $ 1,001,054 Accounts payable.................................................................................. 6,476 Accrued expenses.................................................................................. 44,812 Customer deposits and prepayments................................................................. 1,652 Deferred income taxes............................................................................. 7,026 Minority interest................................................................................. 346 Equity in losses of affiliated partnerships in excess of investment............................... 3,251 ------------ TOTAL LIABILITIES................................................................................... 1,064,617 ------------ COMMITMENTS AND CONTINGENCIES REDEEMABLE PARTNERS' EQUITY......................................................................... 171,373 ------------ PARTNERS' DEFICIT: General partner................................................................................... (13,389) Limited partners.................................................................................. (422,275) ------------ TOTAL PARTNERS' DEFICIT............................................................................. (435,664) ------------ $ 800,326 ------------ ------------
See accompanying notes to condensed consolidated financial statements. F-33 FALCON HOLDING GROUP, L.P. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED ---------------------- THREE MONTHS ENDED MARCH 31, ---------------------- 1997 1998 ---------- ---------- (DOLLARS IN THOUSANDS) REVENUES.................................................................................. $ 63,984 $ 64,557 ---------- ---------- EXPENSES: Service costs........................................................................... 18,295 19,565 General and administrative expenses..................................................... 11,179 11,678 Depreciation and amortization........................................................... 29,793 31,079 ---------- ---------- Total expenses........................................................................ 59,267 62,322 ---------- ---------- Operating income...................................................................... 4,717 2,235 OTHER INCOME (EXPENSE): Interest expense, net................................................................... (20,384) (20,487) Equity in net loss of investee partnerships............................................. (71) (248) Other expense, net...................................................................... (163) (774) Income tax benefit...................................................................... 566 365 ---------- ---------- NET LOSS.................................................................................. $ (15,335) $ (18,909) ---------- ---------- ---------- ----------
See accompanying notes to condensed consolidated financial statements. F-34 FALCON HOLDING GROUP, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED ---------------------- THREE MONTHS ENDED MARCH 31, ---------------------- 1997 1998 ---------- ---------- (DOLLARS IN THOUSANDS) Net cash provided by operating activities................................................. $ 15,322 $ 2,729 ---------- ---------- Cash flows from investing activities: Acquisition of cable television systems................................................. -- (76,789) Capital expenditures.................................................................... (10,624) (18,021) Increase in intangible assets........................................................... (326) (550) Other................................................................................... 9 42 ---------- ---------- Net cash used in investing activities................................................. (10,941) (95,318) ---------- ---------- Cash flows from financing activities: Borrowings from notes payable........................................................... 8,000 96,472 Repayment of debt....................................................................... (15,179) (6,638) Other................................................................................... 24 -- ---------- ---------- Net cash provided by (used in) financing activities................................... (7,155) 89,834 ---------- ---------- Net decrease in cash and cash equivalents................................................. (2,774) (2,755) Cash and cash equivalents at beginning of period.......................................... 13,633 13,917 ---------- ---------- Cash and cash equivalents at end of period................................................ $ 10,858 $ 11,162 ---------- ---------- ---------- ----------
See accompanying notes to condensed consolidated financial statements. F-35 FALCON HOLDING GROUP, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--BASIS OF PRESENTATION Falcon Holding Group, L.P., a Delaware limited partnership (the "Partnership" or "FHGLP"), owns and operates cable television systems serving small to medium-sized communities and the suburbs of certain cities in 23 states (the "Owned Systems"). The Partnership also controls, holds varying equity interests in and manages certain other cable television systems for a fee (the "Affiliated Systems" and, together with the Owned Systems, the "Systems"). The Affiliated Systems operate cable television systems in 16 states. FHGLP is a limited partnership, the sole general partner of which is Falcon Holding Group, Inc., a California corporation ("FHGI"). The condensed consolidated financial statements include the consolidated accounts of FHGLP, its subsidiary cable television operating partnerships and corporations (the "Owned Subsidiaries") and those operating partnerships' general partners which are owned by FHGLP. The condensed consolidated financial statements also include the accounts of Enstar Communications Corporation ("ECC"), a wholly-owned subsidiary of one of the operating partnerships, which is the general partner of the 15 limited partnerships operating under the name "Enstar" (the "Enstar Companys"), which are Affiliated Systems. NOTE 2--INTERIM FINANCIAL STATEMENTS The interim financial statements for the three months ended March 31, 1997 and 1998 are unaudited. These condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Partnership's latest Annual Report on Form 10-K. In the opinion of management, such statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of such periods. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of results for the entire year. NOTE 3--MINORITY INTEREST Included in the operations of Falcon Telecable, one of the Owned Subsidiaries, are the results of operations of Lake Las Vegas Cablevision, L.P., a Delaware limited partnership, which is a joint venture owned 66 2/3% by Falcon Telecable. The minority interest reflects the 33 1/3% of the venture that Falcon Telecable does not own. NOTE 4--ACQUISITION In March 1998 the Partnership paid to Falcon Classic Cable Income Properties, L.P. ("Falcon Classic") $76.8 million (including $1.1 million of interest as required by an agreement settling certain litigation arising from the acquisition by the Partnership of the assets of Falcon Classic) in order to purchase substantially all of the assets of Falcon Classic, other than the cable television system serving the City of Somerset, Kentucky. The Partnership also paid approximately $1.2 million to the settlement fund established in connection with the settlement of the above-referenced litigation, $500,000 of which was reimbursed by insurance on May 1, 1998. The acquisition of the City of Somerset assets will be completed as soon as regulatory approvals can be obtained, of which there can be no assurance. Falcon Classic had revenue of approximately $32.1 million for the year ended December 31, 1997, including approximately $1.5 million from the City of Somerset. On July 16, 1998, the Partnership completed the acquisition of the City of Somerset assets for approximately $6.5 million. F-36 FALCON HOLDING GROUP, L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5--SUBSEQUENT EVENTS On April 3, 1998 the Partnership and its wholly-owned subsidiary, Falcon Funding Corporation ("FFC" and, collectively with the Partnership, the "Issuers"), consummated the issuance of $375,000,000 aggregate principal amount of 8.375% Senior Debentures due 2010 (the "Senior Debentures") and $435,250,000 aggregate principal amount at maturity of 9.285% Senior Discount Debentures due 2010 (the "Senior Discount Debentures" and, collectively with the Senior Debentures, the "Debentures") in a private placement exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). The Issuers are obligated to consummate an offer to exchange, pursuant to an effective registration statement under the Securities Act, the Debentures for debentures with terms identical to the corresponding Debentures, or to cause resales of the Debentures to be registered under the Securities Act pursuant to a shelf registration statement. The Senior Debentures were issued at a price of 99.732% of their principal amount, for total gross proceeds to the Issuers of approximately $374.0 million. The Senior Discount Debentures were issued at a price of $633.29 per $1,000 aggregate principal amount at maturity, for total gross proceeds to the Issuers of approximately $275.6 million, and will accrete to stated value at an annual rate of 9.285% until April 15, 2003. After giving effect to offering discounts, commissions and estimated expenses of the offering, the sale of the Debentures generated net proceeds to the Issuers of approximately $631 million. The Partnership used substantially all the net proceeds from the sale of the Debentures to repay outstanding bank indebtedness. On April 20, 1998, the Partnership made a tender offer for all of its 11% Senior Subordinated Notes due 2003 (the "11% Notes") which expired on May 18, 1998. On May 19, 1998, the Partnership repurchased approximately $247.8 million aggregate principal amount of the 11% Notes with borrowings under the Partnership's Amended and Restated Credit Agreement. The remaining aggregate amount of 11% Notes not tendered of approximately $34.4 million will be redeemed prior to October 15, 1998 in accordance with the redemption provisions of the indenture governing the 11% Notes. The Partnership recorded an extraordinary loss of $19.6 million relating to the tender of the 11% Notes. On June 30, 1998, the Partnership entered into a new bank credit agreement (the "New Credit Facility"). The Partnership borrowed approximately $425.8 million under the New Credit Facility on June 30, 1998, approximately $329 million of which was used to repay the remaining indebtedness outstanding under the Company's existing Amended and Restated Credit Agreement. F-37 INDEPENDENT AUDITORS' REPORT The Board of Directors: TCI Communications, Inc.: We have audited the accompanying combined balance sheets of the TCI Falcon Systems (as defined in Note 1 to the combined financial statements) as of December 31, 1996 and 1997, and the related combined statements of operations and parent's investment and cash flows for each of the years in the three-year period ended December 31, 1997. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the TCI Falcon Systems as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Denver, Colorado March 4, 1998 F-38 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) COMBINED BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 ---------- ---------- AMOUNTS IN THOUSANDS ASSETS Cash...................................................................................... $ 2,614 -- Trade and other receivables, net.......................................................... 3,021 4,665 Property and equipment, at cost: Land.................................................................................... 1,017 1,232 Distribution systems.................................................................... 133,312 137,767 Support equipment and buildings......................................................... 16,804 18,354 ---------- ---------- 151,133 157,353 Less accumulated depreciation........................................................... 58,658 69,857 ---------- ---------- 92,475 87,496 ---------- ---------- Franchise costs........................................................................... 393,292 393,540 Less accumulated amortization........................................................... 52,436 62,849 ---------- ---------- 340,856 330,691 ---------- ---------- Other assets, at cost, net of amortization................................................ 589 714 ---------- ---------- $ 439,555 423,566 ---------- ---------- ---------- ---------- LIABILITIES AND PARENT'S INVESTMENT Cash overdraft............................................................................ $ -- 5,209 Accounts payable.......................................................................... 135 350 Accrued expenses.......................................................................... 3,284 3,487 Deferred income taxes (note 4)............................................................ 114,002 121,183 ---------- ---------- Total liabilities....................................................................... 117,421 130,229 Parent's investment (note 5).............................................................. 322,134 293,337 ---------- ---------- Commitments and contingencies (note 7).................................................... $ 439,555 423,566 ---------- ---------- ---------- ----------
See accompanying notes to combined financial statements. F-39 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ---------- --------- --------- AMOUNTS IN THOUSANDS Revenue......................................................................... $ 87,086 102,155 113,897 Operating costs and expenses: Operating (note 6)............................................................ 28,245 33,521 39,392 Selling, general and administrative........................................... 18,265 21,695 19,687 Administrative fees (note 6).................................................. 4,085 5,768 5,034 Depreciation.................................................................. 11,316 12,077 12,724 Amortization.................................................................. 7,235 8,184 9,785 ---------- --------- --------- 69,146 81,245 86,622 ---------- --------- --------- Operating income.............................................................. 17,940 20,910 27,275 Other income (expense): Intercompany interest expense (note 6)........................................ (5,923) (4,701) (5,832) Other, net.................................................................... 16 (44) (84) ---------- --------- --------- (5,907) (4,745) (5,916) ---------- --------- --------- Earnings before income taxes.................................................. 12,033 16,165 21,359 Income tax expense (note 4)..................................................... (4,758) (6,239) (8,808) ---------- --------- --------- Net earnings.................................................................. 7,275 9,926 12,551 Parent's investment: Beginning of year............................................................. 225,354 265,497 322,134 Change in due to TCI Communications, Inc. ("TCIC")............................ 32,868 46,711 (41,348) ---------- --------- --------- End of year................................................................... $ 265,497 322,134 293,337 ---------- --------- --------- ---------- --------- ---------
See accompanying notes to combined financial statements. F-40 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ---------- --------- --------- AMOUNTS IN THOUSANDS Cash flows from operating activities: Net earnings................................................................... $ 7,275 9,926 12,551 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................................................ 18,551 20,261 22,509 Deferred income tax expense.................................................. 869 4,533 7,181 Changes in operating assets and liabilities, net of effects of acquisitions: Change in receivables...................................................... (1,042) (55) (1,644) Change in other assets..................................................... (139) (248) (125) Change in accounts payable and accrued expenses............................ 708 (473) 418 ---------- --------- --------- Net cash provided by operating activities................................ 26,222 33,944 40,890 ---------- --------- --------- Cash flows from investing activities: Capital expended for property and equipment.................................... (15,877) (13,278) (7,586) Cash paid for acquisitions..................................................... (47,490) (68,240) -- Cash proceeds from sale of assets, at book value, to TCIC...................... 5,088 -- -- Other investing activities..................................................... 850 732 221 ---------- --------- --------- Net cash used in investing activities.................................... (57,429) (80,786) (7,365) ---------- --------- --------- Cash flows from financing activities: Change in due to TCIC.......................................................... 32,868 46,711 (41,348) Change in cash overdraft....................................................... -- -- 5,209 ---------- --------- --------- Net cash provided by (used in) financing activities...................... 32,868 46,711 (36,139) ---------- --------- --------- Net increase (decrease) in cash.......................................... 1,661 (131) (2,614) Cash: Beginning of year...................................................... 1,084 2,745 2,614 ---------- --------- --------- End of year............................................................ $ 2,745 2,614 -- ---------- --------- --------- ---------- --------- --------- Supplemental disclosure of cash flow information: Cash paid during the year for interest......................................... $ 5,923 4,701 5,832 ---------- --------- --------- ---------- --------- --------- Cash paid during the year for income taxes..................................... $ 78 86 140 ---------- --------- --------- ---------- --------- ---------
See accompanying notes to combined financial statements. F-41 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND 1997 (1) BASIS OF PRESENTATION The combined financial statements include the accounts of thirteen of TCIC's cable television systems serving certain subscribers within Oregon, Washington, Alabama, Missouri and California (collectively, the "TCI Falcon Systems"). The TCI Falcon Systems are indirectly wholly-owned by various subsidiaries of TCIC. TCIC is a subsidiary of Tele-Communications, Inc. ("TCI"). All significant inter-entity accounts and transactions have been eliminated in combination. The TCI Falcon Systems have been acquired through a series of transactions where TCIC acquired various larger cable entities (the "Original Systems"). The TCI Falcon Systems' combined financial statements include an allocation of certain purchase accounting adjustments, including the related deferred tax effects, from TCIC's acquisition of the Original Systems. Such allocation and the related franchise cost amortization is based on the relative fair market value of systems involved. In addition, certain operating costs of TCI are charged to the TCI Falcon Systems based on their number of subscribers (see note 6). Although such allocations are not necessarily indicative of the costs that would have been incurred by the TCI Falcon Systems on a stand alone basis, management believes that the resulting allocated amounts are reasonable. PROPOSED PARTNERSHIP FORMATION Effective December 30, 1997, TCIC and Falcon Holding Group, LP ("Falcon") entered into a Contribution and Purchase Agreement, pursuant to which TCIC will contribute the TCI Falcon Systems to a newly formed partnership (the "Partnership") between TCIC and Falcon in exchange for an approximate 47% ownership interest in the Partnership. In addition, the Partnership will assume a portion of the intercompany amounts owed by the TCI Falcon Systems to TCIC and its affiliates. Consummation of the transaction is subject to, among other matters, regulatory approvals. There is no assurance that such transaction will be consummated. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RECEIVABLES Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1996 and 1997 was not significant. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1995, 1996 and 1997, interest capitalized was not significant. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of systems in their entirety. F-42 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FRANCHISE COSTS Franchise costs include the difference between the cost of acquiring cable television systems and amounts assigned to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the TCI Falcon Systems in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically reviews the carrying amounts of property, plant and equipment and its intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. REVENUE RECOGNITION Cable revenue for customer fees, equipment rental, advertising, pay-per-view programming and revenue sharing agreements is recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable television system. COMBINED STATEMENTS OF CASH FLOWS Transactions effected through the intercompany account with TCIC have been considered constructive cash receipts and payments for purposes of the combined statements of cash flows. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (3) ACQUISITIONS On July 31, 1996, pursuant to certain agreements entered into among TCIC, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary of Viacom which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The purchase price for the Viacom Acquisition was comprised of $1.7 billion in assumed debt and the issuance of $0.6 billion in preferred stock. In connection with the Viacom Acquisition, the Redding, California cable system ("Redding") was transferred to the TCI Falcon Systems at TCIC's allocated cost of approximately $68 million, which amount has been reflected as an increase in due to TCIC in the accompanying combined financial statements. F-43 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (3) ACQUISITIONS (CONTINUED) The acquisition of Redding has been accounted for by the purchase method by the TCI Falcon Systems. Accordingly, the results of operations of Redding have been combined with those of the TCI Falcon Systems since the date of acquisition, and the TCI Falcon Systems have recorded Redding's assets and liabilities at fair value. On a pro forma basis, the TCI Falcon Systems' revenue and net earnings would have been increased by $8,273,000 and decreased by $474,000, respectively, for the year ended December 31, 1996 had Redding been combined with the TCI Falcon Systems on January 1, 1996. The foregoing unaudited pro forma financial information is based upon historical results of operations adjusted for acquisition costs and, in the opinion of management, is not necessarily indicative of the results had the TCI Falcon Systems operated Redding since January 1, 1996. As of January 26, 1995, TCI, TCIC and TeleCable Corporation ("TeleCable") consummated a transaction, whereby TeleCable was merged into TCIC. The TeleCable acquisition has been accounted for by the purchase method. The aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of approximately $300 million of TeleCable's net liabilities and the issuance to TeleCable shareholders of TCI Class A common stock and TCI Convertible Preferred Stock, Series D. In connection with the TeleCable acquisition, the Decatur, Alabama cable system was transferred to the TCI Falcon Systems at TCIC's allocated cost of approximately $47 million, which amount has been reflected as an increase in due to TCIC in the accompanying combined financial statements. (4) INCOME TAXES The TCI Falcon Systems are included in the consolidated federal income tax return of TCI. Income tax expense for the TCI Falcon Systems is based on those items in the consolidated calculation applicable to the TCI Falcon Systems. Intercompany tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) among subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The payable or receivable arising from the intercompany tax allocation is recorded as an increase or decrease in due to TCIC. Deferred income taxes are based on the book and tax basis differences of the assets and liabilities within the TCI Falcon Systems. F-44 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (4) INCOME TAXES (CONTINUED) Income tax expense for the years ended December 31, 1995, 1996 and 1997 consists of:
CURRENT DEFERRED TOTAL --------- ----------- --------- AMOUNTS IN THOUSANDS Year ended December 31, 1995: Intercompany allocation.......................................................... $ (3,811) -- (3,811) Federal.......................................................................... -- (387) (387) State and local.................................................................. (78) (482) (560) --------- ----------- --------- $ (3,889) (869) (4,758) --------- ----------- --------- --------- ----------- --------- Year ended December 31, 1996: Intercompany allocation.......................................................... $ (1,620) -- (1,620) Federal.......................................................................... -- (4,032) (4,032) State and local.................................................................. (86) (501) (587) --------- ----------- --------- $ (1,706) (4,533) (6,239) --------- ----------- --------- --------- ----------- --------- Year ended December 31, 1997: Intercompany allocation.......................................................... $ (1,487) -- (1,487) Federal.......................................................................... -- (5,862) (5,862) State and local.................................................................. (140) (1,319) (1,459) --------- ----------- --------- $ (1,627) (7,181) (8,808) --------- ----------- --------- --------- ----------- ---------
Income tax expense differs from the amounts computed by applying the federal income tax rate of 35% as a result of the following:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1996 1997 --------- --------- --------- AMOUNTS IN THOUSANDS Computed "expected" tax expense...................................................... $ (4,212) (5,658) (7,476) Amortization not deductible for tax purposes......................................... (155) (178) (265) State and local income taxes, net of federal income tax benefit...................... (364) (382) (948) Other................................................................................ (27) (21) (119) --------- --------- --------- $ (4,758) (6,239) (8,808) --------- --------- --------- --------- --------- ---------
F-45 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (4) INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liabilities at December 31, 1996 and 1997 are presented below:
DECEMBER 31, --------------------- 1996 1997 ---------- --------- AMOUNTS IN THOUSANDS Deferred tax asset--principally due to non-deductible accruals............................. $ 81 128 ---------- --------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation................... 18,195 20,985 Franchise costs, principally due to differences in amortization and initial basis........ 95,888 100,326 ---------- --------- Total gross deferred tax liabilities................................................... 114,083 121,311 ---------- --------- Net deferred tax liability............................................................. $ 114,002 121,183 ---------- --------- ---------- ---------
(5) PARENT'S INVESTMENT Parent's investment in the TCI Falcon Systems at December 31, 1996 and 1997 is summarized as follows:
DECEMBER 31, --------------------- 1996 1997 ---------- --------- AMOUNTS IN THOUSANDS Due to TCIC................................................................................ $ 260,807 219,459 Retained earnings.......................................................................... 61,327 73,878 ---------- --------- $ 322,134 293,337 ---------- --------- ---------- ---------
The amount due to TCIC represents advances for operations, acquisitions and construction costs as well as the allocation of certain costs from TCIC. See note 6. (6) TRANSACTIONS WITH RELATED PARTIES The amounts due to TCIC consist of various intercompany advances and expense allocations. TCIC charges intercompany interest expense at variable rates to cable systems within the TCI Falcon Systems based upon amounts due to TCIC from the cable systems. As a result of TCIC's ownership of 100% of the TCI Falcon Systems, the amounts due to TCIC have been classified as a component of parent's investment in the accompanying combined financial statements. Such amounts are due on demand. The TCI Falcon Systems purchase, at TCIC's cost, substantially all of their pay television and other programming from affiliates of TCIC. Charges for such programming were $15,774,000, $20,248,000 and $25,500,000 for 1995, 1996 and 1997, respectively, and are included in operating expenses in the accompanying combined financial statements. Certain subsidiaries of TCIC provide administrative services to the TCI Falcon Systems and have assumed managerial responsibility of the TCI Falcon Systems' cable television system operations and construction. As compensation for these services, the TCI Falcon Systems pay a monthly fee calculated on a per-subscriber basis. F-46 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (6) TRANSACTIONS WITH RELATED PARTIES (CONTINUED) The intercompany advances and expense allocation activity in amounts due to TCIC consists of the following:
DECEMBER 31, -------------------------------- 1995 1996 1997 ---------- --------- --------- AMOUNTS IN THOUSANDS Beginning of year............................................................... $ 181,228 214,096 260,807 Transfer of cable system acquisition purchase price........................... 47,490 68,240 -- Programming charges........................................................... 15,774 20,248 25,500 Administrative fees........................................................... 4,085 5,768 5,034 Intercompany interest expense................................................. 5,923 4,701 5,832 Tax allocations............................................................... 3,811 1,620 1,487 Cash transfer................................................................. (44,215) (53,866) (79,201) ---------- --------- --------- End of year..................................................................... $ 214,096 260,807 219,459 ---------- --------- --------- ---------- --------- ---------
(7) COMMITMENTS AND CONTINGENCIES On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the Federal Communications Commission ("FCC") adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, the TCI Falcon Systems' basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. The TCI Falcon Systems believe that they have complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, the TCI Falcon Systems' rates for Regulated Services are subject to review by the FCC, if a complaint has been filed, or the appropriate franchise authority, if such authority has been certified. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. Certain plaintiffs have filed or threatened separate class action complaints against certain of the TCI Falcon Systems, alleging that the systems' practice of assessing an administrative fee to subscribers whose payments are delinquent constitutes an invalid liquidated damage provision, a breach of contract, and violates local consumer protection statutes. Plaintiffs seek recovery of all late fees paid to the subject systems as a class purporting to consist of all subscribers who were assessed such fees during the applicable F-47 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1995, 1996 AND 1997 (7) COMMITMENTS AND CONTINGENCIES (CONTINUED) limitation period, plus attorney fees and costs. In addition to such matters, the TCI Falcon Systems have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is possible the TCI Falcon Systems may incur losses upon conclusion of the matters referred to above, an estimate of any loss or range of loss cannot presently be made. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of these actions, the ultimate disposition should not have a material adverse effect upon the combined financial condition or results of operations of the TCI Falcon Systems. Management of the TCI Falcon Systems has not yet assessed the cost associated with its year 2000 readiness efforts to ensure that its computer systems and related software properly recognize the year 2000 and continue to process business information, and the related potential impact on the TCI Falcon Systems' results of operations. Amounts expended to date have not been material, although there can be no assurance that costs ultimately required to be paid to ensure the TCI Falcon Systems' year 2000 readiness will not have an adverse effect on the TCI Falcon Systems' financial position or results of operations. Additionally, there can be no assurance that the systems of the TCI Falcon Systems' suppliers will be converted in time or that any such failure to convert by such third parties will not have an adverse effect on the TCI Falcon Systems' financial position or results of operations. The TCI Falcon Systems lease business offices, have entered into pole rental agreements and use certain equipment under lease arrangements. Rental expense under such arrangements amounted to $1,152,000, $1,370,000 and $1,868,000 in 1995, 1996 and 1997, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in thousands):
YEARS ENDING DECEMBER 31, - ------------------------------------------------------------------------------------- 1998................................................................................. $ 908 1999................................................................................. 760 2000................................................................................. 665 2001................................................................................. 531 2002................................................................................. 468 Thereafter........................................................................... 3,181 --------- $ 6,513 --------- ---------
F-48 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) COMBINED BALANCE SHEETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- AMOUNTS IN THOUSANDS (UNAUDITED) ASSETS Cash.................................................................................... $ -- -- Trade and other receivables, net........................................................ 4,665 2,557 Property and equipment, at cost: Land.................................................................................. 1,232 1,233 Distribution systems.................................................................. 137,767 141,653 Support equipment and buildings....................................................... 18,354 18,581 ------------ ----------- 157,353 161,467 Less accumulated depreciation......................................................... 69,857 73,158 ------------ ----------- 87,496 88,309 ------------ ----------- Franchise costs......................................................................... 393,540 398,527 Less accumulated amortization......................................................... 62,849 65,332 ------------ ----------- 330,691 333,195 ------------ ----------- Other assets, at cost, net of amortization.............................................. 714 700 ------------ ----------- $ 423,566 424,761 ------------ ----------- ------------ ----------- LIABILITIES AND PARENT'S INVESTMENT Cash overdraft.......................................................................... $ 5,209 1,841 Accounts payable........................................................................ 350 600 Accrued expenses........................................................................ 3,487 3,458 Deferred income taxes................................................................... 121,183 121,362 ------------ ----------- Total liabilities................................................................. 130,229 127,261 Parent's investment (note 3)............................................................ 293,337 297,500 ------------ ----------- Commitments and contingencies (note 5).................................................. $ 423,566 424,761 ------------ ----------- ------------ -----------
See accompanying notes to combined financial statements. F-49 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
THREE MONTHS ENDED MARCH 31, ---------------------- 1997 1998 ---------- ---------- AMOUNTS IN THOUSANDS (UNAUDITED) Revenue................................................................................... $ 28,576 28,421 Operating costs and expenses: Operating (note 4)...................................................................... 9,942 10,418 Selling, general and administrative..................................................... 4,933 5,433 Administrative fees (note 4)............................................................ 1,303 1,126 Depreciation............................................................................ 2,998 3,311 Amortization............................................................................ 2,443 2,480 ---------- ---------- 21,619 22,768 ---------- ---------- Operating income...................................................................... 6,957 5,653 Other income (expense): Intercompany interest expense (note 4).................................................. (1,120) (1,448) Other, net.............................................................................. (48) 59 ---------- ---------- (1,168) (1,389) ---------- ---------- Earnings before income taxes.......................................................... 5,789 4,264 Income tax expense........................................................................ (2,235) (1,793) ---------- ---------- Net earnings.......................................................................... 3,554 2,471 Parent's investment: Beginning of year....................................................................... 322,134 293,337 Change in due to TCI Communications, Inc. ("TCIC")...................................... (9,152) 1,692 ---------- ---------- End of period........................................................................... $ 316,536 297,500 ---------- ---------- ---------- ----------
See accompanying notes to combined financial statements. F-50 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ---------------------- 1997 1998 ---------- ---------- AMOUNTS IN THOUSANDS (UNAUDITED) Cash flows from operating activities: Net earnings............................................................................ $ 3,554 2,471 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization......................................................... 5,441 5,791 Deferred income tax expense........................................................... 1,624 179 Changes in operating assets and liabilities, net of effects of acquisitions: Change in receivables............................................................... 470 2,108 Change in other assets.............................................................. 114 14 Change in accounts payable and accrued expenses..................................... (844) 221 ---------- ---------- Net cash provided by operating activities......................................... 10,359 10,784 ---------- ---------- Cash flows from investing activities: Capital expended for property and equipment............................................. (609) (2,024) Other investing activities.............................................................. 151 (61) ---------- ---------- Net cash used in investing activities............................................. (458) (2,085) ---------- ---------- Cash flows from financing activities: Change in due to TCIC................................................................... (9,152) (5,331) Change in cash overdraft................................................................ -- (3,368) ---------- ---------- Net cash used in financing activities............................................. (9,152) (8,699) ---------- ---------- Net increase in cash.............................................................. 749 -- Cash: Beginning of year............................................................... 2,614 -- ---------- ---------- End of year..................................................................... $ 3,363 -- ---------- ---------- ---------- ----------
See accompanying notes to combined financial statements. F-51 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) (1) BASIS OF PRESENTATION The combined financial statements include the accounts of thirteen of TCIC's cable television systems serving certain subscribers within Oregon, Washington, Alabama, Missouri and California (collectively, the "TCI Falcon Systems"). The TCI Falcon Systems are indirectly wholly-owned by various subsidiaries of TCIC. TCIC is a subsidiary of Tele-Communications, Inc. ("TCI"). All significant inter-entity accounts and transactions have been eliminated in combination. The accompanying interim combined financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These combined financial statements should be read in conjunction with the combined financial statements and notes thereto contained in the TCI Falcon Systems' report for the year ended December 31, 1997. The TCI Falcon Systems have been acquired through a series of transactions where TCIC acquired various larger cable entities (the "Original Systems"). The TCI Falcon Systems' combined financial statements include an allocation of certain purchase accounting adjustments, including the related deferred tax effects, from TCIC's acquisition of the Original Systems. Such allocation and the related franchise cost amortization is based on the relative fair market value of systems involved. In addition, certain operating costs of TCI are charged to the TCI Falcon Systems based on their number of subscribers (see note 4). Although such allocations are not necessarily indicative of the costs that would have been incurred by the TCI Falcon Systems on a stand alone basis, management believes that the resulting allocated amounts are reasonable. PROPOSED PARTNERSHIP FORMATION Effective December 30, 1997, TCIC and Falcon Holding Group, LP ("Falcon") entered into a Contribution and Purchase Agreement, pursuant to which TCIC will contribute the TCI Falcon Systems to a newly formed partnership (the "Partnership") between TCIC and Falcon in exchange for an approximate 47% ownership interest in the Partnership. In addition, the Partnership will assume a portion of the intercompany amounts owed by the TCI Falcon Systems to TCIC and its affiliates. Consummation of the transaction is subject to, among other matters, regulatory approvals. There is no assurance that such transaction will be consummated. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) ACQUISITION On January 1, 1998, a subsidiary of TCIC acquired certain cable television assets in and around Ellensburg, WA from King Videocable Company. On the same date, these assets were transferred to the F-52 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) (2) ACQUISITION (CONTINUED) TCI Falcon Systems. As a result of these transactions, the TCI Falcon Systems recorded non-cash increases in property and equipment of $2,100,000, in franchise costs of $4,923,000, and in parent's investment of $7,023,000. Assuming the acquisition had occurred on January 1, 1997, the TCI Falcon Systems' pro forma results of operations would not have been materially different from the results of operations for the three months ended March 31, 1997. (3) PARENT'S INVESTMENT Parent's investment in the TCI Falcon Systems at December 31, 1997 and March 31, 1998 is summarized as follows:
DECEMBER 31, MARCH 31, 1997 1998 ------------ ---------- AMOUNTS IN THOUSANDS Due to TCIC........................................................ $ 219,459 $ 221,151 Retained earnings.................................................. 73,878 76,349 ------------ ---------- $ 293,337 $ 297,500 ------------ ---------- ------------ ----------
The amount due to TCIC represents advances for operations, acquisitions and construction costs as well as the allocation of certain costs from TCIC. See note 4. (4) TRANSACTIONS WITH RELATED PARTIES The amounts due to TCIC consist of various intercompany advances and expense allocations. TCIC charges intercompany interest expense at variable rates to cable systems within the TCI Falcon Systems based upon amounts due to TCIC from the cable systems. As a result of TCIC's ownership of 100% of the TCI Falcon Systems, the amounts due to TCIC have been classified as a component of parent's investment in the accompanying combined financial statements. Such amounts are due on demand. The TCI Falcon Systems purchase, at TCIC's cost, substantially all of their pay television and other programming from affiliates of TCIC. Charges for such programming were $6,445,000 and $7,133,000 for the three months ended March 31, 1997 and 1998, respectively, and are included in operating expenses in the accompanying combined financial statements. Certain subsidiaries of TCIC provide administrative services to the TCI Falcon Systems and have assumed managerial responsibility of the TCI Falcon Systems' cable television system operations and construction. As compensation for these services, the TCI Falcon Systems pay a monthly fee calculated on a per-subscriber basis. F-53 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) (4) TRANSACTIONS WITH RELATED PARTIES (CONTINUED) The intercompany advances and expense allocation activity in amounts due to TCIC consists of the following:
MARCH 31, 1998 -------------------- AMOUNTS IN THOUSANDS Beginning of period..................................................... $ 219,459 Transfer of cable system acquisition purchase price................... 7,023 Programming charges................................................... 7,133 Administrative fees................................................... 1,126 Intercompany interest expense......................................... 1,448 Tax allocations....................................................... 1,614 Cash transfer......................................................... (16,652) -------- End of period........................................................... $ 221,151 -------- --------
(5) COMMITMENTS AND CONTINGENCIES On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the Federal Communications Commission ("FCC") adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, the TCI Falcon Systems' basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. The TCI Falcon Systems believe that they have complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, the TCI Falcon Systems' rates for Regulated Services are subject to review by the FCC, if a complaint has been filed, or the appropriate franchise authority, if such authority has been certified. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. Certain plaintiffs have filed or threatened separate class action complaints against certain of the TCI Falcon Systems, alleging that the systems' practice of assessing an administrative fee to subscribers whose payments are delinquent constitutes an invalid liquidated damage provision, a breach of contract, and violates local consumer protection statutes. Plaintiffs seek recovery of all late fees paid to the subject systems as a class purporting to consist of all subscribers who were assessed such fees during the applicable F-54 TCI FALCON SYSTEMS (DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 (UNAUDITED) (5) COMMITMENTS AND CONTINGENCIES (CONTINUED) limitation period, plus attorney fees and costs. In addition to such matters, the TCI Falcon Systems have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is possible the TCI Falcon Systems may incur losses upon conclusion of the matters referred to above, an estimate of any loss or range of loss cannot presently be made. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of these actions, the ultimate disposition should not have a material adverse effect upon the combined financial condition or results of operations of the TCI Falcon Systems. The TCI Falcon Systems lease business offices, have entered into pole rental agreements and use certain equipment under lease arrangements. Rental expense under such arrangements amounted to $441,000 and $527,000 for the three months ended March 31, 1997 and 1998, respectively. Management of the TCI Falcon Systems has not yet assessed the cost associated with its year 2000 readiness efforts to ensure that its computer systems and related software properly recognize the year 2000 and continue to process business information, and the related potential impact on the TCI Falcon Systems' results of operations. Amounts expended to date have not been material, although there can be no assurance that costs ultimately required to be paid to ensure the TCI Falcon Systems' year 2000 readiness will not have an adverse effect on the TCI Falcon Systems' financial position or results of operations. Additionally, there can be no assurance that the systems of the TCI Falcon Systems' suppliers will be converted in time or that any such failure to convert by such third parties will not have an adverse effect on the TCI Falcon Systems' financial position or results of operations. F-55 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Shareholder Falcon Funding Corporation We have audited the accompanying balance sheet of Falcon Funding Corporation as of March 27, 1998. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Falcon Funding Corporation as of March 27, 1998 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Los Angeles, California March 31, 1998 F-56 FALCON FUNDING CORPORATION BALANCE SHEET MARCH 27, 1998 Assets--Cash........................................................................ $ 1,000 --------- --------- Shareholder's Equity Common stock, par value $0.01; 1,000 shares authorized, 100 shares issued and outstanding............................................... $ 1 Additional paid-in capital........................................................ 999 --------- $ 1,000 --------- ---------
F-57 FALCON FUNDING CORPORATION NOTE TO BALANCE SHEET MARCH 27, 1998 NOTE 1--BASIS OF PRESENTATION Falcon Funding Corporation ("FFC"), a California corporation, is a wholly-owned subsidiary of Falcon Holding Group, L.P. FFC was organized on March 16, 1998 ("inception") solely for the purpose of acting as co-issuer with Falcon Holding Group, L.P., of $649.6 million (gross proceeds) of senior debentures and senior discount debentures due 2010. FFC had no operations from inception through March 27, 1998 and is not expected to have material operations or assets in the future. FFC is not expected to participate in servicing the principal, interest, premium, if any, or any payment obligations on the debentures. F-58 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below is an estimate of the fees and expenses payable by the Registrants in connection with the Exchange Offer. All amounts are estimated except the filing fees:
Securities and Exchange Commission Registration Fee............................... $ 191,939 Printing and Engraving Fees....................................................... 35,000 Fees of Trustee................................................................... 5,000 Legal Fees and Expenses........................................................... 75,000 Accounting Fees and Expenses...................................................... 70,000 Miscellaneous..................................................................... 23,061 ---------- Total........................................................................... $ 400,000 ---------- ----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. INDEMNIFICATION UNDER THE EXISTING PARTNERSHIP AGREEMENT. The Existing Partnership Agreement provides that FHGLP will indemnify and hold harmless certain Indemnified Persons from any liability, loss, or damage incurred by the Indemnified Person (and will not hold the Indemnified Person liable to FHGLP for any liability, loss, or damage incurred by FHGLP) by reason of any act performed or omitted to be performed by the Indemnified Person in connection with the business of FHGLP; provided that if the liability, loss, damage or claim arises out of any action or inaction of the Indemnified Person, indemnification will be available only if (i) the Indemnified Person determined, in good faith, that its or his course of conduct was in, or not opposed to, the best interests of FHGLP, or the Indemnified Person did not intend its or his inaction to be harmful or opposed to the best interests of FHGLP, and (ii) the action or inaction did not constitute fraud, gross negligence, breach of fiduciary duty (which shall not be construed to encompass mistakes in judgment or any breach of any Indemnified Person's duty of care that did not constitute gross negligence), or willful misconduct by the Indemnified Person. The class of Indemnified Persons includes Falcon in its capacity as the general partner (and its officers, directors, shareholders, employees, and agents), and the employees, officers, and agents of FHGLP, the members of the Board of Representatives ((and the partners that appointed such member to the extent such partner suffers any liability, loss, or damage as a result of the actions of such member of the Board of Representatives). Indemnification under the Existing Partnership Agreement is recoverable only from the assets of FHGLP and not from any assets of the partners. FHGLP may pay for insurance covering liability of the Indemnified Persons for negligence in operation of FHGLP's affairs. The Company may enter into agreements with certain of the Indemnified Persons setting forth procedures for implementing the indemnities provided in the Existing Partnership Agreement, subject to the approval procedures provided for in the Existing Partnership Agreement. The indemnification provisions under the Existing Partnership Agreement do not constitute a waiver by any limited partner of any right that such limited partner may have against any party, including Falcon, under federal or state securities laws. Section 17-108 of the Delaware Revised Uniform Limited Partnership Act authorizes a limited partnership to indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever, subject to such standards and restrictions, if any, as are set forth in its partnership agreement. INDEMNIFICATION UNDER NEW PARTNERSHIP AGREEMENT. The New Partnership Agreement provides that the Partnership will indemnify and hold harmless certain Indemnified Persons from any liability, loss, or damage incurred by the Indemnified Person (and will not hold the Indemnified Person liable to the Partnership for any liability, loss, or damage incurred by the Partnership) by reason of any act performed II-1 or omitted to be performed by the Indemnified Person in connection with the business of the Partnership; provided that if the liability, loss, damage or claim arises out of any action or inaction of the Indemnified Person, indemnification will be available only if (i) the Indemnified Person determined, in good faith, that its or his course of conduct was in, or not opposed to, the best interests of the Partnership, or the Indemnified Person did not intend its or his inaction to be harmful or opposed to the best interests of the Partnership, and (ii) the action or inaction did not constitute fraud, gross negligence, breach of fiduciary duty (which shall not be construed to encompass mistakes in judgment or any breach of any Indemnified Person's duty of care that did not constitute gross negligence), or willful misconduct by the Indemnified Person. The class of Indemnified Persons includes Falcon in its capacity as the general partner (and its officers, directors, shareholders, employees, and agents), and the employees, officers, and agents of The Partnership. Indemnification under the New Partnership Agreement is recoverable only from the assets of The Partnership and not from any assets of the partners. The Partnership may pay for insurance covering liability of the Indemnified Persons for negligence in operation of The Partnership's affairs. The Company may enter into agreements with certain of the Indemnified Persons (and will enter into agreements with the officers of [Falcon/FHGI]) setting forth procedures for implementing the indemnities provided in the New Partnership Agreement. The indemnification provisions under the New Partnership Agreement do not constitute a waiver by any limited partner of any right that such limited partner may have against any party, including Falcon, under federal or state securities laws. Section 17-108 of the Delaware Revised Uniform Limited Partnership Act authorizes a limited partnership to indemnify and hold harmless any partner or other person from and against any and all claims and demands whatsoever, subject to such standards and restrictions, if any, as are set forth in its partnership agreement. INDEMNIFICATION UNDER FHGI AND FFC ARTICLES OF INCORPORATION. The Articles of Incorporation of FHGI and FFC authorize the corporation to provide indemnification of agents (as defined by Section 317 of the California Corporations Code) through by-law provisions, agreements with such persons, votes of stockholders or disinterested directors, or otherwise, to the fullest extent permissible under California law. The by-laws of FHGI provide that the corporation shall indemnify such agents to the maximum extent permitted by California law; the by-laws of FFC provide that the corporation shall have the power to indemnify officers, directors, employees and agents (including, without limitation, fiduciaries of an employee benefit plan governed by the Employee Retirement Income Security Act of 1974) of FFC, and such other persons designated by the Board of Directors, to the full extent permitted under California law, as amended from time to time. Section 317 of the California Corporations Code defines "agent" as any person who is or was a director, officer, employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was the predecessor corporation of the corporation or of another enterprise at the request of the predecessor corporation. Section 317 also provides that a corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. In addition, a corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be II-2 in the best interests of the corporation and its shareholders. No indemnification shall be made under Section 317 for any of the following: (i) in respect of any claim, issue or matter as to which the person shall have been adjudged to be liable to the corporation in the performance of that person's duty to the corporation and its shareholders, unless and only to the extent that the court in which the proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (ii) amounts paid in settling or otherwise disposing of a pending action without court approval; or (iii) expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. INDEMNIFICATION UNDER NEWFALCON PARTNERSHIP AGREEMENT. The NewFalcon Partnership Agreement provides that the Company will indemnify and hold harmless certain Indemnified Persons from any liability, loss, or damage incurred by the Indemnified Person (and will not hold the Indemnified Person liable to the Company for any liability, loss, or damage incurred by the Company) by reason of any act performed or omitted to be performed by the Indemnified Person in connection with the business of the Company; provided that if the liability, loss, damage or claim arises out of any action or inaction of the Indemnified Person, indemnification will be available only if (i) the Indemnified Person determined, in good faith, that its or his course of conduct was in, or not opposed to, the best interests of the Company, or the Indemnified Person did not intend its or his inaction to be harmful or opposed to the best interests of the Company, and (ii) the action or inaction did not constitute fraud, gross negligence, breach of fiduciary duty (which shall not be construed to encompass mistakes in judgment or any breach of any Indemnified Person's duty of care that did not constitute gross negligence), or willful misconduct by the Indemnified Person. The class of Indemnified Persons includes FHGLP in its capacity as the managing general partner (and its officers, directors, shareholders, employees, and agents), the employees, officers, and agents of the Company, the members of the Advisory Committee (and the partner that appointed such member to the extent such partner suffers any liability, loss, or damage as a result of the actions of such member of the Advisory Committee). Indemnification under the NewFalcon Partnership Agreement is recoverable only from the assets of the Company and not from any assets of the partners. The Company may pay for insurance covering liability of the Indemnified Persons for negligence in operation of the Company's affairs. The Company may enter into agreements with certain of the Indemnified Persons (and will enter into agreements with the officers of FGHI) setting forth procedures for implementing the indemnities provided in the NewFalcon Partnership Agreement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On March 17, 1998, in connection with the formation of the FFC, FFC issued 1,000 shares of its voting common stock, one cent ($.01) par value per share, to FHGLP for cash consideration of $1,000. The issuance of FFC common stock to FHGLP was deemed to be exempt from the registration requirements of the Act as a transaction not involving any public offering, pursuant to Section 4(2) of the Act. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 2.1 1995 Contribution, Purchase and Partnership Amendment Agreement, dated as of December 28, 1995 by and among Falcon Holding Group, L.P., its current limited partners, Falcon Holding Group, Inc., Falcon First Communications, L.L.C., Falcon First Communications, L.P., its limited partners and Falcon First Investors, L.P. (16) 3.1 Certificates of Limited Partnership of FHGLP (1) 3.2 Amended and Restated Agreement of Limited Partnership of FHGLP (1) 3.3 Third Amended and Restated Agreement of Limited Partnership of FHGLP (7) 3.4 Form of Fourth Amended and Restated Agreement of Limited Partnership of FHGLP (1) 3.5 Form of Amended and Restated Agreement of Limited Partnership of New Falcon 3.6 Articles of Incorporation of FFC 3.7 Bylaws of FFC 4.1 Indenture for the Old Notes, dated as of March 29, 1993, between FHGLP and United States Trust Company of New York, as trustee (1) 4.2 Form of Old Note (included in Exhibit No. 4.1) (1) 4.3 Form of Amended and Restated Indenture for the Notes, between FHGLP and United States Trust Company of New York, as trustee (1) 4.4 Form of New Note (included in Exhibit No. 4.3) (1) 4.5 Notice to MONY Mutual Life Insurance Company of New York of Prepayment of Falcon Cablevision's, a California limited partnership's, 12% Subordinated Notes due December 31, 1995 (8) 4.6 Indenture for the Debentures, dated as of April 3, 1998, by and among FHGLP, FFC and United States Trust Company of New York, as trustee* 5.1 Opinion of Dow, Lohnes & Albertson, PLLC 10.1 Bank Credit Agreement, dated as of March 17, 1993, between the Owned Partnerships, and certain lenders and agents named therein (1) 10.2 Pledge and Subordination Agreement, dated as of March 29, 1993, between Falcon, FHGLP and certain lenders and agents named therein (1) 10.3 Guarantors Contribution Agreement, dated as of March 29, 1993, among certain subsidiaries of FHGLP (1) 10.4 Management Compensation Agreement, dated as of March 29, 1993, by and among Falcon and the Limited Partners signatory thereto (1) 10.5 Management Rights Agreement, dated as of March 29, 1993, by and between FHGLP and Hellman & Friedman Capital Partners (1) 10.6 Management Rights Agreement, dated as of March 29, 1993, by and between FHGLP and Hellman & Friedman Capital Partners II, L.P. (1) 10.7 Lease, dated December 1989, between Raymond Business Center and Falcon (1) 10.8 Lease, dated as of June 25, 1992, by and between Sumitomo Life Realty (N.Y.), Inc. and Falcon (1)
II-4
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.9 Cash or Deferred Profit Sharing Plan of Falcon (1) 10.10 Money Purchase Pension Plan of Falcon (1) 10.11 Combined Incentive Performance Plan of FHGLP (1) 10.12 Falcon Holding Group 401(k) Plan (1) 10.13 Ordinance No. 93-75 of the city of Santa Clara, Utah granting to Falcon Telecable a Franchise to Construct, Operate and Maintain a Cable Television System (2) 10.14 Ordinance No. 93-01 of the Board of Trustees for the Town of Stratford, Oklahoma granting to Falcon Cable Media a permit to construct, operate and maintain a cable television system and declaring an emergency (2) 10.15 Resolution of the City Council of Hardy, Arkansas extending the Cable Television Franchise of Falcon Telecable (2) 10.16 Ordinance No. 1064 N.S. of the City Council of the City of Colville passing an Ordinance amending Ordinance No. 768 N.S. Section 5. Extending the length of time for the existing Franchise for one year (1) 10.17 Ordinance #3 an ordinance to amend the franchise tax for the Town of Leeds, Utah (1) 10.18 Ordinance No. 1077 regulating rates charged by cable television operators within the City of Pleasanton, Texas (4) 10.19 Permit for the Town of Bethel Acres, Oklahoma authorized Falcon Cable TV to provide cable communication services to the Town of Bethel Acres (4) 10.20 Ordinance No. 93-01, an ordinance setting forth regulations, terms and conditions under which cable television systems shall operate in Stratford, Oklahoma; and granting to Falcon Cable Media, its successors and assigns, a permit to construct, operate and maintain a cable television system and declaring an emergency (4) 10.21 Confirmation of offer of employment with Jon Lunsford and Promissory Note (3) 10.22 Loan agreement between Falcon Holding Group L.P., Lender, and Neil McCarthy Borrower including Short Form Deed of Trust and Assignment of Rents (Individual) and Promissory Note (8) 10.23 Amendment No. 1 to Bank Credit Agreement, dated as of March 17, 1993, between the Owned Partnerships, and certain lenders and agents named therein (6) 10.24 Amendment No. 2 to Bank Credit Agreement, dated as of March 17, 1993, between the Owned Partnerships, and certain lenders and agents named therein (6) 10.25 Bank Credit Agreement, dated as of December 28, 1995, among certain affiliates of Falcon Holding Group, L.P., their respective subsidiaries that are from time to time party thereto, The First National Bank of Boston, as Managing Agent, Toronto-Dominion (Texas) Inc., as Administrative Agent, Chemical Bank, as Co-Administrative Agent, NationsBank of Texas, N.A., as Syndication Agent, and the several lenders from time to time party thereto. (7) 10.26 Agreement and Plan of Merger, dated as of December 28, 1995, by and among Falcon First Communications, L.L.C., Falcon First Communications, L.P., its limited partners and Falcon First Investors, L.P. (7) 10.27 Amendment to Contingent Interest Agreement, dated as of December 28, 1995, between Falcon First Communications, L.P., Continental Equity Capital Corporation, First Chicago Investment Corporation, Madison Dearborn Partners VIII and William Blair Venture Partners III Limited Partnership (7)
II-5
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.28 Tax-Sharing Agreement, dated as of December 28, 1995, by and between WB Cable Investors II, Inc., Madison Dearborn Partners VI, Continental Equity Capital Corporation, Avy Stein, John Willis, Burton McGillevray, Hellman & Friedman Capital Partners II, L.P., Falcon Cable Trust and Falcon Holding Group, L.P. (7) 10.29 Employment Termination and Settlement Agreement between Neil McCarthy and Falcon Holding Group, L.P., dated September 1, 1995 (8) 10.30 First Amendment to and Extension of office Lease between Raymond Business Center and Falcon Holding Group, L.P. (9) 10.31 Asset purchase agreement by and among subsidiaries of Falcon Holding Group, L.P. and Teleview, Inc. (9) 10.32 Amendment No. 1 to Bank Credit Agreement, dated as of December 28, 1995 , among certain affiliates of Falcon Holding Group, L.P., their respective subsidiaries that are from time to time party thereto, The First National Bank of Boston, as Managing Agent, Toronto-Dominion (Texas) Inc., as Administrative Agent, Chemical Bank, as Co-Administrative Agent, NationsBank of Texas, N.A., as Syndication Agent, and the several lenders (9) 10.33 Restricted Subordination Agreement dated as of March 26, 1993 as restated as of December 28, 1995 between Falcon Holding Group, L.P., Falcon Holding Group, Inc. and AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America (9) 10.34 System Appraisal of Falcon Cable Systems Company, as of December 31, 1995, by Malarkey-Taylor Associates, Inc., dated April 29, 1996 (filed as Exhibit 1 to the June 13 Falcon Cable Systems Company Report file no. 19332 and incorporated by reference) (10) 10.35 System Appraisal of Falcon Cable Systems Company, as of December 31, 1995, by Kane-Reece Associates, Inc., dated April 29, 1996 (filed as Exhibit 2 to the June 13 Falcon Cable Systems Company Report file no. 19332 and incorporated by reference) (10) 10.36 System Appraisal of Falcon Cable Systems Company, as of December 31, 1995, by Waller Capital Corporation (filed as Exhibit 3 to the June 13 Falcon Cable Systems Company Report file no. 19332 and incorporated by reference) (10) 10.37 Asset Purchase Agreement by and between the Partnership and New Falcon, dated as of June 13, 1996 (filed as Exhibit 4 to the June 13 Falcon Cable Systems Company Report file no. 19332 and incorporated by reference) (10) 10.38 Amended and Restated Credit Agreement dated July 12, 1996 (10) 10.39 Limited Partnership Interest Purchase Agreement dated July 15, 1996, by and among Falcon Holding Group, L.P., Marc B. Nathanson, Trustee of the Falcon Cable Trust and Advance TV of California, Inc. (11) 10.40 Partnership Option Agreement dated July 15, 1996, by and among Marc B. Nathanson, Trustee of the Falcon Cable Trust and Falcon Holding Group, L.P. (11) 10.41 Partnership Option Agreement dated July 15, 1996, between Advance TV of California, Inc. and Falcon Holding Group, L.P. (11) 10.42 Fourth Amendment to Note Purchase and Exchange Agreement dated July 12, 1996, between Falcon Telecable, AUSA Life Insurance Company of America and MONY Life Insurance Company of America (11) 10.43 Second Restated Subordination Agreement between Registrant and AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America dated July 12, 1996 (11)
II-6
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.44 Second Restated Guaranty Agreement, dated July 12, 1996, by Falcon Cablevision, Falcon Cable Media, Falcon Community Cable, L.P., Falcon Community Ventures I Limited Partnership, Falcon Investors Group, LTD., Falcon Telecable Investors Group, Falcon Media Investors Group, Falcon Community Investors, L.P., Falcon Telecom, L.P., Falcon Cable Systems Company II, L.P., and Falcon First, Inc. in favor of each of AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America with respect to the Notes (11) 10.45 Certificate, dated (July 12, 1996), of Falcon Holding Group, Inc. with respect to the common ownership of certain partnership guarantors (11) 10.46 Insurance Cost Allocation Agreement, dated July 1, 1996, between Falcon Holding Group, L.P. and Falcon International Communications, L.L.C. (12) 10.47 Fair Market Valuation Report for Falcon Classic Cable Income Properties, L.P., as of December 31, 1996, dated February 20, 1997, prepared by Arthur Andersen LLP (12) 10.48 Valuation Analysis for Falcon Classic Cable Income Properties, L.P., as of December 31, 1996, dated March 3, 1997, prepared by Communications Equity Associates (12) 10.49 Fair Market Valuation Report for Falcon Classic Cable Income Properties, L.P., as of December 31, 1996, dated March 10, 1997, prepared by Kane Reece Associates, Inc. (12) 10.50 Assignment and Acceptance Agreement, dated December 4, 1996, between Banque Paribas and City National Bank (13) 10.51 Enstar Finance Company, LLC Limited Liability Company Agreement dated June 6, 1997 (14) 10.52 Asset Purchase Agreement, dated as of June 27, 1997, by and among Falcon Community Cable, L.P., Falcon Cable Media, Falcon Cable Systems Company II, L.P. and Falcon Classic Cable Income Properties, L.P. (14) 10.53 Second Amendment to the 1993 Incentive Performance Plan of FHGLP (14) 10.54 Third Amendment to the 1993 Incentive Performance Plan of FHGLP (14) 10.55 Fourth Amendment to the 1993 Incentive Performance Plan of FHGLP (14) 10.56 Credit Agreement dated as of September 30, 1997 among Enstar Finance Company, LLC, Banque Paribas, as Administrative Agent, and Bank of America National Trust and Savings Association, as Documentation Agent (15) 10.57 Amended and Restated Credit Agreement Consent No. 1 dated as of July 11, 1997 between the affiliates of Falcon Holding Group, L.P., BankBoston, The First National Bank of Boston, as Managing Agent, Toronto-Dominion (Texas) Inc., as Administrative Agent and NationsBank of Texas, N.A., as Syndication Agent (15) 10.58 Amended and Restated Credit Agreement Amendment No. 2 dated as of September 3, 1997, among the affiliates of Falcon Holding Group, L.P., BankBoston, N.A., as Managing Agent for itself and the other lenders, Toronto-Dominion (Texas) Inc., as Administrative Agent and NationsBank of Texas, N.A., as Syndication Agent (15) 10.59 Amended and Restated Credit Agreement Amendment No. 3 dated as of February 6, 1998, among the affiliates of Falcon Holding Group, L.P., BankBoston, N.A., as Managing Agent for itself and the other Lenders, Toronto-Dominion (Texas) Inc., as Administrative Agent and Nationsbank of Texas, N.A., as Syndication Agent (17)
II-7
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.60 Amended and Restated Credit Agreement Amendment No. 4 dated as of March 17, 1998, among the affiliates of Falcon Holding Group, L.P., BankBoston, N.A., as Managing Agent for itself and the other Lenders, Toronto-Dominion (Texas) Inc., as Administrative Agent and NationsBank of Texas, N.A., as Syndication Agent (17) 10.61 First Amendment to Contribution and Purchase Agreement, dated as of March 23, 1998, by and among Falcon Holding Group, L.P., Falcon Communications, L.P., and TCI Falcon Holdings, LLC. (18) 10.62 Second Amendment to Contribution and Purchase Agreement, dated as of April 2, 1998, between Falcon Holding Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC. (18) 10.63 Waiver Letter, dated as of March 27, 1998, among Falcon Holding Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC relating to the Amended and Restated Agreement of Limited Partnership of Falcon Communications, L.P., dated as of December 30, 1997. (18) 10.64 Contribution and Purchase Agreement, dated December 30, 1997, by and among Falcon Holding Group, L.P., Falcon Communications, L.P., Falcon Holding Group, Inc., TCI Falcon Holdings, LLC, Belo Ventures, Inc., and the other parties executing the Agreement. (16) 10.65 Third Amendment to Contribution and Purchase Agreement, dated as of May 12, 1998, by and among Falcon Holding Group, L.P., Falcon Communications, L.P. and TCI Holdings LLC.* 10.66 Credit Agreement, dated as of June 30, 1998, by and among BankBoston, N.A., The Chase Manhattan Bank, NationsBank, N.A., Toronto Dominion (Texas) Inc., Bank of America, N.T. & S.A. and other lenders signatory thereto. 12 Computation of Deficiency of Earnings to Fixed Charges 23.1 Consent of Dow, Lohnes & Albertson, PLLC (contained in Exhibit 5.1) 23.2 Consent of Ernst & Young, LLP 23.3 Consent of KPMG Peat Marwick LLP 25.1 Form T-1 (Statement of Eligibility of Trustee) 27.1 Financial Data Schedule of FHGLP 27.2 Financial Data Schedule of FFC 99.1 Letter of Transmittal 99.2 Notice of Guaranteed Delivery
- ------------------------ * Previously filed with this Registration Statement. (1) Incorporated by reference to the exhibits to FHGLP's Registration Statement on Form S-4, Registration No. 33-60776. (2) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30, 1993. (3) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30, 1995. (4) Incorporated by reference to the exhibits to FHGLP's Annual Report on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1993. II-8 (5) Incorporated by reference to the exhibits to FHGLP's Annual Report on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1994. (6) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1995. (7) Incorporated by reference to the exhibits to FHGLP's current Report on Form 8-K, File No. 33-60776 dated December 28, 1995. (8) Incorporated by reference to the exhibits to FHGLP's Annual Report on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1995. (9) Incorporated by reference to the exhibit to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1996. (10) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1996. (11) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30, 1996. (12) Incorporated by reference to the exhibits to FHGLP's Annual Report on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1996. (13) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1997. (14) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended June 30, 1997. (15) Incorporated by reference to the exhibits to FHGLP's Quarterly Report on Form 10-Q, File No. 33-60776 for the quarter ended September 30, 1997. (16) Incorporated by reference to the exhibits to FHGLP's Current Report on Form 8-K, File No. 33-60776, dated December 30, 1997. (17) Incorporated by reference to the exhibits to FHGLP's Annual Report on Form 10-K, File No. 33-60776 for the fiscal year ended December 31, 1997. (18) Incorporated by reference to the exhibits to FHGLP's quarterly report on Form 10-Q, File No. 33-60776 for the quarter ended March 31, 1998. (b)Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts of Falcon Holding Group, L.P. for each of the three years in the period ended December 31, 1997. ITEM 17. UNDERTAKINGS. The undersigned Registrants hereby undertake: 1. To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement; (a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (b) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the II-9 changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (c) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. 2. That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned Registrants hereby undertake that: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrants pursuant to the provisions, or otherwise, the Registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issues undertake that such reoffering prospectus will contain the information called for by the applicable registration form with respect to the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. Every prospectus: (i) that is filed pursuant to the immediately preceding paragraph or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Falcon Communications, L.P. has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on July 17, 1998. FALCON HOLDING GROUP L.P. 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 ACT OF 1933, THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Director of Falcon Holding * Group, Inc. and Chief - ------------------------------ Executive Officer of the July 17, 1998 Marc B. Nathanson Registrant (Principal Executive Officer) * - ------------------------------ President and Chief July 17, 1998 Frank J. Intiso Operating Officer * - ------------------------------ Director of Falcon Holding July 17, 1998 Stanley S. Itskowitch Group, Inc. Chief Financial Officer /s/ MICHAEL K. MENEREY and Secretary of the - ------------------------------ Registrant (Principal July 17, 1998 Michael K. Menerey Financial and Accounting Officer) *POWER OF ATTORNEY Michael K. Menerey, by signing his name hereto, does sign this document on behalf of each of the persons indicated above for whom he is attorney-in-fact pursuant to a power of attorney duly executed by such person and filed with the Securities and Exchange Commission. /s/ MICHAEL K. MENEREY ----------------------------------------- Michael K. Menerey ATTORNEY-IN-FACT
II-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Falcon Funding Corporation has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on July 17, 1998. FALCON FUNDING CORPORATION By: /s/ MICHAEL K. MENEREY ----------------------------------------- Michael K. Menerey CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Director and Chief * Executive Officer of the - ------------------------------ Registrant (Principal July 17, 1998 Marc B. Nathanson Executive Officer) * - ------------------------------ Director and President and July 17, 1998 Frank J. Intiso Chief Operating Officer * Director and Executive - ------------------------------ Vice President and July 17, 1998 Stanley S. Itskowitch General Counsel Director and Chief Financial Officer and /s/ MICHAEL K. MENEREY Secretary of the - ------------------------------ Registrant (Principal July 17, 1998 Michael K. Menerey Financial and Accounting Officer) *POWER OF ATTORNEY Michael K. Menerey, by signing his name hereto, does sign this document on behalf of each of the persons indicated above for whom he is attorney-in-fact pursuant to a power of attorney duly executed by such person and filed with the Securities and Exchange Commission. /s/ MICHAEL K. MENEREY ----------------------------------------- Michael K. Menerey ATTORNEY-IN-FACT
II-12 EX-3.5 2 EX-3.5 Exhibit 3.5 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FALCON COMMUNICATIONS, L.P., DATED AS OF DECEMBER 30, 1997 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FALCON COMMUNICATIONS, L.P., DATED AS OF DECEMBER 30, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS 1.1 Terms Defined in this Section..........................................2 1.2 Terms Defined Elsewhere in this Agreement.............................11 1.3 Terms Generally.......................................................12 ARTICLE 2 FORMATION, CONTINUATION, AND PURPOSE 2.1 Formation and Continuation............................................13 2.2 Withdrawal and Admission of Partners..................................13 2.3 Name..................................................................13 2.4 Principal Office......................................................13 2.5 Term..................................................................14 2.6 Purposes of Partnership...............................................14 2.7 Limitations on Activities of the Partnership..........................15 2.8 Certificate...........................................................17 2.9 Addresses of the Partners.............................................17 2.10 Foreign Qualification.................................................17 ARTICLE 3 PARTNERSHIP CAPITAL 3.1 Contributions Pursuant to the Contribution Agreement..................17 3.2 Additional Capital Contributions......................................20 3.3 Assumption of Liabilities.............................................20 3.4 Return of Contributions...............................................20 3.5 Schedule of Percentage Interests......................................21 3.6 Operating Expenses....................................................21 3.7 Interest Payments.....................................................21 ARTICLE 4 DISTRIBUTIONS; ALLOCATIONS OF PROFIT AND LOSS 4.1 Distributions of Cash.................................................22
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Page ---- 4.2 Allocations of Net Profit and Net Loss................................24 4.3 Special Provisions Regarding Allocations of Profit and Loss...........24 4.4 Tax Allocations: Code Section 704(c).................................27 ARTICLE 5 AUTHORITY OF THE MANAGING PARTNER; OTHER MATTERS AFFECTING GENERAL PARTNERS 5.1 Authority of Managing Partner.........................................27 5.2 Agreements by Falcon Holding Group, Inc...............................33 5.3 No Personal Liability.................................................34 5.4 Limited Liability.....................................................35 5.5 Tax Matters Partner...................................................35 5.6 Compensation to the Managing Partner and Affiliates...................37 5.7 Reimbursement.........................................................37 ARTICLE 6 ADVISORY COMMITTEE 6.1 Membership............................................................38 6.2 Removal and Replacement of Members....................................38 6.3 Frequency and Location of Meetings....................................39 6.4 By-Laws and Other Matters.............................................39 6.5 Reimbursement.........................................................39 6.6 Members...............................................................39 ARTICLE 7 STATUS OF LIMITED PARTNERS; OTHER LIMITATIONS ON PARTNERS 7.1 Limited Liability.....................................................39 7.2 Return of Distributions of Capital....................................40 7.3 No Management and Control.............................................40 7.4 Specific Limitations..................................................40 7.5 Issuance of Partnership Interests.....................................40 7.6 Restrictions on the Powers and Activities of the Limited Partners.....41 ARTICLE 8 WITHDRAWAL OF A GENERAL PARTNER 8.1 Withdrawal............................................................42 8.2 Effect of Withdrawal of Managing Partner..............................42 8.3 No Dissolution........................................................42 ARTICLE 9 ASSIGNMENT OF PARTNERSHIP INTERESTS 9.1 Assignments by Managing Partner.......................................43 9.2 Assignments by Other Partners.........................................43 9.3 Exceptions............................................................43 9.4 Assignee..............................................................44 9.5 Other Consents and Requirements.......................................44
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Page ---- 9.6 Assignment Not In Compliance..........................................45 9.7 Tax Elections.........................................................45 9.8 Division of Partnership Interests.....................................45 9.9 Substitute Partners...................................................45 9.10 Consent...............................................................46 9.11 Covenant and Representation of TCI Communications, Inc................46 9.12 Pledge of Partnership Interests.......................................46 9.13 Effect of Purchase of Partnership Interests in FHGLP..................47 9.14 Impact of Code Section 708............................................48 ARTICLE 10 BUY/SELL RIGHTS 10.1 Commencement of Buy/Sell Process......................................49 10.2 Election by Responding Partner........................................50 10.3 Offering Partner's Option to Liquidate................................50 10.4 Responding Partner's Option to Purchase During Liquidation............51 10.5 Default by Responding Partner.........................................52 10.6 Removal of FHGLP......................................................53 10.7 General Terms Applicable to Purchase and Sale of Partnership Interests............................................................54 10.8 Termination of Purchase and Sale......................................55 10.9 Restructuring of Transactions.........................................56 10.10 Purchase and Sale of Interests Held by Falcon Holding Group, Inc......56 10.11 Retained TCI Assets...................................................57 ARTICLE 11 CONVERSION TO CORPORATION 11.1 Election by FHGLP.....................................................58 11.2 Public Offering and Registration Rights...............................60 ARTICLE 12 OTHER BUSINESSES AND INVESTMENT OPPORTUNITIES 12.1 Exclusivity...........................................................61 12.2 Exceptions............................................................61 12.3 Clustering Opportunities..............................................63 12.4 Prohibited Cross-Interests............................................63 12.5 No Other Restrictions.................................................66 12.6 Right of First Offer..................................................66 ARTICLE 13 DISSOLUTION AND LIQUIDATION OF PARTNERSHIP 13.1 Events of Dissolution.................................................68 13.2 Liquidation...........................................................69 13.3 Special Provisions Regarding Liquidation by Offering Partner..........71 13.4 Distribution in Kind..................................................72 13.5 No Action for Dissolution.............................................72
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Page ---- 13.6 No Further Claim......................................................72 ARTICLE 14 INDEMNIFICATION 14.1 General...............................................................73 14.2 Exculpation...........................................................73 14.3 Persons Entitled to Indemnity.........................................74 14.4 Procedure Agreements..................................................74 ARTICLE 15 BOOKS, RECORDS, ACCOUNTING, AND REPORTS 15.1 Books and Records.....................................................74 15.2 Delivery to Partner and Inspection....................................75 15.3 Annual Statements.....................................................75 15.4 Quarterly Financial Statements........................................76 15.5 Monthly Statements....................................................77 15.6 Other Information.....................................................77 15.7 Filings...............................................................77 15.8 Non-Disclosure........................................................78 ARTICLE 16 REPRESENTATIONS BY TCI 16.1 Investment Intent.....................................................79 16.2 Securities Regulation.................................................79 16.3 Knowledge and Experience..............................................79 16.4 Economic Risk.........................................................79 16.5 Binding Agreement.....................................................80 16.6 Tax Position..........................................................80 16.7 Information...........................................................80 ARTICLE 17 AMENDMENTS AND WAIVERS 17.1 Amendments to Partnership Agreement...................................80 17.2 Waivers...............................................................81 17.3 Amendments to Other Partnership Agreements............................81 ARTICLE 18 MISCELLANEOUS 18.1 Additional Documents..................................................82 18.2 Inspection............................................................82 18.3 General...............................................................82 18.4 Notices, Etc..........................................................82 18.5 Execution of Papers...................................................82 18.6 Disputed Matters......................................................83 18.7 No Third-Party Beneficiaries..........................................85 18.8 Covenant of TCI Communications, Inc. Regarding Goods and Services.....85
iv TABLE OF SCHEDULES
Schedule Description - -------- ----------- Schedule I Addresses of the Partners Schedule II Capital Contributions and Percentage Interests Schedule III Certain Transactions and Compensation Schedule IV Members of the Advisory Committee
TABLE OF EXHIBITS
Exhibit Description - ------- ----------- Exhibit I By-Laws of Advisory Committee Exhibit II Form of Registration Rights Agreement
v AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FALCON COMMUNICATIONS, L.P. THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP is made and entered into as of December 30, 1997, by and between FALCON HOLDING GROUP, L.P., a Delaware limited partnership, and TCI FALCON HOLDINGS, LLC, a Delaware limited liability company. PRELIMINARY STATEMENT Falcon Communications, L.P. was organized under the California Revised Limited Partnership Act on October 23, 1997, pursuant to an Agreement of Limited Partnership between Falcon Holding Group, L.P. and Stanley S. Itskowitch. TCI, together with its Affiliates, owns, operates, and has rights to acquire certain cable television systems. FHGLP owns and has rights to acquire certain partnership interests and other equity interests in certain partnerships and other entities that, directly and indirectly, own, operate, and have rights to acquire certain cable television systems. Concurrently with the execution and delivery of this Agreement, the Partners, and certain other parties, are entering into a Contribution Agreement, pursuant to which TCI has agreed to contribute or cause to be contributed to the Partnership substantially all the assets of certain cable television systems, subject to certain liabilities being assumed by the Partnership, and FHGLP has agreed to contribute or cause to be contributed to the Partnership substantially all of its assets, subject to certain liabilities being assumed by the Partnership. At the Closing, immediately after the contributions to the Partnership pursuant to Section 2.2(a) of the Contribution Agreement, and pursuant to the Contribution Agreement, FHGLP will assign partnership interests in the Partnership to certain partners of FHGLP and TCI will purchase those partnership interests in the Partnership. The parties to this Agreement desire to enter into this Agreement to provide for the continuation of the Partnership, the withdrawal of Stanley S. Itskowitch as a partner of the Partnership, the admission of TCI as a partner of the Partnership, the allocation of profits and losses, cash flow, and other proceeds of the Partnership between the Partners, the respective rights, obligations, and interests of the Partners to each other and to the Partnership, and certain other matters. NOW, THEREFORE, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 Terms Defined in this Section. ------------------------------ For purposes of this Agreement, the following terms shall have the following meanings (all terms used in this Agreement that are not defined in this Section 1.1 shall have the meanings set forth elsewhere in this Agreement as indicated in Section 1.2, except as otherwise provided in this Agreement): "Accredited Investor" has the meaning assigned to such term under Regulation D promulgated pursuant to the Securities Act. "Act" means the California Revised Limited Partnership Act. "Adjusted Capital Account Deficit" means with respect to either Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Fiscal Year, after: (i) crediting to such Capital Account any amounts that such Partner is obligated to restore to the Partnership pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(c) or is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debiting from such Capital Account the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Advisory Committee" means the Advisory Committee established by Article 6. "Affiliate" means, with respect to any Person, any other Person controlling, controlled by, or under common control with such Person. For purposes of this definition, the term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock or other equity interests, by contract, or otherwise, and the terms "controlled by" and "under common control with" have meanings corresponding to the meaning of "control." Notwithstanding the foregoing, neither the Partnership nor any Person controlled by the Partnership shall be deemed to be an Affiliate of either Partner or of any Affiliate of either Partner, or VICE VERSA, solely as a result of such Partner's Partnership Interest. 2 "Agreement" means this Amended and Restated Agreement of Limited Partnership, as it may be amended from time to time. "Assignee" means a Person that has acquired a beneficial interest in a Partnership Interest in accordance with the provisions of Article 9 but has not become a substitute Partner in accordance with the provisions of Section 9.9. "Business Day" means any day (other than a day that is a Saturday or Sunday) on which banks are permitted to be open for business in the State of California. "Capital Account" means a separate account to be maintained for each Partner in accordance with the Code, which, subject to any contrary requirements of the Code, shall equal such Partner's initial Capital Account balance as provided in Section 3.1(d), increased by: (i) the amount of money contributed by such Partner to the Partnership, including money contributed or deemed to be contributed by such Partner pursuant to Section 2.2(c)(6) of the Contribution Agreement and including money contributed or deemed contributed by such Partner pursuant to Section 3.2(a), but excluding money contributed pursuant to any other provision of the Contribution Agreement and any payment of interest pursuant to any provision of the Contribution Agreement; (ii) the fair market value without regard to Code Section 7701(g) of property, if any, contributed by such Partner to the Partnership (net of liabilities that are secured by such contributed property or that the Partnership or any other Partner is considered to assume or take subject to under Code Section 752), but excluding contributions of property pursuant to the Contribution Agreement; (iii) allocations to the Partner of Net Profit and items of income and gain pursuant to Article 4; and (iv) other additions made in accordance with the Code; and decreased by (i) the amount of cash distributed to such Partner by the Partnership, including cash deemed to be distributed to such Partner pursuant to Section 2.2(c)(6) of the Contribution Agreement and Section 4.1(d) of this Agreement and including cash deemed to be distributed to such Partner pursuant to Section 3.2(a); (ii) allocations to the Partner of Net Loss and items of loss and deduction pursuant to Article 4; 3 (iii) the fair market value without regard to Code Section 7701(g) of property distributed to such Partner by the Partnership (net of liabilities that are secured by such distributed property or that such Partner is considered to assume or take subject to under Code Section 752); and (iv) other deductions made in accordance with the Code. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations under Code Section 704(b) and, to the extent not inconsistent with the provisions of this Agreement, shall be interpreted and applied in a manner consistent with such Treasury Regulations. "Capital Contributions" means, with respect to either Partner, the amount of money and the net fair market value of property contributed by such Partner to the Partnership pursuant to this Agreement. "Certificate" means the certificate of limited partnership filed with respect to the Partnership pursuant to the Act. "Closing" means the consummation of the contribution of assets and partnership interests to FHGLP and the Partnership in accordance with Section 2.1(a), Section 2.2(a), and Section 2.2(b) of the Contribution Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any subsequent federal law of similar import, and, to the extent applicable, the Treasury Regulations. "Contribution Agreement" means the Contribution and Purchase Agreement, dated as of December 30, 1997, among the Partnership, the Partners, and certain other parties identified therein, as it may be amended from time to time in accordance with its terms. "Controlled Affiliate" means, with respect to TCI, any Person that, at such time, is controlled directly or indirectly by TCI or TCI Communications, Inc., a Delaware corporation, (a) through the ownership of Voting Stock or (b) by other means if TCI or TCI Communications, Inc. is the beneficial owner of a majority of the equity of such Person, and, with respect to FHGLP, Marc B. Nathanson or any Person (other than the Partnership or any Subsidiary) that, at such time, is controlled directly or indirectly by Marc B. Nathanson either (a) through the ownership of Voting Stock or (b) by other means if Marc B. Nathanson or one or more members of his family, alone or in combination, is the beneficial owner of a majority of the equity of such Person; PROVIDED, HOWEVER, that the term "Controlled Affiliate," with respect to FHGLP, does not include at any time any Person that at such time has ceased to be controlled directly or indirectly by Marc B. Nathanson as a result of the transfer of Voting Stock or other rights to any other Person, including the estate of Marc B. Nathanson upon his death. 4 "Depreciation" means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be determined in the manner described in Treasury Regulations Section 1.704-1(b)(2)(iv)(g)(3) or Treasury Regulations Section 1.704-3(d)(2), as applicable. "Existing Entities" means Falcon Cable Media, a California Limited Partnership; Falcon Cablevision, a California Limited Partnership; Falcon Telecable, a California Limited Partnership; Falcon Community Cable, L.P., a Delaware limited partnership; Falcon Community Ventures I, L.P., a Delaware limited partnership; Falcon First, Inc, a Delaware corporation; Falcon Cable Systems Company II, L.P., a California limited partnership; and Falcon Video Communications, L.P., a Delaware limited partnership. "Existing Incentive Plan" means, collectively, the Falcon Holding Group, Inc. 1993 Incentive Performance Plan, the Adoption and Assumption Agreement of the 1993 Incentive Performance Plan, dated as of December 30, 1993, between the General Partner and FHGLP, the First Amendment to 1993 Incentive Performance Plan, dated as of December 31, 1993, the Second Amendment to 1993 Incentive Performance Plan, dated as of January 1, 1996, the Third Amendment to 1993 Incentive Performance Plan, dated as of July 1, 1996, the Fourth Amendment to 1993 Incentive Performance Plan, dated as of May 1, 1997, and the amendment contemplated by Section 2.8(i) of the Contribution Agreement. "FCC" means the Federal Communications Commission. "FHGLP" means Falcon Holding Group, L.P., a Delaware limited partnership, or any other Person that succeeds to its Partnership Interest and is admitted as a Partner in accordance with the provisions of this Agreement. "FHGLP Partnership Agreement" means the Fourth Amended and Restated Agreement of Limited Partnership of FHGLP, to be entered into at the Closing pursuant to the Contribution Agreement. "Fiscal Year" means the fiscal year of the Partnership, which shall be the calendar year. "General Partners" means FHGLP, in its capacity as a general partner of the Partnership and not as the limited partner of the Partnership, TCI, and any other Person admitted as a general partner in accordance with the provisions of this Agreement. "Gross Asset Value" means with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: 5 (i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined in accordance with Section 3.1(e); (ii) The Gross Asset Values of all assets of the Partnership shall be adjusted to equal their respective gross fair market values, as determined by the Managing Partner, as of the following times: (A) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a DE MINIMIS Capital Contribution; (B) the distribution by the Partnership to a Partner of more than a DE MINIMIS amount of property of the Partnership as consideration for an interest in the Partnership; and (C) the liquidation of the Partnership within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g); PROVIDED, HOWEVER, that the adjustments pursuant to clauses (A) and (B) above shall be made only if the Managing Partner determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) The Gross Asset Value of any asset of the Partnership distributed to either Partner shall be the gross fair market value of such asset on the date of distribution; and (iv) The Gross Asset Value of the assets of the Partnership shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704- 1(b)(2)(iv)(m) and Section 4.3(g); PROVIDED, HOWEVER, that Gross Asset Value shall not be adjusted pursuant to this paragraph (iv) to the extent that the Managing Partner determines that an adjustment pursuant to paragraph (ii) of this definition is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraph (i), (ii), or (iv) of this definition, the Gross Asset Value of such asset shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Profit and Net Loss. "Indebtedness" means, with respect to any Person, (a) debt of such Person for borrowed money, debt of such Person that represents the deferred purchase price of property, and similar monetary obligations of such Person that are evidenced by bonds, notes, debentures, or other instruments, and capitalized lease obligations, but excluding liabilities or obligations with respect to subscriber deposits, interest rate hedging obligations, accrued interest, other accrued expenses, trade accounts payable, and other similar items, (b) guaranties, endorsements, and other contingent obligations of such Person, whether direct or indirect, in respect of liabilities of any other Person of any of the types described in clause (a) above (other than endorsements for collection or deposit in the ordinary course of business), and (c) liabilities of any other Person of any of the types described in clause (a) above to the extent of the fair market value of any property of such Person that secures such liabilities; PROVIDED, HOWEVER, that (a) Indebtedness of any Person 6 shall not include liabilities or obligations arising under any letter of credit, performance bond, or similar instrument securing the obligations of such Person under any cable television franchise, pole attachment agreement, lease, or other similar agreement entered into in connection with the day-to-day operations of a cable television system, and (b) Indebtedness of the Partnership or any Subsidiary shall not include liabilities or obligations of the Partnership to any Subsidiary or liabilities or obligations of any Subsidiary to the Partnership or any other Subsidiary. "Investors Partnerships" means Falcon Media Investors Group, a California Limited Partnership; Falcon Investors Group, Ltd., a California Limited Partnership; Falcon Telecable Investors Group, a California Limited Partnership; Falcon Community Investors, L.P., a California limited partnership; and Falcon Video Communications Investors, L.P., a California limited partnership. "Limited Partners" means FHGLP, in its capacity as a limited partner of the Partnership and not as the general partner of the Partnership, and any other Person admitted as a limited partner in accordance with the provisions of this Agreement. "Managing Partner" means FHGLP and any General Partner selected as a successor managing partner pursuant to Section 8.1 of this Agreement. "Net Profit and Net Loss" means for each Fiscal Year or other period, an amount equal to the Partnership's taxable income or loss for such Fiscal Year or other period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Profit or Net Loss shall be added to such taxable income or loss; (ii) Code Section 705(a)(2)(B) expenditures of the Partnership that are not otherwise taken into account in computing Net Profit or Net Loss shall be subtracted from such taxable income or loss; (iii) If the Gross Asset Value of any asset of the Partnership is adjusted pursuant to paragraph (ii) or (iii) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profit or Net Loss; (iv) Gain or loss resulting from any disposition of property of the Partnership with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; 7 (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period; (vi) Notwithstanding anything to the contrary in the definition of the terms "Net Profit" and "Net Loss," any items that are specially allocated pursuant to Section 4.3 of this Agreement shall not be taken into account in computing Net Profit or Net Loss; and (vii) For purposes of this Agreement, any deduction for a loss on a sale or exchange of property of the Partnership that is disallowed to the Partnership under Code Section 267(a)(1) or Code Section 707(b) shall be treated as a Code Section 705(a)(2)(B) expenditure. "NewFalcon Interests" has the meaning assigned to it in the Contribution Agreement. "Nonrecourse Deductions" means losses, deductions, or Code Section 705(a)(2)(B) expenditures attributable to Partnership Nonrecourse Liabilities. The amount of Nonrecourse Deductions shall be determined pursuant to Treasury Regulations Section 1.704-2(c), which provides generally that the amount of Nonrecourse Deductions for a Fiscal Year shall equal the net increase, if any, in Partnership Minimum Gain during that Fiscal Year, reduced (but not below zero) by the aggregate distributions made during that Fiscal Year of proceeds of a Nonrecourse Liability that are allocable to an increase in Partnership Minimum Gain. "Nonrecourse Liability" has the meaning set forth in Treasury Regulations Section 1.752- 1(a)(2). "Offering Partner" means the Partner that elects pursuant to Section 10.1(a) to commence the process described in Article 10. "Operating Cash Flow Ratio" means "Operating Cash Flow Ratio" as defined in the Amended and Restated Indenture, dated as of October 29, 1993, between Falcon Holding Group, L.P. and United States Trust Company of New York, as trustee, as it may be amended from time to time, but calculated as if the Partnership were the "Company" for purposes of such definition and "Indebtedness" for purposes of such definition meant Indebtedness as defined in this Agreement. "Ownership Restriction" means any provision of the Communications Act of 1934, as amended, or any other law subsequently enacted, or any rule, regulation, or policy of the FCC promulgated thereunder restricting the ownership and control of communications properties (including cable television systems, television broadcast stations, radio broadcast stations, telephone companies, and newspapers), including those relating to cross-ownership and cross-interest, as those terms are commonly understood in the communications industry. 8 "Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(4), which generally defines "Partner Nonrecourse Debt" as any Partnership liability to the extent such liability is nonrecourse and a partner (or related Person) bears the economic risk of loss pursuant to Treasury Regulations Section 1.752-2. "Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in Treasury Regulations Section 1.704-2(i)(2), which generally defines "Partner Nonrecourse Debt Minimum Gain" as the Partnership Minimum Gain attributable to Partner Nonrecourse Debt. The amount of Partner Nonrecourse Debt Minimum Gain shall be determined in accordance with Treasury Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Deductions" means losses, deductions, or Code Section 705(a)(2)(B) expenditures attributable to Partner Nonrecourse Debt. The amount of Partner Nonrecourse Deductions shall be determined pursuant to Treasury Regulations Section 1.704-2(i)(2), which provides generally that the amount of Partner Nonrecourse Deductions for a Fiscal Year shall equal the net increase, if any, in Partner Nonrecourse Debt Minimum Gain during that Fiscal Year, reduced (but not below zero) by the proceeds of Partner Nonrecourse Debt distributed during the Fiscal Year to the partner bearing the economic risk of loss for such Partner Nonrecourse Debt that are both attributable to such Partner Nonrecourse Debt and allocable to an increase in Partner Nonrecourse Debt Minimum Gain. "Partners" means each General Partner, each Limited Partner, and any other Person that acquires an interest in the Partnership and is admitted to the Partnership. "Partnership" means the partnership created by the Agreement of Limited Partnership, dated as of October 23, 1997, between FHGLP and Stanley S. Itskowitch and continued by the Partners pursuant to this Agreement. "Partnership Interest" means the entire ownership interest of a Partner in the Partnership at any particular time, including all of its rights and obligations hereunder and under the Act. "Partnership Minimum Gain" means the excess of the Partnership Nonrecourse Liabilities over the adjusted tax basis of property securing such Partnership Nonrecourse Liabilities. The amount of Partnership Minimum Gain shall be determined in accordance with Treasury Regulations Section 1.704-2(d), which provides generally that the amount of Partnership Minimum Gain shall be determined by first computing for each Nonrecourse Liability any gain the Partnership would realize if it disposed of the property subject to that Nonrecourse Liability for no consideration other than full satisfaction of such Nonrecourse Liability, and then aggregating the separately computed gains. "Partnership Unit" means, for purposes of calculating a Partner's Percentage Interest and the purchase price for a Partner's Partnership Interest in the event of a purchase and sale of such 9 Partnership Interest pursuant to Article 10, the value assigned to such Partner's Partnership Interest in accordance with the following provisions: (i) effective as of the Closing, there shall be assigned to the Partnership Interest of each Partner that is a Partner on the date of this Agreement, a number of Partnership Units equal to the product of 100,000 times a fraction the numerator of which is the net fair market value of all Capital Contributions being made by such Partner pursuant to the Contribution Agreement and the denominator of which is the net fair market value of all Capital Contributions being made by both Partners pursuant to the Contribution Agreement, with all such net fair market values being determined in the manner specified in Section 3.5(a); and (ii) there shall be assigned to any Partnership Interest issued pursuant to Section 7.5 the number of Partnership Units (if any) required to be assigned to such Partnership Interest under the terms of its issuance. "Percentage Interest" means (a) as of any date prior to the date on which the Closing occurs, with respect to FHGLP, 57.0%, and with respect to TCI, 43.0%, and (b) as of any date on or after the date on which the Closing occurs, the number of Partnership Units assigned to the Partnership Interest of such Partner divided by the aggregate number of Partnership Units assigned to the Partnership Interests of both Partners. "Person" means an individual, partnership, joint venture, association, corporation, trust, estate, limited liability company, limited liability partnership, or any other legal entity. "Responding Partner" means TCI, if FHGLP is the Offering Partner, and FHGLP, if TCI is the Offering Partner. "Securities Act" means the Securities Act of 1933, as amended. "Subsidiary" means, at any time, any Person (including any Existing Entity or any Investors Partnership) that is controlled by the Partnership at such time, but excluding Falcon/ Capital Cable and Falcon/Capital Cable Partners, L.P. "TCI" means TCI Falcon Holdings, LLC, a Delaware limited liability company, or any other Person that succeeds to its Partnership Interest and is admitted as a Partner in accordance with the provisions of this Agreement. "Treasury Regulations" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Unit Liquidation Amount" means the amount that would be distributed to the Offering Partner in liquidation of the Partnership, per Partnership Unit, if (i) each Business Asset were sold 10 for its Liquidation Value (as defined in Section 13.3(b)(2)), without reduction for filing fees, transfer taxes, recordation taxes, sales taxes, document stamps, other charges levied by any governmental entity, attorneys' and accountants' fees and expenses, and other transaction costs of any nature that would be incurred in connection with any such liquidating sale, (ii) Net Profit and Net Loss and items specially allocated in accordance with Section 4.3, including any gain or loss resulting from the liquidating sales described in clause (i), were allocated in accordance with Article 4, and corresponding allocations were made under the partnership agreement or other governing instrument of each Subsidiary, (iii) the Partnership and each Subsidiary paid its accrued, but unpaid, liabilities (which shall not in any event include any prepayment premiums or penalties or other similar costs attributable to the payment of any such liabilities), and (iv) each Subsidiary distributed the remaining proceeds received by it (net of reserves then shown on the financial statements of each Subsidiary but without establishing additional reserves for contingent or unknown liabilities) to its equity owners in liquidation in accordance with its partnership agreement or other governing instrument and the Partnership distributed the remaining proceeds received by it (net of reserves then shown on the financial statements of the Partnership but without establishing additional reserves for contingent or unknown liabilities) to the Partners in liquidation. "Voting Stock" means ownership interests in a Person of any class or kind ordinarily giving the holder the power to vote for the election of directors, managers, or other members of the governing body of such Person or (as may be the case with general partnership interests in a partnership) giving the holder the power to exercise rights typically exercised by directors of a corporation. 1.2 Terms Defined Elsewhere in this Agreement. ------------------------------------------ For purposes of this Agreement, the following terms have the meanings set forth in the sections indicated:
Term Section - ---- ------- AAA Section 18.6(b) Acceptance Section 10.2 Appraised Liquidation Amount Section 10.6(e) Arbitration Notice Section 18.6(e) Business Asset Section 10.1(a) Cluster Systems Section 12.3 Corporation Section 11.1(c)(1) Deferred Assignment Section 9.14(b) FHGLP Appraiser Section 10.6(b)
11
Term Section - ---- ------- FHGLP Liquidation Amount Section 9.13(a)(1) Formal Determination Section 12.4(b) Gross Revenues Section 5.1(b)(2)(N) Incorporation Section 11.1(a) Indemnified Persons Section 14.1 Liquidating Sale Offer Section 13.3(a) Liquidation Value Section 13.3(b)(2) Liquidator Section 13.2(b) Management Incentive Plan Section 5.1(b)(2)(L) Net Overhead Expenses Section 5.1(b)(2)(N) Offer Section 10.1(a) Partners' Cumulative Estimated Tax Liability Section 4.1(a)(1) Regulatory Allocations Section 4.3(i) Restricted Business Section 12.1(a) Restricted Telephony Activity Section 2.7(b) Sale Limit Section 5.1(b)(2)(B) Secretary Section 5.5(b) Section 2.2(b) Units Section 3.5(b) Target Price Section 10.1(a) TCI Appraiser Section 10.6(b) Third Appraiser Section 10.6(b) Unit Price Section 10.1(a) Wireless Exclusive Services Section 2.7(a) Withholding Advance Section 4.1(c)(2)
1.3 Terms Generally. ---------------- The definitions in Section 1.1 and elsewhere in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context requires, any pronoun 12 includes the corresponding masculine, feminine, and neuter forms. The words "include," "includes," and "including" are not limiting. Any reference in this Agreement to a "day" or number of "days" (without the explicit qualification of "Business") shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given on, the next Business Day. ARTICLE 2 FORMATION, CONTINUATION, AND PURPOSE 2.1 Formation and Continuation. --------------------------- The Partnership was formed as a limited partnership pursuant to the Act by the filing of the Certificate with the Secretary of State of California. The Partners hereby agree to continue the Partnership as a limited partnership pursuant to the Act. The rights and liabilities of the Partners shall be determined pursuant to the Act and this Agreement. To the extent that the rights or obligations of either Partner are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement shall, to the extent permitted by the Act, control. Prior to the date of this Agreement, the Partnership has not engaged in any business activities or incurred any liabilities. 2.2 Withdrawal and Admission of Partners. ------------------------------------- Effective upon the date of this Agreement, TCI shall be admitted to the Partnership as a General Partner and Stanley S. Itskowitch shall withdraw from the Partnership. Upon his withdrawal from the Partnership, Stanley S. Itskowitch shall have no further rights under this Agreement by reason of having been a partner, including any rights to any Net Profit, Net Loss, or distributions of the Partnership. 2.3 Name. ----- (a) The name of the Partnership is Falcon Communications, L.P. Except as provided in Section 2.3(b), the business of the Partnership may be conducted under that name or, upon compliance with applicable laws, any other name that the Managing Partner deems appropriate or advisable. The Managing Partner shall file any assumed name certificates and similar filings, and any amendments thereto, that the Managing Partner considers appropriate or advisable. (b) The Partnership shall not conduct business under the name "TeleCommunications, Inc.," "TCI," or any variation thereof without the approval of TCI, except that any asset contributed to the Partnership by TCI may continue to bear any name borne by such asset at the time of its contribution to the Partnership for a period of ninety days after its 13 contribution. The parties agree that neither "Communications" nor "Telecommunications" is a variation of "Tele-Communications, Inc." for purposes of this Section 2.3(b). 2.4 Principal Office. ----------------- The office required to be maintained by the Partnership in the State of California pursuant to Section 15614(a) of the Act shall initially be located at 1801 Century Park East, Suite 2222, Los Angeles, California 90067. The resident agent of the Partnership pursuant to Section 15614(b) of the Act shall initially be Mark A. Goldman. The Partnership may, upon compliance with the applicable provisions of the Act, change its principal office or resident agent from time to time in the discretion of the Managing Partner. The principal office of the Partnership shall be located at 10900 Wilshire Blvd., 15th Floor, Los Angeles, California 90024, or at such other place as the Managing Partner shall from time to time designate by written notice to TCI. The Partnership may conduct business at such additional places as the Managing Partner shall deem advisable. 2.5 Term. ----- The term of the Partnership commenced on October 23, 1997, the date of the filing of the Certificate with the Secretary of State of California, and shall continue until July 1, 2013 (or until any later date that at any time shall have been proposed by the Managing Partner and approved by TCI), unless sooner terminated as provided in this Agreement. 2.6 Purposes of Partnership. ------------------------ The purposes of the Partnership are: (a) to acquire, own, hold for investment, and dispose of partnership or corporate interests in the Existing Entities and the Investors Partnerships, and to exercise all rights incident thereto; (b) to acquire, own, hold for investment, and dispose of debt and equity securities in corporations, general or limited partnerships, or other entities (including the Corporation) that, directly or indirectly, own, as their principal asset or business, cable television systems or other related or ancillary businesses (including cable television programming and personal communications, alternative access, Internet access, and other telephony-related investments or businesses); (c) to engage in the business, directly or indirectly through interests in one or more corporations, partnerships, or other entities, of acquiring, developing, owning, operating, managing, and selling cable television systems and other related and ancillary businesses (including cable television programming and personal communications, alternative access, Internet access, and other telephony-related investments or businesses); 14 (d) to engage in the business of managing cable television systems and other related and ancillary businesses (including cable television programming and personal communications, alternative access, Internet access, and other telephony-related investments or businesses); (e) to possess, transfer, mortgage, pledge, or otherwise deal in, and to exercise all rights, powers, privileges, and other incidents of ownership or possession with respect to securities or other assets held or owned by the Partnership, and to hold securities or assets in the name of a nominee or nominees; (f) to borrow or raise money, and from time to time to issue, accept, endorse, and execute promissory notes, loan agreements, options, stock purchase agreements, contracts, documents, checks, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance, or assignment in trust of, the whole or any part of the property of the Partnership whether at the time owned or thereafter acquired and to guarantee the obligations of others and to sell, pledge, or otherwise dispose of such bonds or other obligations of the Partnership for its purposes; (g) to guarantee the obligations of others in connection with the purchase or acquisition by the Partnership of securities or assets; (h) to maintain an office or offices in such place or places as the Managing Partner shall determine and in connection therewith to rent or acquire office space, engage personnel, and do such other acts and things as may be necessary or advisable in connection with the maintenance of such office, and on behalf of and in the name of the Partnership to pay and incur reasonable expenses and obligations for legal, accounting, investment advisory, consultative and custodial services, and other reasonable expenses including taxes, travel, insurance, rent, supplies, interest, salaries and wages of employees, and all other reasonable costs and expenses incident to the operation of the Partnership; (i) to form and own one or more corporations, trusts, or partnerships (but no entity so formed or owned, while it is a Subsidiary, may do what the Partnership is prohibited by this Agreement from doing); (j) to own, lease, or otherwise acquire any and all assets and services related to the foregoing purposes and to engage in such other activities related either directly or indirectly to the foregoing purposes as may be necessary, advisable, or appropriate, in the opinion of the Managing Partner, for the promotion or conduct of the business of the Partnership; and (k) with the approval of the Managing Partner and TCI, to engage in any other lawful business endeavor. 15 2.7 Limitations on Activities of the Partnership. --------------------------------------------- Notwithstanding any provision of Section 2.6 to the contrary, the following restrictions shall apply to the business activities of the Partnership: (a) On the Closing Date and immediately thereafter, neither the Partnership nor any Subsidiary will be (1) engaged in the bidding for or acquisition of any license for the provision of Wireless Exclusive Services, (2) engaged in the business of providing Wireless Exclusive Services, or (3) providing, offering, promoting, or branding services that are Wireless Exclusive Services. For purposes of this Section 2.7(a), "Wireless Exclusive Services" means wireless communications services that use radio spectrum for cellular, PCS, ESMR, paging, mobile telecommunications, or other voice or data wireless service, whether fixed or mobile, and regardless of form (E.G., analog or digital), method of origination (E.G., voice, data, or telemetry), or content transmitted, but does not include the provision of video wireless services, the provision of satellite or broadband microwave transmission services, or any other businesses or services that do not constitute "Wireless Exclusive Services" as defined in the Amended and Restated Agreement of Limited Partnership of Sprint Spectrum Holding Company, L.P. (formerly known as MajorCo, L.P.), dated January 31, 1996, among Sprint Enterprises, L.P. (formerly known as Sprint Spectrum L.P.), TCI Network Services, Comcast Telephony Services and Cox Telephony Partnership. (b) Prior to January 31, 1999, neither the Partnership nor any Subsidiary will engage in any Restricted Telephony Activity; PROVIDED, HOWEVER, that this restriction shall not apply (1) to the extent that a Controlled Affiliate (as defined in the Parents Agreement, dated as of January 31, 1996, between Tele-Communications, Inc. and Sprint Corporation) of TeleCommunications, Inc. would not be subject to a similar restriction under such Parents Agreement (as a result of any exceptions in such Parents Agreement to the covenants of TeleCommunications, Inc. and its Controlled Affiliates thereunder, any variations between the definition of Restricted Telephony Activity and the activities restricted under such Parent Agreement, or otherwise), or (2) following the termination of such Parents Agreement. For purposes of this Section 2.7(b), a "Restricted Telephony Activity" means: (1) offering or promoting, or packaging any of its products or services with, or acting as sales agent for, local or long distance wireline telephony services under the brand name of any Bell Operating Company or any of GTE Corporation, AT&T Corp., MCI Communications Corporation, British Telecommunications plc, WorldCom, Inc., Cable & Wireless plc, LCI International Inc., or Frontier Corporation; (2) making the distribution facilities of any of its cable television systems available for use by a Person other than an Affiliate of the Partnership in connection with the provision by such Person of local telephone service to residences without making the same 16 facilities available to Sprint Corporation on similar terms for the provision by Sprint Corporation of the same or similar kinds of local telephone service; or (3) making the distribution facilities of any of its cable television systems available for use by any of the Persons described in Section 2.7(b)(1) for the provision to residences of data communications services that are functionally equivalent to asynchronous data transmission services without making the same facilities available to Sprint Corporation on similar terms for the provision by Sprint Corporation of the same or similar kinds of data communications services. (c) Prior to the Closing, the Partnership will not engage in any business activities except as may be appropriate to facilitate the consummation of the transactions to occur at the Closing in accordance with the Contribution Agreement. (d) Neither the Partnership nor any Subsidiary will acquire any equity interest in Enstar Communications Corp. or any subsidiary of Enstar Communications Corp. 2.8 Certificate. ------------ The Managing Partner has caused the Certificate to be filed with the Secretary of State of California. The General Partners shall execute and acknowledge a certificate of amendment amending the Certificate to reflect the admission of TCI as a General Partner, and the Managing Partner shall cause the certificate of amendment to be filed with the Secretary of State of California. The Managing Partner shall cause the Certificate and the certificate of amendment to be filed or recorded in any other public office where filing or recording is required or is deemed by the Managing Partner to be advisable. 2.9 Addresses of the Partners. -------------------------- The respective addresses of the Partners are set forth on Schedule I. 2.10 Foreign Qualification. ---------------------- The Managing Partner shall take all necessary actions to cause the Partnership to be authorized to conduct business legally in all appropriate jurisdictions, including registration or qualification of the Partnership as a foreign limited partnership in those jurisdictions that provide for registration or qualification and the filing of a certificate of limited partnership in the appropriate public offices of those jurisdictions that do not provide for registration or qualification. 17 ARTICLE 3 PARTNERSHIP CAPITAL 3.1 Contributions Pursuant to the Contribution Agreement. ----------------------------------------------------- (a) Contributions. At the Closing, or at such later time as provided in Section 2.2(c), Section 11.10, and Section 11.19 of the Contribution Agreement, and pursuant to the terms of the Contribution Agreement: (1) TCI will contribute or cause to be contributed to the Partnership, free and clear of any claims, liabilities, security interests, mortgages, liens, pledges, conditions, charges, or encumbrances of any nature whatsoever (other than liabilities and liens specified in the Contribution Agreement), the assets specified in Section 2.2(a)(1) of the Contribution Agreement and, if applicable, cash in the amount specified in Section 2.2(a)(1), Section 2.2(c)(1), Section 2.2(c)(4), Section 11.10(d), Section 11.10(e), Section 11.10(f), and Section 11.19(e)(1) of the Contribution Agreement; and (2) FHGLP will contribute or cause to be contributed to the Partnership, free and clear of any claims, liabilities, security interests, mortgages, liens, pledges, conditions, charges, or encumbrances of any nature whatsoever (other than liabilities and liens specified in the Contribution Agreement), the assets specified in Section 2.2(a)(2) and Section 2.2(b) of the Contribution Agreement and, if applicable, cash in the amount specified in Section 2.2(c)(2) and Section 2.2(c)(3) of the Contribution Agreement. (b) Allocation of Contributions by FHGLP. The portion of the Capital Contribution being made by FHGLP pursuant to Section 3.1(a)(2) that is allocable to its interest as Limited Partner (before giving effect to the assignment of the NewFalcon Interests by FHGLP to certain of its partners and the sale of the NewFalcon Interests by such partners to TCI, as provided in the Contribution Agreement) shall equal the aggregate amount specified next to the names of the Redeemed Partners (as defined in the Contribution Agreement) in the table in Section 2.6(a) of the Contribution Agreement (but excluding the amount specified in such table next to the name of any Partner that elects pursuant to Section 2.6(b) of the Contribution Agreement not to be a Redeemed Partner) plus one percent of the Capital Contributions made by both Partners (including FHGLP), and the portion of the Capital Contribution being made by FHGLP pursuant to Section 3.1(a)(2) that is allocable to its interest as General Partner shall equal the amount by which the total Capital Contribution being made by FHGLP pursuant to Section 3.1(a)(2) exceeds the portion of its Capital Contribution that is allocable to its interest as Limited Partner. The portion of FHGLP's interest as General Partner that is allocable to FHGLP's contribution of partnership interests and Mezzanine Securities pursuant to Section 2.2(b) of the Contribution Agreement shall equal the value of those contributions as determined under Section 3.3 and Section 3.4 of the Contribution Agreement. 18 (c) NewFalcon Interests. At the time of their assignment to certain partners of FHGLP pursuant to the Contribution Agreement, the NewFalcon Interests shall represent Partnership Interests as a Limited Partner of the Partnership. Upon the purchase by TCI of the NewFalcon Interests pursuant to the Contribution Agreement, the NewFalcon Interests shall be converted automatically, without further action by FHGLP or TCI, into Partnership Interests as a General Partner of the Partnership. The purchase by TCI of the NewFalcon Interests shall not affect the respective rights and obligations of FHGLP and TCI under this Agreement except insofar as the number of Partnership Units assigned to TCI's Partnership Interest, and TCI's Percentage Interest, shall be increased thereby. (d) Fair Market Value of Contributions; Capital Account Balances. The Partners agree that the fair market value without regard to Code Section 7701(g) of each asset contributed to the Partnership pursuant to Section 3.1(a) (net of liabilities that are secured by such assets or that the Partnership is considered to assume or take subject to under Code Section 752) shall be determined in accordance with Section 3.1(e). The Capital Accounts of the Partners immediately after the Closing, and after giving effect to the assignment of the NewFalcon Interests by FHGLP to certain of its partners and the sale of the NewFalcon Interests by such partners to TCI, as provided in the Contribution Agreement, shall be as follows: (1) In the case of FHGLP, the net fair market value of the partnership interests and other assets of FHGLP that are contributed to the Partnership pursuant to Section 2.2(a)(2) and Section 2.2(b) of the Contribution Agreement, as specified in Section 3.5 of the Contribution Agreement, taking into account any amendment to the Contribution Agreement pursuant to Section 3.8 of the Contribution Agreement, less the aggregate amount specified next to the names of the Redeemed Partners (as defined in the Contribution Agreement) in the table in Section 2.6(a) of the Contribution Agreement (but excluding the amount specified in such table next to the name of any Partner that elects pursuant to Section 2.6(b) of the Contribution Agreement not to be a Redeemed Partner). (2) In the case of TCI, the net fair market value of the TCI Assets (as defined in the Contribution Agreement), as specified in Section 3.2 of the Contribution Agreement, taking into account any amendment to the Contribution Agreement pursuant to Section 3.8 of the Contribution Agreement and any adjustment pursuant to Section 11.19(c) of the Contribution Agreement, but without reduction for the value of any Retained TCI Assets (as defined in the Contribution Agreement) that are not contributed to the Partnership at the Closing, plus the amount of cash contributed to the Partnership by TCI at the Closing pursuant to Section 11.19(c) of the Contribution Agreement, plus the aggregate amount specified next to the names of the Redeemed Partners (as defined in the Contribution Agreement) in the table in Section 2.6(a) of the Contribution Agreement (but excluding the amount specified in such table next to the name of any Partner that elects pursuant to Section 2.6(b) of the Contribution Agreement not to be a Redeemed Partner). 19 (e) Determining Fair Market Value of Contributed Assets. Except as otherwise agreed to between the Partners, the fair market value of any asset contributed by a Partner to the Partnership shall be determined for purposes of this Agreement as follows: (1) The Managing Partner shall determine the fair market value of such asset and send a written notice to TCI setting forth its determination. In the case of any asset contributed to the Partnership pursuant to Section 3.1(a), the Managing Partner's determination shall be consistent with the net fair market values of contributed assets established by the Contribution Agreement. (2) Within ten Business Days after its receipt of the Managing Partner's notice pursuant to Section 3.1(e)(1), TCI may send a written notice to the Managing Partner accepting or rejecting the Managing Partner's determination of the fair market value of such asset. If TCI accepts the Managing Partner's determination or does not send a written notice to the Managing Partner rejecting the Managing Partner's determination within ten Business Days after its receipt of the Managing Partner's notice pursuant to Section 3.1(e)(1), the fair market value of such asset for purposes of this Agreement shall be as determined by the Managing Partner. (3) If TCI sends a written notice to the Managing Partner rejecting the Managing Partner's determination of the fair market value of any asset within ten Business Days after its receipt of the Managing Partner's notice pursuant to Section 3.1(e)(1), the fair market value of such asset for purposes of this Agreement shall be determined by an appraisal to be conducted by an independent appraisal firm agreed to by the Managing Partner and TCI and retained by the Partnership, at the Partnership's expense, with experience in the valuation and appraisal of assets similar to such asset. In the case of assets contributed to the Partnership pursuant to Section 3.1(a), the appraisal shall be consistent with the net fair market values of contributed assets established by the Contribution Agreement. 3.2 Additional Capital Contributions. --------------------------------- (a) Immediately following any payment by the Partnership under the Existing Incentive Plan, including any payment made in connection with the liquidation of the Partnership, FHGLP shall contribute to the Partnership cash in an amount equal to such payment. If FHGLP is required to contribute cash pursuant to this Section 3.2(a) following the liquidation of the Partnership, such cash shall thereafter be distributed to the Partners in accordance with Section 13.2(d). The Partnership may withhold from any distributions to which FHGLP would otherwise be entitled pursuant to Section 13.2(d) the amount of FHGLP's obligations under this Section 3.2(a), and any amounts so withheld shall be treated as amounts (1) distributed to FHGLP pursuant to Section 13.2(d), and (2) contributed by FHGLP to the Partnership in accordance with this Section 3.2(a). (b) There shall be no further assessments for additional Capital Contributions by the Partners to the Partnership. 20 3.3 Assumption of Liabilities. -------------------------- In accordance with the terms and conditions of the Contribution Agreement, the Partnership will, at the Closing (or at such later time as provided in Section 11.10 or Section 11.19 of the Contribution Agreement), assume and undertake to pay, discharge, and perform those obligations and liabilities of TCI, FHGLP, and their respective Affiliates that are specified in Article 4 of the Contribution Agreement. 3.4 Return of Contributions. ------------------------ Neither Partner shall have the right to demand a return of all or any part of its Capital Contribution during the term of the Partnership, and any return of the Capital Contribution of either Partner shall be made solely from the assets of the Partnership and only in accordance with the terms of this Agreement. No interest shall be paid to either Partner with respect to its Capital Contribution to the Partnership. 3.5 Schedule of Percentage Interests. --------------------------------- At the Closing, the Managing Partner will deliver to TCI Schedule II, to be attached to this Agreement, which will set forth: (a) the net fair market value of all Capital Contributions being made by each Partner pursuant to Section 3.1(a), including, in the case of FHGLP, the net fair market value of the Capital Contributions being made pursuant to Section 2.2(b) of the Contribution Agreement, as determined in accordance with Article 3 of the Contribution Agreement, determined as if (1) the TCI Adjustments and the Falcon Adjustments were as set forth in the preliminary settlement statements delivered pursuant to Section 3.7(b) of the Contribution Agreement; (2) as if all Retained TCI Assets and, if no Ellensburg Exclusion Event shall have occurred prior to Closing, all assets of the Ellensburg System were contributed to the Partnership at the Closing, and (3) without regard to any amendment to the Contribution Agreement required by Section 3.8 of the Contribution Agreement that, as of the Closing Date, has not yet been agreed to between FHGLP and TCI or determined by arbitration pursuant to Section 15.9 of the Contribution Agreement (terms used in this Section 3.5(a) that are not defined in this Agreement but are defined in the Contribution Agreement have the meanings assigned to them in the Contribution Agreement); and (b) the number of Partnership Units assigned to the Partnership Interest of each Partner, including, in the case of FHGLP, the number of Partnership Units assigned to the Partnership Interest of FHGLP with respect to the Capital Contributions being made by FHGLP pursuant to Section 2.2(b) of the Contribution Agreement (the "Section 2.2(b) Units"), based on the net fair market value of the Partners' Capital Contributions as specified on Schedule II pursuant to Section 3.5(a), taking into account the assignment by FHGLP of Partnership Interests to certain partners of FHGLP and the purchase of those Partnership Interests by TCI pursuant to 21 the Contribution Agreement, which will occur immediately following the Partners' Capital Contributions at Closing; and (c) the Percentage Interest of each Partner, based on the number of Partnership Units assigned to the Partnership Interest of each Partner, as specified on Schedule II pursuant to Section 3.5(b). 3.6 Operating Expenses. ------------------- Subject to Section 5.1(b)(2)(N) and Section 5.6, the Partnership shall pay (or shall reimburse the Managing Partner for) the operating expenses of the Partnership. 3.7 Interest Payments. ------------------ FHGLP and TCI shall make interest payments to the Partnership as provided in Section 2.2(c)(5) of the Contribution Agreement, and TCI shall make interest payments to the Partnership as provided in Section 11.19 of the Contribution Agreement. Interest paid or payable to the Partnership pursuant to the Contribution Agreement shall not, for purposes of this Agreement, be deemed to be a Capital Contribution. ARTICLE 4 DISTRIBUTIONS; ALLOCATIONS OF PROFIT AND LOSS 4.1 Distributions of Cash. ---------------------- (a) Amount and Timing of Distributions. (1) The Managing Partner shall cause the Partnership to distribute to the Partners prior to March 15 of each Fiscal Year an amount equal to the lesser of (A) the amount of cash held by the Partnership that the Partnership can then distribute to its Partners without violating any restrictions imposed by any contractual covenants of the Partnership, or (B) cash in the amount by which the Partners' Cumulative Estimated Tax Liability exceeds the aggregate amount of distributions previously made to the Partners pursuant to this Section 4.1(a) (including Section 4.1(a)(2)). For purposes of this paragraph, the "Partners' Cumulative Estimated Tax Liability" means the product of (A) the aggregate amount of taxable income and gain (net of or offset by items of deduction, loss, and credit) of the Partnership that has been recognized for income tax purposes and allocated to the Partners for all Fiscal Years of the Partnership through the end of the preceding Fiscal Year times (B) the highest marginal combined federal and state income tax rate applicable to either Partner or, so long as either Partner is treated as a partnership for federal income tax purposes, to any other Person that recognizes taxable income or gain as a result of the allocation from the Partnership, such Partner, or any other Person of taxable income and gain recognized initially by the Partnership (determined after giving effect to the deduction 22 (if allowable) of state income taxes for federal income tax purposes), as reasonably determined by the Managing Partner. (2) All cash of the Partnership not required to be distributed pursuant to Section 4.1(a)(1) shall be distributed at such times and in such amounts as the Managing Partner may determine in its sole discretion. (b) Allocation of Distributions. All distributions of cash pursuant to Section 4.1(a) and Section 13.2(d)(3) shall be allocated between the Partners in proportion to their Percentage Interests. (c) Tax Withholding. (1) The Partnership shall seek to qualify for and obtain exemptions from any provision of the Code or any provision of state, local, or foreign tax law that would otherwise require the Partnership to withhold amounts from payments or distributions to the Partners. If the Partnership does not obtain any such exemption, the Partnership is authorized to withhold from any payment or distribution to either Partner any amounts that are required to be withheld pursuant to the Code or any provision of any state, local, or foreign tax law that is binding on the Partnership. (2) Any amount withheld with respect to any payment or distribution to either Partner shall be credited against the amount of the payment or distribution to which the Partner would otherwise be entitled. If the Code or any provision of any state, local, or foreign tax law that is binding on the Partnership requires that the Partnership remit to any taxing authority any withholding tax with respect to, or for the account of, either Partner in its capacity as a Partner, the Managing Partner shall, to the extent that Partnership funds are available therefor, cause the Partnership to remit the full required amount of such withholding tax to the taxing authority and shall notify such Partner in writing of its obligation to pay to the Partnership such withholding tax to the extent it exceeds the amount of any payment or distribution to which such Partner would otherwise then be entitled. Each Partner shall pay to the Partnership, within five Business Days after its receipt of written notice from the Managing Partner (or, in the case of the Managing Partner, within five Business Days after becoming aware) that withholding is required with respect to such Partner, any amounts required to be remitted by the Partnership to any taxing authority with respect to such Partner that are in excess of the amount of any payment or distribution to which such Partner would otherwise be entitled. If the Partnership is required to remit any withholding tax with respect to, or for the account of, either Partner prior to the Partnership's receipt of any payment required to be made by such Partner pursuant to the preceding sentence, the amount of the payment required to be made by such Partner shall be treated as a loan (the "Withholding Advance") from the Partnership to the Partner, which shall accrue interest from the date the Partnership is required to remit such withholding tax until paid by such Partner or credited against payments or distributions to which such Partner would 23 otherwise be entitled as provided in Section 4.1(c)(3) at a rate of fifteen percent per year, compounded semi-annually. (3) Any Withholding Advance made to a Partner and any interest accrued thereon shall be credited against, and shall be offset by, the amount of any later payment or distribution to which the Partner would otherwise be entitled (without duplication of the credit provided in the first sentence of Section 4.1(c)(2)), with any credit for accrued and unpaid interest as of the date such payment or distribution would otherwise have been made being applied before any credit for the amount of the Withholding Advance. Any Withholding Advance made to a Partner and any interest accrued thereon, to the extent it has not previously been paid by the Partner in cash or fully credited against payments or distributions to which the Partner would otherwise be entitled, shall be paid by the Partner to the Partnership upon the earliest of (A) the dissolution of the Partnership, (B) the date on which the Partner ceases to be a Partner of the Partnership, or (C) demand for payment by the Managing Partner. (4) All amounts that are credited against payments or distributions to which a Partner would otherwise be entitled pursuant to this Section 4.1(c) shall be treated as amounts distributed to such Partner pursuant to Section 4.1(a) for all purposes of this Agreement. (d) Credit Against Required Contributions. The Partnership shall withhold from any distributions to which a Partner (or any Assignee of a Partner described in Section 2.2(c)(6) of the Contribution Agreement) would otherwise be entitled pursuant to this Agreement the amount of such Partner's remaining obligations under Section 2.2(c) of the Contribution Agreement, and any amounts so withheld shall be treated as amounts (1) distributed to such Partner (or Assignee) pursuant to Section 4.1(a) and (2) contributed or paid (as applicable) by such Partner in accordance with Section 2.2(c) of the Contribution Agreement. 4.2 Allocations of Net Profit and Net Loss. --------------------------------------- (a) Allocations of Net Profit and Net Loss. Except as provided in Section 4.2(b), Net Profit and Net Loss for each Fiscal Year (or portion thereof) shall be allocated between the Partners in proportion to their Percentage Interests. (b) Allocations of Net Profit and Net Loss Following Dissolution. Notwithstanding Section 4.2(a), following the dissolution of the Partnership pursuant to Section 13.1, beginning in the Fiscal Year in which such dissolution occurs or beginning in any Fiscal Year prior to the Fiscal Year in which such dissolution occurs if the Partnership's Federal income tax return for such prior Fiscal Year has not yet been required to be filed (not including extensions), items of income and gain, loss, and deduction shall be allocated as follows: (1) first, FHGLP shall be allocated (A) all deductions with respect to payments made by the Partnership pursuant to the Existing Incentive Plan in such Fiscal Year, and (B) deductions in an amount equal to all deductions for payments made by the Partnership 24 pursuant to the Existing Incentive Plan in all prior Fiscal Years (other than payments with respect to which deductions have previously been allocated to FHGLP pursuant to clause (A) of this Section 4.2(b)(1)); and (2) thereafter, items of income and gain, loss, and deduction shall be allocated between the Partners so as to cause the credit balance in each Partner's Capital Account to equal the amount of distributions such Partner would be entitled to receive if an amount equal to the aggregate credit balances in the Partners' Capital Accounts were distributed pursuant to Section 4.1(b). 4.3 Special Provisions Regarding Allocations of Profit and Loss. ------------------------------------------------------------ (a) Minimum Gain Chargeback. Notwithstanding any other provision of this Article 4, if there is a net decrease in Partnership Minimum Gain for any Fiscal Year, each Partner shall be specially allocated items of Partnership income and gain for such Fiscal Year (and if necessary for succeeding Fiscal Years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g); PROVIDED, HOWEVER, that this Section 4.3(a) shall not apply to the extent the circumstances described in Treasury Regulations Sections 1.704-2(f)(2), 1.704-2(f)(3), 1.704- 2(f)(4), or 1.704-2(f)(5) exist. Allocations made pursuant to the preceding sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items of Partnership income and gain to be allocated pursuant to this Section 4.3(a) shall be determined in accordance with Treasury Regulations Section 1.704-2(f)(6). This Section 4.3(a) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. (b) Partner Minimum Gain Chargeback. Notwithstanding any other provision of this Article 4 except Section 4.3(a), if during any Fiscal Year there is a net decrease in Partner Nonrecourse Debt Minimum Gain, each Partner with a share of that Partner Nonrecourse Debt Minimum Gain (determined in accordance with Treasury Regulations Section 1.704-2(i)(5)) as of the beginning of such Fiscal Year must be allocated items of Partnership income and gain for the Fiscal Year (and, if necessary, for succeeding Fiscal Years) equal to that Partner's share of the net decrease in the Partner Nonrecourse Debt Minimum Gain (determined in accordance with Treasury Regulations Section 1.704-2(i)(4)); PROVIDED, HOWEVER, that this Section 4.3(b) shall not apply to the extent the circumstances described in the third and fifth sentences of Treasury Regulations Section 1.704-2(i)(4) exist. Allocations pursuant to the preceding sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items of Partnership income and gain to be allocated pursuant to this Section 4.3(b) shall be determined in accordance with Treasury Regulations Section 1.704-2(i)(4). This Section 4.3(b) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. 25 (c) Qualified Income Offset. If a Limited Partner unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulations Sections 1.704- 1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to such Limited Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Limited Partner as quickly as possible; PROVIDED, HOWEVER, that an allocation pursuant to this Section 4.3(c) shall be made if and only to the extent that such Limited Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article 4 have been tentatively made as if this Section 4.3(c) were not in this Agreement. Allocations made pursuant to the preceding sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. (d) Gross Income Allocation. If a Limited Partner has a deficit Capital Account at the end of any Fiscal Year that is in excess of the sum of (1) the amount such Limited Partner is obligated to restore to the Partnership pursuant to Treasury Regulations Section 1.704- 1(b)(2)(ii)(c), (2) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-2(g)(1), and (3) the amount such Limited Partner is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Section 1.704-2(i)(5), such Limited Partner shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible; PROVIDED, HOWEVER, that an allocation pursuant to this Section 4.3(d) shall be made if and only to the extent that such Limited Partner would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article 4 have been tentatively made as if Section 4.3(c) and this Section 4.3(d) were not in this Agreement. Allocations made pursuant to the preceding sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. (e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated between the Partners in proportion to their Percentage Interests. (f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Partner that bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulations Section 1.704-2(i). (g) Section 754 Adjustment. To the extent any adjustment to the adjusted tax basis of any asset of the Partnership pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of 26 the Treasury Regulations. Any election permitted under Code Section 754 shall be made by the Managing Partner in its sole discretion, subject to Section 9.7. (h) Excess Nonrecourse Liabilities. For purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Treasury Regulations Section 1.752-3(a)(3), each Partner's interest in Partnership profits shall be deemed to be equal to such Partner's Percentage Interest. (i) Curative Allocations. The allocations set forth in this Article 4 (other than Section 4.3(g), Section 4.3(h), and this Section 4.3(i)) (the "Regulatory Allocations") are intended to comply with certain requirements of the Treasury Regulations. The Partners intend that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 4.3(i). Therefore, notwithstanding any other provision of this Article 4 (other than the Regulatory Allocations), the Managing Partner shall make such offsetting special allocations of Partnership income, gain, loss, or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of this Agreement and all Partnership items were allocated pursuant to Section 4.2. In exercising its discretion under this Section 4.3(i), the Managing Partner shall take into account any future Regulatory Allocations under Section 4.3(a) and Section 4.3(b) that, although not yet made, are likely to offset Regulatory Allocations made under Section 4.3(e) and Section 4.3(f). 4.4 Tax Allocations: Code Section 704(c). ------------------------------------- (a) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated between the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value using the traditional allocation method described in Treasury Regulations Section 1.704-3(b). (b) If the Gross Asset Value of any asset of the Partnership is adjusted pursuant to paragraph (ii) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. (c) Allocations pursuant to this Section 4.4 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, either Partner's Capital Account or share of Net Profit, Net Loss, other items, or distributions pursuant to any provision of this Agreement. 27 ARTICLE 5 AUTHORITY OF THE MANAGING PARTNER; OTHER MATTERS AFFECTING GENERAL PARTNERS 5.1 Authority of Managing Partner. ------------------------------ (a) Permitted Acts. Except as expressly provided otherwise in this Agreement, the Managing Partner shall have the exclusive authority to manage the business, operations, and affairs of the Partnership (including internal matters) and the exclusive right to exercise all rights incident to the ownership of all partnership or corporate interests held by the Partnership, and shall have all authority, rights, and powers conferred by law and those required or appropriate for the management of the Partnership business. Each General Partner, including each additional and substituted General Partner, other than the Managing Partner, agrees not to exercise individually any authority, rights, or powers conferred by law on general partners (including any authority, rights, or powers conferred on general partners under the Act) other than as expressly provided in this Agreement or at the direction of or pursuant to authority delegated to it by the Managing Partner. (b) Limitations and Restrictions. (1) Advisory Committee Approval. Notwithstanding any provision in this Agreement to the contrary, and in addition to any other consent or approval that may be required by the express terms of this Agreement, the Partnership shall not, and the Managing Partner shall have no authority to cause the Partnership to, do any of the following without the affirmative vote of at least a majority of the members of the Advisory Committee: (A) sell or otherwise dispose of, or cause or permit any Subsidiary to sell or otherwise dispose of, in any one transaction (or series of mutually contingent transactions), assets of the Partnership or any Subsidiary having an aggregate value in excess of $15,000,000, except upon the liquidation and dissolution of the Partnership in accordance with Article 13 (including a liquidation following an election by the Offering Partner pursuant to Section 10.3(a) or Section 10.5(a)(2)); PROVIDED, HOWEVER, that the limitations of this paragraph shall not apply to any disposition of assets by the Partnership to a Subsidiary or by a Subsidiary to the Partnership or another Subsidiary, to any pledging of assets by any Person to secure any Indebtedness of such Person permitted by this Agreement, to any disposition of assets upon the exercise of any rights granted by such a pledge, or to any transaction approved by TCI pursuant to Section 5.1(b)(2)(B) or Section 5.1(b)(2)(C); (B) purchase or otherwise acquire, or cause or permit any Subsidiary to purchase or otherwise acquire, any assets, business, equity interest in another Person, or other property in any one transaction (or series of mutually contingent transactions) 28 having an aggregate value in excess of $15,000,000; PROVIDED, HOWEVER, that the limitations of this paragraph shall not apply to any transaction approved by TCI pursuant to Section 5.1(b)(2)(D), any acquisition of assets by a Subsidiary from the Partnership or from another Subsidiary, the acquisition of the Classic Systems (as defined in the Contribution Agreement), the contribution of assets to the Partnership pursuant to the Contribution Agreement, or the purchase of partnership interests in FHGLP pursuant to Article 9 of the FHGLP Partnership Agreement; or (C) engage, or cause or permit any Subsidiary to engage, in any line of business other than: (1) acquiring, developing, owning, operating, managing, and selling cable television systems and any related or ancillary businesses that involve the distribution of video programming or data to subscribers, including businesses engaged in the production of cable television programming and the provision of Internet access, but excluding other related or ancillary businesses, such as personal communications, alternative access, and other telephony-related investments or businesses, (2) preliminary activities undertaken by the Partnership or any Subsidiary to determine the feasibility of engaging in any line of business, or (3) any business activity that does not involve an aggregate capital commitment by the Partnership and the Subsidiaries in excess of $1,000,000. (2) TCI Approval. Notwithstanding any provision in this Agreement to the contrary, and in addition to any other consent or approval that may be required by the express terms of this Agreement, the Partnership shall not, and the Managing Partner shall have no authority to cause the Partnership to, do any of the following without the approval of TCI: (A) merge with or consolidate into any Person or become a party to any recapitalization or other form of reorganization, or cause or permit any Subsidiary to merge with or consolidate into any Person or become a party to any recapitalization or other form of reorganization (except that, without the approval of TCI, (1) the Partnership may merge with or consolidate into another Person for the purpose of effecting an Incorporation pursuant to Section 11.1(a); (2) a Subsidiary may merge with another Subsidiary or with the Partnership and the Partnership may merge with a Subsidiary; and (3) a Subsidiary may merge with a Person other than a Subsidiary as a means of effecting any acquisition or disposition of assets that is otherwise permitted by this Agreement); (B) sell or otherwise dispose of, or cause or permit any Subsidiary to sell or otherwise dispose of, in any one transaction (or series of mutually contingent transactions), assets of the Partnership or any Subsidiary (1) having an aggregate value in excess of $500,000 if the aggregate value of all assets sold or otherwise disposed of in transactions 29 described in this Section 5.1(b)(2)(B) would exceed the Sale Limit or (2) having an aggregate value in excess of $30,000,000, except in either case upon the liquidation and dissolution of the Partnership in accordance with Article 13 (including a liquidation following an election by the Offering Partner pursuant to Section 10.3(a) or Section 10.5(a)(2)); PROVIDED, HOWEVER, that the limitations of this paragraph shall not apply to any disposition of assets by the Partnership to a Subsidiary or by a Subsidiary to the Partnership or another Subsidiary, to any pledging of assets by any Person to secure any Indebtedness of such Person permitted by this Agreement, or to any disposition of assets upon the exercise of any rights granted by such a pledge; for purposes of this paragraph, the "Sale Limit" means $100,000,000, reduced by the net pre-tax sales proceeds from the sale of any Retained TCI Assets (as defined in the Contribution Agreement) pursuant to Section 11.10(e) of the Contribution Agreement and increased, but not above $100,000,000, by the value of any assets that are sold or otherwise disposed of by the Partnership or any Subsidiary and are not TCI Assets (as defined in the Contribution Agreement); (C) sell or otherwise dispose of, or cause or permit any Subsidiary to sell or otherwise dispose of, any assets of the Partnership or any Subsidiary, if such sale or other disposition would result in the allocation of income or gain to TCI pursuant to Section 4.4 and Code Section 704(c), except upon the liquidation and dissolution of the Partnership in accordance with Article 13 (including a liquidation following an election by the Offering Partner pursuant to Section 10.3(a) or Section 10.5(a)(2)); PROVIDED, HOWEVER, that the limitations of this paragraph shall not apply to any pledging of assets by any Person to secure any Indebtedness of such Person permitted by this Agreement or to any disposition of assets upon the exercise of any rights granted by such a pledge; (D) purchase or otherwise acquire, or cause or permit any Subsidiary to purchase or otherwise acquire, any assets, business, equity interest in another Person, or other property in any one transaction (or series of mutually contingent transactions) (1) having an aggregate value in excess of $500,000 if the aggregate value of all property purchased or otherwise acquired in transactions described in this Section 5.1(b)(2)(D) would exceed $100,000,000 or (2) having an aggregate value in excess of $30,000,000; PROVIDED, HOWEVER, that the limitations of this paragraph shall not apply to any acquisition of assets by a Subsidiary from the Partnership or from another Subsidiary, the acquisition of the Classic Systems (as defined in the Contribution Agreement), the contribution of assets to the Partnership pursuant to the Contribution Agreement, or the purchase of partnership interests in FHGLP pursuant to Article 9 of the FHGLP Partnership Agreement; (E) make the election provided for in Section 9.1(a)(3) of the FHGLP Partnership Agreement; (F) take any other action that is within the discretion of the Partnership pursuant to Article 9 of the FHGLP Partnership Agreement; 30 (G) incur, create, or assume, or cause or permit any Subsidiary to incur, create, or assume, any Indebtedness if, after giving effect to such Indebtedness, the Operating Cash Flow Ratio would exceed 7.5:1; (H) prior to the second anniversary of the Closing, cause or permit any Subsidiary to incur any Indebtedness the proceeds of which will be used to repay any Indebtedness of the Partnership, or cause or permit any Subsidiary to assume or otherwise become obligated with respect to any Indebtedness of the Partnership (other than pursuant to the guaranties contemplated by Section 2.8(e) of the Contribution Agreement), if, after such repayment, assumption, or other action, the amount of Indebtedness for which the Partnership is the sole primary obligor would be less than the quotient of (1) the amount of Indebtedness of TCI assumed by the Partnership pursuant to Section 4.1(c) of the Contribution Agreement divided by (2) TCI's Percentage Interest immediately after the Closing, after giving effect to TCI's purchase of the NewFalcon Interests; (I) issue any Partnership Interest or any option, warrant, or other debt or equity interest convertible into or evidencing the right to acquire (whether or not for additional consideration) any Partnership Interest, except in connection with an Incorporation pursuant to Section 11.1(a) or pursuant to any Management Incentive Plan approved pursuant to Section 5.1(b)(2)(L); (J) purchase, redeem, retire, or otherwise acquire any Partnership Interests, except as provided in Section 9.13(a) or Article 10 and except for the purchase, redemption, retirement, or other acquisition of any equity interest where the terms of such interest, as approved in accordance with Section 5.1(b)(2)(I), permit or require such purchase, redemption, retirement, or other acquisition; (K) enter into any transaction or agreement, or cause or permit any Subsidiary to enter into any transaction or agreement, with FHGLP or any Affiliate of FHGLP unless the transaction or agreement is on terms that are no less favorable to the Partnership or Subsidiary than could have been obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of FHGLP; PROVIDED, HOWEVER, the limitations of this paragraph shall not apply to the transactions described on Schedule III; (L) adopt or materially amend any employee benefit plan or other compensation arrangement providing for (1) the issuance of Partnership Interests or options evidencing the right to acquire Partnership Interests or (2) the payment of compensation based on the value, or any appreciation in value, of Partnership Interests or the business of the Partnership, to employees of the Partnership and the Subsidiaries (a "Management Incentive Plan"); (M) make reimbursements pursuant to Section 5.7(b) or Section 5.7(c) for costs and expenses incurred by FHGLP or Falcon Holding Group, Inc. in any calendar year that exceed $35,000 in the aggregate for both FHGLP and Falcon Holding Group, Inc.; 31 (N) incur Net Overhead Expenses in any Fiscal Year beginning after the Closing that exceed 4.5% of the Gross Revenues of the Partnership and the Subsidiaries for such Fiscal Year, where "Net Overhead Expenses" means (1) the sum of (a) expenses allocable to administrative employees of the Partnership (but not employees who are employed primarily in the operations of any cable television system or group of cable television systems or regions), including salary, wages, and benefits of such employees and associated payroll taxes, but excluding payments or accruals pursuant to any Management Incentive Plan, (b) legal, audit, and accounting fees, other than expenses that relate primarily to the operations of cable television systems, expenses of a type that FHGLP has historically allocated to cable television systems or regions, and non-recurring costs, such as those relating to financings and acquisitions, (c) expenses relating to office space occupied by the Partnership for its corporate offices, which are currently located in Westwood and Pasadena, California, (d) reimbursements by the Partnership pursuant to Section 5.7(b) or Section 5.7(c) of costs and expenses incurred by FHGLP or Falcon Holding Group, Inc., (e) the cost of insurance required in connection with the administrative activities of the Partnership, but not insurance that relates primarily to the operations of cable television systems or insurance of a type the cost of which FHGLP has historically allocated to cable television systems or regions, (f) reasonable expenses in connection with distributions made by the Partnership and communications necessary in maintaining relations with Partners and outside parties (other than communications that relate primarily to the operations of cable television systems), (g) reasonable expenses in connection with preparing and mailing reports required to be furnished to Partners for investor, tax reporting, or other purposes, or other reports to Partners that the Managing Partner deems to be in the best interest of the Partnership; (h) reasonable expenses of professionals employed by the Partnership in connection with any of the foregoing, including attorneys, accountants, and appraisers, and (i) other expenses incurred by the Partnership of the kinds included in FHGLP's calculation of corporate overhead as reflected in the worksheet presented by FHGLP to TCI in connection with the negotiation of this Agreement, less (2) the sum of all management fees, expense reimbursements, and other payments received by the Partnership from a Person other than a Subsidiary; and "Gross Revenues" means the aggregate gross revenues of the Partnership and the Subsidiaries, as determined on a consolidated basis in accordance with generally accepted accounting principles applied in a manner consistent with the Partnership's annual financial statements pursuant to Section 15.3; (O) liquidate or dissolve except in accordance with Article 13; (P) do any act in contravention of this Agreement; (Q) possess any property of the Partnership or assign the rights of the Partnership in specific property of the Partnership for other than a Partnership purpose; or (R) perform any act (other than an act required by this Agreement or any act taken in good faith reliance upon counsel's opinion that such act will not subject any 32 Limited Partner to liability as a general partner) which would, at the time the act occurred, subject any Limited Partner to liability as a general partner in any jurisdiction. (3) TCI Approval Defined. For purposes of this Agreement, including Section 5.1(b)(2), TCI shall be deemed to have approved any action or proposed action by or on behalf of Falcon Holding Group, Inc., FHGLP, the Partnership, or any Subsidiary if: (A) TCI has affirmatively approved the taking of such action, or (B) TCI has failed to object to the taking of such action within forty-five days (or, in the case of Section 5.1(b)(2)(F), five days) after its receipt of a request from Falcon Holding Group, Inc. or FHGLP for its approval of the taking of such action, or (C) in the case of an action described in Section 5.1(b)(2)(B), Section 5.1(b)(2)(D), Section 5.1(b)(2)(F), or any provision of this Agreement (including Section 11.1(a)) that requires that TCI not unreasonably withhold its approval of any action, TCI has unreasonably withheld its approval of the taking of such action. (4) Consideration of Financings. The Managing Partner will consult with the Advisory Committee before entering into any agreement, or making any material amendment to any agreement, or causing any Subsidiary to enter into any agreement or to make any material amendment to any agreement, providing for the incurring, creation, or assumption by the Partnership or any Subsidiary of Indebtedness in excess of $1,000,000, but the Managing Partner shall not be required under this Section 5.1(b)(4) or otherwise to obtain the approval of the Advisory Committee in connection with any such transaction. (5) Authority to Make Certain Loans. Subject to restrictions in any credit agreement or other similar agreement to which the Partnership or any Subsidiary is a party, if any senior executive employee of the Partnership (other than Marc B. Nathanson) owns a partnership interest in the Managing Partner at the time of his death, the Managing Partner may, without the approval of TCI or the Advisory Committee, cause the Partnership to make loans to the estate of such employee for the sole purpose of permitting the estate of such employee to pay federal and state estate and inheritance taxes that are attributable to such employee's ownership of a partnership interest in the Managing Partner at the time of his death. Any such loan shall be on commercially reasonable terms determined by the Managing Partner, except that (A) such loan shall bear interest at the applicable Federal rate under Code Section 1274 for a debt instrument having the terms of such loan and (B) any estate of an employee to which such a loan is made shall be required to prepay such loan to the extent of any distributions made by the Managing Partner with respect to the partnership interest held by such employee at the time of his death. 33 5.2 Agreements by Falcon Holding Group, Inc. ---------------------------------------- (a) By executing this Agreement, Falcon Holding Group, Inc. agrees, subject to Section 5.2(b): (1) not to take any action in its capacity as general partner of FHGLP or any Investors Partnership that would be prohibited by the provisions of Section 5.1(b) if the Managing Partner had caused the Partnership to take such action directly; (2) without the approval of TCI or as contemplated by Section 10.10, not to effect a withdrawal (as defined in Section 8.1 or in those provisions of any applicable partnership act other than the Act that correspond to the provisions of the Act referred to in Section 8.1) as general partner of FHGLP or any Investors Partnership, or assign, convey, sell, transfer, encumber, or in any way alienate all or any part of its interest in any Investors Partnership, (3) without the approval of TCI or as contemplated by Section 10.10, not to permit the admission of an additional general partner of any Investors Partnership, (4) without the approval of TCI, not to permit the admission of an additional general partner of FHGLP if Falcon Holding Group, Inc. would not then have the power to take all material actions that it is entitled to or required to take under the partnership agreement of FHGLP in its capacity as general partner of FHGLP, (5) without the approval of TCI, not to permit any amendment to the partnership agreement of FHGLP (other than entering into the FHGLP Partnership Agreement) if (A) Falcon Holding Group, Inc. would not then have the power to take all material actions that it is entitled to or required to take under the partnership agreement of FHGLP in its capacity as general partner of FHGLP, or (B) such amendment would materially and adversely affect TCI in its capacity as a partner of the Partnership, (6) without the approval of TCI, not to assign, convey, sell, transfer, encumber, or in any way alienate all or any part of its interest in FHGLP, if Falcon Holding Group, Inc. would not then have the power to take all material actions that it is entitled to or required to take under the partnership agreement of FHGLP in its capacity as general partner of FHGLP, (7) not to receive any indemnification or reimbursement from any of the Investors Partnerships or any of the Existing Entities with respect to any expense, liability, loss, or damage arising after the date of this Agreement for which FHGLP would not have been entitled to indemnification or reimbursement under this Agreement if such expense, liability, loss, or damage had arisen in connection with the business of the Partnership, and 34 (8) not to receive any payment from any Investors Partnership other than indemnification for or reimbursement of expenses, liabilities, losses, and damages (to the extent provided in the partnership agreement of such Investors Partnership and permitted by Section 5.2(a)(7)) and payments with respect to Falcon Holding Group, Inc.'s partnership interest in such Investors Partnership. (b) Notwithstanding Section 5.2(a), Falcon Holding Group, Inc. may take any action necessary or appropriate to effect the conversion of FHGLP to a corporation or another appropriate transaction, including the formation of a corporate holding company, that results in the partnership interest of Falcon Holding Group, Inc. in FHGLP being converted into, or exchanged for, stock in a corporation, in the manner contemplated by Article 10 of the FHGLP Partnership Agreement, so long as, after such transaction, Falcon Holding Group, Inc. would have the power to take all material actions with respect to the corporate successor to FHGLP that it is entitled to or required to take under the partnership agreement of FHGLP in its capacity as general partner of FHGLP. 5.3 No Personal Liability. ---------------------- Neither General Partner shall have any personal liability for the repayment of the Capital Contributions of any Limited Partner; provided that each General Partner shall promptly return to the Partnership or to the Partner or Partners entitled thereto any distributions received by such General Partner in excess of those to which the General Partner is entitled under this Agreement. 5.4 Limited Liability. ------------------ The Managing Partner shall use commercially reasonable efforts, in the conduct of the Partnership's business, to put all suppliers and other Persons with which the Partnership does business on notice that the Partnership is a limited partnership organized under the Act and that no Limited Partner has any personal liability for any obligation of the Partnership. 5.5 Tax Matters Partner. -------------------- (a) FHGLP is hereby designated as the Tax Matters Partner of the Partnership, as provided in Treasury Regulations pursuant to Code Section 6231 and analogous provisions of state law. Each Partner, by the execution of this Agreement, consents to such designation of the Tax Matters Partner and agrees to execute, certify, acknowledge, deliver, swear to, file, and record at the appropriate public offices such documents as may be necessary or appropriate to evidence such consent. (b) To the extent and in the manner provided by applicable law and Treasury Regulations, the Tax Matters Partner shall furnish the name, address, profits interest, and taxpayer identification number of each Partner and any Assignee to the Secretary of the Treasury or his delegate (the "Secretary"). 35 (c) The Tax Matters Partner shall (1) notify each Partner of any audit that is brought to the attention of the Tax Matters Partner by notice from the Internal Revenue Service, and (2) forward to each Partner copies of any written notices, correspondence, reports, or other documents received by the Tax Matters Partner in connection with such audit. The Tax Matters Partner shall notify each Partner pursuant to clause (1) of the preceding sentence within ten Business Days after its receipt of the notice from the Internal Revenue Service described therein, and shall forward to each Partner copies of any notice, correspondence, report, or other document pursuant to clause (2) of the preceding sentence within ten Business Days after its receipt by the Tax Matters Partner. The Tax Matters Partner shall provide TCI with reasonable advance notice of administrative proceedings with the Internal Revenue Service, including any closing conference with the examining agent and any appeals conference. (d) The Tax Matters Partner shall give the Partners written notice of its intent to initiate judicial review, file a request for administrative adjustment on behalf of the Partnership, extend the period of limitations for making assessments of any tax against a Partner with respect to any Partnership item, or enter into any agreement with the Internal Revenue Service that would result in the settlement of any alleged tax deficiency or other tax matter, or to any adjustment of taxable income or loss or any item included therein, affecting the Partnership or any Partner. The Tax Matters Partner shall not take any such action if TCI elects within thirty days after their receipt of the Tax Matters Partner's notice to require that the Tax Matters Partner refrain from taking such action. (e) Subject to the foregoing provisions of this Section 5.5, the Tax Matters Partner is hereby authorized, but not required: (1) to enter into any settlement with the Internal Revenue Service or the Secretary with respect to any tax audit or judicial review, in which agreement the Tax Matters Partner may expressly state that such agreement shall bind the other Partners, except that such settlement agreement shall not bind either Partner that (within the time prescribed pursuant to the Code and Treasury Regulations thereunder) files a statement with the Secretary providing that the Tax Matters Partner shall not have the authority to enter into a settlement agreement on the behalf of such Partner; (2) if a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the Tax Matters Partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court, the District Court of the United States for the district in which the Partnership's principal place of business is located, or elsewhere as allowed by law, or the United States Claims Court; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; 36 (4) to file a request for an administrative adjustment with the Secretary at any time and, if any part of such request is not allowed by the Secretary, to file a petition for judicial review with respect to such request; (5) to enter into an agreement with the Internal Revenue Service to extend the period for assessing any tax that is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners (with respect to the Partnership) or the Partnership in connection with any administrative or judicial tax proceeding to the extent permitted by applicable law or Treasury Regulations. (f) The Partnership shall indemnify and reimburse the Tax Matters Partner for all reasonable expenses (including legal and accounting fees) incurred pursuant to this Section 5.5 in connection with any administrative or judicial proceeding with respect to the tax liability of the Partners. The payment of all such reasonable expenses shall be made before any distributions are made to the Partners. The taking of any action and the incurring of any expense by the Tax Matters Partner in connection with any such proceeding, except to the extent provided herein or required by law, is a matter in the sole discretion of the Tax Matters Partner and the provisions on limitations of liability of the Managing Partner and indemnification set forth in Article 14 shall be fully applicable to FHGLP in its capacity as the Tax Matters Partner. (g) Any Limited Partner that receives a notice of an administrative proceeding under Code Section 6233 relating to the Partnership shall promptly notify the Tax Matters Partner of the treatment of any Partnership item on such Partner's federal income tax return that is or may be inconsistent with the treatment of that item on the Partnership's return. (h) Either Partner that enters into a settlement agreement with the Secretary with respect to any Partnership item shall notify the Tax Matters Partner of such agreement and its terms within sixty days after its date, and the Tax Matters Partner shall notify the other Partners of the settlement agreement within thirty days of such notification. 5.6 Compensation to the Managing Partner and Affiliates. ---------------------------------------------------- Except as described on Schedule III, the Managing Partner and its Affiliates shall not receive any compensation directly or indirectly in connection with the formation, operation, and dissolution of the Partnership except as specified or referred to in this Agreement; PROVIDED, HOWEVER, that partners of FHGLP and officers, directors, and shareholders of Falcon Holding Group, Inc. who are employees of the Partnership may receive compensation for their services as employees of the Partnership, subject to Section 5.1(b)(2)(K). 37 5.7 Reimbursement. -------------- (a) The Partnership shall reimburse each of FHGLP and TCI for all costs and expenses reasonably incurred by either of them (whether incurred before or after the formation of the Partnership) in connection with the formation, organization, and capitalization of the Partnership (including costs and expenses incurred in arranging any proposed or consummated financing), except that the Partnership shall not reimburse FHGLP for, and FHGLP shall retain liability for, the fee described in clause (i) of paragraph 2 of the letter, dated as of June 2, 1997, from Lazard Freres & Co. LLC to FHGLP. (b) Subject to Section 5.1(b)(2)(M) and Section 5.1(b)(2)(N), the Partnership shall also reimburse FHGLP for (1) actual costs and expenses incurred (including filing fees and reasonable legal fees and expenses) for the purpose of maintaining the partnership existence of FHGLP and maintaining the legal status of FHGLP as a partner of the Partnership, (2) costs incurred in the preparation of FHGLP's tax returns and financial statements, (3) costs incurred in connection with the audit of FHGLP's annual financial statements, (4) reasonable expenses in connection with distributions made by FHGLP to its partners and communications necessary in maintaining relations with its partners and outside parties, and (5) reasonable expenses in connection with preparing and mailing reports required to be furnished to its partners for investor, tax reporting, or other purposes, or other reports to its partners that the general partner of FHGLP deems to be in the best interest of FHGLP. (c) Subject to Section 5.1(b)(2)(M) and Section 5.1(b)(2)(N), the Partnership shall also reimburse Falcon Holding Group, Inc. for (1) actual costs and expenses incurred (including filing fees and reasonable legal fees and expenses) for the purpose of maintaining the corporate existence of Falcon Holding Group, Inc. and maintaining the legal status of Falcon Holding Group, Inc. as general partner of FHGLP, (2) reasonable costs incurred in the preparation of Falcon Holding Group, Inc.'s tax returns and financial statements, and (3) costs incurred in connection with the audit of Falcon Holding Group, Inc.'s annual financial statements. (d) The Partnership shall also reimburse FHGLP and TCI for certain expenses to the extent provided in the Contribution Agreement. ARTICLE 6 ADVISORY COMMITTEE 6.1 Membership. ----------- The Partnership shall have an Advisory Committee consisting of six individual representatives of the Partners, as follows: 38 (a) three members of the Advisory Committee shall be designated from time to time by FHGLP in its sole discretion, and one of such members shall be designated by FHGLP as the "chairman" of the Advisory Committee; provided that FHGLP agrees to designate Marc B. Nathanson as a member of the Advisory Committee and as the chairman of the Advisory Committee pursuant to this paragraph for so long as he remains the chief executive officer of the Partnership; (b) one member of the Advisory Committee, who shall not be an officer, director, or employee of FHGLP or any Affiliate of FHGLP, shall be designated by agreement between FHGLP and TCI (except that the initial member of the Advisory Committee to be designated pursuant to this Section 6.1(b), as listed on Schedule IV, shall not require such approval); and (c) two members of the Advisory Committee shall be designated from time to time by TCI. 6.2 Removal and Replacement of Members. ----------------------------------- Any member of the Advisory Committee designated pursuant to Section 6.1(a) or Section 6.1(c) may be removed and replaced at any time, and from time to time, by the Partner that originally designated such member in accordance with Section 6.1(a) or Section 6.1(c). The member of the Advisory Committee designated pursuant to Section 6.1(b) may be removed at any time, and from time to time, by agreement between FHGLP and TCI or, if such member has served for at least two consecutive years, by either FHGLP or TCI. The member of the Advisory Committee designated pursuant to Section 6.1(b), if removed, shall be replaced by agreement between FHGLP and TCI. 6.3 Frequency and Location of Meetings. ----------------------------------- The Advisory Committee shall meet at such times as shall be determined by the chairman of the Advisory Committee, but in any event at least quarterly unless otherwise agreed to by FHGLP and TCI. Meetings of the Advisory Committee may be called from time to time, on at least five days notice (which need not be in writing), by the chairman of the Advisory Committee. Meetings of the Advisory Committee shall be held at a location selected from time to time by the chairman of the Advisory Committee. 6.4 By-Laws and Other Matters. -------------------------- The By-Laws of the Advisory Committee, in the form attached as Exhibit I, shall govern the organization of the Advisory Committee, procedures for meetings of the Advisory Committee, and procedures for actions by the members of the Advisory Committee in lieu of meetings. The Advisory Committee shall have the authority, by affirmative vote of a majority of its members then in office, to amend the By-Laws of the Advisory Committee in any manner that is not 39 inconsistent with the express terms of this Agreement. Members of the Advisory Committee may participate in any meeting of the Advisory Committee by means of conference telephone or similar communications equipment through which all persons participating in the meeting can hear each other. The chairman may invite individuals who are not members of the Advisory Committee to attend and participate in meetings of the Advisory Committee. 6.5 Reimbursement. -------------- The Partnership shall reimburse each member of the Advisory Committee for expenses, including travel and legal expenses, reasonably incurred in connection with such member's performance of his duties as a member of the Advisory Committee. 6.6 Members. -------- The members of the Advisory Committee, as designated by FHGLP and TCI, as of the date of this Agreement, are set forth on Schedule IV. ARTICLE 7 STATUS OF LIMITED PARTNERS; OTHER LIMITATIONS ON PARTNERS 7.1 Limited Liability. ------------------ No Limited Partner shall be bound by or personally liable for the expenses, liabilities, or obligations of the Partnership. In no event shall any Limited Partner be required to make up a deficiency in its Capital Account upon the dissolution and termination of the Partnership. 7.2 Return of Distributions of Capital. ----------------------------------- A Limited Partner may, under certain circumstances, be required by law to return to the Partnership, for the benefit of the Partnership's creditors, amounts previously distributed. No Limited Partner shall be obligated by this Agreement to pay those distributions to or for the account of the Partnership or any creditor of the Partnership. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner must return or pay over any part of those distributions, the obligation shall be that of such Limited Partner alone and not of any other Partner. Any payment returned to the Partnership by a Partner or made directly by a Partner to a creditor of the Partnership shall be deemed a Capital Contribution by such Partner. 40 7.3 No Management and Control. -------------------------- Except as expressly provided in this Agreement, no Partner shall take part in or interfere in any manner with the control, conduct, or operation of the Partnership or have any right or authority to act for or bind the Partnership. 7.4 Specific Limitations. --------------------- No Partner shall have the right or power to: (a) withdraw or reduce its Capital Contribution except as a result of the dissolution of the Partnership or as otherwise provided by law or in this Agreement, (b) bring an action for partition against the Partnership or any assets of the Partnership, (c) cause the termination and dissolution of the Partnership, except as set forth in this Agreement, or (d) demand or receive property other than cash in return for its Capital Contribution. Except as otherwise set forth in this Agreement or in any agreement permitted to be entered into under this Agreement with respect to the purchase, redemption, retirement, or other acquisition of Partnership Interests, no Partner shall have priority over any other Partner either as to the return of its Capital Contribution or as to Net Profit, Net Loss, or distributions. Other than upon the termination and dissolution of the Partnership as provided by this Agreement, there has been no time agreed upon when the Capital Contribution of either Partner will be returned. 7.5 Issuance of Partnership Interests. ---------------------------------- Subject to any approval that may be required by Section 5.1(b)(2)(I) and, if such approval is required, in accordance with the terms thereof, the Managing Partner may issue additional Partnership Interests to any Person and may admit to the Partnership as additional Partners the Persons acquiring such Partnership Interests, if such Persons were not previously admitted as Partners. The Persons acquiring such Partnership Interests shall have the rights and be subject to the obligations attributable to such Partnership Interests in the form issued to them. A Person admitted as a new Partner shall only be entitled to distributions and allocations of Net Profit and Net Loss attributable to the period beginning on the effective date of its admission to the Partnership, and the Partnership shall attribute Net Profit and Net Loss to the period before the effective date of the admission of a new Partner and to the period beginning on the effective date of the admission of a new Partner by the closing of the books method. 7.6 Restrictions on the Powers and Activities of the Limited Partners. ------------------------------------------------------------------ (a) Notwithstanding anything in this Agreement to the contrary, but subject to Section 7.6(b), each Limited Partner, including each additional and substituted Limited Partner, in its capacity as such, shall be subject to the following limitations: 41 (1) No Limited Partner shall act as an employee of the Partnership if the functions of such Limited Partner, directly or indirectly, relate to any cable television system or other media enterprise owned or operated by the Partnership or any Subsidiary; (2) No Limited Partner shall serve, in any material capacity, as an independent contractor or agent with respect to any cable television system or other media enterprise owned or operated by the Partnership or any Subsidiary; (3) No Limited Partner shall communicate with any Person that holds any license, permit, or authorization issued by the FCC and in which the Partnership holds an interest, or with the Managing Partner, on matters pertaining to the day-to-day operations of any cable television system or other media enterprise owned or operated by the Partnership or such Person, and no Limited Partner shall be entitled to vote on such matters; (4) No Limited Partner shall vote on the removal of, or otherwise have the power to remove, any General Partner; (5) No Limited Partner shall perform any services for the Partnership materially related to any cable television system or other media enterprise owned or operated by the Partnership or any Subsidiary; and (6) No Limited Partner shall become actively involved in the management or operation of any cable television system or other media enterprise owned or operated by the Partnership or any Subsidiary. (b) Section 7.6(a) shall not apply to: (1) any Limited Partner that is also a General Partner or to any Limited Partner that is an Affiliate of the Managing Partner; or (2) any Limited Partner with respect to any media enterprise owned or operated by the Partnership or any Subsidiary or to any Person that holds any license, permit, or authorization issued by the FCC if (A) the Partnership or Subsidiary acquired its interest in such media enterprise or such Person after the date of this Agreement and (B) such Limited Partner owned an interest in such media enterprise or such Person at the time the Partnership or Subsidiary acquired its interest in such media enterprise or such Person and was permitted to engage in the activities otherwise prohibited by Section 7.6(a) at the time of such acquisition. (c) Section 7.6(a) shall apply to TCI if this Agreement has been amended pursuant to Section 12.4(b)(4) to convert the Partnership Interest of TCI to that of a Limited Partner. 42 ARTICLE 8 WITHDRAWAL OF A GENERAL PARTNER 8.1 Withdrawal. ----------- The Managing Partner may retire or withdraw from the Partnership only with the approval of TCI. For purposes of this Agreement, the term "withdrawal" means the happening of any event described in Section 15642 of the Act (other than subsections (c) and (d) thereof). If the Managing Partner withdraws, the Partnership shall dissolve in accordance with the provisions of Article 13, unless, within six months after the withdrawal of the Managing Partner, (a) if there is at least one General Partner remaining, a majority in interest of the remaining General Partners (as determined in accordance with Section 15681(c) of the Act) agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of the withdrawal of the Managing Partner, of a General Partner to be successor managing partner, or (b) if there is not at least one General Partner remaining, a majority in interest of the Limited Partners (as determined in accordance with Section 15681(c) of the Act) agree in writing to continue the business of the Partnership pursuant to the terms and provisions of this Agreement, to the admission of at least one General Partner, and to the appointment, effective as of the date of the withdrawal of the Managing Partner, of a General Partner to be successor managing partner. 8.2 Effect of Withdrawal of Managing Partner. ----------------------------------------- If the Partnership is continued pursuant to Section 8.1 following the withdrawal of the Managing Partner, then the Partnership Interest of the Managing Partner shall be converted to that of a Limited Partner. The withdrawal of the Managing Partner shall not alter the allocations and distributions to be made to the Partners pursuant to this Agreement. 8.3 No Dissolution. --------------- The withdrawal of a General Partner other than the Managing Partner shall not cause the dissolution of the Partnership or alter the allocations and distributions to be made to the Partners pursuant to this Agreement. 43 ARTICLE 9 ASSIGNMENT OF PARTNERSHIP INTERESTS 9.1 Assignments by Managing Partner. -------------------------------- Except as provided in Section 9.3, the Managing Partner shall not assign, convey, sell, transfer, encumber, or in any way alienate all or any part of its interest in the Partnership without the approval of TCI. 9.2 Assignments by Other Partners. ------------------------------ Except as provided in Section 9.3, a Partner may not assign (whether by sale, exchange, gift, contribution, distribution, or other transfer, including a pledge or other assignment for security purposes) all or any part of its Partnership Interest without first obtaining the prior written consent of the Managing Partner. Notwithstanding the consent of the Managing Partner to any assignment by a Partner of all or any part of its Partnership Interest, the rights of any Assignee shall be subject at all times to the limitations set forth in Section 9.4. 9.3 Exceptions. ----------- The provisions of Section 9.1 and Section 9.2 shall not apply and no consent of the Managing Partner or TCI, as applicable, shall be required for: (a) an assignment of Partnership Interests pursuant to Article 10; (b) an assignment by a Partner or an Assignee of a Partner to any Person that, directly or indirectly, through the ownership of Voting Stock, controls, is controlled by, or is commonly controlled with such Partner; PROVIDED, HOWEVER, that the Assignee shall immediately execute all documents reasonably required by the Managing Partner (1) to cause the Partnership Interests so acquired by the Assignee to become immediately subject to all of the terms and conditions of this Agreement, and (2) to establish that the Assignee is an Accredited Investor; (c) the assignment by FHGLP of Partnership Interests to certain partners of FHGLP and the purchase of those Partnership Interests by TCI pursuant to the Contribution Agreement, which will occur immediately following the Partners' Capital Contributions at Closing; (d) any pledge of Partnership Interests pursuant to Section 9.12 or the assignment of Partnership Interests upon the exercise by any secured party of any rights granted to it under a pledge agreement entered into pursuant to Section 9.12; or 44 (e) an assignment of the Managing Partner's Partnership Interest to a corporate successor to FHGLP in connection with the conversion of FHGLP to a corporation or the consummation of another appropriate transaction, including the formation of a corporate holding company, in the manner contemplated by Article 10 of the FHGLP Partnership Agreement, so long as, after such transaction, Falcon Holding Group, Inc. would have the power to take all material actions with respect to the corporate successor to FHGLP that it is entitled to or required to take under the partnership agreement of FHGLP in its capacity as general partner of FHGLP. 9.4 Assignee. --------- If the provisions of this Article 9 have been complied with, an Assignee shall be entitled to receive distributions of cash or other property, and allocations of Net Profit and Net Loss and of items of income, deduction, gain, loss, or credit, from the Partnership attributable to the assigned Partnership Interests from and after the effective date of the assignment, and shall have the right to receive a copy of the quarterly and annual financial statements required herein to be provided the Partners, but an Assignee shall have no other rights of a Partner herein, such as rights to any other information, an accounting, inspection of books or records, or voting as a Partner on matters required by law, unless and until such Assignee is admitted as a substitute Partner pursuant to the provisions of Section 9.9. The Partnership and the Managing Partner shall be entitled to treat the assignor as the absolute owner of the Partnership Interests in all respects, and shall incur no liability for distributions, allocations of Net Profit or Net Loss, or transmittal of reports and notices required to be given to Partners that are made in good faith to the assignor until the effective date of the assignment, or, in the case of the transmittal of reports (other than the financial statements referred to above) or notices, until the Assignee is so admitted as a substitute Partner. The effective date of an assignment shall be the first day of the calendar month following the month in which the Managing Partner has received an executed instrument of assignment in compliance with this Article 9 or the first day of a later month if specified in the executed instrument of assignment. The Assignee shall be deemed an Assignee on the effective date, and shall be only entitled to distributions and allocations of Net Profit and Net Loss attributable to the period beginning on the effective date of assignment. The Partnership shall attribute Net Profit and Net Loss to the period before the effective date of assignment and to the period beginning on the effective date of assignment by the closing of the books method. Each Assignee will inherit the balance of the Capital Account, as of the effective date of assignment, of the assignor with respect to the Partnership Interests assigned. 9.5 Other Consents and Requirements. -------------------------------- Any assignment of any Partnership Interests in the Partnership must be in compliance with any requirements imposed by any state securities administrator having jurisdiction over the assignment and the United States Securities and Exchange Commission and must not cause the Partnership or any Subsidiary to be in violation of any Ownership Restriction. 45 9.6 Assignment Not In Compliance. ----------------------------- Any assignment in contravention of any of the provisions of this Article 9 shall be void and of no effect, and shall neither bind nor be recognized by the Partnership. 9.7 Tax Elections. -------------- The Managing Partner will make an election under Code Section 754 to adjust the basis of the Partnership's assets in connection with the assignment by FHGLP of Partnership Interests to certain partners of FHGLP and the purchase of those Partnership Interests by TCI pursuant to the Contribution Agreement. 9.8 Division of Partnership Interests. ---------------------------------- The several rights and obligations inherent in the Capital Account, Percentage Interest, and Partnership Units attributable to a Partner's Partnership Interest are indivisible except in equal proportions, such that the assignment of a specified percentage of a Partner's Partnership Interest may only represent an equal percentage of the total Capital Account, Percentage Interest, and Partnership Units that were attributable to such Partner's Partnership Interest prior to the assignment; PROVIDED, HOWEVER, that the several rights and obligations attributable to all or part of a Partnership Interest may be further divided between those rights that may be exercised by an Assignee subject to Section 9.4 and all other rights and obligations, which may be retained by the assignor. For purposes of applying this Section 9.8, the Partnership Interest of FHGLP as the General Partner and the Partnership Interest of FHGLP as a Limited Partner are separate and distinct Partnership Interests, and all or part of either such Partnership Interest may be assigned independently of the other Partnership Interest (subject to the other provisions of this Agreement). 9.9 Substitute Partners. -------------------- An Assignee may not become a substitute Partner unless all of the following conditions are first satisfied: (a) A duly executed and acknowledged written instrument of assignment shall have been filed with the Partnership, specifying the Partnership Interests being assigned and setting forth the intention of the assignor that the Assignee succeed to the assignor's interest as a substitute Partner; (b) The Assignee shall be an Accredited Investor; (c) The assignor and Assignee shall have executed and acknowledged any other instruments that the Managing Partner deems necessary or desirable for substitution, including the written acceptance and adoption by the Assignee of the provisions of this Agreement and shall 46 have executed, acknowledged, and delivered to the Managing Partner a special power of attorney as provided in Section 18.5(b); (d) Except in the case of an assignment permitted by Section 9.3, the Managing Partner shall have consented in writing to the admission of the Assignee as a substitute Partner, the granting of which may be withheld by the Managing Partner in its sole and absolute discretion; (e) The Assignee shall have paid to the Partnership a transfer fee sufficient to cover all reasonable expenses connected with the substitution; and (f) The assignment to the Assignee shall have complied with the other provisions of this Article 9. 9.10 Consent. -------- Each Partner consents to the admission of substitute Partners by the Managing Partner and to any Assignee of its Partnership Interests becoming a substituted Partner in accordance with the terms and conditions of this Agreement. 9.11 Covenant and Representation of TCI Communications, Inc. ------------------------------------------------------- By executing this Agreement, TCI Communications, Inc., a Delaware corporation, (a) agrees that, prior to the seventh anniversary of the Closing, it will not cause or permit to occur any transaction or series of transactions (other than an assignment of the Partnership Interest of TCI that is permitted by Article 10) if, after giving effect to such transaction or series of transactions, it (or any successor to it that owns, directly or indirectly, substantially all the cable television systems owned, directly or indirectly, by TCI Communications prior to such transaction or series of transactions) would not own, directly or indirectly, more than fifty percent of the outstanding equity interests in TCI or would not directly or indirectly control TCI; and (b) represents and warrants to FHGLP and the Partnership that it owns, directly or indirectly, (1) all of the outstanding equity interests in TCI and (2) substantially all the cable television systems in the United States or interests in cable television systems in the United States that are owned, directly or indirectly, by Tele-Communications, Inc. or any of its Affiliates. 9.12 Pledge of Partnership Interests. -------------------------------- At the request of the Managing Partner, each Partner agrees to pledge its Partnership Interest to secure any Indebtedness of the Partnership that is permitted under this Agreement, on terms determined by the Managing Partner, so long as all Partners are required to pledge their Partnership Interests and the terms of the pledge do not impose any personal liability on any 47 Partner. In negotiating the terms of any such pledge, the Managing Partner will request that the secured party agree to enforce its rights against the Partnership Interests of the Partners proportionately (based on the number of Partnership Units assigned to the Partnership Interest of each Partner). If the secured party under any such pledge enforces its rights against the Partnership Interests of the Partners other than proportionately, the Partners will afford each other such rights of contribution and indemnity as are necessary to cause all liabilities, losses, and damages suffered by the Partners as a result of the exercise by the secured party of its rights under such pledge to be borne by the Partners proportionately. 9.13 Effect of Purchase of Partnership Interests in FHGLP. ----------------------------------------------------- (a) If the Partnership purchases any partnership interests in FHGLP pursuant to Article 9 of the FHGLP Partnership Agreement, then, immediately after such purchase, the Partnership shall distribute all of the partnership interests in FHGLP purchased by the Partnership to FHGLP in redemption of a portion of FHGLP's Partnership Interest. The partnership interests in FHGLP distributed to FHGLP pursuant to this Section 9.13(a) shall be deemed to have a net fair market value equal to the purchase price paid by the Partnership for such partnership interests, as determined in accordance with Section 9.2(e) of the FHGLP Partnership Agreement, and the percentage of FHGLP's Partnership Interest redeemed pursuant to this Section 9.13(a) shall equal the quotient obtained by dividing the purchase price paid by the Partnership for such partnership interests, as determined in accordance with Section 9.2(e) of the FHGLP Partnership Agreement, by the net fair market value of FHGLP's Partnership Interest, determined in accordance with the following provisions: (1) For purposes of determining the net fair market value of FHGLP's Partnership Interest, the "FHGLP Liquidation Amount" of each of the three appraisers retained pursuant to Article 9 of the FHGLP Partnership Agreement shall equal the amount that would be distributed to FHGLP in liquidation of the Partnership, as determined under Section 9.2(e) of the FHGLP Partnership Agreement for purposes of calculating such appraiser's Appraised Liquidation Value (as defined in Section 9.2(e)(1) of the FHGLP Partnership Agreement). (2) Except as provided in Section 9.13(a)(3), the net fair market value of FHGLP's Partnership Interest shall be the average of the two closest of the FHGLP Liquidation Amounts of the three appraisers retained pursuant to Article 9 of the FHGLP Partnership Agreement. (3) If the difference between the highest of the three FHGLP Liquidation Amounts and the middle of the three FHGLP Liquidation Amounts is equal to the difference between the lowest of the three FHGLP Liquidation Amounts and the middle of the three FHGLP Liquidation Amounts, then the net fair market value of FHGLP's Partnership Interest shall be the middle FHGLP Liquidation Amount. 48 (b) Upon the redemption of a portion of FHGLP's Partnership Interest pursuant to Section 9.13(a), the number of Partnership Units assigned to its Partnership Interest shall be reduced by the product of (1) the number of Partnership Units assigned to its Partnership Interest prior to such redemption times (2) the percentage of FHGLP's Partnership Interest being redeemed, as provided in Section 9.13(a). (c) If the redemption of a portion of FHGLP's Partnership Interest pursuant to Section 9.13(a) would change the ownership of the Partnership such that TCI would be required to consolidate its financial statements and those of the Partnership for financial reporting purposes, then, at TCI's request, the Partners will use commercially reasonable efforts to create and implement an alternative structure for the purchase of partnership interests in FHGLP pursuant to Article 9 of the FHGLP Partnership Agreement and the distribution of such partnership interests to FHGLP that would prevent such consolidation. 9.14 Impact of Code Section 708. --------------------------- (a) If the assignment by a Partner of all or part of its Partnership Interest results in the termination of the Partnership within the meaning of Code Section 708, the Partner causing such termination (as determined in accordance with this Section 9.14) will indemnify the other Partner for any additional income tax paid by such other Partner as a result of such termination (including income tax attributable to Code Section 704(c) allocations), whether required to be paid in or for the taxable year in which such termination occurs or in or for any subsequent taxable year, as offset by any income tax savings to be realized by the other Partner as a result of such termination (including income tax savings attributable to Code Section 704(c) allocations), whether realized in or for the taxable year in which such termination occurs or in or for any subsequent taxable year. Except as provided in Section 9.14(b), the Partner whose assignment of all or part of its Partnership Interest resulted in the termination of the Partnership within the meaning of Code Section 708 shall be treated as the Partner causing such termination for purposes of Section 9.14(a). (b) If a Partner desires to assign all or part of its Partnership Interest in a transaction that, if consummated at one time, would result in the termination of the Partnership within the meaning of Code Section 708, such Partner may elect (1) to assign immediately as much of its Partnership Interest as may then be assigned without resulting in the termination of the Partnership within the meaning of Code Section 708 and (2) to assign the remaining portion of its Partnership Interest that it desires to assign as soon thereafter as such subsequent assignment would not result in the termination of the Partnership within the meaning of Code Section 708. If a Partner notifies the other Partner that it has elected to assign all or part of its Partnership Interest in accordance with this Section 9.14(b), specifying in its notice the portion of its Partnership Interest to be assigned immediately in accordance with clause (1) of the preceding sentence and the portion of its Partnership Interest to be assigned subsequently in accordance with clause (2) of the preceding sentence (the assignment of such portion, the "Deferred Assignment"), then, if the other Partner assigns all or any part of its Partnership Interest prior to the Deferred 49 Assignment by the notifying Partner and the Deferred Assignment therefore results in the termination of the Partnership within the meaning of Code Section 708, the other Partner and not the notifying partner shall be treated as the Partner causing such termination for purposes of Section 9.14(a). ARTICLE 10 BUY/SELL RIGHTS 10.1 Commencement of Buy/Sell Process. --------------------------------- (a) At any time after the seventh anniversary of the Closing (subject to Section 10.1(b)), either TCI or FHGLP may elect to commence the process described in this Article 10 by sending written notice (the "Offer") of its election to the Responding Partner, offering to sell to the Responding Partner or, at the Responding Partner's election, to the Partnership, all, but not less than all, of the Offering Partner's Partnership Interest for a price per Partnership Unit which shall be specified by the Offering Partner in the Offer (the "Unit Price") and otherwise on the terms and subject to the conditions set forth in this Article 10. The Offer shall also specify the Offering Partner's estimate of the price at which the Partnership and each Subsidiary could sell each regional cluster of cable television systems owned by the Partnership and each Subsidiary, each other separate business owned by the Partnership and each Subsidiary, and each other asset (such as equity interests in a Person that is not a Subsidiary) or group of assets owned by the Partnership and each Subsidiary (each such regional cluster, other business, or other asset or group of assets, a "Business Asset," and such estimate, with respect to each Business Asset, the "Target Price") in liquidating sales pursuant to Article 13, and the Unit Price specified by the Offering Partner shall equal the Offering Partner's good faith estimate, based on the most recent financial information of the Partnership and the Subsidiaries, of the amount that would be distributed to the Partners in liquidation of the Partnership, per Partnership Unit, if (1) all of the assets of the Partnership and each Subsidiary were sold for the sum of the Target Prices specified by the Offering Partner, without reduction for filing fees, transfer taxes, recordation taxes, sales taxes, document stamps, other charges levied by any governmental entity, attorneys' and accountants' fees and expenses, and other transaction costs of any nature that would be incurred in connection with any such sale, (2) Net Profit and Net Loss and items specially allocated in accordance with Section 4.3, including any gain or loss resulting from the liquidating sales described in clause (1), were allocated in accordance with Article 4, and corresponding allocations were made under the partnership agreement or other governing instrument of each Subsidiary, (3) the Partnership and each Subsidiary paid its accrued, but unpaid, liabilities (which shall not in any event include any prepayment premiums or penalties or other similar costs attributable to the payment of any such liabilities), and (4) each Subsidiary distributed the remaining proceeds received by it (without establishing reserves for contingent or unknown liabilities) to its equity owners in liquidation in accordance with its partnership agreement or other governing instrument and the Partnership distributed the remaining proceeds received by it (without establishing reserves for contingent or unknown liabilities) to the Partners in liquidation. 50 (b) A Partner may not elect to commence the process described in this Article 10, (1) at any time after an election by FHGLP pursuant to Section 11.1(a) unless TCI reasonably declined pursuant to Section 11.1(a) to approve the Incorporation following such election or (2) at any time following the delivery of an Offer pursuant to Section 10.1(a) and prior to such time, if any, that (A) the Offering Partner and the Responding Partner agree to abandon the purchase and sale of Partnership Interests pursuant to such Offer or, if applicable, the liquidation and dissolution of the Partnership as a result of any election made by the Offering Partner pursuant to Section 10.3(a), or (B) the Offering Partner or the Responding Partner elects pursuant to Section 10.8(a), Section 10.8(b), or Section 10.8(c) to terminate the purchase and sale of Partnership Interests pursuant to such Offer or pursuant to a subsequent election pursuant to Section 10.4(a) or Section 10.5(a)(1). (c) The purchase and sale of Partnership Interests pursuant to this Article 10 may be abandoned at any time following the delivery of an Offer pursuant to Section 10.1(a) and prior to the closing thereof by agreement between the Offering Partner and the Responding Partner. 10.2 Election by Responding Partner. ------------------------------- The Responding Partner may accept the Offering Partner's offer to sell the Offering Partner's Partnership Interest, as set forth in the Offer, by sending written notice (the "Acceptance") of its acceptance of such offer to the Offering Partner within thirty Business Days after its receipt of the Offer. The Acceptance shall specify whether the Responding Partner elects that the Partnership purchase the Offering Partner's Partnership Interest; PROVIDED, HOWEVER, that the Responding Partner may not elect pursuant to Section 10.1(a) to require that the Partnership (rather than the Responding Partner) purchase the Offering Partner's Partnership Interest if a purchase of the Offering Partner's Partnership Interest by the Partnership would require any waiver, consent, or approval of any holder of any Indebtedness of the Partnership or any Subsidiary or would require any other waiver, consent, or approval of any Person that could impede or materially delay the closing of the purchase and sale of the Offering Partner's Partnership Interest. Upon the timely delivery of the Acceptance, the Offering Partner shall be obligated to sell and the Responding Partner (or the Partnership, if the Responding Partner properly so elected in its Acceptance) shall be obligated to purchase, in accordance with this Article 10, all of the Offering Partner's Partnership Interest. If the Responding Partner fails to send the Acceptance to the Offering Partner within thirty Business Days after its receipt of the Offer, the Responding Partner shall be deemed to have rejected the Offering Partner's offer. 10.3 Offering Partner's Option to Liquidate. --------------------------------------- (a) If the Responding Partner rejects or is deemed to reject the Offering Partner's offer to sell all of the Offering Partner's Partnership Interest, the Offering Partner may elect to cause the Partnership to be liquidated and dissolved in accordance with Article 13, 51 including the provisions of Section 13.3. The Offering Partner shall make an election to cause the Partnership to be liquidated and dissolved pursuant to this Section 10.3(a) by delivering written notice of its election to the Responding Partner within ten Business Days after the deadline specified in Section 10.2 for the Responding Partner's acceptance of the Offering Partner's offer. (b) The Offering Partner and the Responding Partner may agree at any time to abandon the liquidation and dissolution of the Partnership as a result of any election made by the Offering Partner pursuant to Section 10.3(a). (c) Upon the commencement of the liquidation and dissolution of the Partnership pursuant to any election made pursuant to Section 10.3(a) or Section 10.5(a)(2), all rights and obligations of the Partners with respect to the purchase and sale of their Partnership Interests shall terminate (until such time, if any, as the Offering Partner and the Responding Partner agree to abandon the liquidation and dissolution of the Partnership as a result of any such election), and neither Partner shall have any further obligation to the other Partner with respect to the purchase and sale of its Partnership Interest (except in the case of a subsequent election by the Responding Partner pursuant to Section 10.4(a)). If the Partnership is liquidated, each Partner shall be entitled to receive with respect to its Partnership Interest only such cash and property distributions as shall be provided for in Article 13, regardless of whether such amount is less than the Unit Price or the Unit Liquidation Amount. 10.4 Responding Partner's Option to Purchase During Liquidation. ----------------------------------------------------------- (a) If the Offering Partner elects pursuant to Section 10.3(a) to cause the Partnership to be liquidated and dissolved and, following receipt of all Liquidating Sale Offers solicited by the Offering Partner pursuant to Section 13.3(a) and the completion of any appraisals required by Section 13.3(b)(1), the aggregate Liquidation Value for all the assets of the Partnership and each Subsidiary (as determined under Section 13.3(b)(2)) is less than the aggregate Target Prices for all the assets of the Partnership and each Subsidiary, then the Responding Partner may elect to purchase or to require that the Partnership purchase all, but not less than all, of the Partnership Interest of the Offering Partner for a price per Partnership Unit equal to the Unit Liquidation Amount and otherwise on the terms and subject to the conditions set forth in this Article 10. Promptly following the completion of the solicitation of Liquidating Sale Offers by the Offering Partner pursuant to Section 13.3(a) and any appraisals required by Section 13.3(b)(1), if the aggregate Liquidation Value for all the assets of the Partnership and each Subsidiary is less than the aggregate Target Prices for all the assets of the Partnership and each Subsidiary, the Offering Partner shall so notify the Responding Partner in writing. (b) The Responding Partner may make an election pursuant to Section 10.4(a) by delivering written notice of its election to the Offering Partner within twenty Business Days after its receipt of the Offering Partner's notice pursuant to Section 10.4(a). The notice shall specify whether the Responding Partner elects that the Partnership purchase the Offering Partner's Partnership Interest; PROVIDED, HOWEVER, that the Responding Partner may not elect pursuant to 52 Section 10.4(a) to require that the Partnership (rather than the Responding Partner) purchase the Offering Partner's Partnership Interest if the purchase of the Offering Partner's Partnership Interest by the Partnership could be impeded or materially delayed as a result of any required waiver, consent, or approval of any holder of any Indebtedness of the Partnership or any Subsidiary, or any other required waiver, consent, or approval of any Person, that either would not be required or would be more expeditiously obtained if the Offering Partner's Partnership Interest were purchased by the Responding Partner. Upon the timely delivery of such notice to the Offering Partner, the Offering Partner shall be obligated to sell and the Responding Partner (or the Partnership, if the Responding Partner properly so elected in its notice) shall be obligated to purchase, in accordance with this Article 10, all of the Offering Partner's Partnership Interest. (c) If, following receipt of all Liquidating Sale Offers solicited by the Offering Partner pursuant to Section 13.3(a) and the completion of any appraisals required by Section 13.3(b)(1), either (1) the aggregate Liquidation Value for all the assets of the Partnership and each Subsidiary (as determined under Section 13.3(b)(2)) is not less than the aggregate Target Prices for all the assets of the Partnership and each Subsidiary or (2) the Responding Partner did not make an election pursuant to Section 10.4(a) within twenty Business Days after its receipt of the Offering Partner's notice pursuant to Section 10.4(a), the Responding Partner shall have no right to purchase the Partnership Interest of the Offering Partner and the Offering Partner may cause the Partnership to accept the most favorable Liquidating Sale Offers and shall otherwise cause the Partnership to be liquidated and dissolved in accordance with Article 13 (except as the Offering Partner and the Responding Partner may otherwise agree). 10.5 Default by Responding Partner. ------------------------------ (a) If the Responding Partner elects to purchase all of the Offering Partner's Partnership Interest under either Section 10.2 or Section 10.4(a), and the Responding Partner defaults in its obligation to purchase the Offering Partner's Partnership Interest on the date specified in Section 10.7(a) for the closing of the purchase and sale of the Offering Partner's Partnership Interest, then the Offering Partner may elect either: (1) to purchase or to require that the Partnership purchase all, but not less than all, of the Partnership Interest of the Responding Partner for a price per Partnership Unit equal to 95% of the Unit Price and otherwise on the terms and subject to the conditions set forth in this Article 10; or (2) to cause the Partnership to be liquidated and dissolved in accordance with Article 13. (b) The two options that may be elected by the Offering Partner pursuant to Section 10.5(a) are exclusive of each other but are not exclusive of any other right or remedy that may be available to the Offering Partner at law or equity as a result of the Responding Partner's default. 53 (c) The Offering Partner may make an election pursuant to Section 10.5(a) by delivering written notice of its election to the Responding Partner at any time after the date specified in Section 10.7(a) for the closing of the purchase and sale of the Offering Partner's Partnership Interest and prior to such time, if any, as the Responding Partner stands ready, willing, and able to purchase the Offering Partner's Partnership Interest in accordance with this Article 10. The notice shall specify whether the Offering Partner elects that the Partnership purchase the Responding Partner's Partnership Interest. If the Offering Partner makes a timely election pursuant to Section 10.5(a)(1), the Responding Partner shall be obligated to sell and the Offering Partner (or the Partnership, if the Offering Partner so elected in its notice) shall be obligated to purchase, in accordance with this Article 10, all of the Responding Partner's Partnership Interest. 10.6 Removal of FHGLP. ----------------- (a) The provisions of this Section 10.6 shall apply if: (1) a court of competent jurisdiction sitting in Los Angeles County, California, finds that FHGLP has engaged in conduct while acting as Managing Partner that constitutes either fraud against the Partnership or TCI or a felony involving moral turpitude and that such conduct has resulted in material harm to the Partnership or TCI, and (2) the finding described in Section 10.6(a) has not been reversed, stayed, enjoined, set aside, annulled, or suspended, and is not the subject of any pending request for judicial review, reconsideration, appeal, or stay, and (3) the time for filing any further request for judicial review, reconsideration, appeal, or stay of the finding described in Section 10.6(a) has expired. (b) If each of the conditions specified in Section 10.6(a) is satisfied, then TCI may elect to commence the appraisal procedure described in this Section 10.6(b) by sending written notice of its election to FHGLP within ten Business Days after the condition specified in Section 10.6(a)(3) is satisfied. TCI's notice shall designate one appraiser (the "TCI Appraiser") to determine the fair market value of each Business Asset. Within ten Business Days after its receipt of such notice, FHGLP shall send a written notice to TCI designating a second appraiser (the "FHGLP Appraiser") to determine the fair market value of each Business Asset. Within ten Business Days after TCI's receipt of such notice, the TCI Appraiser and the FHGLP Appraiser shall jointly designate a third appraiser (the "Third Appraiser") to determine the fair market value of each Business Asset. Each appraiser designated pursuant to this Section 10.6(b) shall determine the fair market value of each Business Asset in accordance with the provisions of Section 13.3(b)(1). In determining the fair market value of each Business Asset, each appraiser shall also take into account the potential public market value of equity interests in a Person owning the Business Assets. The provisions of Section 13.3(b)(1) regarding the qualifications of appraisers 54 shall apply to each appraiser designated pursuant to this Section 10.6(b). The fees and expenses of any appraiser designated pursuant to this Section 10.6(b) shall be borne by the Partnership. (c) Within ten Business Days after the completion of the last of the appraisals to be conducted pursuant to Section 10.6(b), the Third Appraiser will estimate the purchase price per Partnership Unit for FHGLP's Partnership Interest (determined in accordance with Section 10.6(e)) and shall send TCI and FHGLP a written notice specifying its estimate of the fair market value of FHGLP's Partnership Interest. (d) TCI may elect to purchase all of the Partnership Interest of FHGLP, and, upon the consummation of such purchase, to remove FHGLP as a Partner, by delivering written notice of its election to FHGLP within ten Business Days after its receipt of the notice from the Third Appraiser pursuant to Section 10.6(c). Upon the timely delivery of such notice to FHGLP, FHGLP shall be obligated to sell and TCI shall be obligated to purchase, in accordance with this Article 10, all of FHGLP's Partnership Interest. (e) The purchase price for FHGLP's Partnership Interest shall be the price per Partnership Unit determined in accordance with this Section 10.6(e). For purposes of determining the purchase price for FHGLP's Partnership Interest, the "Appraised Liquidation Amount" of each appraiser shall be the Unit Liquidation Amount, calculated as if the determination by such appraiser of the fair market value of each Business Asset were the Liquidation Value of such Business Asset. (1) Except as provided in Section 10.6(e)(2), the purchase price per Partnership Unit for FHGLP's Partnership Interest shall be the average of the two closest of the Appraised Liquidation Amount of the TCI Appraiser, the Appraised Liquidation Amount of the FHGLP Appraiser, and the Appraised Liquidation Amount of the Third Appraiser. (2) If the difference between the highest of the three Appraised Liquidation Amounts and the middle of the three Appraised Liquidation Amounts is equal to the difference between the lowest of the three Appraised Liquidation Amounts and the middle of the three Appraised Liquidation Amounts, then the purchase price per Partnership Unit for FHGLP's Partnership Interest shall be the middle Appraised Liquidation Amount. (f) The rights of TCI under this Section 10.6 are in addition to any other rights and remedies available to TCI at law or equity as a result of any conduct by FHGLP described in Section 10.6(a). 10.7 General Terms Applicable to Purchase and Sale of Partnership Interests. ----------------------------------------------------------------------- (a) The closing of the purchase and sale of a Partner's Partnership Interest in accordance with this Article 10 shall occur not later than (1) if no governmental consents or approvals are required in connection with the sale of the selling Partner's Partnership Interest, 55 ninety days after the Offering Partner's receipt of the Responding Partner's election pursuant to Section 10.2 or Section 10.4(a), the Responding Partner's receipt of the Offering Partner's election pursuant to Section 10.5(a)(1), or TCI's election pursuant to Section 10.6(d), whichever is applicable, or (2) in all other cases, the later of thirty days after the receipt of all governmental consents and approvals required in connection with the sale of the selling Partner's Partnership Interest or the date specified in clause (1). (b) The closing of the purchase and sale of the selling Partner's Partnership Interest in accordance with this Article 10 shall take place at the principal office of the Partnership or at any other location agreed to by FHGLP and TCI. (c) At the closing of any purchase and sale of the selling Partner's Partnership Interest pursuant to this Article 10, the purchasing Partner shall pay or cause to be paid to the selling Partner, by cash or other immediately available funds or any other form of consideration mutually agreed to by the selling Partner and the purchasing Partner, the purchase price for the Partnership Interest being purchased and the selling Partner shall deliver to the purchasing Partner (or its permitted assignee) good title, free and clear of any liens (other than those created by this Agreement and those securing financing obtained by the Partnership or any Subsidiary), to the Partnership Interest being sold. (d) The Partnership shall bear all costs relating to any purchase and sale of a Partner's Partnership Interest pursuant to this Article 10, including attorneys' fees and filing fees, but excluding taxes measured on the amount of income, gain, or proceeds realized by the selling Partner or any governmental charges imposed in lieu of such taxes. (e) If either Partner elects in accordance with this Article 10 that the Partnership purchase the other Partner's Partnership Interest, the electing Partner shall guaranty the performance by the Partnership of its obligation to purchase the other Partner's Partnership Interest. (f) The Partners will cooperate in good faith and use their respective commercially reasonable efforts to obtain as quickly as practicable all governmental consents and approvals required in connection with the purchase and sale of a Partner's Partnership Interest pursuant to this Article 10. 10.8 Termination of Purchase and Sale. --------------------------------- (a) The Offering Partner or the Responding Partner may elect to terminate the purchase and sale of Partnership Interests pursuant to any Offer if the closing thereof has not occurred within eighteen months after the Offering Partner's delivery of such Offer, except that a Partner may not elect to terminate the purchase and sale of Partnership Interests pursuant to any Offer if the failure of the closing of such purchase and sale to occur within eighteen months after 56 the delivery of such Offer was a result of the failure of such Partner to act in good faith or of any breach by such Partner of its covenants or other obligations in this Agreement. (b) If the Responding Partner makes a timely election pursuant to Section 10.4(a) to purchase or to require that the Partnership purchase the Partnership Interest of the Offering Partner, the Offering Partner or the Responding Partner may elect to terminate such purchase and sale if the closing thereof has not occurred within eighteen months after the Responding Partner's election, except that a Partner may not elect to terminate the purchase and sale of Partnership Interests pursuant to any such election if the failure of the closing of such purchase and sale to occur within eighteen months after of such election was a result of the failure of such Partner to act in good faith or of any breach by such Partner of its covenants or other obligations in this Agreement. (c) If the Offering Partner makes a timely election pursuant to Section 10.5(a)(1) to purchase or to require that the Partnership purchase the Partnership Interest of the Responding Partner, the Offering Partner may elect to terminate such purchase and sale if the closing thereof has not occurred within eighteen months after the Offering Partner's election, except that the Offering Partner may not elect to terminate such purchase and sale of Partnership Interests if the failure of the closing of such purchase and sale to occur within eighteen months after the Offering Partner's election was a result of the failure of the Offering Partner to act in good faith or of any breach by the Offering Partner of its covenants or other obligations in this Agreement. 10.9 Restructuring of Transactions. ------------------------------ Commencing with the delivery of an Offer pursuant to Section 10.1(a), the Partners will use commercially reasonable efforts for a reasonable period (not to exceed sixty days) to structure any purchase and sale of Partnership Interests pursuant to this Article 10 in a manner that minimizes negative tax consequences to the Partners and the Partnership to the extent doing so would not materially adversely affect either Partner (except to the extent such Partner is adequately compensated by the other Partner for such adverse effect); PROVIDED, HOWEVER, that nothing in this Section 10.9 shall affect the respective rights and obligations of the Partners if, within such reasonable period, the Partners are unable to agree on such a structure. The delivery of an Acceptance pursuant to Section 10.2 shall not terminate or otherwise limit the obligations of the Partners under this Section 10.9 with respect to the structuring of a purchase and sale of Partnership Interests pursuant to this Article 10, but the subsequent failure of the Partners to agree on a structure shall not impair the validity of any such Acceptance. 10.10 Purchase and Sale of Interests Held by Falcon Holding Group, Inc. ----------------------------------------------------------------- (a) If TCI or the Partnership is required to purchase the Partnership Interest of FHGLP pursuant to this Article 10 (including Section 10.6), then, concurrently with the purchase and sale of FHGLP's Partnership Interest, (1) TCI or the Partnership, as applicable, shall 57 purchase, and Falcon Holding Group, Inc. shall sell to TCI or the Partnership, as applicable, all of Falcon Holding Group, Inc.'s partnership interests in each of the Investors Partnerships, and (2) TCI or the Partnership, as applicable, shall purchase, and the Falcon Cable Trust shall sell to TCI or the Partnership, as applicable, all of the Falcon Cable Trust's partnership interest in Falcon Video Communications Investors, L.P. (b) The purchase price for the purchase and sale of Falcon Holding Group, Inc.'s partnership interests in each of the Investors Partnerships shall be the price per Partnership Unit paid to FHGLP for its Partnership Interest multiplied by the product of 100,000 times a fraction the numerator of which is the aggregate net fair market value of Falcon Holding Group, Inc.'s partnership interests in each of the Investors Partnerships (determined as provided below) and the denominator of which is the net fair market value of all Capital Contributions being made by both Partners pursuant to the Contribution Agreement, with such net fair market values being determined in the manner specified in Section 3.5(a). The purchase price for the purchase and sale of the Falcon Cable Trust's partnership interest in Falcon Video Communications Investors, L.P. shall be the price per Partnership Unit paid to FHGLP for its Partnership Interest multiplied by the product of 100,000 times a fraction the numerator of which is the net fair market value of the Falcon Cable Trust's partnership interest in Falcon Video Communications Investors, L.P. (determined as provided below) and the denominator of which is the net fair market value of all Capital Contributions being made by both Partners pursuant to the Contribution Agreement, with such net fair market values being determined in the manner specified in Section 3.5(a). The net fair market value of Falcon Holding Group, Inc.'s partnership interest in any Investors Partnership shall be the percentage ownership interest in such Investors Partnership held by Falcon Holding Group, Inc. as of the Closing times the net fair market value of such Investors Partnership, as determined in accordance with Section 3.5(b) of the Contribution Agreement. The net fair market value of the Falcon Cable Trust's partnership interest in Falcon Video Communications Investors, L.P. shall equal one percent of the net fair market value of Falcon Video Communications Investors, L.P., as determined in accordance with Section 3.4(a) of the Contribution Agreement. 10.11 Retained TCI Assets. -------------------- If at the time any Offer is made pursuant to this Article 10 or any appraisal is being performed pursuant to Section 10.6 any Retained TCI Assets (as defined in the Contribution Agreement) have not been contributed to the Partnership pursuant to Section 11.10(c) of the Contribution Agreement or sold pursuant to Section 11.10(e) of the Contribution Agreement, then: (a) all values used in this Article 10 (including the Target Price, Liquidation Value, and appraised fair market value of each Business Asset) shall be determined and calculated as if such Retained TCI Assets were owned by the Partnership; and (b) if FHGLP purchases the Partnership Interest of TCI pursuant to this Article 10, all obligations of TCI under Section 11.10 of the Contribution Agreement with respect to such Retained TCI Assets (including obligations to contribute the Retained TCI Assets or the proceeds 58 of their sale to the Partnership) shall survive the withdrawal of TCI from the Partnership upon the sale of its Partnership Interest. ARTICLE 11 CONVERSION TO CORPORATION 11.1 Election by FHGLP. ------------------ (a) FHGLP may elect at any time, subject to Section 11.1(f), with the approval of TCI, which shall not be unreasonably withheld, to require that the Partnership be converted into a corporation or require that the Partnership effect another appropriate transaction, including the formation of a corporate holding company, that results in the Partnership Interests being converted into, or exchanged for, stock in a corporation (any such transaction, an "Incorporation"), in either case for purposes of effecting an initial public offering. The Partners agree that adverse, uncompensated tax consequences to TCI resulting from an Incorporation would be a reasonable basis for TCI to withhold its approval of the Incorporation, and that the inability of the Corporation (as defined in Section 11.1(c)(1)) to "pass-through" losses to TCI for tax purposes shall not be considered an adverse, uncompensated tax consequence to TCI or any other reasonable basis for TCI to withhold its approval of an Incorporation. TCI may not assert that adverse, uncompensated tax consequences to TCI were a reasonable basis for it to withhold its approval of any Incorporation proposed by FHGLP unless TCI has delivered to FHGLP, within forty-five days after FHGLP's election pursuant to this Section 11.1(a), a written notice objecting to the Incorporation and within fifteen days thereafter, if requested by FHGLP, a description of such tax consequences in reasonable detail. The Partners agree that the manner of effecting the Incorporation shall be determined by FHGLP, consistent with this Section 11.1, and may include: (1) the contribution or other assignment of all or substantially all of the assets and liabilities of the Partnership and, if appropriate, the Subsidiaries to one or more Persons formed by FHGLP or any of its Affiliates for the purpose of effecting the Incorporation; (2) the merger or consolidation of the Partnership with or into one or more Persons formed by FHGLP or any of its Affiliates for the purpose of effecting the Incorporation; or (3) the contribution, transfer, or other disposition of all of the Partnership Interests to one or more Persons formed by FHGLP or any of its Affiliates for the purpose of effecting the Incorporation. (b) Following an election by FHGLP pursuant to Section 11.1(a) and the approval of the Incorporation by TCI, FHGLP and TCI shall negotiate in good faith, and as soon as practicable thereafter shall execute, acknowledge, and deliver, or cause to be executed, 59 acknowledged, and delivered, all instruments and documents that may be required to best effectuate the Incorporation. (c) The terms of any Incorporation shall: (1) cause the relative equity interests of the Partners or their successors-in-interest in the corporation that succeeds the Partnership as the Person through which the Partners or their successors-in-interest own equity interests in the assets of the Partnership (the "Corporation") to be the same as the relative equity interests of the Partners in the Partnership immediately prior to the Incorporation, (2) impose restrictions on the activities of any Limited Partner, in its capacity as a stockholder of the Corporation, including restrictions that are analogous to the restrictions specified in Section 7.6(a), if doing so would prevent the Incorporation from causing the violation of any Ownership Restriction by the Corporation or any Person in which the Corporation owns any equity interest, (3) at the request of a Limited Partner, impose restrictions on the activities of such Limited Partner, in its capacity as a stockholder of the Corporation, including restrictions that are analogous to the restrictions specified in Section 7.6(a), if doing so would prevent the Incorporation from causing the violation of any Ownership Restriction by such Limited Partner or any Person in which such Limited Partner owns any equity interest, and (4) terminate all other rights and obligations of the Partners under this Agreement. (d) FHGLP may elect, in its sole discretion, to cause the terms of the Incorporation to include either or both of the following features: (1) Falcon Holding Group, Inc. and its Affiliates shall retain control of the Corporation and shall have exclusive authority to manage the operations and affairs of the Corporation, subject to applicable law. Such control may be achieved by (A) dividing the authorized common stock of the Corporation into two classes, one of which would have one vote per share and the other of which would have more than one vote per share, and (B) issuing to FHGLP and any other stockholder of the Corporation that is an Affiliate of Falcon Holding Group, Inc. shares of the class of common stock having more than one vote per share and issuing to TCI and any other stockholder of the Corporation that is not an Affiliate of Falcon Holding Group, Inc. (including purchasers in the public offering described in Section 11.2(a)) shares of the class of common stock having one vote per share (but (A) each share of common stock shall have identical rights to dividends and liquidating distributions and shall be deemed to be of equal value, regardless of class, (B) each share of the class of common stock having more than one vote per share may be converted at the option of the holder into one share of the class of common stock having one vote per share, and (C) each share of the class of common stock having more than one 60 vote per share shall convert automatically into one share of the class of common stock having one vote per share upon its transfer to any Person that is not an Affiliate of the transferor). (2) FHGLP and the Partnership shall be consolidated, such that the owners of the Corporation immediately after the Incorporation (before giving effect to the public offering described in Section 11.2(a)) shall be the owners of FHGLP immediately prior to the Incorporation and either TCI or the owners of TCI. Such a consolidation may be effected through the contribution to the Corporation by the owners thereof of all equity interests in FHGLP and in TCI in exchange for equity interests in the Corporation, such that, after the Incorporation, the Corporation would own, directly or indirectly, all of FHGLP and TCI. To facilitate such a structure, TCI covenants that, during the term of this Agreement, it will not acquire any assets or properties other than its Partnership Interests, will not engage in any business other than the ownership of its Partnership Interest, and will not incur any liabilities or obligations, other than liabilities and obligations arising under this Agreement. (e) Upon any Incorporation that involves the transfer of the assets of the Partnership to the Corporation in exchange for interests in the Corporation, the Partnership shall be liquidated and any interests in the Corporation received by the Partnership in connection with the Incorporation shall be distributed to the Partners in accordance with the provisions of Article 13. (f) FHGLP may not make the election provided for in Section 11.1(a), (1) within one year after a prior election by FHGLP pursuant to Section 11.1(a) if TCI reasonably declined pursuant to Section 11.1(a) to approve the Incorporation following such election, or (2) at any time following the delivery of an Offer pursuant to Section 10.1(a) and prior to such time, if any, that (A) the Offering Partner and the Responding Partner agree to abandon the purchase and sale of Partnership Interests pursuant to such Offer or, if applicable, the liquidation and dissolution of the Partnership as a result of any election made by the Offering Partner pursuant to Section 10.3(a) or (B) the Offering Partner or the Responding Partner elects pursuant to Section 10.8(a), Section 10.8(b), or Section 10.8(c) to terminate the purchase and sale of Partnership Interests pursuant to such Offer or pursuant to a subsequent election pursuant to Section 10.4(a) or Section 10.5(a)(1). 11.2 Public Offering and Registration Rights. ---------------------------------------- (a) Consummation of the Incorporation shall be conditioned on the concurrent public offering and sale of equity securities in the Corporation on such terms and conditions as FHGLP deems appropriate, with the approval of TCI, which shall not be unreasonably withheld. If requested by FHGLP, as part of such public offering, TCI shall execute all reasonably necessary documents in connection therewith, as determined by FHGLP. (b) In connection with the Incorporation and the consummation of the public offering described in Section 11.2(a), the Corporation shall offer to enter into a Registration 61 Rights Agreement, substantially in the form of Exhibit II (as it may be amended in accordance with this Agreement), with each of the Partners and each of the partners of FHGLP, in their capacities as stockholders of the Corporation. ARTICLE 12 OTHER BUSINESSES AND INVESTMENT OPPORTUNITIES 12.1 Exclusivity. ------------ (a) After the Closing and during the term of the Partnership, subject to Section 12.2(a), TCI Communications, Inc. and TCI agree that, so long as TCI or any Affiliate of TCI is a Partner, neither TCI nor any Controlled Affiliate of TCI, and Falcon Holding Group, Inc. and FHGLP agree that, so long as FHGLP or any Affiliate of FHGLP is a Partner, neither FHGLP nor any Controlled Affiliate of FHGLP, will directly or indirectly participate in the construction, ownership, operation, management, or financing of any Person that is engaged within any of the geographic areas in which the Partnership, any Falcon Entity (as defined in the Contribution Agreement), or any other Person controlled by the Partnership or any Falcon Entity (as defined in the Contribution Agreement) provides or is franchised to provide cable television service in the business (the "Restricted Business") of offering multichannel video programming to subscribers, other than programming offered by direct broadcast satellite or telephony. (b) During the term of the Partnership, subject to Section 12.2(a) and Section 12.2(b), Falcon Holding Group, Inc. and FHGLP agree that neither FHGLP nor any Controlled Affiliate of FHGLP will directly or indirectly acquire any equity interest in any Person that is principally engaged within the United States in the Restricted Business. 12.2 Exceptions. ----------- (a) The provisions of Section 12.1 shall not apply to: (1) the construction, ownership, operation, management, or financing by a Partner or any of its Controlled Affiliates of any Restricted Business disclosed on Schedule V; (2) any action otherwise prohibited by Section 12.1 that, in the case of action by TCI or any of its Controlled Affiliates, is consented to by FHGLP, and, in the case of action by FHGLP or any of its Controlled Affiliates, is approved by TCI; (3) the construction, ownership, operation, management, or financing of any Restricted Business, or the acquisition and ownership of any equity interest in any Person engaged in the Restricted Business, by the Partnership, any Subsidiary, or any other Person in which neither the applicable Partner nor any of its Controlled Affiliates owns, directly or 62 indirectly, any equity interest, other than as a result of its interest in the Partnership or, in the case of Falcon Holding Group, Inc., as a result of its interest as a general partner in the Investors Partnerships; (4) the construction, ownership, operation, management, or financing by any Person of any Restricted Business if the acquisition by FHGLP or any Controlled Affiliate of FHGLP of an equity interest in the Person engaged in such Restricted Business was permitted by Section 12.1(b) (after giving effect to Section 12.2(b)); (5) the acquisition and ownership of a passive investment in units of a diversified investment partnership or similar entity that represents less than five percent of the outstanding units of such entity and does not give the holder rights to participate in the operations of such entity; (6) the acquisition and ownership of securities of any company listed on a national securities exchange or quoted on the Nasdaq Stock Market and which do not represent control of such company; (7) the acquisition and ownership of an interest in a Person whose business consists, directly or indirectly, primarily of (A) investments in businesses conducted primarily outside the United States of America or (B) the conduct of businesses conducted primarily outside the United States of America; (8) the acquisition and ownership of an equity interest in any Person engaged in the Restricted Business if the Restricted Business does not constitute the principal activity, in terms of revenues or fair market value, of the businesses conducted by the Person in which such interest is acquired; or (9) the continued holding by a Partner or any of its Controlled Affiliates of an equity interest in any Person that begins to engage in the Restricted Business after the acquisition by such Partner or its Controlled Affiliate of such equity interest if neither such Partner nor its Controlled Affiliate has any responsibility or control over the conduct by such Person of the Restricted Business and uses all commercially reasonable efforts, including voting its equity interest, to cause such entity to cease engaging in the Restricted Business. (b) The provisions of Section 12.1(b) shall also not apply to the acquisition and ownership by FHGLP or any Controlled Affiliate of FHGLP of any equity interest in any Person engaged in the Restricted Business, if: (1) FHGLP first offered to the Partnership the opportunity for the Partnership or any Subsidiary to acquire such equity interest instead of FHGLP or any Controlled Affiliate of FHGLP; 63 (2) the acquisition of such equity interest by the Partnership or any Subsidiary was not approved by TCI pursuant to Section 5.1(b)(2)(D); (3) FHGLP or the Controlled Affiliate of FHGLP that acquires such equity interest assigns to the Partnership, without further consideration, any carried interest that is part of such equity interest; and (4) at the time of the acquisition of such equity interest by FHGLP or its Controlled Affiliate, the total number of subscribers of all Restricted Businesses in which FHGLP and its Controlled Affiliates have acquired and continue to hold equity interests pursuant to this Section 12.2(b) does not exceed twenty-five percent of the total number of subscribers of the Partnership and the Subsidiaries. 12.3 Clustering Opportunities. ------------------------- If FHGLP, TCI, or any of their respective Controlled Affiliates acquires or proposes to acquire in a single transaction multiple cable television systems and some of those cable television systems (the "Cluster Systems") would present greater opportunities for operational efficiencies through clustering if they were operated by the Partnership and the Subsidiaries instead of by the acquiring Partner and its Controlled Affiliates, then the acquiring Partner and its Controlled Affiliates will: (a) use commercially reasonable efforts (taking into account tax and regulatory considerations) to permit the Partnership or any Subsidiary to acquire the Cluster Systems either from the acquiring Partner or Controlled Affiliate or from the Person from which the acquiring Partner or Controlled Affiliate intends to acquire the multiple cable television systems that include the Cluster Systems, in either case on substantially the same terms and conditions as the proposed acquisition of the Cluster Systems by the acquiring Partner or Controlled Affiliate; and (b) if tax or regulatory considerations preclude the acquisition of the Cluster Systems by the Partnership or any Subsidiary, use commercially reasonable efforts to permit the Partnership or any Subsidiary to manage the Cluster Systems on terms and conditions to be agreed upon. 12.4 Prohibited Cross-Interests. --------------------------- (a) Each Partner agrees that, during the term of this Agreement, neither such Partner nor any Affiliate of such Partner shall, directly or indirectly, acquire any interest in any business or in any Person if the acquisition of such interest would cause the Partnership or any Subsidiary to be in violation of any Ownership Restriction. (b) If, during the term of this Agreement, there is a Formal Determination that either Partner's holding of a Partnership Interest causes the Partnership or any Subsidiary to be 64 in violation of any Ownership Restriction, then the following provisions of this Section 12.4(b) shall apply. For purposes of this Section 12.4(b), a "Formal Determination" means (i) an agreement between FHGLP and TCI, (ii) a written determination by the FCC (including a determination by staff employees of the FCC acting under delegated authority), regardless of whether such determination is subject to administrative or judicial review, reconsideration, or appeal (except to the extent that FHGLP and TCI agree that any such determination will not constitute a Formal Determination during the pendency of any review, reconsideration, or appeal), or (iii) a decision of any court of competent jurisdiction, regardless of whether such decision is subject to administrative or judicial review, reconsideration, or appeal (except to the extent that FHGLP and TCI agree that any such decision will not constitute a Formal Determination during the pendency of any review, reconsideration, or appeal). FHGLP and TCI will use their respective good faith efforts, after consultation with legal counsel, to reach an agreement as to whether either Partner's holding of a Partnership Interest causes the Partnership or any Subsidiary to be in violation of any Ownership Restriction. (1) The Partnership will use reasonable efforts to obtain a stay of any enforcement action by the FCC against the Partnership or any Subsidiary as a result of any such violation of an Ownership Restriction, and the Partners will cooperate reasonably with the Partnership in such efforts, to the extent necessary to prevent such violation from having a material adverse effect on the Partnership and the Subsidiaries before it is cured. For purposes of this Section 12.4(b), a material adverse effect on the Partnership and the Subsidiaries includes the loss of any license or licenses issued by the FCC that, in the aggregate, are material to the conduct of the business of the Partnership and the Subsidiaries, the imposition of any fines or forfeitures that, in the aggregate, are material in amount, and limitations on the ability of the Partnership or any Subsidiary to conduct its business in the ordinary course consistent with its past practices. (2) The Partnership and the Partners will cooperate reasonably with each other and negotiate in good faith with the FCC to obtain a determination by the FCC (including a determination by staff employees of the FCC acting under delegated authority) that certain actions proposed to be taken by a Partner or its Affiliates would cure any such violation of an Ownership Restriction. The actions proposed to be taken by a Partner or its Affiliates to cure such violation may be those that, in such Partner's judgment, are least detrimental to such Partner and its Affiliates, and may include the divestiture of any asset or the restructuring of any investment. (3) If there is a Formal Determination that TCI's holding of a Partnership Interest causes the Partnership or any Subsidiary to be in violation of any Ownership Restriction, TCI agrees to take all actions necessary to cure any such violation of an Ownership Restriction; PROVIDED, HOWEVER, that: (A) if the Partnership and the Partners receive a determination by the FCC (including a determination by staff employees of the FCC acting under delegated 65 authority) that certain actions proposed to be taken by TCI or its Affiliates would cure such violation, then, if TCI and its Affiliates take such actions, TCI shall not be required to take any other action under this Section 12.4(b) to cure such violation until such time, if any, that there is a subsequent Formal Determination that such actions did not cure such violation; (B) TCI shall not be required to take any action to cure such violation prior to the time that such violation would have a material adverse effect on the Partnership and the Subsidiaries; and (C) TCI shall not be required to take any action to cure any violation that arose from any acquisition made by the Partnership or any Subsidiary in violation of Section 12.4(c). (4) The actions that TCI may be required to take pursuant to Section 12.4(b)(3), subject to the limitations therein, shall include, to the extent necessary to cure such violation, executing amendments to this Agreement to convert the Partnership Interest of TCI to that of a Limited Partner or to eliminate any right of TCI under this Agreement (other than its right to allocations of income, its right to distributions, its rights under Section 5.1(b)(2)(C), and its right to approve any other action by the Partnership and the Subsidiaries if such action (A) in the case of an action that does not uniquely affect either Partner, such as an acquisition or disposition of assets or a financing, would have a material adverse economic effect on TCI or (B) in the case of an action that uniquely affects either Partner, such as a transaction between the Partnership and an Affiliate of a Partner, would have an adverse economic effect on TCI). (5) If there is a Formal Determination that FHGLP's holding of a Partnership Interest causes the Partnership or any Subsidiary to be in violation of any Ownership Restriction, FHGLP will use its best efforts to cure any such violation; PROVIDED, HOWEVER, that: (A) if the Partnership and the Partners receive a determination by the FCC (including a determination by staff employees of the FCC acting under delegated authority) that certain actions proposed to be taken by FHGLP or its Affiliates would cure such violation, then, if FHGLP and its Affiliates take such actions, FHGLP shall not be required to take any other action under this Section 12.4(b) to cure such violation until such time, if any, that there is a subsequent Formal Determination that such actions did not cure such violation; (B) FHGLP shall not be required to take any action to cure such violation prior to the time that such violation would have a material adverse effect on the Partnership and the Subsidiaries; and (C) FHGLP shall not be required by this Section 12.4(b)(5) to convert the Partnership Interest of FHGLP to that of a Limited Partner or to eliminate any right of FHGLP under this Agreement. 66 (c) The Managing Partner will not permit the Partnership or any Subsidiary to enter into a binding agreement to effect the acquisition, directly or indirectly, of any interest in any business or in any Person if the Managing Partner has actual knowledge that consummating the acquisition described in such binding agreement would cause either Partner or any Affiliate of either Partner to be in violation of any Ownership Restriction. If the Managing Partner desires to cause or permit the Partnership or any Subsidiary to enter into a binding agreement to effect the acquisition, directly or indirectly, of any interest in any business or in any Person, the Managing Partner may send a written notice to each Partner describing the proposed acquisition and specifically requesting that each Partner notify the Managing Partner promptly if such proposed acquisition would cause such Partner or any of its Affiliates to be in violation of any Ownership Restriction. If the Managing Partner sends such a notice at least thirty days before the Partnership or any Subsidiary enters into a binding agreement to effect such an acquisition then (1) the Managing Partner shall be conclusively presumed to have actual knowledge of any violation of an Ownership Restriction by a Partner or any of its Affiliates that is described in a response to the Managing Partner's notice that the Managing Partner receives from such Partner before the Partnership or Subsidiary enters into a binding agreement to effect such acquisition, and (2) the Managing Partner shall be conclusively presumed not to have actual knowledge of any violation of an Ownership Restriction by a Partner or any of its Affiliates that is not described in a response to the Managing Partner's notice that the Managing Partner receives from such Partner before the Partnership or Subsidiary enters into a binding agreement to effect such acquisition. If the Managing Partner does not send such a notice at least thirty days before the Partnership or any Subsidiary enters into a binding agreement to effect such an acquisition, and such acquisition causes either Partner or any Affiliate of either Partner to be in violation of any Ownership Restriction as a result of circumstances existing at the time that the Partnership or Subsidiary entered into a binding agreement to effect such acquisition, the Managing Partner will cause the Partnership and any Subsidiary to take all actions necessary to cure such violation and will indemnify and hold harmless such Partner and its Affiliates for all losses, costs, and expenses resulting from such violation. 12.5 No Other Restrictions. ---------------------- Except as specifically provided above in this Section 12, nothing in this Agreement shall limit the ability of either Partner, or any partner, Affiliate, Controlled Affiliate, agent, or representative of either Partner, to engage in or possess an interest in other business ventures of any nature or description, independently or with others, whether currently existing or hereafter created and whether or not competitive with or advanced by the business of the Partnership. Neither the Partnership nor the other Partner shall have any rights in or to the income or profits derived therefrom, nor shall either Partner have any obligation to the other Partner with respect to any such enterprise or related transaction. 67 12.6 Right of First Offer. --------------------- (a) First Offer Generally. Except as provided in Section 12.6(b), the sale or other disposition by the Partnership or any Subsidiary of any cable television system shall be subject to this Section 12.6(a). (1) If the Partnership or any Subsidiary proposes to sell any cable television system or group of cable television systems, the Partnership shall send a written notice to TCI identifying the cable television system or group of cable television systems that the Partnership or such Subsidiary proposes to sell. The notice shall describe all offers, letters of intent (whether or not executed), expressions of interest, and other similar communications prepared, delivered, received, or solicited by or on behalf of the Partnership or such Subsidiary with respect to such systems. (2) TCI shall have the right to offer to purchase the cable television system or group of cable television systems that the Partnership or such Subsidiary proposes to sell, on terms determined by TCI in its sole discretion. If TCI submits an offer to purchase the cable television system or group of cable television systems that the Partnership or such Subsidiary proposes to sell, the Partnership or such Subsidiary shall have the right to accept or reject such offer in its sole discretion. (3) Neither the Partnership nor any Subsidiary shall sell or otherwise dispose of any cable television system unless the Partnership delivered a notice pursuant to Section 12.6(a)(1) with respect to such cable television system or a group of cable television systems that included such cable television system and: (A) if TCI declined or otherwise failed to submit an offer for such cable television system or group of cable television systems within thirty Business Days after its receipt of the Partnership's notice pursuant to Section 12.6(a)(1), the Partnership or such Subsidiary entered into a binding agreement for the sale or other disposition of such cable television system or group of cable television systems within 150 days after TCI's receipt of the Partnership's notice pursuant to Section 12.6(a)(1) and consummated such sale or other disposition under such binding agreement within nine months after such binding agreement was entered into; or (B) if TCI submitted an offer for such cable television system or group of cable television systems within thirty Business Days after its receipt of the Partnership's notice pursuant to Section 12.6(a)(1), the Partnership or such Subsidiary entered into a binding agreement for the sale or other disposition of such cable television system or group of cable television systems within 150 days after TCI's receipt of the Partnership's notice pursuant to Section 12.6(a)(1), the Partnership or such Subsidiary consummated such sale or other disposition under such binding agreement within nine months after such binding agreement was entered into, and the terms of such sale or other disposition were more favorable to the Partnership, in the 68 reasonable judgment of FHGLP, than the terms of the offer made by TCI pursuant to Section 12.6(a)(2). (b) Exceptions. The provisions of Section 12.6(a) shall not apply to: (1) any sale or other disposition of any cable television system upon the liquidation and dissolution of the Partnership in accordance with Article 13 (including a liquidation following an election by the Offering Partner pursuant to Section 10.3(a) or Section 10.5(a)(2)); (2) any sale or other disposition of any cable television system by the Partnership to any Subsidiary or by any Subsidiary to the Partnership or to any other Subsidiary; or (3) any sale or other disposition of any cable television system approved by TCI pursuant to Section 5.1(b)(2)(B) or otherwise. ARTICLE 13 DISSOLUTION AND LIQUIDATION OF PARTNERSHIP 13.1 Events of Dissolution. ---------------------- The Partnership shall be dissolved upon the happening of any of the following events: (a) the failure of the Partners to continue the Partnership in accordance with the provisions of Section 8.1 after the withdrawal of the Managing Partner; (b) the expiration of the term of the Partnership as set forth in Section 2.5; (c) an election to liquidate and dissolve the Partnership made by the Offering Partner pursuant to Section 10.3(a) or Section 10.5(a)(2); (d) the sale, exchange, involuntary conversion, or other disposition or transfer of all or substantially all of the assets of the Partnership; (e) subject to any restriction in any agreement to which the Partnership is a party, an election to liquidate and dissolve the Partnership made by FHGLP with the approval of TCI; (f) an election to liquidate and dissolve the Partnership made by TCI if Marc B. Nathanson (or any successor approved by TCI pursuant to this paragraph) ceases to be active in the business of the Partnership on a regular and consistent basis (such as by reason of his death 69 or disability) and a successor chief executive officer of the Partnership shall not have been designated by the Managing Partner and approved by TCI within nine months after the date on which Marc B. Nathanson (or any successor) ceases to be active in the business of the Partnership; for purposes of this Section 13.1(f): (1) Marc B. Nathanson (or any successor) shall not be considered to have ceased to be active in the business of the Partnership on a regular and consistent basis solely as a result of (A) normal and customary vacations, (B) leave not exceeding sixty consecutive days during which he remains in regular and consistent contact with the Partnership's other senior management, (C) his failure to spend his time exclusively on the business of the Partnership, or (D) the exercise by Marc B. Nathanson of reasonable business judgment in choosing how to perform his duties on behalf of the Partnership); and (2) Marc B. Nathanson (or any successor) shall not be considered as being under a disability until such time as either (A) two physicians, one of whom shall be selected by the Managing Partner and the other of whom shall be selected by TCI or (B) a third physician selected jointly by the two physicians described in clause (A) shall have certified that he suffers from a permanent physical condition that prevents the performance of his duties on behalf of the Partnership on a regular and consistent basis. (g) the termination of the Contribution Agreement in accordance with its terms prior to the Closing; or (h) subject to any provision of this Agreement that limits or prevents dissolution, the happening of any event that, under applicable law, causes the dissolution of a limited partnership. 13.2 Liquidation. ------------ (a) Upon dissolution of the Partnership for any reason, the Partnership shall immediately commence to wind up its affairs. A reasonable period of time shall be allowed for the orderly termination of the Partnership business, discharge of its liabilities, and distribution or liquidation of the remaining assets so as to enable the Partnership to minimize the normal losses attendant to the liquidation process. (b) Liquidation of the assets of the Partnership shall be managed on behalf of the Partnership by the "Liquidator," which shall be (1) if the Partnership is being liquidated pursuant to Section 13.1(c), the Offering Partner and (2) in all other events, either (A) the Managing Partner or (B) if the Managing Partner has withdrawn (as described in Section 8.1), a liquidating trustee selected by TCI. The Liquidator shall be responsible for soliciting offers to purchase the entirety of the Partnership's assets (including equity interests in other Persons) or portions or clusters of assets of the Partnership. Notwithstanding any provision of this Agreement to the contrary, if a Person other than the Managing Partner is the Liquidator, no approval or 70 other action by the Managing Partner shall be required in connection with the consummation of any liquidating sale of all or any part of the assets of the Partnership that has been approved by the Liquidator consistent with its obligations under this Agreement and the Act. The Liquidator shall afford each Partner an opportunity to offer to purchase any assets of the Partnership that are offered for sale in connection with the liquidation of the Partnership to the extent doing so would be consistent with the orderly liquidation of the Partnership. (c) The Liquidator shall cause a full accounting of the assets and liabilities of the Partnership to be taken and a statement thereof to be furnished to each Partner within thirty days after the distribution of all of the assets of the Partnership. (d) The property and assets of the Partnership and the proceeds from the liquidation thereof shall be applied in the following order of priority: (1) first, to payment of the debts and liabilities of the Partnership, in the order of priority provided by law (including any loans by either Partner to the Partnership) and payment of the expenses of liquidation; (2) second, to setting up of such reserves as the Liquidator may deem reasonably necessary for any contingent or unforeseen liabilities or obligations of the Partnership or any obligation or liability not then due and payable; provided, however, that any such reserve shall be paid over by the Liquidator to an escrow agent, to be held by such escrow agent for the purpose of disbursing such reserves in payment of such liabilities, and, at the expiration of such escrow period as the Liquidator shall deem advisable, to distribute the balance thereafter remaining in the manner hereinafter provided; and (3) finally, to payment to the Partners, in accordance with Section 4.1(b). The distributions pursuant to this Section 13.2(d)(3) shall, to the extent possible, be made prior to the later of the end of the Fiscal Year in which the dissolution occurs or the ninetieth day after the date of dissolution, or such other time period which may be permitted under Treasury Regulations Section 1.704-1(b)(2)(ii)(b). (e) If in the course of the liquidation and dissolution of the Partnership pursuant to this Article 13, the Liquidator determines that a sale by all the Partners to any Person of their Partnership Interests, instead of a sale by the Partnership and the Subsidiaries of their respective assets, would more efficiently effect the liquidation of the Partners' economic interests in the Partnership or would reduce negative tax consequences to the Partners and the Partnership, but would not adversely affect the rights and obligations of either Partner (including the tax consequences to either Partner), then each Partner agrees to sell its Partnership Interest to such Person, and the Liquidator shall have the authority, pursuant to the power of attorney granted in Section 18.5(b), to execute, acknowledge, deliver, swear to, file, and record all agreements, instruments, and other documents that may be necessary or appropriate to effect the sale of such Partner's Partnership Interest. 71 (f) Following the dissolution of the Partnership pursuant to Section 13.1, the Partners will use commercially reasonable efforts to structure the liquidation of the Partnership in a manner that minimizes negative tax consequences to the Partners and the Partnership to the extent doing so would not materially adversely affect either Partner (except to the extent such Partner is adequately compensated by the other Partner for such adverse effect). Any structure agreed to by the Partners pursuant to this Section 13.2(f) shall supersede the other provisions of this Article 13 to the extent it is inconsistent with such other provisions, but nothing in this Section 13.2(f) shall modify or otherwise affect the other provisions of this Article 13 if the Partners are unable to agree on such a structure. 13.3 Special Provisions Regarding Liquidation by Offering Partner. ------------------------------------------------------------- If the Partnership is being liquidated pursuant to Section 13.1(c) as the result of an election by the Offering Partner pursuant to Section 10.3(a), then: (a) Solicitation of Offers. The Offering Partner, as Liquidator, shall solicit offers (each, a "Liquidating Sale Offer") to purchase, singly or in combination, each Business Asset owned by the Partnership and each Subsidiary or equity interests in the Persons owning each such Business Asset. (b) Appraisal. (1) If the Offering Partner, as Liquidator, does not receive or does not expect to receive a Liquidating Sale Offer with respect to any Business Asset or equity interests in the Persons owning any such Business Asset, or if the Liquidation Value of such Business Asset (as determined under Section 13.3(b)(2) without regard to clause (B) thereof, based on the most favorable Liquidating Sale Offer that the Offering Partner receives or expects to receive for such Business Asset) is less than eighty-five percent of the Target Price for such Business Asset, then the Offering Partner may elect to require that the fair market value of the assets of such Business Asset be determined by appraisal in accordance with this Section 13.3(b)(1). An appraisal pursuant to this Section 13.3(b)(1) shall be conducted by an appraiser agreed to by the Offering Partner and the Responding Partner, who shall be nationally recognized as being qualified and experienced in the appraisal of the assets to be appraised and shall not be an Affiliate of either Partner. Any appraiser retained pursuant to this Section 13.3(b)(1) shall be instructed to complete its appraisal within thirty days after it was retained. The fees and expenses of any appraiser retained pursuant to this Section 13.3(b)(1) shall be borne by the Partnership. In determining the fair market value of any Business Asset, the appraiser shall: (A) assume that the fair market value of such Business Asset is the price at which such Business Asset (as a going concern, if applicable) would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and each having reasonable knowledge of all relevant facts; 72 (B) assume a sale of such Business Asset for cash; and (C) use valuation techniques then prevailing in the applicable industry. (2) As used in this Agreement, "Liquidation Value" means, with respect to each Business Asset, the greater of (A) the amount of the most favorable Liquidating Sale Offer for such Business Asset (provided that, if the most favorable Liquidating Sale Offer with respect to any Business Asset is an offer to purchase equity interests in the Persons owning such Business Asset or an offer to deliver consideration that would allow the Partners to defer or avoid any tax liability resulting from the disposition of such Business Asset, the Liquidation Value shall equal the amount of cash consideration for the assets of such Business Asset that would, upon liquidation of the Partnership and the Subsidiaries, generate equivalent after-tax proceeds to the Partners as such Liquidating Sale Offer) or (B) the fair market value of the Business Asset as determined by an appraisal in accordance with this Section 13.3(b)(1). (c) Restriction on Sales. If the aggregate Liquidation Value for all the assets of the Partnership and each Subsidiary is less than the aggregate Target Prices for all the assets of the Partnership and each Subsidiary, than neither the Partnership nor any of the Subsidiaries will sell any assets pursuant to any Liquidating Sale Offer unless the Offering Partner shall have delivered to the Responding Partner the notice required by Section 10.4(a) and the Responding Partner shall have failed to make an election pursuant to Section 10.4(a) within ten Business Days after its receipt of the Offering Partner's notice. 13.4 Distribution in Kind. --------------------- Except as provided in Section 9.13(a), the Partnership shall not distribute any non-cash asset to either Partner without the consent of FHGLP and the approval of TCI. Any asset distributed in kind to one or more Partners shall first be valued at its fair market value to determine the gain or loss used in determining Net Profit or Net Loss that would have resulted if such asset were sold for such value, such gain or loss shall then be allocated pursuant to Article 4, and the Partners' Capital Accounts shall be adjusted to reflect such gain or loss. The amount distributed and charged to the Capital Account of each Partner receiving an interest in such distributed asset shall be the fair market value of such interest (net of any liability secured by such asset that such Partner assumes or takes subject to). The fair market value of any asset distributed in kind in connection with the liquidation of the Partnership shall be determined by an independent appraiser (any such appraiser must be nationally recognized as an expert in valuing the type of asset involved) selected by the Liquidator. 73 13.5 No Action for Dissolution. -------------------------- The Partners acknowledge that irreparable damage would be done to the goodwill and reputation of the Partnership if either Partner should bring an action in court to dissolve the Partnership under circumstances where dissolution is not required by Section 13.1. This Agreement has been drawn carefully to provide fair treatment of all parties and equitable payment in liquidation of the Partnership Interests of both Partners. Accordingly, except where the Managing Partner has failed to liquidate and dissolve the Partnership to the extent required by Section 13.1, each Partner hereby waives and renounces its right to initiate legal action to seek dissolution or to seek the appointment of a receiver or trustee to liquidate the Partnership. 13.6 No Further Claim. ----------------- Upon dissolution, each Limited Partner shall look solely to the assets of the Partnership for the return of its investment, and if the property of the Partnership remaining after payment or discharge of the debts and liabilities of the Partnership, including debts and liabilities owed to one or more of the Partners, is insufficient to return the aggregate capital contributions of a Limited Partner, such Limited Partner shall have no recourse against any other Partner. ARTICLE 14 INDEMNIFICATION 14.1 General. -------- The Partnership shall indemnify, defend, and hold harmless the Managing Partner, the Managing Partner's officers, directors, shareholders, employees, and agents, the employees, officers, and agents of the Partnership, the members of the Advisory Committee, and either Partner that has designated a member of the Advisory Committee (but only to the extent such Partner suffers any liability, loss, or damage as a result of the actions of such member of the Advisory Committee) (all indemnified persons being referred to as "Indemnified Persons" for purposes of this Article 14), from any liability, loss, or damage incurred by the Indemnified Person by reason of any act performed or omitted to be performed by the Indemnified Person in connection with the business of the Partnership, including costs and attorneys' fees (which attorneys' fees may be paid as incurred) and any amounts expended in the settlement of any claims of liability, loss, or damage; PROVIDED, HOWEVER, that, if the liability, loss, damage, or claim arises out of any action or inaction of an Indemnified Person, indemnification under this Section 14.1 shall be available only if (a) either (i) the Indemnified Person, at the time of such action or inaction, determined, in good faith, that its or his course of conduct was in, or not opposed to, the best interests of the Partnership, or (ii) in the case of inaction by the Indemnified Person, the Indemnified Person did not intend its or his inaction to be harmful or opposed to the best interests of the Partnership, and (b) the action or inaction did not constitute fraud, gross negligence, breach of fiduciary duty (which shall not be construed to encompass mistakes in judgment or any breach 74 of any Indemnified Person's duty of care that did not constitute gross negligence), or willful misconduct by the Indemnified Person; and PROVIDED, FURTHER, however, that indemnification under this Section 14.1 shall be recoverable only from the assets of the Partnership and not from any assets of the Partners. The Partnership may pay for insurance covering liability of the Indemnified Persons for negligence in operation of the Partnership's affairs. 14.2 Exculpation. ------------ No Indemnified Person shall be liable, in damages or otherwise, to the Partnership or to either Partner for any loss that arises out of any act performed or omitted to be performed by it or him pursuant to the authority granted by this Agreement if (a) either (i) the Indemnified Person, at the time of such action or inaction, determined, in good faith, that its or his course of conduct was in, or not opposed to, the best interests of the Partnership, or (ii) in the case of inaction by the Indemnified Person, the Indemnified Person did not intend its or his inaction to be harmful or opposed to the best interests of the Partnership, and (b) the conduct of the Indemnified Person did not constitute fraud, gross negligence, breach of fiduciary duty (which shall not be construed to encompass mistakes in judgment or any breach of any Indemnified Person's duty of care that did not constitute gross negligence), or willful misconduct by such Indemnified Person. 14.3 Persons Entitled to Indemnity. ------------------------------ Any Person who is within the definition of "Indemnified Person" at the time of any action or inaction in connection with the business of the Partnership shall be entitled to the benefits of this Article 14 as an "Indemnified Person" with respect thereto, regardless of whether such Person continues to be within the definition of "Indemnified Person" at the time of his or its claim for indemnification or exculpation hereunder. 14.4 Procedure Agreements. --------------------- The Partnership shall enter into agreements with the officers of Falcon Holding Group, Inc. setting forth procedures for implementing the indemnities provided in this Article 14 that are substantially identical to the agreements in effect between those officers and FHGLP on the date of this Agreement. The Partnership may enter into additional agreements with any of its employees, officers, and agents, any of the officers, directors, shareholders, employees, and agents of Falcon Holding Group, Inc., and any member of the Advisory Committee, setting forth procedures for implementing the indemnities provided in this Article 14. ARTICLE 15 BOOKS, RECORDS, ACCOUNTING, AND REPORTS 75 15.1 Books and Records. ------------------ The Partnership shall maintain at its principal office all of the following: (a) A current list of the full name and last known business or residence address of each Partner together with the Capital Contributions and Partnership Interest of each Partner; (b) A copy of the Certificate, this Agreement, and any and all amendments to either thereof, together with executed copies of any powers of attorney pursuant to which any certificate or amendment has been executed; (c) Copies of the Partnership's federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years; (d) The audited financial statements of the Partnership for the six most recent Fiscal Years; and (e) The Partnership's books and records for at least the current and past three Fiscal Years. 15.2 Delivery to Partner and Inspection. ----------------------------------- (a) Upon the request of a Partner, the Managing Partner shall promptly deliver to the requesting Partner, at the expense of the Partnership, a copy of the information required to be maintained by Section 15.1 except for Section 15.1(e). (b) Each Partner, or its duly authorized representative, has the right, upon reasonable request, to inspect and copy during normal business hours any of the Partnership records. 15.3 Annual Statements. ------------------ (a) The Managing Partner shall cause to be prepared for each Partner at least annually, at Partnership expense, audited financial statements of the Partnership and a consolidated audited financial statement for the Partnership and the Subsidiaries (other than any Subsidiary the financial statements of which cannot, under generally accepted accounting principles, be consolidated with the financial statements of the Partnership), along with supplemental information for the Partnership and each Subsidiary included in the consolidated financial statements, all prepared in accordance with generally accepted accounting principles and accompanied by a report thereon containing the opinion of Ernst & Young LLP or other nationally recognized accounting firm chosen by the Managing Partner. The financial statements will include a balance sheet, statement of income or loss, statement of cash flows, and statement of Partners' equity. The supplemental information will consist of a consolidating balance sheet and 76 a consolidating statement of operations and Partners' equity for the preceding Fiscal Year. The Managing Partner shall distribute the financial statements or portions thereof to each Partner as follows: (1) the Managing Partner shall distribute to each Partner a statement setting forth the net income or loss of the Partnership for each Fiscal Year within forty-five days after the close of such Fiscal Year; (2) the Managing Partner shall distribute to each Partner the balance sheet, statement of income or loss, statement of cash flows, and statement of Partners' equity to be included in the financial statements for each Fiscal Year within sixty days after the close of such Fiscal Year; (3) the Managing Partner shall distribute to each Partner a preliminary draft of the complete financial statements for each Fiscal Year within seventy-five days after the close of such Fiscal Year; and (4) the Managing Partner shall distribute to each Partner the complete financial statements for each Fiscal Year as soon as practicable after the close of such Fiscal Year and, in any event, within ninety days after the close of such Fiscal Year. (b) The Managing Partner shall have prepared at least annually, at Partnership expense, Partnership information necessary for the preparation of each Partner's federal and state income tax returns. The Managing Partner shall send the information described in this paragraph to each Partner within seventy-five days after the end of each Fiscal Year and shall use commercially reasonable efforts to send such information to each Partner within sixty-five days after the end of each Fiscal Year. (c) The Managing Partner shall also cause to be distributed to each Partner operating and capital expenditure budgets for the Partnership and for each Subsidiary for which the Partnership prepares such budgets and consolidated operating and capital expenditure budgets for the Partnership and all Subsidiaries for which the Partnership prepares such budgets. The Managing Partner shall cause such budgets to be distributed to each Partner as soon as practicable after they are prepared and, in any event, on or before February 15 of the year to which they relate. (d) The Managing Partner shall also cause to be distributed to each Partner, within ten days after delivery to the Managing Partner, any audited financial statements that are prepared with respect to any Subsidiary the financial statements of which are not consolidated with the financial statements of the Partnership. 77 (e) The Managing Partner shall distribute to each Partner, promptly after they become available, copies of the Partnership's federal, state, and local income tax or information returns for each taxable year. 15.4 Quarterly Financial Statements. ------------------------------- At the close of each of the first three quarters of any Fiscal Year, the Managing Partner shall cause to be distributed to each Partner a quarterly report covering each calendar quarter of the operations of the Partnership and each Subsidiary, consisting of unaudited financial statements (comprising a balance sheet, a statement of income or loss, and a statement of cash flows), and a statement of other pertinent information regarding the Partnership and each such Subsidiary and their activities. The Managing Partner shall cause copies of the statements and other pertinent information (including a summarized statement of operations data of the Partnership that complies with the requirements of APB Opinion No. 18 and Rule 4-08(g) of Regulation S-X under the Securities Act) to be distributed to each Partner within thirty days after the close of the calendar quarter to which the statements relate. The Managing Partner shall distribute to each Partner (a) a preliminary draft of a statement setting forth the net income or loss of the Partnership for each calendar quarter within twenty-one days after the close of such calendar quarter, and (b) a final statement setting forth the net income or loss of the Partnership for each calendar quarter within thirty days after the close of such calendar quarter. The Managing Partner shall also cause to be distributed to each Partner, within ten days after delivery to the Managing Partner, any quarterly report that is prepared with respect to any Subsidiary the operating results of which are not included in the quarterly report of the Partnership. 15.5 Monthly Statements. ------------------- The Managing Partner shall cause to be distributed to each Partner a monthly report covering each calendar month of the operations of the Partnership and each Subsidiary, consisting of unaudited statements of income and loss for the Partnership and each cable television system or other business owned by the Existing Entities (or regional group thereof), with comparisons to the applicable budgets prepared by the Partnership. The Managing Partner shall cause copies of the statements to be distributed to each Partner within thirty days after the close of the calendar month covered by such report. The Managing Partner shall also cause to be distributed to each Partner, within ten days after delivery to the Managing Partner, any monthly report that is prepared with respect to any Subsidiary the operating results of which are not included in the monthly report of the Partnership. 15.6 Other Information. ------------------ The Managing Partner shall provide to each Partner any other information and reports relating to any cable television systems or other businesses owned by, and the financial condition of, the Partnership, the Existing Entities, any other Subsidiary, or any other Person in which the Partnership owns, directly or indirectly, a partnership or other equity interest, the Partner may 78 reasonably request. The Managing Partner shall distribute to each Partner, promptly after the preparation or receipt thereof by the Managing Partner, any financial or other information with respect to any Person in which the Partnership owns, directly or indirectly, a partnership or other equity interest, but which is not a Subsidiary, that is (a) regularly prepared by any Person controlled by the Managing Partner for distribution to the partners or other investors in such Person, or (b) received by the Partnership or any Subsidiary with respect to any equity interest of the Partnership or any Subsidiary in such Person. 15.7 Filings. -------- The Managing Partner, at Partnership expense, shall cause the income tax returns for the Partnership to be prepared and timely filed with the appropriate authorities. The Managing Partner shall send to each Partner a draft of the Partnership's annual federal income tax return at least thirty days before the filing of such return with the Internal Revenue Service. The Managing Partner, at Partnership expense, shall also cause to be prepared and timely filed, with appropriate federal and state regulatory and administrative bodies, all reports required to be filed by the Partnership with those entities under then current applicable laws, rules, and regulations. The reports shall be prepared on the accounting or reporting basis required by the regulatory bodies. Upon written request, each Partner shall be provided with a copy of any of the reports without expense to the requesting Partner. 15.8 Non-Disclosure. --------------- Each Partner agrees that, except as otherwise consented to by the Managing Partner, all non-public information furnished to it or to which it has access pursuant to this Agreement (including information relating to any dispute or the resolution thereof pursuant to Section 18.6) will be kept confidential and will not be disclosed by such Partner, or by any of its agents, representatives, or employees, in any manner whatsoever, in whole or in part, except that: (a) each Partner shall be permitted to disclose such information to those of its agents, representatives, and employees who need to be familiar with such information in connection with such Partner's investment in the Partnership, (b) each Partner shall be permitted to disclose such information to its Affiliates, (c) each Partner shall be permitted to disclose information to the extent required by law, including federal or state securities laws or regulations, or by the rules and regulations of any stock exchange or association on which securities of such Partner or any of its Affiliates are traded, so long as such Partner shall have first afforded the Partnership with a reasonable opportunity to contest the necessity of disclosing such information, (d) each Partner shall be permitted to disclose information to the extent necessary for the enforcement of any right of such Partner arising under this Agreement, 79 (e) each Partner shall be permitted to disclose information to a permitted Assignee or potential Assignee, so long as (1) such Partner shall first have provided to the Managing Partner written notice thereof and of the identity of the Person to whom the disclosure is to be made and (2) such Person agrees (in a writing which provides the Partnership with an independent right of enforcement) to be bound by the provisions of this Section 15.8, (f) each Partner shall be permitted to disclose information that is or becomes generally available to the public other than as a result of a disclosure by such Partner, its agents, representatives, or employees, and (g) each Partner shall be permitted to disclose information that becomes available to such Partner on a nonconfidential basis from a source (other than the Partnership, any other Partner, or their respective agents, representatives, and employees) that, to the best of such Partner's knowledge, is not prohibited from disclosing such information to such Partner by a legal, contractual, or fiduciary obligation to the Partnership or any other Partner. ARTICLE 16 REPRESENTATIONS BY TCI TCI hereby represents and warrants to, and agrees with, FHGLP and the Partnership as follows: 16.1 Investment Intent. ------------------ It is acquiring its Partnership Interest with the intent of holding the same for investment for its own account and without the intent or a view to participating directly or indirectly in, or for resale in connection with, any distribution of such Partnership Interest within the meaning of the Securities Act or any applicable state securities laws, and it does not intend to divide its participation with others, nor to resell, assign, or otherwise dispose of all or any part of its Partnership Interest. In making such representation, TCI acknowledges that a purchase now with an intent to resell by reason of any foreseeable specific contingency, some predetermined event, or an anticipated change in market value or in the condition of the Partnership would represent a purchase with an intent inconsistent with the foregoing representation. 16.2 Securities Regulation. ---------------------- (a) It acknowledges and agrees that the Partnership Interest is being issued and sold in reliance on the exemption from registration contained in Section 4(2) of the Securities Act and exemptions contained in applicable state securities laws, and that it cannot and will not be sold or transferred except in a transaction that is exempt under the Securities Act and those state acts 80 or pursuant to an effective registration statement under those acts or in a transaction that is otherwise in compliance with the Securities Act and those state acts. (b) It understands that it has no contract right for the registration under the Securities Act of the Partnership Interest for public sale and that, unless such Partnership Interest is registered or an exemption from registration is available, such Partnership Interest may be required to be held indefinitely. 16.3 Knowledge and Experience. ------------------------- It has such knowledge and experience in financial, tax, and business matters as to enable it to evaluate the merits and risks of its investment in the Partnership and to make an informed investment decision with respect thereto. 16.4 Economic Risk. -------------- It is able to bear the economic risk of an investment in its Partnership Interest. 16.5 Binding Agreement. ------------------ This Agreement is and will remain its valid and binding agreement, enforceable in accordance with its terms (subject, as to the enforcement of remedies, to any applicable bankruptcy, insolvency, or other laws affecting the enforcement of creditor's rights). 16.6 Tax Position. ------------- Unless it provides prior written notice to the Partnership, it will not take a position on its federal income tax return, on any claim for refund, or in any administrative or legal proceedings that is inconsistent with any information return filed by the Partnership or with the provisions of this Agreement. 16.7 Information. ------------ It has received all documents, books, and records pertaining to an investment in the Partnership requested by it. It has had a reasonable opportunity to ask questions of and receive answers from FHGLP concerning the Partnership, and all such questions have been answered to its satisfaction. ARTICLE 17 AMENDMENTS AND WAIVERS 81 17.1 Amendments to Partnership Agreement. ------------------------------------ (a) This Agreement may only be modified or amended by the Managing Partner with the approval of TCI, except that this Agreement may be amended from time to time by the Managing Partner without the consent or approval of TCI: (1) to reflect the rights and obligations of any Person admitted as a Partner upon the issuance of Partnership Interests pursuant to Section 7.5 and any change in the rights and obligations of any existing Partner upon the issuance to any Person (including any existing Partner) of Partnership Interests pursuant to Section 7.5, (2) to change the Partnership's principal office or other place of business, (3) to change the Partnership's method of allocating income and loss for tax purposes to the extent required by new or changed Treasury Regulations, Internal Revenue Service announcements or rulings, or final court decisions if such change is not adverse to the interests of TCI; (4) to add to the representations, duties, or obligations of the Managing Partner or surrender any right or power granted to the Managing Partner for the benefit of TCI, so long as such change would not require TCI to consolidate the Partnership for financial reporting purposes; or (5) to cause to be deleted from this Agreement any provision or part of any provision that is found by a court of competent jurisdiction to be invalid or unenforceable in any respect, which provision may be deleted from this Agreement by the Managing Partner to the extent of such invalidity or unenforceability without in any way affecting the remaining parts of such provision or the remaining provisions of this Agreement. (b) TCI may elect at any time to cause this Agreement to be amended to convert the Partnership Interest of TCI to that of a Limited Partner and to eliminate any right of TCI under this Agreement. (c) The Managing Partner shall cause to be prepared and filed any amendment to the Certificate that may be required to be filed under the Act as a consequence of any amendment to this Agreement. (d) The Managing Partner will give prompt notice to TCI of any modification or amendment to this Agreement pursuant to this Section 17.1. 82 17.2 Waivers. -------- The observance or performance of any term or provision of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) by the party entitled to the benefits of such term or provision. 17.3 Amendments to Other Partnership Agreements. ------------------------------------------- The partnership agreements or charter documents of each of the Investors Partnerships and each of the Existing Entities may be modified or amended from time to time by Falcon Holding Group, Inc., acting as or on behalf of a partner or shareholder of any of such entities, only with the approval of TCI; PROVIDED, HOWEVER, that such agreements may be amended from time to time without the consent or approval of TCI, (a) as contemplated by the Contribution Agreement, (b) to reflect any change in any such partnership's principal office or other place of business, or (c) to reflect a change to any such partnership's method of allocating income and loss for tax purposes to the extent required by new or changed Treasury Regulations, Internal Revenue Service announcements or rulings, or final court decisions, if such change is not materially adverse to the interests of TCI. ARTICLE 18 MISCELLANEOUS 18.1 Additional Documents. --------------------- At any time and from time to time after the date of this Agreement, upon the request of the Managing Partner, each Partner shall do and perform, or cause to be done and performed, all such additional acts and deeds, and shall execute, acknowledge, and deliver, or cause to be executed, acknowledged, and delivered, all such additional instruments and documents, as may be required to best effectuate the purposes and intent of this Agreement. 18.2 Inspection. ----------- Each Partner shall have the right at reasonable times to inspect the books and records of the Partnership. 18.3 General. -------- This Agreement: (a) shall be binding on the executors, administrators, estates, heirs, and legal successors of the Partners; (b) be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of law principles thereunder, and the United States Arbitration Act, to the extent provided in Section 18.6; (c) may be executed in more than one counterpart as of the day and year first above written; and (d) contains the entire contract 83 between the Partners as to the subject matter of this Agreement. The waiver of any of the provisions, terms, or conditions contained in this Agreement shall not be considered as a waiver of any of the other provisions, terms, or conditions of this Agreement. 18.4 Notices, Etc. ------------- All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery, confirmation of telex or telecopy, or receipt (which may be evidenced by a return receipt if sent by registered mail), addressed (a) if to either Partner, at the address of such Partner set forth on Schedule I or at such other address as such Partner shall have furnished to the Partnership in writing, (b) if to the Partnership, at 10900 Wilshire Blvd., 15th Floor, Los Angeles, California 90024. 18.5 Execution of Papers. -------------------- (a) The Partners agree to execute such instruments, documents, and papers as the Managing Partner deems necessary or appropriate to carry out the intent of this Agreement. (b) Each Partner, including each additional and substituted Partner, by the execution of this Agreement, irrevocably constitutes and appoints the Liquidator its true and lawful attorney-in-fact with full power and authority in its name, place, and stead to execute, acknowledge, deliver, swear to, file, and record all agreements, instruments, and other documents that may be necessary or appropriate to effect the sale of such Partner's Partnership Interest pursuant to Section 13.2(e). (c) The power of attorney granted pursuant to Section 18.5(b) shall be deemed to be a power coupled with an interest, in recognition of the fact that each of the Partners under this Agreement will be relying upon the power of the Liquidator to act as contemplated by this Agreement in any filing and other action by it on behalf of the Partnership, and shall survive the bankruptcy, death, adjudication of incompetence or insanity, or dissolution of any Person hereby giving such powers and the transfer or assignment of all or any part of such Person's Partnership Interest; PROVIDED, HOWEVER, that in the event of an assignment by a Partner, the powers of attorney given by the assignor shall survive such assignment only until such time as the Assignee shall have been admitted to the Partnership as a substituted Partner and all required documents and instruments shall have been duly executed, filed, and recorded to effect such substitution. (d) Each Partner agrees to be bound by any actions taken by the Liquidator acting in good faith pursuant to the power of attorney granted pursuant to Section 18.5(b) that are consistent with and subject to the provisions of this Agreement and hereby waives any and all defenses that may be available to contest, negate, or disaffirm any action of the Liquidator taken in good faith under the power of attorney granted pursuant to Section 18.5(b) that are consistent with and subject to the provisions of this Agreement. 84 18.6 Disputed Matters. ----------------- (a) Generally. If a dispute arises out of or relates to this Agreement or any alleged breach thereof, the Partners will attempt in good faith to resolve such dispute through negotiation. Either Partner may initiate negotiations by providing written notice in letter form to the other Partner setting forth in general terms the subject of the dispute. Representatives of each Partner with full settlement authority shall meet at a mutually agreeable time and place within thirty days of the date of the initial notice in order to attempt to resolve the dispute. If the dispute is not resolved at this meeting, the parties can agree to schedule one or more additional meetings to attempt to resolve the dispute or either party can elect, by written notice to the other party, to require that the dispute be submitted for mediation as set forth below. (b) Mediation. If a dispute arises out of or relates to this Agreement or any alleged breach thereof and if the dispute is not settled through negotiation as described in Section 18.6(a), the Partners agree to submit the dispute for mediation administered by the American Arbitration Association (or any organization successor thereto) ("AAA") under its Commercial Mediation Rules before resorting to arbitration. Either Partner may initiate mediation pursuant to Rule 2 of the AAA's Commercial Mediation Rules. The Partners will cooperate with the AAA and with one another in the appointment of a mediator and in scheduling the mediation proceedings. Unless otherwise agreed by the Partners, the first mediation session shall be held no later than thirty days after the date of filing the written request for mediation, and the memorandum provided for under Rule 9 of the Commercial Mediation Rules shall be provided to the mediator at least five days prior to the first mediation session. All offers, promises, conduct, and statements, whether oral or written, made in the course of the mediation by either of the Partners, their agents, employees, experts, and attorneys, and by the mediator or any AAA employees, shall be confidential and inadmissible for any purposes, including impeachment, in any arbitration or other proceeding involving the parties, but evidence that is otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as a result of its use in the mediation. Either Partner may initiate arbitration with respect to the matters submitted to mediation by filing a written demand for arbitration with the AAA no sooner than thirty days after the first mediation session. The mediation may continue after the commencement of arbitration if the Partners so agree. Unless otherwise agreed by the Partners, the mediator shall be disqualified from serving as arbitrator in the case. (c) Arbitration. If a dispute arises out of or relates to this Agreement or any alleged breach thereof, and if the dispute is not resolved through negotiation and mediation as described in Section 18.6(a) and Section 18.6(b), such dispute shall be settled by arbitration in Phoenix, Arizona, in accordance with the Commercial Arbitration Rules of the AAA and the Supplementary Procedures for Large, Complex Disputes of the AAA or other rules agreed to by the Partners, by a single arbitrator. (d) United States Arbitration Act. The Partners acknowledge that this Agreement evidences a transaction involving interstate commerce. Insofar as it applies, the 85 United States Arbitration Act shall govern the interpretation of, enforcement of, and proceedings pursuant to the arbitration clause in this Agreement. After arbitration has commenced pursuant to Rule 6 of the Commercial Arbitration Rules, either Partner may make an application to the arbitrator seeking injunctive relief to maintain the status quo until such time as the arbitration award is rendered or the dispute is otherwise resolved. (e) Request for Arbitration. The Partner requesting arbitration shall do so by giving notice to that effect (the "Arbitration Notice") to the other Partner and by filing the notice with the AAA in accordance with Rule 6 of the Commercial Arbitration Rules. Within thirty days after the Arbitration Notice is filed, the Partners shall select an arbitrator using the procedures for arbitrator selection of the AAA from the arbitrators in the Large, Complex case pool for the Phoenix, Arizona AAA office. (f) Administrative Conference and Hearing. Upon selection of the arbitrator, the Partners shall conduct an initial administrative conference provided for by the Supplementary Procedures for Large, Complex Disputes of the AAA at which the Partners shall agree to a schedule and procedures for the exchange of relevant information and the hearing and to any other matters the arbitrator or the Partners involved in the dispute deem appropriate. The Partners may submit to the arbitrator prior to the hearing any written information and may make any oral presentation at the hearing that the Partners deem appropriate to support their respective positions with respect to the disputed matter. At any hearing before the arbitrator at which witnesses present testimony either in person or telephonically the Partners involved in the dispute shall be entitled to cross examine the witnesses; PROVIDED, HOWEVER, that this provision shall not be deemed to preclude the ability of any party to present testimony by affidavit in the arbitration hearing. (g) Decision and Award. The arbitrator shall render his written decision and award, including a statement of reasons upon which such award is based, within thirty days after the arbitration hearing. Except insofar as the United States Arbitration Act applies to such matters, the agreement to arbitrate set forth in this Section 18.6 shall be construed, and the legal relations between the Partners shall be determined in accordance with, the substantive laws of the State of California as provided for in Section 18.3 of this Agreement. The decision of the arbitrator shall be in writing and shall be binding upon the Partners involved in the dispute, final and non-appealable. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (h) Exclusivity of Arbitration. Except as provided under the United States Arbitration Act, no action at law or in equity based upon any dispute that is subject to arbitration under this Section 18.6 shall be instituted. (i) Fees and Expenses. All expenses of any arbitration pursuant to this Section 18.6, including fees and expenses of the Partners' attorneys, fees and expenses of the arbitrator, and fees and expenses of any witness or the cost of any proof produced at the request of the arbitrator, shall be borne as determined by the arbitrator. If either Partner institutes any action 86 in law or in equity in violation of Section 18.6(h) and the other Partner successfully compels arbitration under this Section 18.6, the Partner instituting such action shall pay all reasonable expenses incurred by the other Partner relating to such action, including reasonable fees and expenses of the other Partner's attorneys. 18.7 No Third-Party Beneficiaries. ----------------------------- This Agreement is not intended to, and shall not be construed to, create any right enforceable by any Person not a party hereto, including any partner of FHGLP or any creditor of the Partnership or of either of the Partners. 18.8 Covenant of TCI Communications, Inc. Regarding Goods and Services. ------------------------------------------------------------------ By executing this Agreement, TCI Communications, Inc., a Delaware corporation, agrees to use commercially reasonable efforts to (a) cause to be offered to the Partnership equipment, billing, @Home, digital, HITS, and other goods or services that are made available by third-party vendors or otherwise to other cable television systems that are owned by or otherwise affiliated with TCI Communications, Inc., at a cost equal to the direct cost incurred by TCI Communications, Inc. on behalf of such cable television systems for such goods and services (including direct costs incurred by TCI Communications, Inc. that are paid to Persons other than the applicable third-party vendor), and (b) make available to the Partnership on a royalty-free basis any technological innovations that TCI Communications, Inc. develops or becomes aware of and has access to, for other cable television systems that are owned by or otherwise affiliated with TCI Communications, Inc. 87 IN WITNESS WHEREOF, the Partners have hereunto set their hands as of the day first heretofore mentioned. FALCON HOLDING GROUP, L.P. By: Falcon Holding Group, Inc., its general partner By: -------------------------------- Name: Marc B. Nathanson Title: Chief Executive Officer FOR PURPOSES OF SECTION 5.2, SECTION 10.10, SECTION 12.1, AND SECTION 17.3 ONLY: Falcon Holding Group, Inc. By: -------------------------------- Name: Marc B. Nathanson Title: Chief Executive Officer FOR PURPOSES OF SECTION 10.10 ONLY: Falcon Cable Trust By: -------------------------------- Name: Marc B. Nathanson Title: Trustee THIS IS A SIGNATURE PAGE TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FALCON COMMUNICATIONS, L.P. (SIGNATURES CONTINUE) 88 TCI FALCON HOLDINGS, LLC By: -------------------------------- Name: Title: FOR PURPOSES OF SECTION 9.11, SECTION 12.1, AND SECTION 18.8 ONLY: TCI Communications, Inc. By: -------------------------------- Name: Title: THIS IS A SIGNATURE PAGE TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FALCON COMMUNICATIONS, L.P. (SIGNATURES CONTINUE) 89 AS WITHDRAWING PARTNER FOR PURPOSES OF SECTION 2.2 ONLY: ------------------------------- Stanley S. Itskowitch THIS IS A SIGNATURE PAGE TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF FALCON COMMUNICATIONS, L.P. 90 SCHEDULE I TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP ADDRESSES OF THE PARTNERS Falcon Holding Group, L.P. 10900 Wilshire Blvd., 15th Floor Los Angeles, California 90024 TCI Falcon Holdings, LLC c/o Tele-Communications, Inc. Terrace Tower II 5619 DTC Parkway Englewood, Colorado 80111-3000 SCHEDULE IV TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP INITIAL MEMBERS OF THE ADVISORY COMMITTEE 1. Members designated by FHGLP pursuant to Section 6.1(a): Marc B. Nathanson (chairman) Frank J. Intiso Stanley S. Itskowitch 2. Member agreed to by FHGLP and TCI pursuant to Section 6.1(b): John S. Evans 3. Members designated by TCI pursuant to Section 6.1(c): Leo J. Hindery, Jr. William R. Fitzgerald EX-3.6 3 EX-3.6 Exhibit 3.6 ARTICLES OF INCORPORATION OF FALCON FUNDING CORPORATION FIRST: That the name of the corporation (the "Corporation") is Falcon Funding Corporation. SECOND: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the California Corporations Code (the "Code") other than the banking business, the trust business or the practice of a profession permitted to be incorporated by the California Corporations Code. THIRD: The name and address of the Corporation's initial agent for service of process in the State of California is: CT Corporation System (a Delaware corporation) 818 West 7th Street Los Angeles, California 90017 FOURTH: The Corporation is authorized to issue only one class of shares of stock; and the total number of shares which the Corporation is authorized to issue is one thousand (1,000) shares of voting common stock, with a par value of one cent ($.01) per share. FIFTH: The name and mailing address of the sole incorporator is as follows: Thomas D. Twedt Dow, Lohnes & Albertson, PLLC 1200 New Hampshire Ave N.W. Suite 800 Washington, D.C. 20036 SIXTH: The Corporation is to have perpetual existence. SEVENTH: The By-Laws of the Corporation may be made, altered, amended, changed, added to or repealed by the board of directors without the assent or vote of the stockholders, except as set forth in Section 212 of the Code. EIGHTH: Elections of directors need not be by written ballot unless the By-Laws of the Corporation shall so provide. NINTH: Meetings of stockholders may be held within or without the State of California, as the By-Laws may provide. The books and records of the Corporation may be kept (subject to any provision contained in the Code) outside the State of California at such time or places as may be designated from time to time by the board of directors or in the By-Laws of the Corporation. TENTH: The liability of directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ELEVENTH: The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Code) through By-Law provisions, agreements with agents, votes of stockholders or disinterested directors, or otherwise, to the fullest extent permissible under California law. TWELFTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, the undersigned has executed these Articles of Incorporation this 13th day of March, 1998. ------------------------------ Thomas D. Twedt, Incorporator EX-3.7 4 EX-3.7 Exhibit 3.7 BY-LAWS OF FALCON FUNDING CORPORATION ARTICLE I OFFICES Section l. The registered office of Falcon Funding Corporation (the "Corporation") shall be located in the City of Los Angeles, County of Los Angeles, State of California. Section 2. The principal office of the Corporation shall be in the City of Los Angeles, County of Los Angeles, State of California. The Corporation may also have offices at such other places both within and without the State of California and the United States as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All annual meetings of the stockholders for the election of directors shall be held at the principal office of the Corporation, at such place and time as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of California or the United States, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of the notice thereof. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of California or the United States, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of the stockholders shall be held on such date not more than one hundred and eighty days (180) following the end of the fiscal year, and at a time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. At the annual meeting, the stockholders shall elect by a plurality vote a Board of Directors and shall transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. Special meetings of the stockholders for any purpose or purposes, unless otherwise provided by statute, the Articles of Incorporation or these By-laws, shall be called by the Chief Executive Officer ("CEO") or Secretary at the request in writing of a majority of the Board of Directors or at the request in writing of stockholders owning a majority of the capital stock of the Corporation issued and outstanding and entitled to vote. Such requests shall state the purpose or purposes of the proposed meeting. Section 5. Written notice of a special meeting shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called and shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 6. The holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by law or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. Unless otherwise required by law or the Articles of Incorporation, any question brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the stockholders represented and entitled to vote thereat. Each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy, but no proxy shall be voted on or after three years from this date, unless such proxy provides for a longer period. Section 8. Unless otherwise provided by statute, the Articles of Incorporation or these By-laws, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock of the Corporation having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such consent shall be filed with the Secretary of the Corporation. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS 2 Section 1. The number of directors that constitutes the Board of Directors shall be at least one (1) and not more than five (5), the exact number of which shall initially be fixed by the Incorporator and thereafter from time to time by the Board of Directors. Except as provided in Section 2 of this Article, directors shall be elected by a plurality of the votes cast at annual meetings of stockholders, and each director so elected shall hold office until the next annual meeting and until his successor is duly elected and qualified, or until his earlier resignation or removal. Any director may resign at any time upon notice to the Corporation. Directors need not be shareholders. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. The directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified. If at the time of filling any vacancy or any newly created directors the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), stockholders holding at least a majority of the outstanding shares entitled to vote for directors shall have the right to order to vote to fill any such vacancies or newly created directorships, or to replace any directors chosen by the directors. Section 3. The business of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Articles of Incorporation or these By-laws directed or required to be exercised or done by the stockholders. ARTICLE IV MEETINGS OF THE BOARD OF DIRECTORS Section 1. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of California or the United States. Regular meetings of the Board of Directors may be held without notice at such place as may from time to time be determined by the Board. Special meetings of the Board of Directors may be called by the President or by any two directors. Notice thereafter shall be given by the Secretary to each director either by mail on four day's notice or by telegram or telephone on one day's notice. Section 2. At all meetings of the Board, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, unless otherwise specifically provided by statute or the Articles of Incorporation. If a quorum is not present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum shall be present. 3 Section 3. Unless otherwise provided by statute, the Articles of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or the committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Directors. Section 4. Unless otherwise provided by the Articles of Incorporation or these By-laws, members of the Board of Directors, or of any committee designated by the Board, may participate in a meeting of the Board or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. ARTICLE V COMMITTEES OF DIRECTORS The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each consisting of two or more directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. ARTICLE VI COMPENSATION OF DIRECTORS Section l. The directors may be paid their expenses, if any, of attending meetings of the Board of Directors. Such payments may take the form of a fixed sum for attendance at each meeting or a stated salary as a director. Members of committees may be allowed like compensation for attending committee meetings. Section 2. No payment permitted under this Article VI shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 3. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their 4 votes are counted for such purpose if (i) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE VII OFFICERS Section l. The officers of the Corporation shall be designated by the Board of Directors by election and, unless otherwise required by the California Corporations Code (the "Code"), may include a CEO, a President, a Chief Operating Officer ("COO"), a Chief Financial Officer ("CFO"), one or more Vice Presidents, a Secretary, a General Counsel, one or more Assistant Secretaries, a Treasurer, and one or more Assistant Treasurers. The Board of Directors may also elect such other officers and agents as it deems necessary. Any number of offices may be held by the same person, unless otherwise provided by statute, the Articles of Incorporation or these By-laws. In its discretion, the Board of Directors may choose not to fill any office for any period as it may deem advisable, except that of any vacancy in the offices of the CEO and Secretary shall be filled as expeditiously as possible. Section 2. The officers of the Corporation shall be elected by the Board of Directors at the Board's first meeting after each annual meeting of stockholders. Section 3. The officers of the Corporation shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. Section 4. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors. 5 Section 5. The CEO shall be the chief executive officer of the Corporation. The CEO shall preside at all meetings of the stockholders, and shall see that all orders and resolutions of the Board of Directors are carried into effect. The CEO shall execute under the seal of the Corporation bonds, mortgages, contracts and other contracts requiring a seal, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof is expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The CEO shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these by-laws or by the Board of Directors. Section 6. In the absence of the CEO or in the event of his inability or refusal to act, the President or a Vice-President (or in the event there are more than one, the Vice-Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the CEO and, when so acting, shall have all the powers of and be subject to all the restrictions upon the CEO. The President or Vice-President shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 7. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all of the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for any committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors and shall perform such other duties as may be prescribed by the Board of Directors or the CEO, under whose supervision he shall be. The Secretary shall have custody of the seal of the Corporation, and he, or an Assistant Secretary, shall have the authority to affix the same to any instrument requiring it, and (when so affixed) it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Section 8. The CFO shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. Section 9. The CFO shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the CEO, and the Board of Directors at the Board's regular meetings or when the Board 6 so requires, an account of all his transactions as CFO and of the financial condition of the Corporation. Section 10. If required by the Board of Directors, the CFO shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. 7 ARTICLE VIII NOTICE Section 1. Whenever, under the provisions of law or of the Articles of Incorporation or of these by-laws, notice is required to be given to any director or stockholder in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram or by telephone and shall be deemed to be given at the time when such telegram is sent or such telephone notice is actually given and received. Section 2. Whenever any notice is required to be given under the provisions of law or of the Articles of Incorporation or by these By-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE IX CERTIFICATES OF STOCK Section 1. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by the CEO, the President or a Vice-President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by the stockholder in the Corporation. Section 2. Any or all of the signatures on the certificate may be a facsimile if the certificate is manually signed on behalf of a transfer agent or a registrar (other than the Corporation itself or an employee of the Corporation). In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. The Board of Directors may direct that a new certificate or certificates be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates or his legal representative to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any 8 claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by the proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date that shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new date for the adjourned meeting. Section 6. The Corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares to receive dividends and to vote as such owner. The Corporation shall be entitled to hold liable for calls and assessments a person registered on its books as the owner of shares. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, regardless of whether the Corporation shall have express or other notice thereof, unless otherwise provided by statute, the Articles of Incorporation or these By-laws. ARTICLE X GENERAL PROVISIONS Section 1. DIVIDENDS. Dividends upon the capital stock of the Corporation, unless otherwise provided by statute, the Articles of Incorporation or these By-laws, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, property, or in shares of stock, unless otherwise provided by statute, the Articles of Incorporation or these By-laws. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, may think proper as a reserve or reserves for contingencies, equalizing dividends, repairing or maintaining any property of the Corporation, or for such other purpose or purposes as the Board of Directors shall think conducive to the interests of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. 9 Section 2. DISBURSEMENTS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other persons as the Board of Directors may from time to time designate. Section 3. FISCAL YEAR. The fiscal year of the Corporation shall be designated by resolution of the Board of Directors. Section 4. CORPORATE SEAL. The Corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, California." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 5. INDEMNIFICATION. The Corporation shall have the power to indemnify its officers, directors, employees and agents of the Corporation, and such other persons as designated by the Board of Directors, to the full extent as permitted under Section 317 of the Code, as amended from time to time. To assure indemnification under this provision of all such persons who are or were "fiduciaries" of an employee benefit plan governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time, said Section 317 shall, for the purposes hereof, be interpreted as follows: "other enterprise" shall be deemed to include an employee benefit plan; the Corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the Corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to said Act of Congress shall be deemed "fines"; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Corporation. Section 6. AMENDMENTS. Unless such power is reserved to the stockholders by statute, the Articles of Incorporation or these By-laws, these By-laws may be altered, amended or repealed, in whole or in part, or new By-laws adopted either by the stockholders or the Board of Directors (when such power is conferred upon the Board of Directors by the Articles of Incorporation, and subject to repeal or change by action of the stockholders) provided, however, that notice of such alteration, repeal, or adoption of new by-laws be contained in the notice of such meeting of stockholders or Board of Directors as the case may be. All such amendments must be approved by either the holders of a majority of the capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office. 10 EX-5.1 5 EX-5.1 [LETTERHEAD OF DOW, LOHNES & ALBERTSON, PLLC APPEARS HERE] Exhibit 5.1 July 17, 1998 Falcon Holding Group, L.P. Falcon Funding Corporation 10900 Wilshire Boulevard 15th Floor Los Angeles, California 90024 Re: Falcon Holding Group, L.P. Falcon Funding Corporation Registration Statement on Form S-4 (Registration No. 333-55755) Ladies and Gentlemen: We refer to the above-referenced Registration Statement (the "Registration Statement") on Form S-4, filed on June 1, 1998, by Falcon Holding Group, L.P. ("FHGLP") and Falcon Funding Corporation ("FFC" and, together with FHGLP, the "Issuers"), with the Securities and Exchange Commission (the "Commission"), for the purpose of registering under the Securities Act of 1933, as amended (the "Securities Act"), the Issuers' 8.375% Series B Senior Debentures due 2010 (the "Senior Exchange Debentures") and 9.285% Series B Senior Discount Debentures due 2010 (the "Senior Discount Exchange Debentures" and collectively with the Senior Exchange Debentures, the "Exchange Debentures"), to be offered in exchange (the "Exchange Offer") for the Issuers' outstanding 8.375% Series A Senior Debentures due 2010 (the "Old Senior Debentures") and 9.285% Series A Senior Discount Debentures due 2010 (the "Old Senior Discount Debentures" and collectively with the Old Senior Debentures, the "Old Debentures"). The Old Debentures were issued under, and the Exchange Debentures are to be issued under, an Indenture, dated as of April 3, 1998, among FHGLP, FFC and United States Trust Company of New York, as Trustee (the "Indenture"). In connection with the foregoing registration, we have acted as special counsel for the Issuers, and have examined originals or copies of (i) the Third Amended and Restated Agreement of Limited Partnership and Certificate of Limited Partnership of FHGLP in effect as of the date hereof, (ii) the Articles of Incorporation and Bylaws of FFC in effect as of the date hereof, (iii) the Indenture, (iv) the Registration Rights Agreement, dated as of April 3, 1998 (the "Registration Rights Agreement"), by and among the Issuers, Morgan Stanley & Co. Incorporated, Lazard Freres & Co. LLC, Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancAmerica Robertson Stephens, BancBoston Securities Inc., CIBC Oppenheimer, NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc., as the Placement Agents for the initial offering of the Old Debentures, and (v) the Registration Statement. We have also examined all such records of the Issuers and all such agreements, certificates of public officials, certificates of officers or representatives of the Issuers and others, and such other documents, certificates and corporate or other records as we have deemed necessary or appropriate as a basis for the opinion set forth herein. In our examination we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to use as certified or photostatic copies and the authenticity of the originals of such latter documents. As to any facts relevant to the 2 opinion expressed herein, we have relied upon statements and representations of officers and other representatives of the Issuers and others (all of which we assume to be true, complete and accurate in all respects). We are members of the Bar of the District of Columbia and do not purport to be experts on, or generally familiar with, or certified to express legal conclusions based upon, the laws of any other jurisdiction, other than the Delaware General Corporation Law, the Delaware Revised Uniform Limited Partnership Act and the laws of the United States to the extent applicable hereto. Accordingly, as to matters of law set forth below, our opinion is limited to matters of law under the laws of the District of Columbia, the laws of the United States to the extent applicable hereto, the Delaware General Corporation Law and the Delaware Revised Uniform Limited Partnership Act, and we express no opinion as to conflicts of law rules, or the laws of any states or jurisdictions other than as specified above. Based upon the foregoing and subject to the other qualifications stated herein, we are of the opinion that the Exchange Debentures have been duly authorized and when executed by the proper officers of the Issuers, duly authenticated by the Trustee, and issued by the Issuers in accordance with the provisions of the Indenture, against surrender and cancellation of a like aggregate principal amount of Old Debentures pursuant to the Exchange Offer as contemplated in the Registration Rights Agreement, will constitute the legal, valid and binding obligations of the Issuers enforceable against the Issuers in accordance with their terms, except to the extent that (a) the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium (whether general or specific), fraudulent conveyance or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights and remedies generally, (b) the remedy of specific performance and injunctive and other forms of equitable relief may be limited by equitable defenses and the discretion of the court before which any proceeding therefor may be brought (whether such proceeding is at law or in equity or in a bankruptcy proceeding) or limited by other equitable principles of general applicability, and (c) the waiver as to usury, stay or extension laws may be unenforceable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and any abbreviated registration statements relating thereto that may be filed to register additional securities identical to those covered by the Registration Statement (including a registration statement filed pursuant to Rule 462(b) under the Securities Act), and to the reference to this firm under the caption "Legal Matters" contained in this prospectus filed as a part thereof. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, Dow, Lohnes & Albertson, PLLC By: /s/ Edward J. O'Connell --------------------------- Edward J. O'Connell Member EX-10.66 6 EX-10.66 Exhibit 10.66 -------------------------------------------------------------------------- -------------------------------------------------------------------------- FALCON CABLE COMMUNICATIONS, LLC FALCON CABLE MEDIA, A CALIFORNIA LIMITED PARTNERSHIP FALCON CABLE SYSTEMS COMPANY II, L.P. FALCON CABLEVISION, A CALIFORNIA LIMITED PARTNERSHIP FALCON COMMUNITY CABLE, L.P. FALCON COMMUNITY VENTURES I LIMITED PARTNERSHIP FALCON FIRST, INC. FALCON TELECABLE, A CALIFORNIA LIMITED PARTNERSHIP FALCON TELECOM, L.P. CREDIT AGREEMENT Dated as of June 30, 1998 BANKBOSTON, N.A. as Documentation Agent THE CHASE MANHATTAN BANK as Co-Syndication Agent NATIONSBANK, N.A. as Syndication Agent TORONTO DOMINION (TEXAS) INC. as Administrative Agent and BANK OF AMERICA, N.T. & S.A. as Agent -------------------------------------------------------------------------- -------------------------------------------------------------------------- TABLE OF CONTENTS Page 1. DEFINITIONS; CERTAIN RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . . .1 2. THE CREDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.1. REVOLVING CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.1.1. REVOLVING LOAN . . . . . . . . . . . . . . . . . . . . . . . . 32 2.1.2. BORROWING REQUESTS . . . . . . . . . . . . . . . . . . . . . . 34 2.1.3. REVOLVING NOTES. . . . . . . . . . . . . . . . . . . . . . . . 35 2.1.4. FALCON VIDEO REVOLVING LOAN. . . . . . . . . . . . . . . . . . 35 2.2. TERM LOAN B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.2.1. TERM LOAN B. . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.2.2. TERM LOAN B NOTES. . . . . . . . . . . . . . . . . . . . . . . 36 2.2.3. MANDATORY ASSIGNMENT OF TERM LOAN B-1. . . . . . . . . . . . 36 2.3. TERM LOAN C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.3.1. TERM LOAN C. . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.3.2. TERM LOAN C NOTES. . . . . . . . . . . . . . . . . . . . . . . 38 2.4. SUPPLEMENTAL CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.4.1. REQUEST FOR SUPPLEMENTAL FACILITIES. . . . . . . . . . . . . 38 2.4.2. SUPPLEMENTAL FACILITIES. . . . . . . . . . . . . . . . . . . . 39 2.4.3. BORROWING REQUESTS . . . . . . . . . . . . . . . . . . . . . . 39 2.4.4. SUPPLEMENTAL NOTES.. . . . . . . . . . . . . . . . . . . . . . 40 2.5. APPLICATION OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . 40 2.5.1. LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.5.2. SPECIFICALLY PROHIBITED APPLICATIONS . . . . . . . . . . . . . 40 2.6. BORROWERS OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 40 2.7. NATURE OF OBLIGATIONS OF LENDERS TO EXTEND CREDIT. . . . . . . . . . . 41 3. INTEREST; EURODOLLAR PRICING OPTIONS; FEES. . . . . . . . . . . . . . . . . . 41 3.1. INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.2. EURODOLLAR PRICING OPTIONS . . . . . . . . . . . . . . . . . . . . . . 42 3.2.1. ELECTION OF EURODOLLAR PRICING OPTIONS . . . . . . . . . . . . 42 3.2.2. NOTICE TO LENDERS AND BORROWERS. . . . . . . . . . . . . . . . 43 3.2.3. SELECTION OF INTEREST PERIODS. . . . . . . . . . . . . . . . . 43 3.2.4. ADDITIONAL INTEREST. . . . . . . . . . . . . . . . . . . . . . 43 3.2.5. CHANGE IN APPLICABLE LAWS, REGULATIONS, ETC. . . . . . . . . . 44 3.2.6. FUNDING PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . 44 3.3. COMMITMENT FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.3.1. REVOLVING LOAN . . . . . . . . . . . . . . . . . . . . . . . . 45
-i- 3.3.2. TERM LOAN B-2. . . . . . . . . . . . . . . . . . . . . . . . . 46 3.4. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.5. CAPITAL ADEQUACY . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.6. REGULATORY CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.7. COMPUTATIONS OF INTEREST AND FEES. . . . . . . . . . . . . . . . . . . 47 3.8. INTEREST LIMITATION. . . . . . . . . . . . . . . . . . . . . . . . . . 47 4. PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.1. PAYMENT AT MATURITY. . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.2. FIXED REQUIRED PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . 48 4.2.1. TERM LOAN B. . . . . . . . . . . . . . . . . . . . . . . . . 48 4.2.2. TERM LOAN C. . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.2.3. SUPPLEMENTAL LOAN. . . . . . . . . . . . . . . . . . . . . . . 48 4.3. MAXIMUM AMOUNT OF REVOLVING CREDIT, ETC. . . . . . . . . . . . . . . . 48 4.4. ASSET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 4.4.1. OPERATING ASSET SALE NOTICE. . . . . . . . . . . . . . . . . . 49 4.4.2. PREPAYMENT ON SALE . . . . . . . . . . . . . . . . . . . . . . 49 4.4.3. ASSET REINVESTMENT RESERVE AMOUNT. . . . . . . . . . . . . . . 49 4.4.4. ALLOCATIONS OF PREPAYMENT. . . . . . . . . . . . . . . . . . . 50 4.5. DESIGNATED FINANCING DEBT. . . . . . . . . . . . . . . . . . . . . . . 50 4.6. VOLUNTARY PREPAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 50 4.7. APPLICATION OF PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . 51 5. CONDITIONS TO EXTENDING CREDIT. . . . . . . . . . . . . . . . . . . . . . . . 51 5.1. CONDITIONS ON INITIAL CLOSING DATE . . . . . . . . . . . . . . . . . . 51 5.1.1. SATISFACTION OF EXISTING BANK DEBT . . . . . . . . . . . . . . 52 5.1.2. NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.1.3. PAYMENT OF FEES. . . . . . . . . . . . . . . . . . . . . . . . 52 5.1.4. LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . 52 5.1.5. PLEDGE AND SUBORDINATION AGREEMENT . . . . . . . . . . . . . . 52 5.1.6. MONY SUBORDINATED DEBT . . . . . . . . . . . . . . . . . . . . 52 5.2. CONDITIONS TO EACH EXTENSION OF CREDIT . . . . . . . . . . . . . . . . 53 5.2.1. OFFICER'S CERTIFICATE. . . . . . . . . . . . . . . . . . . . . 53 5.2.2. PROPER PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 53 5.2.3. LEGALITY, ETC. . . . . . . . . . . . . . . . . . . . . . . . . 53 5.3. EXTENSIONS OF CREDIT FOLLOWING THE TCI CLOSING.. . . . . . . . . . . . 53 5.3.1. REPAYMENT OF FINANCING DEBT. . . . . . . . . . . . . . . . . . 54 5.3.2. ASSIGNMENT OF DEBENTURES AND INDENTURES. . . . . . . . . . . . 54 5.3.3. JOINDERS AND ASSIGNMENTS.. . . . . . . . . . . . . . . . . . . 54 5.4. CONDITIONS ON SUPPLEMENTAL FACILITY CLOSING DATES. . . . . . . . . . . 54 5.4.1. SUPPLEMENTAL NOTES . . . . . . . . . . . . . . . . . . . . . . 54 5.4.2. JOINDER AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . 55 5.4.3. LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . 55
-ii- 5.4.4. FINANCED ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . 55 5.4.5. GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6. GUARANTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6.1. GUARANTEES OF CREDIT OBLIGATIONS . . . . . . . . . . . . . . . . . . . 55 6.2. CONTINUING OBLIGATION. . . . . . . . . . . . . . . . . . . . . . . . . 56 6.3. WAIVERS WITH RESPECT TO CREDIT OBLIGATIONS . . . . . . . . . . . . . . 56 6.4. LENDERS' POWER TO WAIVE, ETC . . . . . . . . . . . . . . . . . . . . . 58 6.5. INFORMATION REGARDING OBLIGORS, ETC. . . . . . . . . . . . . . . . . . 59 6.6. CERTAIN GUARANTOR REPRESENTATIONS. . . . . . . . . . . . . . . . . . . 59 6.7. NO SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.8. SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.9. CONTRIBUTION AMONG GUARANTORS. . . . . . . . . . . . . . . . . . . . . 60 6.10. FUTURE SUBSIDIARIES; FURTHER ASSURANCES. . . . . . . . . . . . . . . . 61 6.11. RELEASE OF GUARANTOR . . . . . . . . . . . . . . . . . . . . . . . . . 61 7. GENERAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 7.1. TAXES AND OTHER CHARGES; ACCOUNTS PAYABLE. . . . . . . . . . . . . . . 61 7.1.1. TAXES AND OTHER CHARGES. . . . . . . . . . . . . . . . . . . . 61 7.1.2. ACCOUNTS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . 62 7.2. CONDUCT OF BUSINESS, ETC.. . . . . . . . . . . . . . . . . . . . . . . 62 7.2.1. TYPES OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 62 7.2.2. MAINTENANCE OF PROPERTIES. . . . . . . . . . . . . . . . . . . 62 7.2.3. COMPLIANCE WITH MATERIAL AGREEMENTS. . . . . . . . . . . . . . 62 7.2.4. STATUTORY COMPLIANCE . . . . . . . . . . . . . . . . . . . . . 63 7.3. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 7.4. FINANCIAL STATEMENTS AND REPORTS . . . . . . . . . . . . . . . . . . . 63 7.4.1. ANNUAL REPORTS . . . . . . . . . . . . . . . . . . . . . . . . 63 7.4.2. QUARTERLY REPORTS. . . . . . . . . . . . . . . . . . . . . . . 64 7.4.3. TCI CLOSING REPORT . . . . . . . . . . . . . . . . . . . . . . 65 7.4.4. OTHER REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . 65 7.4.5. NOTICE OF LITIGATION; NOTICE OF DEFAULTS . . . . . . . . . . . 66 7.4.6. FRANCHISE MATTERS. . . . . . . . . . . . . . . . . . . . . . . 66 7.4.7. ERISA REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . 66 7.4.8. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 66 7.5. CERTAIN FINANCIAL TESTS. . . . . . . . . . . . . . . . . . . . . . . . 67 7.5.1. CONSOLIDATED TOTAL DEBT TO CONSOLIDATED ANNUALIZED OPERATING CASH FLOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 7.5.2. CONSOLIDATED ANNUALIZED OPERATING CASH FLOW TO CONSOLIDATED CASH INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 7.5.3. CONSOLIDATED ANNUALIZED OPERATING CASH FLOW TO CONSOLIDATED PRO FORMA DEBT SERVICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 7.5.4. CAPITAL EXPENDITURES.. . . . . . . . . . . . . . . . . . . . . 68
-iii- 7.6. INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 7.7. GUARANTEES; LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . 70 7.8. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 7.9. INVESTMENTS AND ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . 72 7.10. DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 7.11. MERGER, CONSOLIDATION AND DISPOSITIONS OF ASSETS . . . . . . . . . . . 77 7.12. ISSUANCE OF STOCK BY SUBSIDIARIES; SUBSIDIARY DISTRIBUTIONS. . . . . . 78 7.12.1. ISSUANCE OF STOCK BY SUBSIDIARIES. . . . . . . . . . . . . . . 78 7.12.2. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS. . . . . . . . . . 78 7.13. ERISA, ETC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 7.14. TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . 79 7.15. INTEREST RATE PROTECTION . . . . . . . . . . . . . . . . . . . . . . . 80 7.16. COMPLIANCE WITH ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . 80 7.17. NO OUTSIDE MANAGEMENT FEES . . . . . . . . . . . . . . . . . . . . . . 80 7.18. DERIVATIVE CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . 81 7.19. NEGATIVE PLEDGE CLAUSES. . . . . . . . . . . . . . . . . . . . . . . . 81 7.20. FUTURE SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . 81 8. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . 81 8.1. ORGANIZATION AND BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 82 8.1.1. THE BORROWERS. . . . . . . . . . . . . . . . . . . . . . . . . 82 8.1.2. OTHER GUARANTORS . . . . . . . . . . . . . . . . . . . . . . . 82 8.1.3. QUALIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . 82 8.1.4. CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . 83 8.2. FINANCIAL STATEMENTS AND OTHER INFORMATION; MATERIAL AGREEMENTS. . . . 83 8.2.1. FINANCIAL STATEMENTS AND OTHER INFORMATION . . . . . . . . . . 83 8.2.2. MATERIAL AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . 84 8.3. CHANGES IN CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . 84 8.4. AGREEMENTS RELATING TO FINANCING DEBT, INVESTMENTS, ETC. . . . . . . . 84 8.5. TITLE TO ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 8.6. LICENSES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 8.6.1. FRANCHISES; FCC LICENSES . . . . . . . . . . . . . . . . . . . 85 8.6.2. FCC AND OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . 85 8.7. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 8.8. TAX RETURNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 8.9. AUTHORIZATION AND ENFORCEABILITY . . . . . . . . . . . . . . . . . . . 86 8.10. NO LEGAL OBSTACLE TO AGREEMENTS. . . . . . . . . . . . . . . . . . . . 86 8.11. DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 8.12. CERTAIN BUSINESS REPRESENTATIONS . . . . . . . . . . . . . . . . . . . 87 8.12.1. LABOR RELATIONS. . . . . . . . . . . . . . . . . . . . . . . . 87 8.12.2. ANTITRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . 87 8.12.3. CONSUMER PROTECTION. . . . . . . . . . . . . . . . . . . . . . 87 8.12.4. YEAR 2000 ISSUES . . . . . . . . . . . . . . . . . . . . . . . 87
-iv- 8.13. ENVIRONMENTAL REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . 87 8.13.1. ENVIRONMENTAL COMPLIANCE . . . . . . . . . . . . . . . . . . . 87 8.13.2. ENVIRONMENTAL LITIGATION . . . . . . . . . . . . . . . . . . . 88 8.13.3. HAZARDOUS MATERIAL . . . . . . . . . . . . . . . . . . . . . . 88 8.13.4. ENVIRONMENTAL CONDITION OF PROPERTIES. . . . . . . . . . . . . 88 8.14. PENSION PLANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 8.15. CONTRIBUTION AGREEMENT, ETC. . . . . . . . . . . . . . . . . . . . . . 89 8.16. GOVERNMENT REGULATION; MARGIN STOCK. . . . . . . . . . . . . . . . . . 89 8.16.1. GOVERNMENT REGULATION. . . . . . . . . . . . . . . . . . . . . 89 8.16.2. MARGIN STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 89 8.17. DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 9. DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 9.1. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 90 9.1.1. NON-PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . 90 9.1.2. BREACH OF DESIGNATED COVENANTS. . . . . . . . . . . . . . . . 90 9.1.3. BREACH OF OTHER COVENANTS. . . . . . . . . . . . . . . . . . . 90 9.1.4. MISREPRESENTATION. . . . . . . . . . . . . . . . . . . . . . . 90 9.1.5. CROSS-DEFAULT, ETC.. . . . . . . . . . . . . . . . . . . . . . 90 9.1.6. CHANGE OF CONTROL, ETC. . . . . . . . . . . . . . . . . . . . 91 9.1.7. ENFORCEABILITY, ETC. . . . . . . . . . . . . . . . . . . . . 92 9.1.8. JUDGMENTS, ETC.. . . . . . . . . . . . . . . . . . . . . . . . 92 9.1.9. FRANCHISE REVOCATION, ETC. . . . . . . . . . . . . . . . . . 93 9.1.10. ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 9.1.11. BANKRUPTCY, ETC. . . . . . . . . . . . . . . . . . . . . . . 93 9.2. CERTAIN ACTIONS FOLLOWING AN EVENT OF DEFAULT. . . . . . . . . . . . . 94 9.2.1. NO OBLIGATION TO EXTEND CREDIT . . . . . . . . . . . . . . . . 94 9.2.2. SPECIFIC PERFORMANCE; EXERCISE OF RIGHTS . . . . . . . . . . . 94 9.2.3. ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . 94 9.2.4. ENFORCEMENT OF PAYMENT; CREDIT SECURITY; SETOFF. . . . . . . . 95 9.2.5. CUMULATIVE REMEDIES. . . . . . . . . . . . . . . . . . . . . . 95 9.3. ANNULMENT OF DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . 95 9.4. WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 10. EXPENSES; INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 10.1. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 10.2. GENERAL INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 97 11. OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 11.1. INTERESTS IN CREDITS . . . . . . . . . . . . . . . . . . . . . . . . . 97 11.2. AGENTS' AUTHORITY TO ACT, ETC. . . . . . . . . . . . . . . . . . . . . 97 11.3. BORROWERS TO PAY AGENT, ETC. . . . . . . . . . . . . . . . . . . . . . 98 11.4. LENDER OPERATIONS FOR ADVANCES, ETC. . . . . . . . . . . . . . . . . . 98
-v- 11.4.1. ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 11.4.2. ADMINISTRATIVE AGENT TO ALLOCATE PAYMENTS, ETC.. . . . . . . . 98 11.4.3. DELINQUENT LENDERS; NONPERFORMING LENDERS. . . . . . . . . . . 99 11.5. SHARING OF PAYMENTS, ETC.. . . . . . . . . . . . . . . . . . . . . . . 99 11.6. AGENT'S RESIGNATION OR REMOVAL . . . . . . . . . . . . . . . . . . . .100 11.7. CONCERNING THE AGENTS. . . . . . . . . . . . . . . . . . . . . . . . .100 11.7.1. ACTION IN GOOD FAITH, ETC. . . . . . . . . . . . . . . . . . .101 11.7.2. NO IMPLIED DUTIES, ETC.. . . . . . . . . . . . . . . . . . . .101 11.7.3. VALIDITY, ETC. . . . . . . . . . . . . . . . . . . . . . . . .101 11.7.4. COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . .101 11.7.5. EMPLOYMENT OF AGENTS AND COUNSEL . . . . . . . . . . . . . . .102 11.7.6. RELIANCE ON DOCUMENTS AND COUNSEL. . . . . . . . . . . . . . .102 11.7.7. AGENT'S REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . .102 11.8. RIGHTS AS A LENDER . . . . . . . . . . . . . . . . . . . . . . . . . .102 11.9. INDEPENDENT CREDIT DECISION. . . . . . . . . . . . . . . . . . . . . .103 11.10. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .103 12. SUCCESSORS AND ASSIGNS; LENDER ASSIGNMENTS AND PARTICIPATIONS . . . . . . . .103 12.1. ASSIGNMENTS BY LENDERS . . . . . . . . . . . . . . . . . . . . . . . .104 12.1.1. ASSIGNEES AND ASSIGNMENT PROCEDURES. . . . . . . . . . . . . .104 12.1.2. TERMS OF ASSIGNMENT AND ACCEPTANCE . . . . . . . . . . . . . .105 12.1.3. REGISTER . . . . . . . . . . . . . . . . . . . . . . . . . . .106 12.1.4. ACCEPTANCE OF ASSIGNMENT AND ASSUMPTION. . . . . . . . . . . .106 12.1.5. FEDERAL RESERVE BANK . . . . . . . . . . . . . . . . . . . . .106 12.1.6. FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . .106 12.2. CREDIT PARTICIPANTS. . . . . . . . . . . . . . . . . . . . . . . . . .106 12.3. REPLACEMENT OF LENDER. . . . . . . . . . . . . . . . . . . . . . . . .107 13. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108 14. FOREIGN LENDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109 15. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109 16. LIMITED RECOURSE AGAINST PARTNERS . . . . . . . . . . . . . . . . . . . . . .110 17. AMENDMENTS, CONSENTS, WAIVERS, ETC. . . . . . . . . . . . . . . . . . . . . .110 17.1. LENDER CONSENTS FOR AMENDMENTS . . . . . . . . . . . . . . . . . . . .110 17.2. COURSE OF DEALING; NO IMPLIED WAIVERS. . . . . . . . . . . . . . . . .112 18. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 18.1. DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 18.2. NO STRICT CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . .112
-vi- 18.3. CERTAIN OBLIGOR ACKNOWLEDGMENTS. . . . . . . . . . . . . . . . . . . .113 18.4. VENUE; SERVICE OF PROCESS; CERTAIN WAIVERS . . . . . . . . . . . . . .113 18.5. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . .114 18.6. INTERPRETATION; GOVERNING LAW; ETC . . . . . . . . . . . . . . . . . .114
-vii- EXHIBITS 1-A - Description of TCI Transactions 1-B - Borrowers, Restricted Companies, Investor Group Companies, Guarantors 1-C - Example of Pro Rata Revolver Prepayment 2.1.3 - Form of Revolving Note 2.1.4 - Falcon Video Joinder 2.2.2 - Form of Term Loan B Note 2.3.2 - Form of Term Loan C Note 2.6 - New Falcon II Assignment and Assumption 5.1.5 - Pledge and Subordination Agreement 5.2.1. - Officer's Certificate 7.14 - Affiliate Contractual Obligations 8.1 - Restricted Companies 8.2.2 - Material Agreements 8.4 - Financing Debt, Certain Investments, etc. 8.7 - Litigation 11.1 - Lender Percentage Interests 12.1.1 - Assignment and Acceptance
-viii- FALCON RESTRICTED COMPANIES CREDIT AGREEMENT This Agreement, dated as of June 30, 1998, is among the affiliates of Falcon Holding Group, L.P., a Delaware limited partnership, set forth in Exhibit 8.1 hereto, their respective subsidiaries that are from time to time party hereto and the Lenders (as defined below), including BankBoston, N.A. as Documentation Agent for itself and the other Lenders, Toronto Dominion (Texas) Inc., as Administrative Agent, NationsBank, N.A., as Syndication Agent, Bank of America, N.T. & S.A., as Agent, and The Chase Manhattan Bank,, as Co-Syndication Agent. RECITALS: Under this Agreement, the Lenders are providing a $650,000,000 reducing revolving credit facility maturing in December 2006, a $200,000,000 amortizing term loan maturing in June 2007 and a $300,000,000 amortizing term loan maturing in December 2007 and may make available in their discretion as requested by the Borrowers up to $350,000,000 in additional revolving credit and/or term loans pursuant to one or more supplemental credit facilities. The Loan will be advanced initially to eight joint and several Borrowers, all of whom (except Falcon First, Inc.) are limited partnerships of which Holding, L.P. is the sole limited partner and Holding, L.P. and an Investor Group Company are the sole general partners (except for Falcon Community Ventures I Limited Partnership, whose ownership is set forth in Exhibit 8.1). Immediately prior to the TCI Closing (as defined below), Falcon Video will become an additional borrower under the revolving credit facility to the extent provided herein, and upon the TCI Closing the sole borrower under all three facilities will be New Falcon II. Except as set forth in Exhibit 8.1, each Investor Group Company is itself a limited partnership of which Holding, L.P. is the sole limited partner and Holding, L.P. and Holding, Inc. are the sole general partners. Holding, Inc. is the sole general partner of Holding, L.P. Holding, L.P. owns all the capital stock of Falcon First, Inc. All Investor Group Companies, all Borrowers and all their respective Subsidiaries (other than the Excluded Companies) are Restricted Companies hereunder and are guaranteeing all the Credit Obligations (except to the extent otherwise provided herein prior to the TCI Closing and, in the case of Falcon Video and its Investor Group Company, prior to the discharge of Financing Debt of Falcon Video as contemplated in Section 5.3.1). In addition, from and after the TCI Closing (and, in the case of Falcon Video and its Investor Group Company, from and after the discharge of Financing Debt of Falcon Video as contemplated in Section 5.3.1), New Falcon II is pledging its equity interests in the other Restricted Companies, and Falcon Communications, L.P. is pledging its equity interest in New Falcon II, as collateral for the Credit Obligations. The parties agree as follows: 1. DEFINITIONS; CERTAIN RULES OF CONSTRUCTION. Certain capitalized terms are used in this Agreement and in the other Credit Documents with the specific meanings defined below in this Section 1. Except as otherwise explicitly specified to the contrary, (a) the capitalized term "Section" refers to sections of this Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references to a particular Section include all subsections thereof, (d) the word "including" shall be construed as "including without limitation", (e) accounting terms not otherwise defined herein shall have the meaning provided under GAAP, (f) references to a particular statute or regulation include all rules and regulations thereunder and any successor statute, regulation or rules, in each case as from time to time in effect, (g) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Agreement and the other Credit Documents and (h) references to "DOLLARS" or "$" mean United States Funds. References to "the date hereof" mean the date first set forth above. "ACCUMULATED BENEFIT OBLIGATIONS" means the actuarial present value of the accumulated benefit obligations under any Plan, calculated in a manner consistent with Statement No. 87 of the Financial Accounting Standards Board. "ADMINISTRATIVE AGENT" means Toronto Dominion in its capacity as administrative agent for the Lenders hereunder, as well as its successors and assigns in such capacity pursuant to Section 11.6. "AFFECTED LENDER" is defined in Section 12.3. "AFFILIATE" means, with respect to any Restricted Company or New Falcon II (or any other specified Person, including a Lender), any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Restricted Company (or other specified Person) or, in the case of any Lender which is an investment fund, the investment advisor thereof and any investment fund having the same investment advisor, and shall include (a) any officer or director or general partner of such Restricted Company (or other specified Person) and (b) any Person of which the Restricted Company (or other specified Person) or any Affiliate (as defined in clause (a) above) of such Restricted Company (or other specified Person) shall, directly or indirectly, beneficially own either (i) at least 15% of the outstanding equity securities having the general power to vote or (ii) at least 15% of all equity interests. "AGENT" means each of the Documentation Agent, the Administrative Agent, the Syndication Agent, the Co-Syndication Agent and the Agent. "AGGREGATE PERCENTAGE INTERESTS" means, at any date, the sum of the dollar amounts represented by the Percentage Interests in each of the Revolving Loan, Term Loan B, Term Loan C and the Supplemental Loan. "AGREEMENT" means this Agreement as from time to time in effect. "APPLICABLE MARGIN" means, on any date, the percentage in the table below for the applicable portion of the Revolving Loan, Term Loan B or Term Loan C, as the case may be, set opposite the applicable Reference Leverage Ratio. -2- REVOLVING LOAN
Eurodollar Reference Leverage Ratio Base Rate Pricing Option ------------------------ --------- -------------- Greater than or equal to 5.50 0.375% 1.375% Greater than or equal to 5.00 0.125% 1.125% but less than 5.50 Greater than or equal to 4.50 0.000% 0.875% but less than 5.00 Greater than or equal to 4.00 0.000% 0.625% but less than 4.50 Less than 4.00 0.000% 0.500%
; PROVIDED, HOWEVER, that if the TCI Closing does not occur by December 31, 1998, from January 1, 1999 until the TCI Closing, the Applicable Margin indicated by the then-applicable Reference Leverage Ratio set forth above will be increased 0.250%; and PROVIDED, FURTHER, that prior to the TCI Closing, the Applicable Margin will be not less than 1.00% in the case of any Eurodollar Pricing Option. TERM LOAN B
Eurodollar Reference Leverage Ratio Base Rate Pricing Option ------------------------ --------- -------------- Greater than or equal to 5.50 1.000% 2.000% Greater than or equal to 4.50 0.750% 1.750% but less than 5.50 Less than 4.50 0.500% 1.500%
; PROVIDED, HOWEVER, that if the TCI Closing does not occur by December 31, 1998, from January 1, 1999 until the TCI Closing, the Applicable Margin indicated by the then-applicable Reference Leverage Ratio set forth above will be increased 0.250%; TERM LOAN C
Eurodollar Reference Leverage Ratio Base Rate Pricing Option ------------------------ --------- -------------- Greater than or equal to 5.50 1.250% 2.250% Greater than or equal to 4.50 1.000% 2.000% but less than 5.50 Less than 4.50 0.750% 1.750%
-3- ; PROVIDED, HOWEVER, that if the TCI Closing does not occur by December 31, 1998, from January 1, 1999 until the TCI Closing, the Applicable Margin indicated by the then-applicable Reference Leverage Ratio set forth above will be increased 0.250%; and, PROVIDED, FURTHER, that prior to the TCI Closing, the Applicable Margin will be not less than 2.000% in the case of any Eurodollar Pricing Option or 1.000% in the case of the Base Rate applicable to any portion of Term Loan C. Any adjustment in the Applicable Margin shall take effect on the third Banking Day following the receipt by the Administrative Agent of the financial statements required to be furnished by Section 7.4.1 or 7.4.2; PROVIDED, HOWEVER, that if for any reason the Restricted Companies shall not have furnished the financial statements required by Section 7.4.1 or 7.4.2 for any fiscal quarter by the time required by such Sections and the Documentation Agent reasonably determines that the Applicable Margin indicated by the Reference Leverage Ratio for such fiscal quarter would be increased from that previously in effect, commencing on the date which is three Banking Days after such financial statements were due until the third Banking Day following receipt by the Administrative Agent of such financial statements, the Applicable Margin shall be the Applicable Margin as so increased. In connection with the TCI Closing, an adjustment in the Applicable Margin shall take effect on the later of (a) the TCI Closing or (b) the fifth Banking Day following the receipt by the Administrative Agent of the TCI Closing Report; PROVIDED, HOWEVER, that if for any reason the Restricted Companies shall not have furnished the TCI Closing Report by the time required by Section 7.4.3 and the Applicable Margin indicated by the Reference Leverage Ratio for the period immediately following the TCI Closing would be increased from the Applicable Margin previously in effect, commencing on the TCI Closing until the fifth Banking Day following receipt by the Administrative Agent of the TCI Closing Report, the Applicable Margin shall be the Applicable Margin as so increased. "APPLICABLE MATURITY DATE" means (a) with respect to the Revolving Loan, the Final Revolving Maturity Date, (b) with respect to Term Loan B, the Final Term Loan B Maturity Date, (c) with respect to Term Loan C, the Final Term Loan C Maturity Date and (d) with respect to the Supplemental Loan, the final maturity date of the applicable portion of the Supplemental Loan. "APPLICABLE RATE" means, at any date, the sum of: (a) (i) with respect to each portion of the Loan subject to a Eurodollar Pricing Option, the sum of the Applicable Margin PLUS the Eurodollar Rate with respect to such Eurodollar Pricing Option; (ii) with respect to each other portion of the Loan, the sum of the Applicable Margin PLUS the Base Rate; and -4- (iii) with respect to any Supplemental Facility, the rate per annum agreed in writing by the Borrower and the Lenders extending such Supplemental Facility in accordance with Section 2.4; PLUS (b) an additional 2% beginning on the occurrence of an Event of Default and ending on the date such Event of Default is no longer continuing. "ASSET REINVESTMENT RESERVE AMOUNT" is defined in Section 4.4.3. "ASSIGNEE" is defined in Section 12.1.1. "ASSIGNMENT AND ACCEPTANCE" is defined in Section 12.1.1. "BANKBOSTON" means BankBoston, N.A. "BANKING DAY" means any day other than Saturday, Sunday or a day on which banks in Boston, Massachusetts or New York, New York are authorized or required by law or other governmental action to close and, if such term is used with reference to a Eurodollar Pricing Option, any day on which dealings are effected in the Eurodollars in question by first-class banks in the inter-bank Eurodollar markets in New York, New York and at the location of the applicable Eurodollar Office. "BANKRUPTCY CODE" means Title 11 of the United States Code (or any successor statute) and the rules and regulations thereunder, all as from time to time in effect. "BANKRUPTCY DEFAULT" means an Event of Default referred to in Section 9.1.11. "BASE RATE" means, on any day, the greater of (a) the rate of interest announced by the Administrative Agent at the Houston Office from time to time as its corporate base rate (which may not be its lowest commercial lending rate) or (b) the sum of 1/2% PLUS the Federal Funds Rate. "BASIC EURODOLLAR RATE" means, as applied to any Interest Period, the quotient (rounded to the nearest 1/100%) obtained by dividing (a) the sum of the Basic Reference Eurodollar Rates of the Reference Lenders for such Interest Period by (b) the number of such Reference Lenders. Each determination by the Administrative Agent of any Basic Eurodollar Rate pursuant to the foregoing sentence shall, in the absence of manifest error, be conclusive. "BASIC REFERENCE EURODOLLAR RATE" means, for any Reference Lender as applied to any Interest Period, the rate of interest at which Eurodollar deposits in an amount comparable to the Percentage Interest of such Reference Lender in the portion of the Loan as to which a Eurodollar Pricing Option has been elected and which have a term corresponding to the Interest Period in question are offered to such Reference Lender by first class banks in the inter-bank Eurodollar -5- market for delivery in immediately available funds at a Eurodollar Office on the first day of such Interest Period as determined by the Administrative Agent at approximately 10:00 a.m. (New York time) two Banking Days prior to the date upon which the Interest Period in question is to commence, which determination by the Administrative Agent shall, in the absence of manifest error, be conclusive. "BORROWER" or "BORROWERS" means (a) prior to the TCI Closing and the contemporaneous execution and delivery of the New Falcon II Assignment and Assumption by New Falcon II, (i) the Pre-TCI Borrowers and (ii) solely with respect to the loan made pursuant to Section 2.1.4, upon the execution and delivery of the Falcon Video Joinder, Falcon Video and (b) upon the TCI Closing and the contemporaneous execution and delivery of the New Falcon II Assignment and Assumption by New Falcon II, New Falcon II. "BY-LAWS" means all written by-laws, rules, regulations and all other documents relating to the management, governance or internal regulation of any Person other than an individual, or interpretive of the Charter of such Person, all as from time to time in effect. "CAPITAL EXPENDITURES" means, for any period, amounts added or required to be added to the property, plant and equipment or other fixed assets account on the Consolidated balance sheet of the Restricted Companies, prepared in accordance with GAAP, in respect of (a) the acquisition, construction, improvement or replacement of land, buildings, machinery, equipment, leaseholds and any other real or personal property, (b) to the extent not included in clause (a) above, materials, contract labor and direct labor relating thereto (excluding amounts properly expensed as repairs and maintenance in accordance with GAAP) and (c) software development costs to the extent not expensed in accordance with GAAP; PROVIDED, HOWEVER, that Capital Expenditures shall not include the purchase price for the acquisition of another Person (or all or a portion of the assets of another Person) as a going concern permitted by Section 7.9; and PROVIDED, FURTHER, that Capital Expenditures shall not include amounts funded with insurance proceeds received in respect of the loss of or damage to property, plant, equipment or other fixed assets of the Restricted Companies. "CAPITALIZED LEASE" means any lease which is required to be capitalized on the balance sheet of the lessee in accordance with GAAP, including Statement Nos. 13 and 98 of the Financial Accounting Standards Board. "CAPITALIZED LEASE OBLIGATIONS" means the amount of the liability reflecting the aggregate discounted amount of future payments under all Capitalized Leases calculated in accordance with GAAP, including Statement Nos. 13 and 98 of the Financial Accounting Standards Board. "CASH EQUIVALENTS" means: (a) negotiable certificates of deposit, time deposits (including sweep accounts), demand deposits and bankers' acceptances issued by any Lender or any United States -6- financial institution having capital and surplus and undivided profits aggregating at least $100,000,000 and rated at least Prime-2 by Moody's Investors Service, Inc. or A-2 by Standard & Poor's Ratings Group; (b) short-term corporate obligations rated at least Prime-2 by Moody's Investors Service, Inc. or A-2 by Standard & Poor's Ratings Group, or issued by any Lender; (c) any direct obligation of the United States of America or any agency or instrumentality thereof, or of any state or municipality thereof, (i) which has a remaining maturity at the time of purchase of not more than one year or (ii) which is subject to a repurchase agreement with any Lender (or any other financial institution referred to in clause (a) above) exercisable within one year from the time of purchase and (iii) which, in the case of obligations of any state or municipality, is rated Aa2 or better by Moody's Investors Service, Inc.; (d) any mutual fund or other pooled investment vehicle rated Aa2 or better by Moody's Investors Service, Inc. which invests principally in obligations described above; and (e) in an amount not to exceed $5,000,000, deposits in overnight sweep accounts offered by a bank described in clause (a) above. "CERCLA" means the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980. "CERCLIS" means the federal Comprehensive Environmental Response Compensation Liability Information System List (or any successor document) promulgated under CERCLA. "CHARTER" means the articles of organization, certificate of incorporation, statute, constitution, joint venture agreement, partnership agreement, limited liability company operating agreement, trust indenture or other charter document of any Person other than an individual, each as from time to time in effect. "CLOSING DATE" means the Initial Closing Date and each subsequent date on which any extension of credit is made pursuant to Section 2.1 or 2.4. "CODE" means, collectively, the federal Internal Revenue Code of 1986 (or any successor statute) and the rules and regulations thereunder. "COMMITMENT" means, with respect to any Lender, such Lender's Percentage Interest in the obligations to extend the credits contemplated by the Credit Documents. The original Commitments are set forth in Exhibit 11.1. -7- "COMMITMENT NOTICE" is defined in Section 2.4.1. "COMMUNICATIONS ACT" means the federal Communications Act of 1934, the federal Cable Television Consumer Protection and Competition Act of 1992 and the federal Telecommunications Act of 1996. "COMPUTATION COVENANTS" means Sections 7.5, 7.6.6, 7.6.7, 7.6.18, 7.7.3, 7.9.3, 7.9.7, 7.9.8, 7.9.9, 7.9.10, 7.9.12, 7.10.3, 7.10.4, 7.10.5, 7.10.7, 7.10.8, 7.10.9, 7.10.10, 7.11.3 and 7.11.5. "CONSOLIDATED" and "CONSOLIDATING", when used with reference to any term, mean that term as applied to the accounts of the Restricted Companies (or other specified Person) and all of their respective Subsidiaries (or other specified group of Persons), or such of their respective Subsidiaries as may be specified, consolidated or combined or consolidating or combining, as the case may be, in accordance with GAAP and with appropriate deductions for minority interests in Subsidiaries, as required by GAAP; PROVIDED, HOWEVER, that in no event shall the Excluded Companies be included in the Consolidated financial statements of the Restricted Companies for purposes of compliance with Section 7 (other than Section 7.4) or for purposes of determining the Applicable Margin and the related definitions; and, PROVIDED, FURTHER, that upon the TCI Closing, the Consolidated financial statements of the Restricted Companies and related defined terms shall give pro forma effect to the TCI Transactions and the addition of Falcon Video as a Restricted Company for calculation periods that cover respective dates that are prior to and after the TCI Closing in a manner consistent with Article 11 of Regulation S-X under the Securities Act. "CONSOLIDATED ANNUALIZED OPERATING CASH FLOW" means the product of Consolidated Operating Cash Flow multiplied by four. "CONSOLIDATED CASH INTEREST EXPENSE" means, for any period, the aggregate amount of interest, including payments in the nature of interest under Capitalized Leases and net payments under Interest Rate Protection Agreements, accrued by the Restricted Companies on Consolidated Total Debt and Interest Rate Protection Agreements (whether such interest is reflected as an item of expense or capitalized) in accordance with GAAP on a Consolidated basis; PROVIDED, HOWEVER, that Consolidated Cash Interest Expense shall include commitment fees and other Lender fees included in interest expense in accordance with GAAP and Distributions to New Falcon I, Holding, L.P. and TCI and its Affiliates described in Sections 7.10.3(a), (b) and (d) on account of interest on Indebtedness incurred by New Falcon I, Holding, L.P. and TCI and its Affiliates, but shall not include PIK Interest Payments. "CONSOLIDATED EXCESS CASH FLOW" means, for any period, Consolidated Operating Cash Flow MINUS Consolidated Total Fixed Charges. -8- "CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of the Restricted Companies determined in accordance with GAAP on a Consolidated basis (giving pro forma effect to the results of operations for such period of any Person or other business acquired through purchase or exchange by the Restricted Companies in accordance with Section 7.9 during such period, but not giving effect to the results of operations for such period contributed by any System or other assets sold by the Restricted Companies during such period); PROVIDED, HOWEVER, that Consolidated Net Income shall not include: (a) the income (or loss) of any Person (other than a Restricted Company or a Subsidiary of a Restricted Company) in which any Restricted Company has an ownership interest; PROVIDED, HOWEVER, that Consolidated Net Income shall include amounts in respect of the income of such Person when actually received in cash by the Restricted Companies in the form of dividends or similar Distributions; (b) all amounts included in computing such net income (or loss) in respect of the write-up of any asset or the retirement of any Indebtedness at less than face value after December 31, 1997; (c) the effect of extraordinary and nonrecurring items of gain, income, loss or expense, including in any event the following items (i) to the extent approved by at least two of the Specified Agents, whose approval shall not be unreasonably withheld, litigation and tax judgments and settlements, including the Falcon Cable Systems Settlement Payments and (ii) payments of up to an aggregate of $5,000,000 (or such larger amount as may be approved by at least two of the Specified Agents) during any fiscal quarter of the Restricted Companies in respect of: franchise taxes relating to prior periods; sales, use and other tax assessments relating to prior periods; payments, refunds or credits in respect of customer late fees relating to prior periods; other similar items relating to prior periods; and acquisition deposits that are forfeited during such period. (d) the income of any Subsidiary (other than a Restricted Company) to the extent the payment of such income in the form of a Distribution or repayment of Indebtedness to any Restricted Company is not permitted, whether on account of any Charter or By-law restriction, any agreement, instrument, deed or lease or any law, statute, judgment, decree or governmental order, rule or regulation applicable to such Subsidiary or otherwise; and (e) any after-tax gains or losses attributable to returned surplus assets of any Plan. For purposes of computing Consolidated Net Income for any fiscal quarter, to the extent such items have not previously been accrued or allocated to a prior period, (i) payments of insurance deductible amounts and discretionary employee or management bonuses shall be allocated one fourth to the fiscal quarter in which payment is made and one fourth to each of the -9- next three fiscal quarters and (ii) Consolidated Net Income shall include 100% of the income of each Restricted Company, notwithstanding that such Restricted Company may not be a wholly owned Subsidiary of New Falcon I (or Holding, L.P. prior to the TCI Closing) and that, as a result thereof, GAAP would otherwise require a portion of such Restricted Company's income from Consolidated Net Income to be deducted on account of minority interests in such Restricted Company. "CONSOLIDATED OPERATING CASH FLOW" means, for any three-month period, the total of: (a) Consolidated Net Income PLUS (b) all amounts deducted in computing such Consolidated Net Income in respect of: (i) depreciation, amortization and other charges that are not expected to be paid in cash; (ii) interest on Financing Debt (including payments in the nature of interest under Capitalized Leases) and net payments in the nature of interest under Interest Rate Protection Agreements; (iii) federal, state and local taxes based upon or measured by income; (iv) an amount equal to the payments made pursuant to section 2.8(i) of the Contribution Agreement in respect of the Existing Incentive Plan (as defined in the Contribution Agreement); (v) other non-cash charges; and (vi) any reasonable costs incurred or expensed in connection with an acquisition or disposition permitted by Sections 7.9 or 7.11. MINUS (c) to the extent Consolidated Net Income has not already been reduced thereby, Distributions by the Restricted Companies to Holding, L.P. of a type described in Section 7.10.4 (for reimbursement of management expenses), whether or not permitted thereby. "CONSOLIDATED PRO FORMA DEBT SERVICE" means, for any period, the sum of the following items, projected to be accrued by the Restricted Companies: (a) Consolidated Cash Interest Expense, -10- PLUS (b) the aggregate amount of all mandatory scheduled payments (excluding the final scheduled principal payment on each Term Loan) and mandatory prepayments of revolving loans as a result of mandatory reductions in revolving credit availability, all with respect to Financing Debt of the Restricted Companies in accordance with GAAP on a Consolidated basis, including payments in the nature of principal under Capitalized Leases, but in no event including contingent prepayments required by Sections 4.3, 4.4 or 4.5 or voluntary payments contemplated by Section 4.6. For purposes of computing Consolidated Pro Forma Debt Service: (i) the amount of Financing Debt outstanding on the first day of such period shall be assumed to remain outstanding during the entire period, except to the extent required to be reduced by mandatory scheduled payments, mandatory payments on the Revolving Loan and other items described in paragraph (b) above; and (ii) where interest varies with a floating rate, the rate in effect on the first day of such period will be assumed to remain constant during the entire period (giving effect to any applicable Interest Rate Protection Agreements). "CONSOLIDATED REVENUES" means, for any period: (a) the net operating revenues (after reductions for discounts) of the Restricted Companies determined in accordance with GAAP on a Consolidated basis; MINUS (b) any proceeds included in such net operating revenues from the sale, refinancing, condemnation or destruction of any Systems; MINUS (c) actual bad debt expense to the extent not already deducted in computing such net operating revenues. "CONSOLIDATED TOTAL DEBT" means, at any date, the principal amount of all Financing Debt of the Restricted Companies on a Consolidated basis (other than Indebtedness of the Restricted Companies owing to Holding, L.P. or to New Falcon I permitted by Section 7.6.14 or Indebtedness of the Restricted Companies owing to TCI or its Affiliates permitted by Section 7.6.15) MINUS the lesser of (a) cash and Cash Equivalents of the Restricted Companies on a Consolidated basis in accordance with GAAP or (b) $5,000,000. "CONSOLIDATED TOTAL FIXED CHARGES" means, for any period, the sum of: (a) Consolidated Cash Interest Expense, -11- PLUS (b) the aggregate amount of all mandatory scheduled payments and mandatory prepayments of revolving loans as a result of mandatory reductions in revolving credit availability, all with respect to Financing Debt of the Restricted Companies in accordance with GAAP on a Consolidated basis, including payments in the nature of principal under Capitalized Leases, but in no event including contingent prepayments required by Sections 4.4 or 4.5 or voluntary prepayments contemplated by Section 4.6. PLUS (c) Capital Expenditures, PLUS (d) federal, state and local taxes based upon or measured by income actually paid by any Restricted Company, other than taxes with respect to extraordinary and nonrecurring gains, PLUS (e) Distributions by the Restricted Companies to their partners or members that are not Restricted Companies of a type described in Section 7.10.5 (in respect of taxes), whether or not permitted thereby, PLUS (f) to the extent not included in the foregoing clauses, Distributions by the Restricted Companies to Holding, L.P., New Falcon I or TCI and its Affiliates of a type described in Section 7.10.3 (for debt service), whether or not permitted thereby. "CONTRIBUTION AGREEMENT" means the Contribution and Purchase Agreement dated December 30, 1997, among Holding, L.P., New Falcon I, Holding, Inc., TCI Falcon Holdings, LLC and certain other parties named therein, including the First Amendment dated March 23, 1998, the Second Amendment dated April 2, 1998, and the Third Amendment dated May 12, 1998, as the same may be further amended, modified or supplemented from time to time in accordance with Section 7.2.3. "COPYRIGHT ACT" is defined in Section 8.6.2. "CREDIT DOCUMENTS" means: (a) this Agreement, the Notes, the Pledge and Subordination Agreement, the fee agreement contemplated by Section 5.1.3, the Falcon Video Joinder, the New Falcon II Assignment and Assumption and each Interest Rate Protection Agreement provided by a Lender (or an Affiliate of a Lender) to any Restricted Company, each as from time to time in effect; and (b) any other present or future agreement or instrument from time to time entered into among any Restricted Company or (so long as any Restricted Company is also party thereto) any Affiliate of any of them, on one hand, and either the Documentation Agent or all the Lenders, on the other hand, relating to, amending or modifying this -12- Agreement or any other Credit Document referred to above or which is stated to be a Credit Document, each as from time to time in effect. "CREDIT OBLIGATIONS" means all present and future liabilities, obligations and Indebtedness of any Restricted Company or any of their Affiliates party to a Credit Document owing to any Lender (or, in the case of Interest Rate Protection Agreements, any Affiliate of a Lender) under or in connection with this Agreement or any other Credit Document, including obligations in respect of principal, interest, commitment fees, payment and reimbursement obligations under Interest Rate Protection Agreements, amounts provided for in Sections 3.2.4, 3.4, 3.5, 3.6 and 10 and other fees, charges, indemnities and expenses from time to time owing hereunder or under any other Credit Document (all whether accruing before or after a Bankruptcy Default and whether or not allowed in a bankruptcy proceeding). "CREDIT PARTICIPANT" is defined in Section 12.2. "CREDIT SECURITY" means all assets from time to time hereafter subjected to a security interest, mortgage or charge (or intended or required so to be subjected pursuant to the Pledge and Subordination Agreement or any other Credit Document) to secure the payment or performance of any of the Credit Obligations. "DEFAULT" means any Event of Default and any event or condition which with the passage of time or giving of notice, or both, would become an Event of Default. "DELINQUENCY PERIOD" is defined in Section 11.4.3. "DELINQUENT LENDER" is defined in Section 11.4.3. "DELINQUENT PAYMENT" is defined in Section 11.4.3. "DESIGNATED FINANCING DEBT" means Financing Debt incurred by a Restricted Company after the date hereof other than Financing Debt permitted by Sections 7.6.1 (the Credit Obligations), 7.6.7 (purchase money Indebtedness and Capitalized Leases), 7.6.9 (intercompany Indebtedness), 7.6.10 (Holding, L.P. Senior Subordinated Notes), 7.6.11 (existing Indebtedness) 7.6.14 (Indebtedness owing from a Restricted Company to Holding, L.P. or New Falcon I), 7.6.15 (Indebtedness owing from a Restricted Company to TCI or its Affiliates) and 7.6.18 (other Indebtedness). "DISTRIBUTION" means, with respect to any Restricted Company (or other specified Person): (a) the binding declaration or payment of any dividend or distribution, including dividends payable in shares of capital stock or other equity interests of any Restricted -13- Company, on or in respect of any shares of any class of capital stock or other equity interests of any Restricted Company; (b) the purchase, redemption or other retirement by any Restricted Company of any shares of any class of capital stock or other equity interests of any Holding Company (or of options, warrants or other rights for the purchase of such shares), directly, indirectly through a Subsidiary or otherwise; (c) any other distribution on or in respect of any shares of any class of equity of or beneficial interest in any Restricted Company; (d) any payment by any Restricted Company of principal or interest with respect to, or any purchase, redemption or defeasance by any Restricted Company of, any Indebtedness of any Holding Company which by its terms or the terms of any agreement is subordinated to the payment of the Credit Obligations; and (e) any payment (including amounts accrued and payable for management fees and reimbursement of expenses), loan or advance by any Restricted Company to, or any other Investment by any Restricted Company in, the holder of any shares of any class of capital stock of or equity interest in any Holding Company or any Affiliate of such holder; PROVIDED, HOWEVER, that the term "DISTRIBUTION" shall not include payments in the ordinary course of business in respect of (i) reasonable compensation paid to employees, officers and directors, (ii) advances to employees for travel expenses, drawing accounts and similar expenditures, (iii) rent paid to or accounts payable for services rendered or goods sold by non-Affiliates or (iv) intercompany accounts payable and real property leases to non-Affiliates. "DOCUMENTATION AGENT" means BankBoston in its capacity as Documentation Agent for the Lenders hereunder, as well as its successors and assigns in such capacity pursuant to Section 11.6. "ENSTAR" means Enstar Communications Corporation, a Georgia corporation owned by Falcon Cablevision, a California Limited Partnership, which will be transferred to New Falcon II as part of the TCI Transactions. "ENVIRONMENTAL LAWS" means all applicable federal, state or local statutes, laws, ordinances, codes, rules, regulations and guidelines having the force of law (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "ERISA" means the federal Employee Retirement Income Security Act of 1974. -14- "ERISA GROUP PERSON" means each Restricted Company, any Subsidiary and any Person which is a member of the controlled group or under common control with any Restricted Company within the meaning of section 414 of the Code or section 4001(a)(14) of ERISA. "EURODOLLAR PRICING OPTIONS" means the options granted pursuant to Section 3.2.1 to have the interest on any portion of the Loan computed on the basis of a Eurodollar Rate. "EURODOLLARS" means, with respect to any Lender, deposits of United States Funds in a non-United States office or an international banking facility of such Lender. "EURODOLLAR OFFICE" means such non-United States office or international banking facility of any Lender as the Lender may from time to time select. "EURODOLLAR RATE" for any Interest Period means the rate, rounded to the nearest 1/100%, obtained by dividing (a) the Basic Eurodollar Rate for such Eurodollar Interest Period by (b) an amount equal to 1 MINUS the Eurodollar Reserve Rate; PROVIDED, HOWEVER, that if at any time during such Interest Period the Eurodollar Reserve Rate applicable to any outstanding Eurodollar Pricing Option changes, the Eurodollar Rate for such Interest Period shall automatically be adjusted to reflect such change, effective as of the date of such change. "EURODOLLAR RESERVE RATE" means the stated maximum rate (expressed as a decimal) of all reserves (including any basic, supplemental, marginal or emergency reserve or any reserve asset), if any, as from time to time in effect, required by any Legal Requirement to be maintained by any Lender against (a) "Eurocurrency liabilities" as specified in Regulation D of the Board of Governors of the Federal Reserve System (or any successor regulation), (b) any other category of liabilities that includes Eurodollar deposits by reference to which the interest rate on portions of the Loan covered by Eurodollar Pricing Options is determined, (c) the principal amount of or interest on any portion of the Loan covered by a Eurodollar Pricing Option or (d) any other category of extensions of credit, or other assets, that includes loans covered by a Eurodollar Pricing Option. "EVENT OF DEFAULT" is defined in Section 9.1. "EXCHANGE ACT" means the federal Securities Exchange Act of 1934. "EXCLUDED COMPANIES" means Enstar, Enstar's Subsidiaries, Falcon Lake Las Vegas Cablevision, L.P., a Delaware limited partnership, Falcon/Capital Cable, a Delaware general partnership, Falcon/Capital Cable Partners, L.P., a Delaware limited partnership, Falcon Britannia, L.P., a California limited partnership, Falcon Classic, Duhamel Falcon Cable Mexico, L.L.C., a Delaware limited liability company, Pacific Microwave Joint Venture, a California general partnership, Wilcat Transmission Company, Inc., a Delaware corporation, Falcon Pacific Microwave, Inc., a Delaware corporation, SFC Transmissions, a California joint venture, and 212 Seventh Street, Inc., a Missouri corporation, and any other Subsidiary (including a Subsidiary -15- that is a Permitted Joint Venture) of a Restricted Company that at the time of determination shall be designated as an Excluded Company by written notice of such Restricted Company to the Documentation Agent. The Borrowers may designate any Subsidiary of the Restricted Companies (including any newly acquired or newly organized Subsidiary of the Restricted Companies) to be an Excluded Company by written notice to the Documentation Agent, provided the acquisition or organization of such Subsidiary would be permitted under Section 7.9. The Borrowers may designate any Excluded Company to be a Restricted Company by written notice to the Documentation Agent, provided that no Default shall occur and be continuing or shall result as a consequence thereof. "FALCON CABLE SYSTEMS SETTLEMENT" is defined in Section 7.10.13. "FALCON CABLE SYSTEMS SETTLEMENT PAYMENTS" is defined in Section 7.10.13. "FALCON CLASSIC" means Falcon Classic Cable Income Properties, L.P., a California limited partnership. "FALCON FIRST" means Falcon First, Inc., a Delaware corporation. "FALCON PERMITTED HOLDERS" means any of (a) Holding, Inc. for so long as a majority of the voting power of the voting capital stock of Holding, Inc. is beneficially owned by any of the Persons listed in the other clauses of this definition, (b) any Nathanson Family Investor, (c) Tele-Communications, Inc., a Delaware corporation, and TCI Communications, Inc., a Delaware corporation, (d) any Person in which Tele-Communications, Inc. is the owner, directly or indirectly, of at least 25% of the outstanding voting stock or other equity interests of such Person, and (e) any Persons controlling, controlled by or under common control with any other Person described in clauses (a) through (d) of this definition; PROVIDED, HOWEVER, that for purposes of calculating the amount of voting stock or other equity interests of any Persons held by Falcon Permitted Holders, voting stock or other equity interests held by directors and executive officers of Holdings, Inc. shall be deemed to be held by Falcon Permitted Holders. "FALCON VIDEO" means Falcon Video Communications, L.P., a Delaware limited partnership. "FALCON VIDEO JOINDER" is defined in Section 2.1.4. "FALCON VIDEO REVOLVING LOAN" is defined in Section 2.1.4. "FCC" means the Federal Communications Commission and any successor governmental agency. -16- "FCC LICENSE" means any broadcasting, community antenna television or relay systems, each station, business radio, microwave and other license issued by the FCC under the Communications Act. "FEDERAL FUNDS RATE" means, for any day, (a) the rate equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as such weighted average is published for such day (or, if such day is not a Banking Day, for the immediately preceding Banking Day) by the Federal Reserve Bank of New York or (b) if such rate is not so published for such Banking Day, as determined by the Administrative Agent using any reasonable means of determination. Each determination by the Administrative Agent of the Federal Funds Rate shall, in the absence of manifest error, be conclusive. "FINAL REVOLVING MATURITY DATE" means December 29, 2006. "FINAL TERM LOAN B MATURITY DATE" means June 29, 2007. "FINAL TERM LOAN C MATURITY DATE" means December 31, 2007. "FINANCIAL OFFICER" means (a) the chief financial officer, treasurer or corporate controller of Holding, Inc. in its capacity as general partner of the managing general partner of New Falcon I, in its capacity as general partner of the managing general partner of the sole member of New Falcon II, in its capacity as managing general partner of each Investor Group Company, in such Investor Group Company's capacity as the managing general partner of a Borrower (or other specified Person), or a vice president whose primary responsibility is for the financial affairs of Holding, Inc. (or other specified Person) in such capacity, (b) in the case of Falcon First, the chief financial officer, treasurer or corporate controller of Falcon First or a vice president whose primary responsibility is for the financial affairs of Falcon First, (c) in the case of Falcon Video, the chief financial officer, treasurer or corporate controller of Falcon Video Communications Investors, L.P. or a vice president whose primary responsibility is for the financial affairs of Falcon Video, (d) in the case of any other specified Person, the chief financial officer, treasurer, corporate controller or vice president whose primary responsibility is for the financial affairs of such Person, and (e) in any event, Michael K. Menerey and Jon W. Lunsford, all of whose incumbency and signatures will have been certified to the Administrative Agent by an appropriate attesting officer of Holding, Inc. (or other specified Person) prior to or contemporaneously with the delivery of any certificates delivered to the Administrative Agent hereunder. "FINANCING DEBT" means: (a) Indebtedness in respect of borrowed money; (b) Indebtedness evidenced by notes, debentures or similar instruments; -17- (c) Indebtedness in respect of Capitalized Leases; (d) Indebtedness in respect of the deferred purchase price of assets (other than normal trade accounts payable that are not overdue beyond customary practice); and (e) Indebtedness in respect of mandatory redemption, repurchase or dividend rights on capital stock (or other equity). "FRANCHISE" means any franchise, permit, license or other authorization granted by any governmental unit or authority that authorizes the construction and operation of a System. "GAAP" means generally accepted accounting principles, as defined by the United States Financial Accounting Standards Board, as from time to time in effect; PROVIDED, HOWEVER, that (a) for purposes of compliance with Section 7 (other than Section 7.4) and the related definitions, "GAAP" means such principles as in effect on December 31, 1997 as applied by the Restricted Companies in the preparation of the December 31, 1997 financial statements referred to in Section 8.2.1(a), and consistently followed, without giving effect to any subsequent changes thereto and (b) in the event of a change in generally accepted accounting principles after such date, either the Borrowers or the Required Lenders may request a change in the definition of "GAAP", in which case the parties hereto shall negotiate in good faith with respect to an amendment of this Agreement implementing such change. "GUARANTEE" means, with respect to any Restricted Company (or other specified Person): (a) any guarantee by the Restricted Company of the payment or performance of, or any contingent obligation by the Restricted Company in respect of, any Financing Debt of any other Person; (b) any other arrangement whereby credit is extended to a Person on the basis of any promise or undertaking of the Restricted Company (including any "comfort letter" or "keep well agreement" written by the Restricted Company to a creditor or prospective creditor of such Person) to (i) pay the Financing Debt of such Person, (ii) purchase an obligation owed by such Person, (iii) pay for the purchase or lease of assets or services regardless of the actual delivery thereof or (iv) maintain the capital, working capital, solvency or general financial condition of such Person, in each case whether or not such arrangement is disclosed in the balance sheet of the Restricted Company or referred to in a footnote thereto; (c) any liability of the Restricted Company as a general partner of a partnership in respect of Financing Debt of such partnership; (d) any liability of the Restricted Company as a joint venturer of a joint venture in respect of Financing Debt of such joint venture; and -18- (e) reimbursement obligations with respect to letters of credit, surety bonds and other financial guarantees; PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Guarantee and the amount of Indebtedness resulting from such Guarantee shall be the amount which should be carried on the balance sheet of the obligor whose obligations were guaranteed in respect of such obligations, determined in accordance with GAAP. "GUARANTOR" means each Restricted Company and each Subsidiary of a Restricted Company that is party hereto and is not either a Borrower or an Excluded Company; PROVIDED, HOWEVER, that Falcon Video and Falcon Video Investors, L.P. shall become Guarantors only upon the TCI Closing and the discharge of Financing Debt of Falcon Video as contemplated in Section 5.3.1. Exhibit 1-B lists the Guarantors prior to and immediately after the TCI Closing. "HAZARDOUS MATERIAL" means, collectively, any pollutant, toxic or hazardous material or waste, including any "hazardous substance" or "pollutant" or "contaminant" as defined in section 101(14) of CERCLA or any similar state or local statute or regulation or regulated as toxic or hazardous under the Resource Conservation and Recovery Act or any similar state or local statute or regulation, and the rules and regulations thereunder, as from time to time in effect. "HOLDING COMPANIES" means Holding, L.P., Holding, Inc. and their respective Subsidiaries, including New Falcon I and the Restricted Companies. "HOLDING, INC." means Falcon Holding Group, Inc., a California corporation that is the general partner of Holding, L.P., or any successor corporation, partnership, limited liability company or other entity that would not create an Event of Default immediately as a result of such succession and that enters into assumption agreements with respect to the Pledge and Subordination Agreement and the other Credit Documents to which either Holding, Inc. or Holding, L.P. is a party reasonably satisfactory to such successor and the Required Lenders in all respects. "HOLDING, L.P." means Falcon Holding Group, L.P., a Delaware limited partnership, or any successor corporation, partnership, limited liability company or other entity that would not create an Event of Default immediately as a result of such succession and that enters into assumption agreements with respect to the Pledge and Subordination Agreement and the other Credit Documents to which either Holding, Inc. or Holding, L.P. is a party reasonably satisfactory to such successor and the Required Lenders in all respects. "HOLDING, L.P. SENIOR SUBORDINATED NOTES" means the 11% Senior Subordinated Notes due September 15, 2003 issued by Holding, L.P. pursuant to the Senior Subordinated Notes Indenture. -19- "HOUSTON OFFICE" means the principal banking office of the Administrative Agent in Houston, Texas. "INDEBTEDNESS" means all obligations, contingent or otherwise, which in accordance with GAAP are required to be classified upon the balance sheet of any Restricted Company (or other specified Person) as liabilities, but in any event including: (a) indebtedness in respect of borrowed money; (b) indebtedness evidenced by notes, debentures or similar instruments; (c) Capitalized Lease Obligations; (d) the deferred purchase price of assets (including trade accounts payable); (e) mandatory redemption, repurchase or dividend obligations with respect to capital stock (or other evidence of beneficial interest); (f) unfunded pension fund obligations and liabilities; (g) all Guarantees and endorsements in respect of Indebtedness of others; and (h) liabilities secured by any Lien existing on property owned or acquired by any Restricted Company, whether or not the liability secured thereby shall have been assumed; PROVIDED, HOWEVER, that, to the extent that a liability secured by a Lien on such property is otherwise nonrecourse to the Restricted Company, the amount of Indebtedness in respect of such liability shall be the lesser of the fair market value of such property or the amount of such liability. "INDEMNIFIED PARTY" is defined in Section 10.2. "INITIAL CLOSING DATE" means June 30, 1998 or such other date prior to September 30, 1998 as agreed by the Borrowers and the Documentation Agent as the first Closing Date hereunder. "INTEREST PERIOD" means any period, selected as provided in Section 3.2.1, of one, two, three and six months (or any longer period to which all the Lenders have given their consent to the Administrative Agent), commencing on any Banking Day and ending on the corresponding date in the subsequent calendar month so indicated (or, if such subsequent calendar month has no corresponding date, on the last day of such subsequent calendar month); PROVIDED, HOWEVER, that subject to Section 3.2.3, if any Interest Period so selected would otherwise begin or end on a date which is not a Banking Day, such Interest Period shall instead begin or end, as the case may be, on the immediately preceding or succeeding Banking Day as determined by the Administrative -20- Agent in accordance with the then current banking practice in the inter-bank Eurodollar market with respect to Eurodollar deposits at the applicable Eurodollar Office, which determination by the Administrative Agent shall, in the absence of manifest error, be conclusive. "INTEREST RATE PROTECTION AGREEMENT" means any interest rate swap, interest rate cap, interest rate hedge or other contractual arrangement protecting a Person against increases in variable interest rates or converting fixed interest rates into variable interest rates on Financing Debt. "INVESTMENT" means, with respect to any Restricted Company (or other specified Person): (a) any share of capital stock, other equity interest, evidence of Indebtedness or other security issued by any other Person; (b) any loan, advance or extension of credit to, or contribution to the capital of, any other Person; (c) any Guarantee of the Indebtedness of any other Person; (d) any acquisition of all or any part of the business of any other Person or the assets comprising such business or part thereof; (e) any commitment or option to make any Investment if the consideration for such commitment or option exceeds $1,000; and (f) any other similar investment. The investments described in the foregoing clauses (a) through (f) shall constitute Investments whether they are made or acquired by purchase, exchange, issuance of stock or other securities, merger, reorganization or any other method; PROVIDED, HOWEVER, that Investments shall not include (i) current trade and customer accounts receivable for property leased, goods furnished or services rendered in the ordinary course of business and payable in accordance with customary trade terms, (ii) advances, payments and prepayments to suppliers for property leased, goods furnished and services rendered in the ordinary course of business, (iii) advances to employees for travel expenses, drawing accounts and similar expenditures, (iv) stock or other securities acquired in connection with the satisfaction or enforcement of Indebtedness or claims due to any Restricted Company or as security for any such Indebtedness or claim or (v) demand deposits in banks or trust companies. In determining the amount of outstanding Investments for purposes of Section 7.9, the amount of any Investment shall be the cost thereof (including the amount of any Indebtedness assumed in any purchase or secured by any asset acquired in such purchase (whether or not any Indebtedness is assumed) or for which any Person that becomes a Subsidiary is liable on the date -21- on which the securities of such Person are acquired) MINUS any returns of capital on such Investment actually received in cash (determined in accordance with GAAP without regard to amounts realized as income on such Investment). "INVESTOR GROUP COMPANY" means any Person that is a managing general partner of a Pre-TCI Borrower and, upon the TCI Closing and the discharge of the Financing Debt of Falcon Video as contemplated by Section 5.3.1, Falcon Video Communications Investors, L.P.; PROVIDED, HOWEVER, that in no event shall New Falcon I constitute an Investor Group Company. Exhibit 1-B lists the Investor Group Companies prior to and immediately after the TCI Closing. "LEGAL REQUIREMENT" means any requirement imposed upon any of the Lenders by any law of the United States of America or any jurisdiction in which any Eurodollar Office is located or by any regulation, order, interpretation, ruling or official directive of the Board of Governors of the Federal Reserve System or any other board or governmental or administrative agency of the United States of America, of any jurisdiction in which any Eurodollar Office is located, or of any political subdivision of any of the foregoing. Any requirement imposed by any such regulation, order, ruling or official directive not having the force of law shall be deemed to be a Legal Requirement if any of the Lenders reasonably believes that compliance therewith is in accordance with customary commercial practice. "LENDER" means the Persons owning a Percentage Interest in the Credit Obligations or having a Commitment and their respective Assignees permitted by Section 12.1. "LENDING OFFICER" shall mean such officers or employees of the Administrative Agent as from time to time designated by it in writing to the Borrowers. "LIEN" means, with respect to any Restricted Company (or any other specified Person): (a) Any encumbrance, mortgage, pledge, lien, charge or security interest of any kind upon any property or assets of the Restricted Company, whether now owned or hereafter acquired, or upon the income or profits therefrom; (b) The acquisition of, or the agreement to acquire, any property or asset upon conditional sale or subject to any other title retention agreement, device or arrangement (including a Capitalized Lease); and (c) The sale, assignment, pledge or transfer for security of any accounts, general intangibles or chattel paper of the Restricted Company, with or without recourse. "LOAN" means, collectively, the Revolving Loan, the Term Loans and the Supplemental Loan. "MANDATORY ASSIGNMENT" is defined in Section 2.2.3. -22- "MARGIN STOCK" means "margin stock" within the meaning of Regulations T, U or X (or any successor provisions) of the Board of Governors of the Federal Reserve System, or any regulations, interpretations or rulings thereunder, all as from time to time in effect. "MATERIAL ADVERSE CHANGE" means a material adverse change since December 31, 1997 in the business, assets, financial condition or income of the Restricted Companies (on a Consolidated basis) (or any other specified Persons) as a result of any event or development. "MATERIAL AGREEMENTS" means each of the agreements listed in Exhibit 8.2.2 as in effect on the Initial Closing Date and furnished to the Lenders and as subsequently amended, modified and supplemented in accordance with Section 7.2.3. "MATERIAL FINANCING DEBT" means any Financing Debt (other than the Credit Obligations) outstanding in an aggregate amount of principal (whether or not due) and accrued interest exceeding $10,000,000. "MAXIMUM AMOUNT OF SUPPLEMENTAL CREDIT" is defined in Section 2.4.1. "MAXIMUM AMOUNT OF SUPPLEMENTAL REVOLVING FACILITY CREDIT" is defined in Section 2.4.1. "MAXIMUM AMOUNT OF REVOLVING CREDIT" is defined in Section 2.1.1. "MONY SUBORDINATED DEBT" means the 11.56% Series B Subordinated Notes due March 31, 2001, originally issued by Falcon Telecable, a California Limited Partnership, pursuant to a Note Purchase Agreement dated as of October 21, 1991, as in effect from time to time in accordance with Section 7.2.3, with Affiliates of the Mutual Life Insurance Company of New York, including notes evidencing deferred fees due on account of risk-based capital requirements issued by such Restricted Companies on the same terms as the other MONY Subordinated Debt issued by Falcon Telecable, a California Limited Partnership. "MULTIEMPLOYER PLAN" means any Plan that is a "multiemployer plan" as defined in section 4001(a)(3) of ERISA. "NATHANSON FAMILY INVESTORS" means Marc B. Nathanson, Greg Nathanson (the brother of Marc B. Nathanson), Liliane Vladimirschi (the sister-in-law of Marc B. Nathanson), any of their respective spouses, estates, lineal descendants (including adoptive children), heirs, executors, personal representatives, administrators, trusts for any of their benefit and charitable foundations to which voting stock of Holding, Inc., Holding, L.P. or any successor thereto beneficially owned by any of the foregoing have been transferred and corporations and partnerships in which one or more of the foregoing own more than 51% of the voting stock or other equity interests. -23- "NET CASH PROCEEDS" means the cash proceeds of an Operating Asset Sale by any Restricted Company net of (a) any Indebtedness permitted by Section 7.6.7 (Capitalized Leases and purchase money indebtedness) secured by assets being sold in such transaction required to be paid from such proceeds, (b) with respect to any such Restricted Company that is not a tax flow-through entity, income taxes that will be required to be paid as a result of such asset sale as estimated by such Restricted Company in good faith, and with respect to any such Restricted Company that is a tax flow-through entity, distributions to all the direct or indirect holders of the equity of such Restricted Company, in proportion to their ownership interests, sufficient to permit each such direct or indirect holder of the equity of such Restricted Company to pay income taxes that may be required to be paid by it as a result of such asset sale as estimated by such Restricted Company in good faith, (c) all reasonable expenses of such Restricted Company incurred in connection with the transaction and (d) amounts subject to a reserve or escrow to fund indemnification obligations incurred in connection with such asset sale; PROVIDED, HOWEVER, that the principal (but not interest) component of amounts described in this clause (d) will become Net Cash Proceeds upon release from such reserve or escrow. "NET DEBT PROCEEDS" means the cash proceeds of the incurrence of Designated Financing Debt by any Restricted Company (net of reasonable out-of-pocket transaction fees and expenses). "NEW FALCON I" means Falcon Communications, L.P., a California limited partnership, and any successor corporation, partnership, limited liability company or other entity that would not create an Event of Default immediately as a result of such succession and that enters into assumption agreements with respect to the Pledge and Subordination Agreement and the other Credit Documents to which New Falcon I is a party reasonably satisfactory to such successor and the Required Lenders in all respects. "NEW FALCON I DEBENTURES" means, collectively, the $375,000,000 8.375% Senior Debentures due 2010 and the $435,250,000 9.285% Senior Discount Debentures due 2010, each issued jointly and severally by Holding, L.P. and its Wholly Owned Subsidiary, Falcon Funding Corporation, pursuant to the New Falcon I Debentures Indenture and assumed to the extent of Holding, L.P.'s obligations by New Falcon I upon the TCI Closing. "NEW FALCON I DEBENTURES INDENTURE" means the Indenture dated as of April 3, 1998, as in effect from time to time in accordance with Section 7.2.3, among Holding, L.P., Falcon Funding Corporation and United States Trust Company of New York, as trustee, with respect to the New Falcon I Debentures (and any subsequent indentures on identical terms, except with respect to transfer restrictions, entered into for a registered exchange offer of the New Falcon I Debentures) and assumed to the extent of Holding, L.P.'s obligations by New Falcon I upon the TCI Closing. "NEW FALCON II" means Falcon Cable Communications, LLC, a Delaware limited liability company. "NEW FALCON II ASSIGNMENT AND ASSUMPTION" is defined in Section 2.6. -24- "NONPERFORMING LENDER" is defined in Section 11.4.3. "NOTES" means each of the Revolving Notes, the Term B Notes, the Term C Notes and the Supplemental Notes. "OBLIGOR" means each Borrower and each other Restricted Company guaranteeing or granting collateral to secure any Credit Obligations. "OPERATING ASSETS" means (a) a group of tangible and intangible assets used by a Person to provide cable television services or to conduct any related activities, or (b) all of the outstanding capital stock of, or other equity interests in, a Person engaged in the provision of cable television services or conducting any related activities. "OPERATING ASSET SALE" is defined in Section 4.4.1. "PAYMENT DATE" means the last Banking Day of each March, June, September and December occurring after the Initial Closing Date. "PBGC" means the Pension Benefit Guaranty Corporation or any successor entity. "PERCENTAGE INTEREST" is defined in Section 11.1. "PERFORMING LENDER" is defined in Section 11.4.3. "PERMITTED ASSET SWAP" means the exchange by any Restricted Company of Operating Assets (including Systems) (a) for fair value in a single transaction (or a substantially contemporaneous series of related transactions) pursuant to which, within five Banking Days of the transfer of such Operating Assets, the Restricted Companies receive Operating Assets related to businesses permitted by Section 7.2.1 or (b) in a transaction which qualifies as a like-kind exchange under section 1031 of the Code or any successor provision (with any cash received by the Restricted Company in connection with such exchange constituting Net Cash Proceeds therefrom and any cash paid by the Restricted Company in connection with such exchange being subject to the limitations of Section 7.9); PROVIDED, HOWEVER, that (i) no single Permitted Asset Swap may involve Operating Assets to which 15% or more of Consolidated Operating Cash Flow for the period of four fiscal quarters of the Restricted Companies ending on the last day of the fiscal quarter ending immediately prior to the date of such exchange is properly allocable and (ii) the sum of the aggregate annual percentages described in the foregoing clause (i) between the Initial Closing Date and the Final Term Loan C Maturity Date shall not exceed 30%. "PERMITTED JOINT VENTURE" means a joint venture, limited partnership, corporation, general partnership or limited liability company or other entity between or involving a Restricted Company pursuant to which the new entity would operate a business not prohibited by section 7.2.1; PROVIDED, HOWEVER, that if the Permitted Joint Venture is not a Restricted Company, the -25- Restricted Companies shall in no event incur any Financing Debt, by way of guarantee, general partner or joint venturer liability or otherwise, as a result of the incurrence of Financing Debt by any such joint venture, limited partnership, corporation, general partnership or limited liability company. "PERMITTED JOINT VENTURE INVESTMENT MULTIPLE AMOUNT" means the portion of Consolidated Annualized Operating Cash Flow properly allocable to the Systems or other assets contributed to (or otherwise invested in) a Permitted Joint Venture that is not a Restricted Company at the time of and immediately after giving effect to such Investment by the Restricted Companies for the period of three consecutive months most recently ended prior to such contribution (or other Investment) for which financial statements have been (or are required to have been) furnished in accordance with Section 7.4.2 multiplied by the ratio of Consolidated Total Debt to Consolidated Annualized Operating Cash Flow as shown in the most recently submitted compliance computations pursuant to Section 7.4.2(b). "PERSON" means any present or future natural person or any corporation, association, partnership, joint venture, company, limited liability company, business trust, trust, organization, business or government or any governmental agency or political subdivision thereof. "PIK INTEREST PAYMENTS" means any accrued interest payments on Financing Debt that are postponed, evidenced by book-entry accrual or made through the issuance of "payment-in-kind" notes or other securities, all in accordance with the terms of such Financing Debt; PROVIDED, HOWEVER, that in no event shall PIK Interest Payments include payments made with cash or Cash Equivalents. "PLAN" means, at any time, any pension benefit plan subject to Title IV of ERISA maintained, or to which contributions have been made or are required to be made, by any ERISA Group Person within six years prior to such time. "PLEDGE AND SUBORDINATION AGREEMENT" means the Pledge and Subordination Agreement dated as of the Initial Closing Date in substantially the form of Exhibit 5.1.5, as from time to time in effect, among Holding, L.P., Holding, Inc., the Restricted Companies, the Documentation Agent and, after the TCI Closing, New Falcon I and New Falcon II. "PRE-TCI BORROWERS" means, collectively, 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., a Delaware limited partnership; Falcon Community Ventures I Limited Partnership, a California limited partnership; Falcon First, Inc., a Delaware corporation; Falcon Telecable, a California limited partnership; and Falcon Telecom, L.P., a California Limited Partnership. -26- "PRO RATA REVOLVER PREPAYMENT PORTION" means, at any date, with respect to specified Net Cash Proceeds from any Operating Asset Sale that will be allocated to repay the Revolving Loan, the portion of such Net Cash Proceeds calculated as follows: (a) add all percentage reductions of the Revolving Loan occurring on or after the date of such Operating Asset Sale through the Final Revolving Maturity Date; (b) divide the percentage reduction of each remaining Payment Date by the sum in clause (a) above; and (c) multiply the Net Cash Proceeds by the percentage determined under clause (b) above for each such Payment Date. An example of the computation of the Pro Rata Revolver Prepayment Portion is set forth in Exhibit 1-C. "PRO RATA TERM LOAN B PREPAYMENT PORTION" means, at any date, with respect to specified Net Cash Proceeds from any Operating Asset Sale that will be allocated to repay Term Loan B, the portion of such Net Cash Proceeds calculated as follows: (a) add all percentage reductions of Term Loan B occurring on or after the date of such Operating Asset Sale up to but excluding the Final Term Loan B Maturity Date; (b) divide the percentage reduction of each remaining Payment Date by the sum in clause (a) above; and (c) multiply the Net Cash Proceeds by the percentage determined under clause (b) above for each such Payment Date. "PRO RATA TERM LOAN C PREPAYMENT PORTION" means, at any date, with respect to specified Net Cash Proceeds from any Operating Asset Sale that will be allocated to repay Term Loan C, the portion of such Net Cash Proceeds calculated as follows: (a) add all percentage reductions of Term Loan C occurring on or after the date of such Operating Asset Sale up to but excluding the Final Term Loan C Maturity Date; (b) divide the percentage reduction of each remaining Payment Date by the sum in clause (a) above; and (c) multiply the Net Cash Proceeds by the percentage determined under clause (b) above for each such Payment Date. -27- "PRO RATA TERM PREPAYMENT PORTIONS" means, collectively, the Pro Rata Term Loan B Prepayment Portion and the Pro Rata Term Loan C Prepayment Portion. "QUALIFIED INSTITUTIONAL BUYER" means: (a) a duly authorized domestic bank, savings and loan association, insurance company, registered investment company, registered investment adviser or registered dealer, acting for its own account or the accounts of other Qualified Institutional Buyers, which in the aggregate owns and invests on a discretionary basis at least $100 million in securities and (if a bank or savings and loan association) which has a net worth of at least $25 million; or (b) a foreign bank or savings and loan association or equivalent institution, acting for its own account or the account of other Qualified Institutional Buyers, which in the aggregate owns and invests on a discretionary basis at least $100 million in securities and has a net worth of at least $25 million; or (c) any other entity which also constitutes a "qualified institutional buyer" as defined in Rule 144A under the Securities Act; or (d) any other entity acceptable to the Restricted Companies. "REDEEMABLE CAPITAL STOCK" means any class or series of capital stock or other equity interests of any Person that, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, is or upon the happening of an event or passage of time would be, required to be redeemed (in whole or in part) prior to the final maturity of any portion of the Loan or is redeemable (in whole or in part) at the option of the holder thereof at any time prior to the final maturity of any portion of the Loan. "REFERENCE LENDER" means each of BankBoston and Toronto Dominion. "REFERENCE LEVERAGE RATIO" means, at any date, the ratio of (a) Consolidated Total Debt as of the end of the most recent fiscal quarter for which financial statements have been furnished to the Lenders in accordance with Section 7.4.2 prior to such date to (b) Consolidated Annualized Operating Cash Flow for such period. "REGISTER" is defined in Section 12.1.3. "RELATED FUND" means, with respect to any Lender that is a fund that invests in senior bank loans, any other fund or entity that invests in bank loans and is advised or managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. -28- "REMAINING DOLLAR-YEARS" of any Indebtedness means, at any date, the sum of the products obtained by multiplying (a) the amount of each remaining scheduled payment of principal (or in the case of a revolving credit facility, each scheduled reduction in the revolving credit commitment) by (b) the number of years (calculated to the nearest twelfth) which will elapse between such date and the making of the payment (or in the case of a revolving credit facility, such scheduled reduction in the revolving credit commitment). "REPLACEMENT LENDER" is defined in Section 12.3. "REQUIRED LENDERS" means, with respect to any consent or other action to be taken by either the Lenders or any Agent under the Credit Documents, such Lenders as own at least a majority of the Aggregate Percentage Interests; PROVIDED, HOWEVER, that with respect to the matters referred to in the proviso to Section 17.1, Required Lenders means such Lenders as own at least the respective portions of the Percentage Interests indicated therein. "RESOURCE CONSERVATION AND RECOVERY ACT" means the federal Resource Conservation and Recovery Act, 42 U.S.C. section 690, ET SEQ. "RESTRICTED COMPANY" means each of the Borrowers, the Guarantors, the Investor Group Companies and their respective Subsidiaries that are Guarantors and that are not Excluded Companies; PROVIDED, HOWEVER, that Falcon Video and Falcon Video Communications Investors, L.P. shall become Restricted Companies only upon the TCI Closing and the discharge of Financing Debt of Falcon Video as contemplated by Section 5.3.1. Exhibit 1-B lists the Restricted Companies prior to and immediately after the TCI Closing. "REVOLVING LENDER" means each Lender owning a Percentage Interest in the Revolving Loan or having a Commitment to extend a portion of the Revolving Loan and its Assignees permitted by Section 12.1. "REVOLVING LOAN" is defined in Section 2.1.1. "REVOLVING NOTE" is defined in Section 2.1.3. "SECURITIES ACT" means the federal Securities Act of 1933. "SENIOR SUBORDINATED NOTES INDENTURE" means the Indenture dated as of October 29, 1993, as in effect from time to time in accordance with Section 7.2.3, between Holding, L.P. and United States Trust Company of New York, as trustee, with respect to the Holding, L.P. Senior Subordinated Notes (and any subsequent indenture on identical terms, except with respect to transfer restrictions, entered into for a registered exchange offer of the Holding, L.P. Senior Subordinated Notes). -29- "SPECIFIED AGENTS" means, collectively, the Documentation Agent, the Syndication Agent and the Administrative Agent. "SUBSCRIBER" means each home with one or more television sets connected to a System and each subscriber equivalent represented by a bulk account (determined by dividing the total monthly bill for the account by the basic monthly charge for a single outlet in the area). "SUBSIDIARY" means any Person of which any Investor Group Company or Borrower (or other specified Person) shall at the time, directly or indirectly through one or more of its Subsidiaries, (a) own at least 50% of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally, (b) hold at least 50% of the partnership, joint venture or similar interests or (c) be a general partner or joint venture. "SUPPLEMENTAL AGENT" is defined in Section 2.4.1. "SUPPLEMENTAL FACILITY" is defined in Section 2.4.1. "SUPPLEMENTAL LENDERS" is defined in Section 2.4.1. "SUPPLEMENTAL LOAN" is defined in Section 2.4.4. "SUPPLEMENTAL NOTE" is defined in Section 2.4.4. "SYNDICATION AGENT" means NationsBank, N.A. in its capacity as syndication agent hereunder, as well as its successors and assigns in such capacity pursuant to Section 11.6. "SYSTEM" means the assets constituting a cable television system most of which is within a geographical area covered by one or more Franchises held by any Restricted Company serving subscribers who are connected by drop lines to trunk or distribution lines carrying signals from one or more head-end facilities. "TAX" means any tax, levy, duty, deduction, withholding or other charges of whatever nature at any time required by any Legal Requirement (a) to be paid by any Lender or (b) to be withheld or deducted from any payment otherwise required hereby to be made to any Lender, in each case on or with respect to (i) the principal amount of or interest on any portion of the Loan, (ii) any fees, expenses, indemnities or other amounts payable to any Lender under any Credit Document or (iii) funds transferred from a non-United States office or an international banking facility of any Lender to a United States office of such Lender in order to fund (or deemed by Section 3.2.6 to have funded) a portion of the Loan subject to a Eurodollar Pricing Option; PROVIDED, HOWEVER, that the term "Tax" shall not include (A) taxes imposed upon or measured by the net income of such Lender or (B) franchise or similar business licensing taxes for qualification of offices of such Lender in any jurisdiction. -30- "TCI" means TCI Falcon Holdings, LLC, a Delaware limited liability company, and any successor entity or transferee of TCI's interest in New Falcon I that would not create an Event of Default immediately as a result of such succession or transfer. "TCI CLOSING" means the "Closing" as defined in the Contribution Agreement. "TCI CLOSING REPORT" is defined in Section 7.4.3. "TCI DEBT" means the Financing Debt, not to exceed $440,000,000 in aggregate principal amount, assumed by New Falcon II in the TCI Transactions pursuant to section 4.1 of the Contribution Agreement. "TCI TRANSACTIONS" means the transactions described in the memorandum attached as Exhibit 1-A and the related transactions described in the Contribution Agreement. "TERM LENDER" means each Lender owning a Percentage Interest in the Term Loans or having a Commitment to extend a portion of the Term Loans and its Assignees permitted by Section 12.1. "TERM LOAN" means Term Loan B and Term Loan C, collectively. "TERM LOAN B" is defined in Section 2.2.1. "TERM LOAN B NOTE" is defined in Section 2.2.2. "TERM LOAN B-1" is defined in Section 2.2.1. "TERM LOAN B-1 LENDERS" is defined in Section 2.2.1. "TERM LOAN B-2" is defined in Section 2.2.1. "TERM LOAN B-2 CLOSING DATE" is defined in Section 2.2.1. "TERM LOAN B-2 LENDERS" is defined in Section 2.2.1. "TERM LOAN C" is defined in Section 2.3.1. "TERM LOAN C LENDERS" is defined in Section 2.3.1. "TERM LOAN C NOTE" is defined in Section 2.3.2. "TERM NOTES" means the Term Loan B Notes and the Term Loan C Notes, collectively. -31- "TORONTO DOMINION" means Toronto Dominion (Texas) Inc. "TRANCHE" means each of the Revolving Loan, Term Loan B, Term Loan C and the Supplemental Loan, each considered as a separate credit facility. "UNITED STATES FUNDS" means such coin or currency of the United States of America as at the time shall be legal tender therein for the payment of public and private debts. "WEIGHTED AVERAGE LIFE TO MATURITY" of any Indebtedness means, at any date, the number of years obtained by dividing the Remaining Dollar-Years of such Indebtedness by the outstanding principal amount of the Indebtedness (or, in the case of a revolving credit facility, the maximum amount of revolving credit commitment, regardless of the amount of revolving loans then outstanding). "WHOLLY OWNED SUBSIDIARY" means any Subsidiary of which all of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally (other than directors' qualifying shares) is owned by any Investor Group Company or any Borrower (or other specified Person) directly, or indirectly through one or more Wholly Owned Subsidiaries. 2. THE CREDITS. 2.1. REVOLVING CREDIT. 2.1.1. REVOLVING LOAN. Subject to all of the terms and conditions of this Agreement and so long as no Default exists and is continuing, each Revolving Lender severally agrees to make revolving loans to the Borrowers, who, except as provided in Section 2.1.4, shall be jointly and severally liable therefor, in an aggregate principal amount for all Revolving Lenders equal to the amount requested in accordance with Section 2.1.2 from time to time prior to the Final Revolving Maturity Date, but not to exceed at any time outstanding the Maximum Amount of Revolving Credit. In no event will the principal amount of the loans at any one time outstanding made by any Revolving Lender under this Section 2.1 exceed an amount equal to such Revolving Lender's Percentage Interest in the Maximum Amount of Revolving Credit. "MAXIMUM AMOUNT OF REVOLVING CREDIT" means, on any date, the amount set forth for such date in the table below, reduced as provided further below:
Percentage Date Stated Amount Reduction ---- ------------- --------- Prior to September 30, 2001 $650,000,000 0.000% September 30, 2001 through December 30, 2001 $633,750,000 2.500%
-32- December 31, 2001 through March 30, 2002 $617,500,000 2.500% March 31, 2002 through June 29, 2002 $601,250,000 2.500% June 30, 2002 through September 29, 2002 $585,000,000 2.500% September 30, 2002 through December 30, 2002 $568,750,000 2.500% December 31, 2002 through March 30, 2003 $552,500,000 2.500% March 31, 2003 through June 29, 2003 $536,250,000 2.500% June 30, 2003 through September 29, 2003 $520,000,000 2.500% September 30, 2003 through December 30, 2003 $503,750,000 2.500% December 31, 2003 through March 30, 2004 $487,500,000 2.500% March 31, 2004 through June 29, 2004 $455,000,000 5.000% June 30, 2004 through September 29, 2004 $422,500,000 5.000% September 30, 2004 through December 30, 2004 $390,000,000 5.000% December 31, 2004 through March 30, 2005 $357,500,000 5.000% March 31, 2005 through June 29, 2005 $316,875,000 6.250% June 30, 2005 through September 29, 2005 $276,250,000 6.250% September 30, 2005 through December 30, 2005 $235,625,000 6.250% December 31, 2005 through March 30, 2006 $195,000,000 6.250% March 31, 2006 through June 29, 2006 $146,250,000 7.500% June 30, 2006 through September 29, 2006 $ 97,500,000 7.500% September 30, 2006 up to the Final Revolving Maturity Date $ 48,750,000 7.500% Final Revolving Maturity Date $ 0 7.500%
-33- Each amount in the foregoing table shall be further permanently reduced by the following amounts: (a) The sum of the Pro Rata Revolver Prepayment Portions applicable to the reduction date for such amount set forth in such table of the respective amounts of Net Cash Proceeds from Operating Asset Sales to the extent that such Net Cash Proceeds are not applied to repay the Term Loans or the Supplemental Loan pursuant to Section 4.4 or allocated to an effective Asset Reinvestment Reserve Amount. (b) The amount of Net Debt Proceeds to the extent that such amount is allocated to the permanent reduction of the Maximum Amount of Revolving Credit by Section 4.5. (c) Upon any Investment pursuant to Section 7.9.9 in a Permitted Joint Venture that is not a Restricted Company at the time of and immediately after giving effect to such Investment, the Permitted Joint Venture Investment Multiple Amount with respect to such Investment. (d) Such amount (in an integral multiple of $1,000,000 and in a minimum amount of $1,000,000) specified by three Banking Days' notice from the Borrowers to the Administrative Agent. The aggregate principal amount of the loans made pursuant to this Section 2.1.1 at any time outstanding is referred to as the "REVOLVING LOAN". 2.1.2. BORROWING REQUESTS. Revolving Loans will be made to the Borrowers by the Revolving Lenders under Section 2.1.1 on any Banking Day on or after the Initial Closing Date and prior to the Final Revolving Maturity Date. Not later than noon (New York time) on the first Banking Day (third Banking Day if any portion of such loan will be subject to a Eurodollar Pricing Option on the requested Closing Date) prior to the requested Closing Date for any such loan, a Financial Officer for the Borrowers will give the Administrative Agent notice of its request (which may be given by a telephone call received by a Lending Officer and promptly confirmed in writing), specifying (a) the amount of the requested loan (not less than $1,000,000 and an integral multiple of $100,000) (except to the extent a greater amount may be required in the case of a Eurodollar Pricing Option) and (b) the requested Closing Date therefor. Upon receipt of such notice by the Administrative Agent, the Administrative Agent shall give prompt telephonic or written notice to each Lender. Each such loan will be made at the Houston Office by wire deposit to the Administrative Agent as specified in writing from time to time. In connection with each such loan, the Borrowers shall furnish to the Administrative Agent a certificate in substantially the form of Exhibit 5.2.1. -34- 2.1.3. REVOLVING NOTES. The Administrative Agent shall keep a record of the Revolving Loan and the respective interests of the Lenders therein as part of the Register, which shall evidence the Revolving Loan. The Revolving Loan shall be deemed owed to each Lender having a Commitment therein severally in accordance with such Lender's Percentage Interest therein, and all payments thereon shall be for the account of each Lender in accordance with its Percentage Interest therein. Upon written request of any Lender, the Borrowers' obligations to pay such Lender's Percentage Interest in the Revolving Loan shall be evidenced by a separate note of the Borrowers in substantially the form of Exhibit 2.1.3 (the "REVOLVING NOTES"), payable to such Lender in accordance with such Lender's Percentage Interest in the Revolving Loan. 2.1.4. FALCON VIDEO REVOLVING LOAN. Upon or after execution and delivery by Falcon Video of a joinder agreement in substantially the form of Exhibit 2.1.4 (the "FALCON VIDEO JOINDER"), Falcon Video may request, and each Revolving Lender severally agrees to make in accordance with this Section 2.1, a revolving loan to Falcon Video in an amount sufficient to permit Falcon Video to discharge its obligations pursuant to section 2.8(b) of the Contribution Agreement (the "FALCON VIDEO REVOLVING LOAN"); PROVIDED, HOWEVER, that in no event will the Falcon Video Revolving Loan exceed $125,000,000 or cause the Revolving Loan to exceed the Maximum Amount of Revolving Credit. Not later than noon (New York time) on the third Banking Day prior to the requested initial Closing Date for the Falcon Video Revolving Loan, which initial Closing Date shall be on or immediately prior to the TCI Closing, a Financial Officer for Falcon Video will give the Administrative Agent written notice of its request, specifying (a) the amount of the requested loan (not less than $1,000,000 and an integral multiple of $100,000) (except to the extent a greater amount may be required in the case of a Eurodollar Pricing Option) and (b) the requested Closing Date therefor. Upon receipt of such notice by the Administrative Agent, the Administrative Agent shall give prompt telephonic or written notice to each Revolving Lender. Such loan will be made at the Houston Office by wire deposit to the Administrative Agent as specified in writing from time to time. In connection with such loan, Falcon Video shall furnish to the Administrative Agent a certificate in substantially the form of Exhibit 5.2.1. Prior to the TCI Closing and the discharge of Financing Debt of Falcon Video as contemplated in Section 5.3.1, Falcon Video shall be solely liable for the Falcon Video Revolving Loan, which shall in all other respects be treated for purposes of this Agreement as a portion of the Revolving Loan. Prior to the TCI Closing and the discharge of Financing Debt of Falcon Video as contemplated in Section 5.3.1, no other Borrowers or Guarantors shall be liable in respect of the Falcon Video Revolving Loan, and, prior to the TCI Closing and the discharge of Financing Debt of Falcon Video as contemplated in Section 5.3.1, Falcon Video shall not be liable for, or incur any obligation hereunder in respect of, any portion of the Loan other than the Falcon Video -35- Revolving Loan. Prior to the TCI Closing and the discharge of Financing Debt of Falcon Video as contemplated in Section 5.3.1, the Falcon Video Revolving Loan shall be unsecured by any collateral granted in favor of the Lenders, and the Lenders acknowledge the existence of first priority Liens on the assets of Falcon Video (and Falcon Video Communications Investors, L.P.'s partnership interest in Falcon Video) securing Falcon Video's obligations to its present senior lenders, which existing Liens are permitted hereunder to the extent provided in Section 7.8.14. Immediately after the TCI Closing, pursuant to Section 2.6, New Falcon II will assume Falcon Video's liabilities and obligations as the Borrower in respect of the Falcon Video Revolving Loan and the Falcon Video Revolving Loan will thereafter be treated for all purposes of this Agreement as a portion of the Revolving Loan. 2.2. TERM LOAN B. 2.2.1. TERM LOAN B. Subject to all the terms and conditions of this Agreement and so long as no Default exists and is continuing, on the Initial Closing Date, the Lenders other than the Lenders that are also acting as Agents (the "TERM LOAN B-1 LENDERS") will, in accordance with their respective Percentage Interests in Term Loan B-1, severally lend to the Borrowers (who shall be jointly and severally liable therefor) as a term loan ("TERM LOAN B-1") an aggregate amount of $125,794,117.75. On a date after the Initial Closing Date, but in no event later than September 30, 1998 (the "TERM LOAN B-2 CLOSING DATE"), the Lenders that are also acting as Agents (the "TERM LOAN B-2 LENDERS") will, upon at least five Banking Days' written notice from the Borrowers to the Administrative Agent, in accordance with their respective Percentage Interests in Term Loan B-2, severally lend to the Borrowers (who shall be jointly and severally liable therefor) as a term loan ("TERM LOAN B-2") an aggregate amount of $74,205,882.25. The aggregate principal amount of the loans made pursuant to this Section 2.2.1 at any one time outstanding is collectively referred to as "TERM LOAN B". In connection with both Term Loan B-1 and Term Loan B-2, the Borrowers shall furnish to the Administrative Agent certificates in substantially the form of Exhibit 5.2.1. 2.2.2. TERM LOAN B NOTES. Term Loan B-1 and Term Loan B-2 shall be made at the Houston Office by crediting the amount of each such loan to the general account of the Borrowers with the Administrative Agent against, in each case, delivery to the Administrative Agent of the separate joint and several term notes of the Borrowers (the "TERM LOAN B NOTES") payable to the respective Lenders. The Term Loan B Note issued to each Lender shall be in substantially the form of Exhibit 2.2.2. 2.2.3. MANDATORY ASSIGNMENT OF TERM LOAN B-1. On any Banking Day prior to the earlier of the Term Loan B-2 Closing Date and October 15, 1998, after the occurrence and during the continuance of an Event of Default, the Term Loan B-1 Lenders holding at least a majority of Term Loan B-1 may, in their sole discretion, give notice to the Term Loan B-2 Lenders and the Borrowers that all Term Loan B-1 Lenders are making a -36- mandatory assignment at par of a portion of Term Loan B-1 to the Term Loan B-2 Lenders (the "MANDATORY ASSIGNMENT") within the next five Banking Days. The portion of Term Loan B-1 subject to the Mandatory Assignment shall be in the amount necessary so that, after giving effect to the Mandatory Assignment, the Term Loan B-1 Lenders and the Term Loan B-2 Lenders will own the respective Percentage Interests in Term Loan B-1 that they would have owned in Term Loan B in the event Term Loan B-2 had been outstanding. Such a notice of the Mandatory Assignment shall be deemed to have been automatically given upon a Bankruptcy Default or upon the exercise of any of the remedies provided in Section 9.2. Each Lender irrevocably agrees to consummate the Mandatory Assignment in the manner specified above in this Section 2.2.3, notwithstanding (a) whether any conditions specified in Section 5 have been satisfied and (b) that a Default has occurred and is continuing. In the event that any Mandatory Assignment cannot for any reason be made on the date required above (including as a result of the commencement of a proceeding under the Bankruptcy Code), each Term Loan B-2 Lender shall promptly purchase from the Term Loan B-1 Lenders as of the date the Mandatory Assignment otherwise would have occurred such participation in Term Loan B-1 as shall be necessary to cause the Lenders to share in Term Loan B-1 ratably based upon their respective Percentage Interests in Term Loan B as if Term Loan B-2 had been outstanding. In the event of such participations, all interest payable on Term Loan B-1 shall be for the account of the Term Loan B-1 Lenders until the date on which the participations are required to be purchased and, to the extent attributable to the purchased participations, shall be payable to the participants from and after such date. At the time any such purchase of participations is actually made, the purchasing Lender shall pay the Term Loan B-1 Lenders interest on the principal amount of the participation purchased at the overnight Federal Funds Rate for each day, commencing with the date the Mandatory Assignment otherwise would have occurred to the date of payment for such participation. In the event a Mandatory Assignment is consummated and the Borrowers subsequently become entitled to borrow Term Loan B-2 in accordance with this Agreement, the Commitments of the Lenders in Term Loan B-2 shall equal the Percentage Interests in Term Loan B as if Term Loan B-2 had already been outstanding. 2.3. TERM LOAN C. 2.3.1. TERM LOAN C. Subject to all the terms and conditions of this Agreement and so long as no Default exists and is continuing, on the Initial Closing Date those Lenders having Commitments in Term Loan C (the "TERM LOAN C LENDERS") will, in accordance with their respective Percentage Interests in Term Loan C, severally lend to the Borrowers (who shall be jointly and severally liable therefor) as a term loan an aggregate amount of $300,000,000. The aggregate principal amount of the loans made pursuant to this Section 2.3.1 at any one time outstanding is referred to as "TERM LOAN C". In connection with Term Loan C, the Borrowers shall furnish to the Administrative Agent a certificate in substantially the form of Exhibit 5.2.1. -37- 2.3.2. TERM LOAN C NOTES. Term Loan C shall be made at the Houston Office by crediting the amount of such loan to the general account of the Borrowers with the Administrative Agent against delivery to the Administrative Agent of the separate joint and several term notes of the Borrowers (the "TERM LOAN C NOTES") payable to the respective Term Loan C Lenders. The Term Loan C Note issued to each Term Loan C Lender shall be in substantially the form of Exhibit 2.3.2. 2.4. SUPPLEMENTAL CREDIT. 2.4.1. REQUEST FOR SUPPLEMENTAL FACILITIES. Subject to all the terms of this Agreement and so long as no Default exists and is continuing, from time to time on and after the Initial Closing Date, the Borrowers may request, by written notice to the Documentation Agent, a revolving credit and/or term loan facility (a "SUPPLEMENTAL FACILITY") in a specified aggregate amount (in the case of a revolving credit facility requested under this Section 2.4.1, the "MAXIMUM AMOUNT OF SUPPLEMENTAL REVOLVING FACILITY CREDIT") that, when added to the sum of then effective Supplemental Facilities, does not exceed $350,000,000 (the "MAXIMUM AMOUNT OF SUPPLEMENTAL CREDIT"). The interest rate, commitment fee rate, amortization schedule, maturity date and other terms and conditions for each Supplemental Facility shall be proposed by the Borrowers at the time the Borrowers request such Supplemental Facility; PROVIDED, HOWEVER, that (a) the maturity of all or any portion of such Supplemental Facility shall in no event occur prior to the Final Term Loan C Maturity Date, (b) the Weighted Average Life to Maturity of such Supplemental Facility shall in no event be shorter than, if the Supplemental Facility is a revolving credit loan, the Weighted Average Life to Maturity of the Revolving Loan and, if the Supplemental Facility is a term loan, the Weighted Average Life to Maturity of Term Loan C and (c) the terms and conditions of such Supplemental Facility shall be materially no more restrictive on the Restricted Companies than the provisions of this Agreement applicable to the Loan. Such request shall also include a diligence package with respect to any proposed acquisition to which the requested Supplemental Facility relates. Upon receipt of such request and proposed terms, the Documentation Agent will promptly notify, and deliver a copy of such request and related materials to, each other Lender (by telephone or otherwise). Within 10 Banking Days after receipt by the Lenders of such request, each Lender interested in participating in the requested Supplemental Facility shall notify the Documentation Agent and the Borrowers of its desire to participate and the maximum amount of its proposed Commitment with respect to such Supplemental Facility (a "COMMITMENT NOTICE"); PROVIDED, HOWEVER, that each Lender may participate in such Supplemental Facility in its sole discretion, and no Lender shall be deemed to have committed to participate in any Supplemental Facility as of the date hereof, nor shall any Lender have any obligation to participate in any Supplemental Facility unless and until it commits to do so as provided in this Section 2.4.1. Following receipt of such Commitment Notices, the Borrowers (i) shall allocate the Commitments -38- with respect to such Supplemental Facility, which allocations may be made, at the Borrowers' option, in whole or in part to one or more of the Lenders or other lenders selected by the Borrowers (such Lenders or other lenders, the "SUPPLEMENTAL LENDERS"), (ii) shall select one or more financial institutions (which financial institutions may, but need not, include one or more of the Agents or Lenders) to serve as the agent or agents for the Supplemental Facility (such agent or agents, the "SUPPLEMENTAL AGENT") and (iii) shall advise each Lender of the amount of such Lender's Commitment with respect to the Supplemental Facility; PROVIDED; HOWEVER, that the existing Lenders providing a Commitment Notice with respect to such Supplemental Facility shall be entitled to participate in such Supplemental Facility on terms and conditions generally applicable to all Supplemental Lenders with respect to such Supplemental Facility, subject, however, to the allocations made by the Borrowers pursuant to clause (i) above. Supplemental Lenders and Supplemental Agents not otherwise Lenders hereunder shall become Lenders hereunder pursuant to a joinder agreement reasonably satisfactory to the Specified Agents and the Borrowers. The Specified Agents and the Borrowers will agree on amendments to this Agreement, if any, necessary to implement any Supplemental Facility and a form of Supplemental Note to be issued by the Borrowers in connection with such Supplemental Facility. 2.4.2. SUPPLEMENTAL FACILITIES. Subject to all the terms and conditions of this Agreement and so long as no Default exists and is continuing, from time to time on and after the Initial Closing Date and prior to the final maturity of the Supplemental Facility determined in accordance with Section 2.4.1, the Supplemental Lenders will, severally in accordance with their respective Commitments therein, make loans to the Borrowers with respect to such Supplemental Facility as may be requested by the Borrowers in accordance with Section 2.4.3. The aggregate principal amount of outstanding revolving loans under any Supplemental Facility shall in no event exceed the Maximum Amount of Revolving Facility Credit for such Supplemental Facility. The sum of the aggregate principal amount of outstanding loans under all Supplemental Facilities shall in no event exceed the Maximum Amount of Supplemental Credit. 2.4.3. BORROWING REQUESTS. After a Supplemental Facility has been established as provided in this Section 2.4, the Borrowers may from time to time request a loan under this Section 2.4 by providing to the Supplemental Agent and the Documentation Agent a written notice in accordance with Section 2.4.1. Such notice must be not later than noon (Boston time) on the first Banking Day (third Banking Day if any portion of such loan will be subject to a Eurodollar Pricing Option on the requested Closing Date) prior to the requested Closing Date for such loan. The notice must specify (a) the amount of the requested loan (which shall be not less than $500,000 and an integral multiple of $100,000) and (b) the requested Closing Date therefor (which shall be a Banking Day). Upon receipt of such notice, the Supplemental Agent will promptly inform each Supplemental Lender participating in such Supplemental Facility (by telephone or otherwise). Each such loan will be made at the office of the Supplemental Agent -39- specified by such Supplemental Agent by depositing the amount thereof to the general account of the Borrowers with the Supplemental Agent or by wire transfer as the Borrowers may direct in writing to the Supplemental Agent. In connection with each such loan, the Borrowers shall furnish to the Supplemental Agent and the Documentation Agent a certificate in substantially the form of Exhibit 5.2.1 and any additional information the Supplemental Agent, Documentation Agent or any Lender shall reasonably request. 2.4.4. SUPPLEMENTAL NOTES. The aggregate principal amount of the loans outstanding from time to time under this Section 2.4 is referred to as the "SUPPLEMENTAL LOAN". The Documentation Agent shall keep a record of the Supplemental Loan and the interests of the respective Lenders therein as part of the Register, which shall evidence the Supplemental Loan. The Supplemental Loan shall be deemed owed to each Lender having a Commitment therein severally in accordance with such Lender's Percentage Interest therein, and all payments thereon shall be for the account of each Lender in accordance with its Percentage Interest therein. Upon request of any Lender, the Borrowers' obligations to pay such Lender's Percentage Interest in the Supplemental Loan shall be evidenced by a separate note of the Borrowers (the "SUPPLEMENTAL NOTE"), payable to such Lender in accordance with such Lender's Percentage Interest in the Supplemental Loan. 2.5. APPLICATION OF PROCEEDS. 2.5.1. LOAN. Subject to Section 2.5.2, each Borrower will apply the proceeds of the Loan for (a) the repayment of existing Financing Debt of the Borrowers, (b) the repayment by redemption or tender of the Holding, L.P. Senior Subordinated Notes pursuant to the Holding, L.P. Senior Subordinated Note Indenture, (c) the repayment of the TCI Debt, (d) the acquisition of the assets of Falcon Classic pursuant to Section 7.9.12, (e) Capital Expenditures permitted by this Agreement, Investments and acquisitions permitted by Section 7.9 and for Distributions permitted by Section 7.10, (f) general corporate, partnership and limited liability company purposes and (g) the satisfaction of Falcon Video's obligations pursuant to section 2.8(b) of the Contribution Agreement and the repayment of all outstanding Indebtedness of Falcon Video under its bank credit facilities as contemplated by Section 5.3.1. 2.5.2. SPECIFICALLY PROHIBITED APPLICATIONS. No Borrower will, directly or indirectly, apply any part of the proceeds of any extension of credit made pursuant to the Credit Documents to purchase or to carry Margin Stock or to any transaction prohibited by the Credit Documents or by Legal Requirements applicable to the Lenders. 2.6. BORROWERS OBLIGATIONS. Except as provided in Section 2.1.4, prior to the TCI Closing and the execution and delivery by New Falcon II of the Assignment and Assumption Agreement in substantially the form of Exhibit 2.6 (the "NEW FALCON II ASSIGNMENT AND -40- ASSUMPTION"), the Borrowers shall be the Pre-TCI Borrowers, the obligations of which under this Agreement shall be joint and several, and, solely with respect to the loan made pursuant to Section 2.1.4 upon the execution and delivery of the Falcon Video Joinder, Falcon Video. Immediately after the TCI Closing, pursuant to the New Falcon II Assignment and Assumption, (a) the Pre-TCI Borrowers will assign to New Falcon II, and New Falcon II will assume, all of the Pre-TCI Borrowers' rights, obligations and liabilities as Borrowers under this Agreement and (b) pursuant to the New Falcon II Assignment and Assumption, Falcon Video will assign to New Falcon II, and New Falcon II will assume, all of Falcon Video's obligations and liabilities as a Borrower in respect of the Falcon Video Revolving Loan. Upon such assignments and assumptions, New Falcon II will be the sole Borrower hereunder and the Pre-TCI Borrowers' and Falcon Video's rights, liabilities and obligations as Borrowers hereunder (but not as Guarantors) shall cease. 2.7. NATURE OF OBLIGATIONS OF LENDERS TO EXTEND CREDIT. The Lenders' obligations under this Agreement to make the Loan are several and are not joint or joint and several. If any Lender shall fail to perform its obligations to extend any such credit, the amount of the commitment of the Lender so failing to perform may be assumed by the other Lenders, in their sole discretion, in such proportions as such Lenders may agree among themselves and the Percentage Interests of each other Lender shall be appropriately adjusted, but such assumption and adjustment shall not relieve the Lenders from any of their obligations to make any such extension of credit or to repay any Delinquent Payment required by Section 11.4. 3. INTEREST; EURODOLLAR PRICING OPTIONS; FEES. 3.1. INTEREST. The Loan shall accrue and bear interest at a rate per annum which shall at all times equal the Applicable Rate. Prior to any stated or accelerated maturity of the Revolving Loan, either Term Loan or the Supplemental Loan, as the case may be, the Borrowers jointly and severally will, on each Payment Date, pay the accrued and unpaid interest on the portion of the Loan which was not subject to a Eurodollar Pricing Option. On the last day of each Interest Period or on any earlier termination of any Eurodollar Pricing Option, the Borrowers will jointly and severally pay the accrued and unpaid interest on the portion of the Loan which was subject to the Eurodollar Pricing Option which expired or terminated on such date; PROVIDED, HOWEVER, that in the case of any Interest Period longer than three months, the Borrowers will also pay the accrued and unpaid interest on the Loan subject to the Eurodollar Pricing Option having such Interest Period every 90 days, beginning on the 90th day after the commencement of such Interest Period (or if any such day is not a Banking Day, the Banking Day immediately preceding such 90th day). On any stated or accelerated maturity of the Revolving Loan, either Term Loan or the Supplemental Loan, as the case may be, the Borrowers jointly and severally will pay all accrued and unpaid interest on the Revolving Loan, the Term Loans or the Supplemental Loan, as the case may be, including any accrued and unpaid interest on the portion of the Loan which is subject to a Eurodollar Pricing Option. All payments of interest hereunder shall be made to the Administrative Agent for the account of each Lender in accordance with the Lenders' respective Percentage Interests. -41- 3.2. EURODOLLAR PRICING OPTIONS. 3.2.1. ELECTION OF EURODOLLAR PRICING OPTIONS. Subject to all of the terms and conditions hereof and so long as no Default under Sections 9.1.1, 9.1.5 (except clause (b) thereof) or 9.1.11 exists and is continuing, the Borrowers may from time to time, by irrevocable notice from a Financial Officer to the Administrative Agent received no later than noon (New York time) three Banking Days prior to the commencement of the Interest Period selected in such notice, elect to have such portion of the Loan as the Borrowers may specify in such notice accrue and bear daily interest during the Interest Period so selected at the Applicable Rate computed on the basis of the Eurodollar Rate. In the event the Borrowers, at any time, fail to elect a Eurodollar Pricing Option under this Section 3.2.1 for any portion of the Loan, then such portion of the Loan will accrue and bear interest at the Applicable Rate based on the Base Rate. Simultaneous elections by a group of Borrowers for the same Interest Period of a portion of the Revolving Loan, either Term Loan, the Supplemental Loan or all of such Tranches on a combined basis shall be deemed to be the election of a single Eurodollar Pricing Option. No election under this Section 3.2.1 shall become effective if, prior to the commencement of any such Interest Period, the Administrative Agent determines, in the manner provided below, that (a) the electing or granting of the Eurodollar Pricing Option in question would violate a Legal Requirement or (b) Eurodollar deposits in an amount comparable to the principal amount of the Loan as to which such Eurodollar Pricing Option has been elected and which have a term corresponding to the proposed Interest Period are not readily available in the inter-bank Eurodollar market for delivery at any Eurodollar Office or, by reason of circumstances affecting such market, adequate and reasonable methods do not exist for ascertaining the interest rate applicable to such deposits for the proposed Interest Period. For purposes of determining ready availability of Eurodollar deposits with respect to a proposed Interest Period, such Eurodollar deposits shall be deemed not readily available if the Required Lenders shall have advised the Administrative Agent by telephone, confirmed in writing or by facsimile, at or prior to noon (New York time) on the second Banking Day prior to the commencement of such proposed Interest Period that, based upon the knowledge of such Lenders of the Eurodollar market and after reasonable efforts to determine the availability of such Eurodollar deposits, such Lenders reasonably determine that Eurodollar deposits in an amount equal to the respective Percentage Interest of such Lenders in the portion of the Loan as to which such Eurodollar Pricing Option has been elected and which have a term corresponding to the Interest Period in question will not be offered in the Eurodollar market to such Lender at a rate of interest that does not exceed the Basic Eurodollar Rate, and the Administrative Agent and the Borrowers reasonably concur in such determination (unless the foregoing results from the creditworthiness of such Lenders or a change in the availability of -42- Eurodollar markets to such Lenders resulting from the failure of such Lenders to comply with legal or regulatory requirements). 3.2.2. NOTICE TO LENDERS AND BORROWERS. The Administrative Agent will promptly inform each Lender (by telephone or otherwise and promptly confirmed in writing) of each notice received by it from the Borrowers pursuant to Section 3.2.1 and of the Interest Period specified in such notice. Upon determination by the Administrative Agent of the Eurodollar Rate for such Interest Period or in the event no such election shall become effective, the Administrative Agent will promptly notify the Borrowers and each Lender (by telephone or otherwise and promptly confirmed in writing) of the Eurodollar Rate so determined or why such election did not become effective. 3.2.3. SELECTION OF INTEREST PERIODS. Interest Periods shall be selected so that: (a) the minimum portion of the Loan subject to any Eurodollar Pricing Option shall be $5,000,000 and an integral multiple of $1,000,000; (b) no more than 20 Eurodollar Pricing Options shall be outstanding at any one time; (c) a portion of Term Loan B equal to the amount of the next mandatory prepayment required by Section 4.2.1 shall not be subject to a Eurodollar Pricing Option on the date such mandatory prepayment is required to be made; (d) a portion of Term Loan C equal to the amount of the next mandatory prepayment required by Section 4.2.2 shall not be subject to a Eurodollar Pricing Option on the date such mandatory prepayment is required to be made; (e) an aggregate principal amount of the Revolving Loan equal to the amount of the next mandatory prepayment required by Section 4.3 shall not be subject to a Eurodollar Pricing Option on the date such mandatory prepayment is required to be made; and (f) no Interest Period with respect to any part of the Loan subject to a Eurodollar Pricing Option shall expire later than the Applicable Maturity Date. 3.2.4. ADDITIONAL INTEREST. If any portion of the Loan which is subject to a Eurodollar Pricing Option is repaid, or any Eurodollar Pricing Option is terminated for any reason (other than (a) a Legal Requirement not having the force of law or (b) the payment in full of the Credit Obligations as a result of the failure of any Lender to perform its obligations hereunder), on a date which is prior to the last Banking Day of the Interest Period applicable to such Eurodollar Pricing Option, the Borrowers jointly and severally will pay to the Administrative Agent for the account of each Lender in -43- accordance with the Lenders' respective Percentage Interests, in addition to any amounts of interest otherwise payable hereunder, an amount equal to daily interest for the unexpired portion of such Interest Period on the portion of the Loan so repaid, or as to which a Eurodollar Pricing Option was so terminated, at a per annum rate equal to the excess, if any, of (i) the Eurodollar Rate calculated on the basis of the rate applicable to such Eurodollar Pricing Option MINUS (ii) the lowest rate of interest obtainable by the Lenders with respect to Eurodollar deposits which have a maturity date approximating the last Banking Day of such Interest Period. For purposes of this Section 3.2.4, if any portion of the Loan which was to have been subject to a Eurodollar Pricing Option is not outstanding on the first day of the Interest Period applicable to such Eurodollar Pricing Option other than for reasons described in Section 3.2.1, the Borrowers shall be deemed to have terminated such Eurodollar Pricing Option. A certificate of an officer of the Administrative Agent setting forth in reasonable detail the basis of calculation of such amount of interest shall, in the absence of manifest error, be conclusive. Except to the extent set forth in Section 12.3, the assignment by any Lender of all or a portion of such Lender's interests, rights and obligations under this Agreement and the other Credit Documents shall not constitute a termination of a Eurodollar Pricing Option. 3.2.5. CHANGE IN APPLICABLE LAWS, REGULATIONS, ETC. If any Legal Requirement having the force of law shall prevent any Lender from funding through the purchase of deposits, or maintaining, any portion of the Loan subject to a Eurodollar Pricing Option or otherwise from giving effect to such Lender's obligations as contemplated hereby (unless the foregoing results from the creditworthiness of such Lender or a change in the availability of Eurodollar markets to such Lender resulting from the failure of such Lender to comply with legal or regulatory requirements), (a) the Administrative Agent may by notice to the Borrowers terminate all of the affected Eurodollar Pricing Options, (b) the portion of the Loan subject to such terminated Eurodollar Pricing Options shall immediately bear interest thereafter at the Applicable Rate computed on the basis of the Base Rate and (c) the Borrowers shall make any payment required by Section 3.2.4 to the extent the Applicable Rate based on the Eurodollar Rates for the affected Eurodollar Pricing Options exceeds the Applicable Rate based on the Base Rate. A certificate of an officer of the Administrative Agent describing in reasonable detail such mandatory Legal Requirement and setting forth in reasonable detail a calculation of the payment required by Section 3.2.4 shall, in the absence of manifest error, be conclusive. 3.2.6. FUNDING PROCEDURE. The Lenders may fund any portion of the Loan subject to a Eurodollar Pricing Option out of any funds available to the Lenders. Regardless of the source of the funds actually used by any of the Lenders to fund any portion of the Loan subject to a Eurodollar Pricing Option, however, all amounts payable hereunder, including the interest rate applicable to any such portion of the Loan and the amounts payable under Sections 3.2.4 and 3.4, shall be computed as if each Lender had actually funded such Lender's Percentage Interest in such portion of the Loan through the purchase of deposits in such amount with a maturity the same as the applicable Interest -44- Period relating thereto and through the transfer of such deposits from an office of the Lender having the same location as the applicable Eurodollar Office to one of such Lender's offices in the United States of America. 3.3. COMMITMENT FEES. 3.3.1. REVOLVING LOAN. In consideration of the Revolving Lenders' commitments to make the extensions of credit provided for in Section 2.1, while such commitments are outstanding, the Borrowers jointly and severally will pay to the Administrative Agent for the account of the Revolving Lenders, on each Payment Date and on the Final Revolving Maturity Date, commitment fees in an amount equal to the product of: (a) annual interest at a rate equal to the commitment fee percentage in the table below set opposite the Reference Leverage Ratio as of such date; MULTIPLIED BY (b) the amount by which (i) the average daily Maximum Amount of Revolving Credit during the three-month period or portion thereof ending on such date exceeded (ii) the average daily Revolving Loan during such period or portion thereof:
Commitment Fee Reference Leverage Ratio Percentage ------------------------ ---------- Greater than or equal to 5.00 0.375% Less than 5.00 0.250%
The commitment fee under this Section 3.3.1 shall begin to accrue on the date hereof. Any adjustment in the commitment fee percentage shall take effect on the third Banking Day following the receipt by the Administrative Agent of the financial statements required to be furnished by Sections 7.4.1 or 7.4.2; PROVIDED, HOWEVER, that if for any reason the Restricted Companies shall not have furnished the financial statements required by Sections 7.4.1 or 7.4.2 for any fiscal quarter by the time required by such Sections, the commitment fee percentage during the period from the date which is three Banking Days after such financial statements were due until the third Banking Day following receipt by the Administrative Agent of such financial statements shall be 0.375%. In connection with the TCI Closing, an adjustment in the commitment fee percentage shall take effect on the later of (a) the TCI Closing or (b) the fifth Banking Day following the receipt by the Administrative Agent of the TCI Closing Report; provided, however, that if for any reason the Restricted Companies shall not have furnished the TCI Closing Report by the time required by Section 7.4.3, commencing on the TCI Closing until the fifth Banking Day following receipt by the Administrative Agent of the TCI Closing Report, the commitment fee percentage shall be 0.375%. -45- 3.3.2. TERM LOAN B-2. In consideration of the commitments of the Term Loan B-2 Lenders to make Term Loan B-2, the Borrowers jointly and severally will pay to the Administrative Agent for the account of the Term Loan B-2 Lenders, on the later of the Term Loan B-2 Closing Date and September 30, 1998, commitment fees in an aggregate amount equal to the product of (a) the average daily unborrowed amount of the Term Loan B-2 Commitments MULTIPLIED BY (b) annual interest at a rate equal to 0.375%. The commitment fee under this Section 3.3.2 shall begin to accrue on the date hereof. 3.4. TAXES. If (a) any Lender shall be subject to any Tax or (b) any Borrower shall be required to withhold or deduct any Tax, the Borrowers will on demand by the Administrative Agent or such Lender, accompanied by the certificate referred to below, pay to the Administrative Agent for such Lender's account such additional amount as is necessary to enable such Lender to receive net of any Tax the full amount of all payments of principal, interest, fees, expenses, indemnities and other amounts payable by the Borrowers to such Lender under any Credit Document. Each Lender agrees that if, after the payment by the Borrowers of any such additional amount, any amount identifiable as a part of any Tax related thereto is subsequently recovered or used as a credit by such Lender, such Lender shall reimburse the Borrowers to the extent of the amount so recovered or used. A certificate of an officer of such Lender setting forth the amount of such Tax or recovery or use and the basis therefor shall, in the absence of manifest error, be conclusive. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 3.5. CAPITAL ADEQUACY. Except as provided in Section 3.6, if any Lender shall have determined that compliance by such Lender with any change after the date hereof in any applicable law, governmental rule, regulation or order regarding capital adequacy of banks or bank holding companies, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender with any request or directive regarding capital adequacy if such Lender reasonably believes that compliance therewith is in accordance with customary commercial practice (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital as a consequence of such Lender's obligations hereunder to a level below that which such Lender could have achieved but for such compliance (taking into consideration such Lender's policies with respect to capital adequacy immediately before such compliance and assuming that such Lender's capital was fully utilized prior to such compliance) by an amount deemed by such Lender to be material, then the Borrowers jointly and severally will on demand by the Administrative Agent, accompanied by the certificate referred to below, pay to the Administrative Agent from time to time as specified by such Lenders as are so affected such additional amounts as shall be sufficient to compensate such Lenders for such reduced return, together with interest on each such amount from 15 Banking Days after the date demanded until payment in full thereof at the rate of interest on overdue installments of principal provided in Section 3.1. A certificate of an officer of any such Lender setting forth the amount to be paid to it and the basis for computation thereof hereunder -46- shall, in the absence of manifest error, be conclusive. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 3.6. REGULATORY CHANGES. If any Lender shall have determined that (a) any change in any Legal Requirement after the date hereof shall directly or indirectly (i) reduce the amount of any sum received or receivable by such Lender with respect to the Loan or the return to be earned by such Lender on the Loan, (ii) impose a cost on such Lender or any Affiliate of such Lender that is attributable to the making or maintaining of, or such Lender's commitment to make, its portion of the Loan, (iii) require such Lender or any Affiliate of such Lender to make any payment on or calculated by reference to the gross amount of any amount received by such Lender under any Credit Document, or (iv) reduce, or have the effect of reducing, the rate of return on any capital of such Lender or any Affiliate of such Lender that such Lender or such Affiliate is required to maintain on account of the Loan or such Lender's Commitment and (b) such reduction, increased cost or payment shall not be fully compensated for by an adjustment in the Applicable Rate, then the Borrowers jointly and severally shall pay to such Lender (without duplication of payments to other Lenders) such additional amounts as such Lender determines will, together with any adjustment in the Applicable Rate, fully compensate for such reduction, increased cost or payment, together with interest on each such amount from 15 Banking Days after the date demanded until payment in full thereof at the then highest Applicable Rate. A certificate of an officer of such Lender setting forth in reasonable detail the amount to be paid to it and the basis for computation thereof hereunder shall, in the absence of manifest error, be conclusive. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 3.7. COMPUTATIONS OF INTEREST AND FEES. For purposes of this Agreement, interest and commitment fees (and any amount expressed as interest) shall be computed on a daily basis and (a) with respect to any portion of the Loan subject to a Eurodollar Pricing Option, on the basis of a 360-day year and (b) with respect to commitment fees and any other portion of the Loan, on the basis of a 365 or 366-day year, as the case may be. 3.8. INTEREST LIMITATION. Notwithstanding any other provision of this Agreement or any other Credit Document, the maximum amount of interest that may be charged to or collected from any Borrower by any Lender under this Agreement or any other Credit Document shall in no event exceed the maximum amount of interest that could lawfully be charged or collected under applicable law. Any provision of this Agreement or any other Credit Document that could be construed as providing for interest in excess of such lawful maximum shall be expressly subject to this Section 3.8. Any part of the Credit Obligations consisting of amounts to be paid to any Lender for the use, forbearance or retention of the Credit Obligations shall, to the extent permitted by applicable law, be allocated throughout the full term of the Credit Obligations until payment in full of the Credit Obligations (including any renewal or extension thereof) so that interest on account of the Credit Obligations shall not exceed the maximum amount permitted by applicable law. -47- 4. PAYMENT. 4.1. PAYMENT AT MATURITY. On the Applicable Maturity Date or any accelerated maturity of any portion of the Loan, the Borrowers jointly and severally will pay to the Administrative Agent for the account of each Lender for credit to the Revolving Loan, Term Loan B, Term Loan C or the Supplemental Loan, as the case may be, an amount equal to the Revolving Loan, Term Loan B, Term Loan C or the Supplemental Loan, as the case may be, then due, together with all accrued and unpaid interest and any fees thereon, and on the latest Applicable Maturity Date or any earlier accelerated maturity of the Loan, all other Credit Obligations then outstanding. 4.2. FIXED REQUIRED PREPAYMENTS. 4.2.1. TERM LOAN B. On the last Banking Day of March, June, September and December, beginning March 31, 1999, the Borrowers will jointly and severally pay to the Administrative Agent, for the account of the Lenders as a prepayment of Term Loan B, the lesser of (a) $500,000, as adjusted after the date hereof in accordance with this Section 4, or (b) the amount of Term Loan B then outstanding, in each case, together with accrued interest on such amount prepaid, and a final payment of the balance of Term Loan B on the Final Term Loan B Maturity Date. 4.2.2. TERM LOAN C. On the last Banking Day of each March, June, September and December, beginning March 31, 1999, the Borrowers will jointly and severally pay to the Administrative Agent, for the account of the Lenders as a prepayment of Term Loan C, the lesser of (a) $750,000, as adjusted after the date hereof in accordance with this Section 4, or (b) the amount of Term Loan C then outstanding, in each case together with accrued interest on such prepaid amount, and a final payment of the balance of Term Loan C on the Final Term Loan C Maturity Date. 4.2.3. SUPPLEMENTAL LOAN. The schedule for prepayments of each Supplemental Facility shall be determined in accordance with Section 2.4. 4.3. MAXIMUM AMOUNT OF REVOLVING CREDIT, ETC. If at any time the Revolving Loan exceeds the Maximum Amount of Revolving Credit, the Borrowers jointly and severally will immediately pay the amount of such excess to the Administrative Agent for the account of the Revolving Lenders as a mandatory prepayment of the Revolving Loan. If at any time a revolving portion of the Supplemental Loan exceeds the applicable Maximum Amount of Supplemental Revolving Facility Credit, the Borrowers jointly and severally will immediately pay the amount of such excess to the Administrative Agent for the account of the Lenders participating therein as a mandatory prepayment of such Supplemental Facility. If for any reason the TCI Closing does not occur within 30 days after the Falcon Video Revolving Loan is advanced, Falcon Video shall repay the Falcon Video Revolving Loan in full and shall cease to be a Borrower. -48- 4.4. ASSET SALES. 4.4.1. OPERATING ASSET SALE NOTICE. In the event that the Restricted Companies sell, exchange or dispose of Operating Assets in a transaction (other than a transaction permitted by Section 7.11.1 or Section 7.11.2) (including a Permitted Asset Swap to the extent of the amount of cash received by the Restricted Companies), the Borrower making (or whose Subsidiaries are making) such sale, exchange or disposition (each, an "OPERATING ASSET SALE") shall, within five days of such Operating Asset Sale, provide written notice to the Lenders of (a) the closing date for such Operating Asset Sale, (b) the amount of Net Cash Proceeds (if any, in the case of an exchange) therefrom, (c) whether any portion of the Net Cash Proceeds will be reserved as an Asset Reinvestment Reserve Amount in accordance with Section 4.4.3, (d) how much of the Revolving Loan, the Term Loan and the Supplemental Loan will be prepaid with the Net Cash Proceeds in accordance with Section 4.4.2, (e) a revised schedule of reductions in the Maximum Amount of Revolving Credit and any Maximum Amount of Supplemental Revolving Facility Credit giving effect to such prepayment, (f) a revised schedule of mandatory prepayments of each of Term Loan B and Term Loan C giving effect to such prepayment and (g) a revised schedule of mandatory prepayments of the Supplemental Loan giving effect to such prepayment. 4.4.2. PREPAYMENT ON SALE. The Loan shall be repaid in accordance with this Section 4.4 to the extent that (a) the Net Cash Proceeds of the Operating Asset Sale described in such written notice exceeds 15% of Consolidated Operating Cash Flow for the period of four fiscal quarters of the Restricted Companies ending on the last day of the fiscal quarter ending immediately prior to the date of the Operating Asset Sale and (b) such excess Net Cash Proceeds are not subject to an effective Asset Reinvestment Reserve Amount in accordance with Section 4.4.3. 4.4.3. ASSET REINVESTMENT RESERVE AMOUNT. The Borrowers may elect to reserve Net Cash Proceeds described in Section 4.4.2(a) for reinvestment (directly or by stock purchase, merger or otherwise, provided any entity so acquired becomes a Restricted Company) in replacement Operating Assets. The amount so reserved (the "ASSET REINVESTMENT RESERVE AMOUNT") must be so applied within 540 days after the Operating Asset Sale creating the Asset Reinvestment Reserve Amount. In the event the Asset Reinvestment Reserve Amount is not reinvested within such 540-day period (or if the Borrowers abandon their plans for the reinvestment of the Asset Reinvestment Reserve Amount), the Borrowers shall notify the Lenders within three Banking Days and specify (a) how much of the Revolving Loan, the Term Loan and the Supplemental Loan will be prepaid with the Asset Reinvestment Reserve Amount in accordance with Section 4.4.4, (b) a revised schedule of reductions in the Maximum Amount of Revolving Credit and any Maximum Amount of Supplemental Revolving Facility Credit giving effect to such prepayment, (c) a revised schedule of mandatory prepayments of each of Term Loan B -49- and Term Loan C giving effect to such prepayment and (d) a revised schedule of mandatory prepayments of the Supplemental Loan giving effect to such prepayment. 4.4.4. ALLOCATIONS OF PREPAYMENT. Prepayments of the Loan (and reductions in the Maximum Amount of Revolving Credit and any Maximum Amount of Supplemental Revolving Facility Credit) made pursuant to this Section 4.4 will be allocated to the Revolving Loan, Term Loan B, Term Loan C and the Supplemental Loan, pro rata in proportion to the relative size of the Maximum Amount of Revolving Credit, any Maximum Amount of Supplemental Revolving Facility Credit, Term Loan B, Term Loan C and the term portions of the Supplemental Loan, and prepayments of Term Loan B, Term Loan C and the term portions of the Supplemental Loan under this Section 4.4 shall be applied to the prepayments required under Section 4.2 pro rata over the remaining payments in accordance with the Pro Rata Term Prepayment Portions. All such prepayments (and reductions in the Maximum Amount of Revolving Credit, and any Maximum Amount of Supplemental Revolving Facility Credit) must be made within five Banking Days after the Operating Asset Sale or the termination of effectiveness of an Asset Reinvestment Reserve Amount, as the case may be. 4.5. DESIGNATED FINANCING DEBT. Upon, or within five days prior to, the incurrence by any of the Restricted Companies of Designated Financing Debt, the Borrower incurring (or whose Subsidiaries are incurring) such Designated Financing Debt shall provide written notice to the Lenders of the closing date for such incurrence and the amount of Net Debt Proceeds. Such Net Debt Proceeds shall be applied to the prepayment of the Revolving Loan, Term Loan B, Term Loan C and the Supplemental Loan, pro rata in proportion to the relative size of the Maximum Amount of Revolving Credit, any Maximum Amount of Supplemental Revolving Facility Credit, Term Loan B, Term Loan C and the term portions of the Supplemental Loan, and prepayments of Term Loan B, Term Loan C and term portions of the Supplemental Loan under this Section 4.5 shall be applied to the prepayments required under Section 4.2 pro rata over the remaining payments in accordance with the Pro Rata Term Prepayment Portions. All such payments (and reductions in the Maximum Amount of Revolving Credit and any Maximum Amount of Supplemental Revolving Facility Credit) must be made within five Banking Days after the incurrence of the Designated Financing Debt. 4.6. VOLUNTARY PREPAYMENTS. In addition to the prepayments required by Sections 4.2, 4.3, 4.4 and 4.5, the Borrowers jointly and severally may from time to time prepay all or any portion of the Loan (in a minimum amount of $1,000,000 and an integral multiple of $100,000), without premium (except as provided in Section 3.2.4 with respect to early termination of Eurodollar Pricing Options). The Borrowers shall give the Administrative Agent at least one Banking Day prior notice in the case of a Revolving Loan or revolving portion of the Supplemental Loan prepayment (three Banking Days' prior notice if any portion of the Revolving Loan or revolving portion of the Supplemental Loan to be repaid is subject to a Eurodollar Pricing Option) and at least five Banking Day's prior notice in the case of a Term Loan or term portion of the Supplemental Loan prepayment, specifying the date of payment, the total principal -50- amount of the Revolving Loan, Term Loan or Supplemental Loan to be paid on such date and the amount of interest to be paid with such prepayment (and any amounts due with respect to early termination of Eurodollar Pricing Options under Section 3.2.4). Any prepayment of the Revolving Loan or revolving portion of the Supplemental Loan made pursuant to this Section 4.6 may, at the Borrowers' option as indicated in the notice delivered pursuant to the preceding sentence, permanently reduce the Maximum Amount of Revolving Credit or Maximum Amount of Supplemental Revolving Facility Credit, as the case may be. The effectiveness of such notice may, at the Borrowers' option, be conditioned on the closing of a credit facility the proceeds of which will be used to prepay the Loan, or the effectiveness of Investments or acquisitions permitted by Section 7.9 or mergers, consolidations or dispositions of assets permitted by Section 7.11, in which case such notice may be revoked by the Borrowers (by notice delivered in accordance with this Section 4.6) if such condition is not satisfied without any liability to the Lenders. If such condition is satisfied, such notice shall be deemed to have been effective as of the date of the giving of such notice. All prepayments of Term Loan B, Term Loan C or the term portions of the Supplemental Loan under this Section 4.6 shall be applied to the prepayments required under Section 4.2 pro rata over the remaining payments. With respect to the amount of such prepayment allocated to the Term Loan in accordance with the previous sentence, the Borrowers may allocate the first $80,000,000 of such prepayment either pro rata in proportion to the relative size of Term Loan B and Term Loan C or disproportionately to Term Loan C, as the Borrowers may elect. To the extent of aggregate prepayments over $80,000,000, such excess amounts shall be allocated pro rata in proportion to the relative size of Term Loan B and Term Loan C. 4.7. APPLICATION OF PAYMENTS. Any prepayment of the Revolving Loan, Term Loan or the Supplemental Loan, as the case may be, shall be applied first to the portion of the Revolving Loan, Term Loan or the Supplemental Loan, as the case may be, not then subject to Eurodollar Pricing Options, then the balance of any such prepayment shall be applied to the portion of the Revolving Loan, Term Loan or Supplemental Loan, as the case may be, then subject to Eurodollar Pricing Options, in the chronological order of the respective maturities thereof (or as the Restricted Companies may otherwise specify), together with any payments required by Section 3.2.4 with respect to early termination of Eurodollar Pricing Options. All payments of principal hereunder shall be made to the Administrative Agent for the account of each Lender in accordance with the Lenders' respective Percentage Interests. The amounts of the Term Loan or term portion of the Supplemental Loan prepaid pursuant to Sections 4.2, 4.4, 4.5 or 4.6 may not be reborrowed. 5. CONDITIONS TO EXTENDING CREDIT. 5.1. CONDITIONS ON INITIAL CLOSING DATE. The obligations of the Lenders to make any extension of credit pursuant to Section 2 shall be subject to the satisfaction, on or before the Initial Closing Date, of the following conditions (in addition to the further conditions in Section 5.2): -51- 5.1.1. SATISFACTION OF EXISTING BANK DEBT. Contemporaneously with the extension of credit on the Initial Closing Date, all outstanding Indebtedness of the Restricted Companies under any bank credit facilities (other than this Agreement, Indebtedness of Falcon Video and the Mezzanine Notes, as defined in the Contribution Agreement) as in effect immediately prior to the Initial Closing Date shall have been paid in full, and any collateral pledged or granted thereunder shall have been released, and the Borrower shall have furnished to the Administrative Agent on such Closing Date a certificate to these effects). 5.1.2. NOTES. The Borrowers shall have executed the Notes and delivered them to the Documentation Agent for each Lender. The Revolving Loan and each of Term Loan B-1 and Term Loan C will close and fund simultaneously. 5.1.3. PAYMENT OF FEES. The Borrowers shall have paid to the Agents the respective fees due on the Initial Closing Date in the amounts agreed separately by the Borrowers and the Agents as set forth in a separate fee letter among such parties. 5.1.4. LEGAL OPINIONS. On the Initial Closing Date, the Lenders shall have received from the following counsel their respective opinions with respect to the transactions contemplated by the Credit Documents, which opinions shall be in form and substance reasonably satisfactory to the Lenders. (a) Dow, Lohnes & Albertson, PLLC, special counsel for the Restricted Companies. (b) Ropes & Gray, special counsel for the Documentation Agent. The Restricted Companies authorize and direct their counsel to furnish the opinion described in clause (a). 5.1.5. PLEDGE AND SUBORDINATION AGREEMENT. Each of Holding, L.P., Holding, Inc. and the Restricted Companies (prior to the TCI Closing) shall have duly authorized, executed and delivered to the Documentation Agent a Pledge and Subordination Agreement substantially in the form of Exhibit 5.1.5 and shall have executed, delivered, filed and registered such notices, Uniform Commercial Code financing statements and other documents as the Documentation Agent may have reasonably requested in order to perfect the security interests required to be created pursuant to the Pledge and Subordination Agreement. 5.1.6. MONY SUBORDINATED DEBT. The note purchase agreements and other documents relating to the MONY Subordinated Debt shall not prohibit the Restricted Companies from entering into, or performing the transactions contemplated by, the Credit Documents. -52- 5.2. CONDITIONS TO EACH EXTENSION OF CREDIT. The obligations of the Lenders to make any extension of credit pursuant to Section 2 shall be subject to the satisfaction, on or before the Closing Date for such extension of credit, of the following conditions: 5.2.1. OFFICER'S CERTIFICATE. (a) The representations and warranties contained in Sections 6.6 and 8 and in sections 2.2 and 4 of the Pledge and Subordination Agreement shall be true and correct on and as of the Closing Date with the same force and effect as though originally made on and as of such date (except for those representations and warranties made as of a specified earlier date, which shall have been true and correct as of such date); (b) no Default shall exist and be continuing on such Closing Date prior to or immediately after giving effect to the requested extension of credit; (c) as of the Closing Date, the Borrowers shall be permitted to incur the requested loan under section 4.03 of the Senior Subordinated Notes Indenture and section 4.07 of the New Falcon I Debentures Indentures; (d) as of the Closing Date, no Material Adverse Change shall have occurred; and (e) the Borrowers shall have furnished to the Administrative Agent on such Closing Date a certificate to such effect in substantially the form of Exhibit 5.2.1, signed by a Financial Officer. 5.2.2. PROPER PROCEEDINGS. This Agreement, each other Credit Document and the extensions of credit and the granting of the security interests contemplated hereby and thereby shall have been authorized by all necessary proceedings of each Obligor and any of their respective Affiliates party thereto. All necessary consents, approvals and authorizations of any governmental or administrative agency or any other Person with respect to the foregoing shall have been obtained and shall be in full force and effect. The Administrative Agent shall have received copies of all documents, including certificates, records of corporate, partnership and limited liability company proceedings and opinions of counsel, which the Administrative Agent may have reasonably requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities. 5.2.3. LEGALITY, ETC. The making of the requested extension of credit shall not (a) subject any Lender to any penalty or special tax (other than a Tax for which the Borrowers have reimbursed the Lenders under Section 3.4), (b) be prohibited by any law or governmental order or regulation applicable to any Lender or any Obligor or (c) violate any mandatory credit restraint program of the executive branch of the government of the United States of America, the Board of Governors of the Federal Reserve System or any other governmental or administrative agency. 5.3. EXTENSIONS OF CREDIT FOLLOWING THE TCI CLOSING. With respect to any extension of credit pursuant to Section 2 which is requested by the Borrowers upon or after the TCI Closing: -53- 5.3.1. REPAYMENT OF FINANCING DEBT. Contemporaneously with or immediately following the TCI Closing, Falcon Video shall have paid in full all Financing Debt owed by it, all revolving credit or other committed credit facilities relating to such Financing Debt shall have been terminated (except for indemnification and other customary provisions that survive termination) and all collateral and guarantees granted by Falcon Video with respect to such Financing Debt shall have been released. The conditions set forth in this Section 5.3.1 shall be deemed satisfied upon receipt of payoff letters, executed UCC-3 termination statements and other appropriate releases the effectiveness of which are explicitly conditioned on the extensions of credit pursuant to this Agreement, the proceeds of which will be used to pay in full such Financing Debt. 5.3.2. ASSIGNMENT OF DEBENTURES AND INDENTURES. (a) Holding, L.P. shall have assigned to New Falcon I, and New Falcon I shall have assumed, all rights and obligations of Holding, L.P. pursuant to the New Falcon I Debentures and New Falcon I Debentures Indenture and, to the extent then outstanding, the Holding, L.P. Senior Subordinated Notes and the Holding, L.P. Senior Subordinated Notes Indenture and (b) New Falcon I shall have assigned to New Falcon II, and New Falcon II shall have assumed, all rights and obligations of New Falcon I pursuant to such Holding, L.P. Senior Subordinated Notes and the Holding, L.P. Senior Subordinated Notes Indenture to the extent then outstanding. 5.3.3. JOINDERS AND ASSIGNMENTS. Contemporaneously with or immediately following the TCI Closing upon the discharge of the Falcon Video Financing Debt as contemplated by Section 5.3.1, (a) Falcon Video shall have duly authorized, executed and delivered to the Documentation Agent the Falcon Video Joinder and a joinder to the Pledge and Subordination Agreement as a Pledgor (as defined therein), (b) New Falcon II and the other Restricted Companies shall have duly authorized, executed and delivered to the Agent the New Falcon II Assignment and Assumption and (c) New Falcon I and New Falcon II shall have duly authorized, executed and delivered to the Documentation Agent a joinder to the Pledge and Subordination Agreement as a Pledgor (as defined therein). 5.4. CONDITIONS ON SUPPLEMENTAL FACILITY CLOSING DATES. The obligations of the Supplemental Lenders to make any extension of credit pursuant to a Supplemental Facility pursuant to Section 2.4 (to the extent the Supplemental Lenders agreed to become so obligated) shall be subject to the satisfaction, on or before the initial Closing Date for such Supplemental Facility, of the conditions set forth in this Section 5.4, as well as the further conditions of Section 5.2. 5.4.1. SUPPLEMENTAL NOTES. The Borrowers shall have duly executed and delivered to the Documentation Agent the appropriate Supplemental Notes for each Supplemental Lender having a Commitment therein. -54- 5.4.2. JOINDER AGREEMENT. Any new Lenders participating in such Supplemental Facility shall have executed and delivered a joinder agreement reasonably satisfactory to the Documentation Agent and the Borrowers pursuant to which each such new Lender agrees to become a party to and be bound by this Agreement. 5.4.3. LEGAL OPINIONS. On such Closing Date, the Lenders shall have received legal opinions satisfactory to the Supplemental Lenders and the Documentation Agent from the respective counsels of the Borrowers and the Supplemental Agent in substantially the form delivered pursuant to Section 5.1.4. 5.4.4. FINANCED ACQUISITIONS. Contemporaneously with the making by the Lenders of an extension of credit under a Supplemental Facility requested for the purpose of making an acquisition permitted under Section 7.9, the Borrowers shall have furnished to the Lenders a certificate of the Borrowers signed on their behalf by a Financial Officer to the effect that the closing is occurring under the acquisition agreement relating to the proposed acquisition contemporaneously with such extension of credit. 5.4.5. GENERAL. All legal, corporate, limited liability company and partnership proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Documentation Agent and the Documentation Agent shall have received copies of all documents which the Documentation Agent may have reasonably requested in connection with such Supplemental Facility. All other conditions as may be reasonably determined by the Documentation Agent and set forth in the written commitments with respect to such Supplemental Facility, including the payment of any syndication or closing fees which are so set forth, shall be reasonably satisfactory in form and substance to the Documentation Agent. 6. GUARANTEES. 6.1. GUARANTEES OF CREDIT OBLIGATIONS. Each Guarantor unconditionally jointly and severally guarantees that the Credit Obligations (other than the Falcon Video Revolving Loan) incurred by any Borrower or any other Obligor will be performed and will be paid in full in cash when due and payable, whether at the stated or accelerated maturity thereof or otherwise, this guarantee being a guarantee of payment and not of collectability and being absolute and in no way conditional or contingent. In the event any part of such Credit Obligations shall not have been so paid in full when due and payable, such Guarantor will, immediately upon written notice by the Documentation Agent or the Administrative Agent or, without notice, immediately upon the occurrence of a Bankruptcy Default, pay or cause to be paid to the Administrative Agent for the Lenders' account the amount of such Credit Obligations which are then due and payable and unpaid. The obligations of each Guarantor hereunder shall not be affected by the invalidity, unenforceability or irrecoverability of any of the Credit Obligations as against any Obligor, any other guarantor thereof or any other Person. For purposes hereof, the Credit Obligations shall be -55- due and payable when and as the same shall be due and payable under the terms of this Agreement or any other Credit Document notwithstanding the fact that the collection or enforcement thereof may be stayed or enjoined under the Bankruptcy Code, as from time to time in effect, or other applicable law. 6.2. CONTINUING OBLIGATION. Each Guarantor acknowledges that the Lenders have entered into this Agreement (and, to the extent that the Lenders may enter into any future Credit Document, will have entered into such agreement) in reliance on this Section 6 being a continuing irrevocable agreement, and such Guarantor agrees that its guarantee may not be revoked in whole or in part. The obligations of the Guarantors hereunder shall terminate when the commitment of the Lenders to extend credit under this Agreement shall have terminated and all of the Credit Obligations have been indefeasibly paid in full in cash and discharged; PROVIDED, HOWEVER, that: (a) if a claim is made upon the Lenders at any time for repayment or recovery of any amounts or any property received by the Lenders from any source on account of any of the Credit Obligations and the Lenders repay or return any amounts or property so received (including interest thereon to the extent required to be paid by the Lenders) or (b) if the Lenders become liable for any part of such claim by reason of (i) any judgment or order of any court or administrative authority having competent jurisdiction, or (ii) any settlement or compromise of any such claim, then the Guarantors shall remain liable under this Agreement for the amounts so repaid or returned or the amounts for which the Lenders become liable (such amounts being deemed part of the Credit Obligations) to the same extent as if such amounts had never been received by the Lenders, notwithstanding any termination hereof or the cancellation of any instrument or agreement evidencing any of the Credit Obligations. The Guarantors shall, not later than five days after receipt of notice from the Administrative Agent, jointly and severally pay to the Administrative Agent an amount equal to the amount of such repayment or return for which the Lenders have so become liable. Payments hereunder by a Guarantor may be required by the Administrative Agent on any number of occasions. 6.3. WAIVERS WITH RESPECT TO CREDIT OBLIGATIONS. Except to the extent expressly required by this Agreement or any other Credit Document, each Guarantor (in its capacity as a Guarantor, but not as a Borrower for its own account) waives, except to the extent prohibited by the provisions of applicable law that may not be waived, all of the following (including all defenses, counterclaims and other rights of any nature based upon any of the following): (a) presentment, demand for payment and protest of nonpayment of any of the Credit Obligations, and notice of protest, dishonor or nonperformance; -56- (b) notice of acceptance of this guarantee and notice that credit has been extended in reliance on the Guarantor's guarantee of the Credit Obligations; (c) notice of any Default or of any inability to enforce performance of the obligations of any Obligor or any other Person thereunder; (d) demand for performance or observance of, and any enforcement of any provision of, the Credit Obligations, this Agreement or any other Credit Document or any pursuit or exhaustion of rights or remedies with respect to any Credit Security or against any Obligor or any other Person in respect of the Credit Obligations or any requirement of diligence or promptness on the part of the Lenders in connection with any of the foregoing; (e) any act or omission on the part of the Lenders which may impair or prejudice the rights of the Guarantor, including subrogation rights or rights to obtain exoneration, contribution, indemnification or any other reimbursement from any Obligor or any other Person; (f) failure or delay to perfect or continue the perfection of any security interest in any Credit Security; (g) any action which harms or impairs the value of, or any failure to preserve or protect the value of, any Credit Security; (h) any act or omission which might vary the risk of the Guarantor or otherwise operate as a deemed release or discharge; (i) any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than the obligation of the principal; (j) the provisions of any "one action" or "anti-deficiency" law which would otherwise prevent the Lenders from bringing any action, including any claim for a deficiency, against the Guarantor before or after the Lenders' commencement or completion of any foreclosure action, whether judicially, by exercise of power of sale or otherwise, or any other law which would otherwise require any election of remedies by the Lenders; (k) all demands and notices of every kind with respect to the foregoing; and (l) to the extent not referred to above, all defenses (other than disputed facts) which any Obligor may now or hereafter have to the payment of the Credit -57- Obligations, together with all suretyship defenses, which could otherwise be asserted by such Guarantor. No delay or omission on the part of the Lenders in exercising any right under this Agreement or any other Credit Document or under any guarantee of the Credit Obligations or with respect to any Credit Security shall operate as a waiver or relinquishment of such right. No action which the Lenders or any Obligor may take or refrain from taking with respect to the Credit Obligations, including any amendments thereto or modifications thereof or waivers with respect thereto, shall affect the provisions of this Agreement or the obligations of the Guarantor hereunder. None of the Lenders' rights shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of any Obligor, or by any noncompliance by any Obligor with the terms, provisions and covenants of this Agreement, regardless of any knowledge thereof which the Lenders may have or otherwise be charged with. 6.4. LENDERS' POWER TO WAIVE, ETC. Each Guarantor (solely in its capacity as a Guarantor and without affecting any of its rights as a Borrower) grants to the Lenders full power in their discretion, without notice to or consent of such Guarantor, such notice and consent being hereby expressly waived to the fullest extent permitted by applicable law, and without in any way affecting the liability of the Guarantor under its guarantee hereunder: (a) To waive compliance with, and any Default under, and to consent to any amendment to or modification or termination of any terms or provisions of, or to give any waiver in respect of, this Agreement, any other Credit Document, any Credit Security, the Credit Obligations or any guarantee thereof (each as from time to time in effect); (b) To grant any extensions of the Credit Obligations (for any duration), and any other indulgence with respect thereto, and to effect any total or partial release (by operation of law or otherwise), discharge, compromise or settlement with respect to the obligations of the Obligors or any other Person in respect of the Credit Obligations, whether or not rights against the Guarantor under this Agreement are reserved in connection therewith; (c) To take security from the Restricted Companies or other Obligors in any form for the Credit Obligations, and to consent to the addition to or the substitution, exchange, release or other disposition of, or to deal in any other manner with, any part of any property contained in any Credit Security whether or not the property, if any, received upon the exercise of such power shall be of a character or value the same as or different from the character or value of any property disposed of, and to obtain, modify or release any present or future guarantees of the Credit Obligations and to proceed against any of the Credit Security or such guarantees in any order; -58- (d) To collect or liquidate or realize upon any of the Credit Obligations or any Credit Security in any manner or to refrain from collecting or liquidating or realizing upon any of the Credit Obligations or the Credit Security; and (e) To extend credit under this Agreement, any other Credit Document or otherwise in such amount as the Lenders may determine, even though the condition of the Obligors (financial or otherwise on an individual or Consolidated basis) may have deteriorated since the date hereof. 6.5. INFORMATION REGARDING OBLIGORS, ETC. Each Guarantor acknowledges and agrees that it has made such investigation as it deems desirable of the risks undertaken by it in entering into this Agreement and is fully satisfied that it understands all such risks. Each Guarantor waives any obligation which may now or hereafter exist on the part of the Lenders to inform it of the risks being undertaken by entering into this Agreement or of any changes in such risks and, from and after the date hereof, each Guarantor undertakes to keep itself informed of such risks and any changes therein. Each Guarantor expressly waives any duty which may now or hereafter exist on the part of the Lenders to disclose to the Guarantor any matter related to the business, operations, character, collateral, credit, condition (financial or otherwise), income or prospects of the Obligors or their Affiliates or their properties or management, whether now or hereafter known by the Lenders. Each Guarantor represents, warrants and agrees that it assumes sole responsibility for obtaining from the Obligors all information concerning this Agreement and all other Credit Documents and all other information as to the Obligors and their Affiliates or their properties or management as such Guarantor deems necessary or desirable. 6.6. CERTAIN GUARANTOR REPRESENTATIONS. Each Guarantor represents that: (a) it is in its best interest and in pursuit of its partnership, limited liability company or corporate purposes as an integral part of the business conducted and proposed to be conducted by the Restricted Companies (including such Guarantor), and reasonably necessary and convenient in connection with the conduct of the business conducted and proposed to be conducted by it, to induce the Lenders to enter into this Agreement and to extend credit to each Borrower by making the Guarantees contemplated by this Section 6; (b) the credit available hereunder will directly or indirectly inure to its benefit; and (c) by virtue of the foregoing it is receiving at least reasonably equivalent consideration from the Lenders for its Guarantee. Each Guarantor acknowledges that it has been advised by the Documentation Agent that the Lenders are unwilling to enter into this Agreement unless the Guarantees contemplated by this Section 6 are given by it. Each Guarantor represents that: -59- (i) it will not be rendered insolvent as a result of entering into this Agreement, (ii) after giving effect to the transactions contemplated by this Agreement, it will have assets having a fair saleable value in excess of the amount required to pay its probable liability on its existing debts as they have become absolute and matured, (iii) it has, and will have, access to adequate capital for the conduct of its business and (iv) it has the ability to pay its debts from time to time incurred in connection therewith as such debts mature. 6.7. NO SUBROGATION. Until the Credit Obligations have been indefeasibly paid in full and all commitments to extend further credit under the Credit Documents have been irrevocably terminated, each Guarantor waives all rights of reimbursement, subrogation, contribution, offset and other claims against the Borrowers (in their capacity as borrowers hereunder) arising by contract or operation of law in connection with any payment made or required to be made by such Guarantor under this Agreement, except for contribution rights provided in Section 6.9. 6.8. SUBORDINATION. Each Guarantor covenants and agrees that all Indebtedness, claims and liabilities now or hereafter owing by any Borrower to such Guarantor are hereby subordinated to the prior payment in full of the Credit Obligations and are so subordinated as a claim against such Borrower or any of its assets, whether such claim be in the ordinary course of business or in the event of voluntary or involuntary liquidation, dissolution, insolvency or bankruptcy, so that no payment with respect to any such Indebtedness, claim or liability will be made or received while any of the Credit Obligations are outstanding; PROVIDED, HOWEVER, that the Borrowers may make payments permitted by Section 7.10. 6.9. CONTRIBUTION AMONG GUARANTORS. The Guarantors agree that, as among themselves in their capacity as guarantors of the Credit Obligations, the ultimate responsibility for repayment of the Credit Obligations, in the event that the Borrowers fail to pay when due their Credit Obligations, shall be equitably apportioned, to the extent consistent with the Credit Documents, among the respective Guarantors (a) in the proportion that each, in its capacity as a guarantor, has benefited from the extensions of credit to the Borrowers by the Lenders under the Credit Agreement, or (b) if such equitable apportionment cannot reasonably be determined or agreed upon among the affected Guarantors, in proportion to their respective net worths determined on or about the date hereof (or such later date as such Guarantor becomes party hereto). In the event that any Guarantor, in its capacity as a guarantor, pays an amount with respect to the Credit Obligations in excess of its proportionate share as set forth in this Section 6.9, each other Guarantor shall, to the extent consistent with the Credit Documents, make a contribution payment to such Guarantor in an amount such that the aggregate amount paid by -60- each Guarantor reflects its proportionate share of the Credit Obligations. In the event of any default by any Guarantor under this Section 6.9, each other Guarantor will bear, to the extent consistent with the Credit Documents, its proportionate share of the defaulting Guarantor's obligation under this Section 6.9. This Section 6.9 is intended to set forth only the rights and obligations of the Guarantors among themselves and shall not in any way affect the obligations of any Guarantor to the Lenders under the Credit Documents (which obligations shall at all times constitute the joint and several obligations of all the Guarantors). 6.10. FUTURE SUBSIDIARIES; FURTHER ASSURANCES. The Borrowers and each Guarantor shall from time to time cause any present or future Subsidiary not designated as an Excluded Company to join this Agreement as a Restricted Company and a Guarantor pursuant to a joinder agreement in form and substance reasonably satisfactory to the Documentation Agent. Each Guarantor will, promptly upon the request of the Documentation Agent from time to time, execute, acknowledge and deliver, and file and record, all such instruments, and take all such action, as the Documentation Agent reasonably deems necessary or advisable to carry out the intent and purposes of this Section 6. 6.11. RELEASE OF GUARANTOR. If any Guarantor is the subject of a merger or a sale or disposition of its stock or of substantially all of its assets in a transaction permitted under Section 7.11, the Guarantee of such Person under this Section 6 shall be automatically terminated as of the closing of such merger, sale or disposition and the application of any proceeds thereof as required by this Agreement. The Guarantee under this Section 6 of any Person that is subsequently designated as an Excluded Company in accordance with this Agreement shall be automatically terminated as of the effectiveness of such designation. 7. GENERAL COVENANTS. Each of the Restricted Companies covenants that, until all of the Credit Obligations shall have been paid in full and until the Lenders' commitments to extend credit under this Agreement and any other Credit Document shall have been irrevocably terminated (except for indemnification and other customary provisions that survive termination), it will comply with such of the following provisions as are applicable to it: 7.1. TAXES AND OTHER CHARGES; ACCOUNTS PAYABLE. 7.1.1. TAXES AND OTHER CHARGES. Each of the Restricted Companies will duly pay and discharge, or cause to be paid and discharged, before the same shall become in arrears, all taxes, assessments and other governmental charges imposed upon such Person and its properties, sales or activities, or upon the income or profits therefrom, as well as all claims for labor, materials or supplies which if unpaid might by law become a Lien upon any of its property; PROVIDED, HOWEVER, that any such tax, assessment, charge or claim need not be paid if the validity or amount thereof shall at the time be contested in good faith by appropriate proceedings (or if all such unpaid taxes, assessments, charges or claims do not exceed $500,000 in the aggregate) and if such Person shall, in accordance with GAAP, have set aside on its books adequate reserves with respect -61- thereto; and PROVIDED, FURTHER, that each of the Restricted Companies will pay or bond, or cause to be paid or bonded, all such taxes, assessments, charges or other governmental claims immediately upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor (except to the extent such proceedings have been dismissed or stayed). 7.1.2. ACCOUNTS PAYABLE. Each of the Restricted Companies will promptly pay when due, or in conformity with customary trade terms, all other Indebtedness incident to the operations of such Person; PROVIDED, HOWEVER, that any such Indebtedness need not be paid if the validity or amount thereof shall at the time be contested in good faith and if such Person shall, in accordance with GAAP, have set aside on its books adequate reserves with respect thereto. 7.2. CONDUCT OF BUSINESS, ETC. 7.2.1. TYPES OF BUSINESS. The Restricted Companies will engage only in the business of (a) developing, acquiring, constructing, improving, owning and operating cable television systems, and (b) other businesses incidental, related or complementary thereto, including the provision of programming services, telephone services and the transmission of voice and data and other information; PROVIDED, HOWEVER, that Investments permitted by Section 7.9.9 will not be prohibited by this Section 7.2.1. 7.2.2. MAINTENANCE OF PROPERTIES. Each Restricted Company: (a) will keep its properties in such repair, working order and condition, and will from time to time make such repairs, replacements, additions and improvements thereto for the efficient operation of its businesses in management's reasonable business judgment and will comply at all times in all material respects with all Franchises, FCC Licenses and leases to which it is party so as to prevent any loss or forfeiture thereof or thereunder, unless (i) compliance is at the time being contested in good faith by appropriate proceedings or (ii) the management of the Restricted Company reasonably determines that compliance is not in the best interests of the Restricted Company and that such loss or forfeiture will not result in a Material Adverse Change; and (b) except to the extent permitted under Section 7.11, will do all things necessary to preserve, renew and keep in full force and effect and in good standing its legal existence and authority necessary to continue its business (other than in the case of an inactive subsidiary that does not own material assets). 7.2.3. COMPLIANCE WITH MATERIAL AGREEMENTS. Each of the Restricted Companies will comply in all material respects with the provisions of the Material Agreements to which they are a party or bound (to the extent not inconsistent with this Agreement or any -62- other Credit Document). Without the prior written consent of the Required Lenders, which may not be unreasonably withheld, no Material Agreement shall be amended, modified, waived or terminated in any manner that would have in any material respect an adverse effect on the interests of the Lenders; PROVIDED, HOWEVER, that notwithstanding the foregoing, in the case of the New Falcon I Debentures and New Falcon I Debentures Indenture, the consent of the Required Lenders shall be required only with respect to an increase in the interest rate applicable to the Debentures currently outstanding under such Indenture. 7.2.4. STATUTORY COMPLIANCE. Each of the Restricted Companies will comply in all material respects with the Communications Act, including the rules and regulations of the FCC relating to the carriage of television signals, and all other valid and applicable statutes, laws, ordinances, zoning and building codes and other rules and regulations of the United States of America, of the states and territories thereof and their counties, municipalities and other subdivisions and of any foreign country or other jurisdictions applicable to such Person, except where compliance therewith shall at the time be contested in good faith by appropriate proceedings or the failure so to comply is not reasonably likely to result in a Material Adverse Change. 7.3. INSURANCE. Each of the Restricted Companies will maintain with financially sound and reputable insurers insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same general locations as the Restricted Companies. The Restricted Companies will from time to time provide such information regarding such insurance arrangements as the Documentation Agent may reasonably request. The Agents and the Lenders acknowledge that the existing self-insurance programs of the Restricted Companies, as they may be modified from time to time in a manner that does not materially change the nature and relative scale of such programs, comply with the requirements of this Section 7.3. 7.4. FINANCIAL STATEMENTS AND REPORTS. Each of the Restricted Companies will maintain a system of accounting in which entries will be made in their books and records of all transactions in relation to their business and affairs in accordance with GAAP. The fiscal year of the Restricted Companies will end on December 31 in each year. 7.4.1. ANNUAL REPORTS. The Restricted Companies will furnish to the Lenders as soon as available, and in any event within 105 days after the end of each fiscal year, the Consolidated and Consolidating balance sheet of New Falcon I (prior to the TCI Closing, Holding, L.P.) and its Subsidiaries as at the end of such fiscal year, the Consolidated and Consolidating statements of earnings, changes in partners' equity and cash flows of New Falcon I (prior to the TCI Closing, Holding, L.P.) and its Subsidiaries for such fiscal year (all in reasonable detail and, in such Consolidating financial statements, showing the -63- financial condition and performance of the Restricted Companies as a group), and together with comparative figures for the preceding fiscal year, all accompanied by: (a) Unqualified reports of Ernst & Young LLP (or, if they cease to be auditors of the Restricted Companies, independent certified public accountants of recognized national standing reasonably satisfactory to the Documentation Agent), to the effect that they have audited such Consolidated financial statements in accordance with generally accepted auditing standards and that such Consolidated financial statements present fairly, in all material respects, the financial position of the Restricted Companies at the dates thereof and the results of their operations for the periods covered thereby in conformity with GAAP. (b) The statement of such accountants that they have caused this Agreement to be reviewed and that in the course of their audit of the Restricted Companies no facts have come to their attention that cause them to believe that any Default exists or, if such is not the case, specifying such Default and the nature thereof. This statement is furnished by such accountants with the understanding that the examination of such accountants cannot be relied upon to give such accountants knowledge of any such Default except as it relates to accounting or auditing matters within the scope of their audit. (c) A certificate of a Financial Officer to the effect that such officer has caused this Agreement to be reviewed and has no knowledge of any Default, or if such officer has such knowledge, specifying such Default and the nature thereof, and what action the Restricted Companies have taken, are taking or propose to take with respect thereto. (d) In the event of a material change in GAAP after the date hereof, computations, certified by a Financial Officer, reconciling the financial statements referred to above with financial statements prepared in accordance with GAAP as applied to the other covenants in Section 7 and related definitions. (e) Computations demonstrating, as of the end of such fiscal year, compliance with the Computation Covenants. (f) Supplements to Exhibits 8.1 and 8.4 showing any changes in the information set forth in such Exhibits during the last quarter of such fiscal year, as well as any changes in the Charter, Bylaws or incumbency of officers of the Restricted Companies from those previously certified to the Documentation Agent. 7.4.2. QUARTERLY REPORTS. The Restricted Companies will furnish to the Lenders as soon as available and, in any event, within 60 days after the end of each calendar -64- quarter, the internally prepared Consolidated balance sheet as of the end of such quarter and the Consolidated statements of income, changes in partners' equity and cash flows of New Falcon I (prior to the TCI Closing, Holding, L.P.) and its Subsidiaries for such quarter and for the portion of the fiscal year then ending (all in reasonable detail and, in such Consolidating financial statements, showing the financial condition and performance of the Restricted Companies as a group), together with comparative figures for the same period in the preceding fiscal year, all accompanied by: (a) A certificate signed by a Financial Officer to the effect that such financial statements have been prepared in accordance with GAAP and present fairly, in all material respects, the financial position of the Restricted Companies covered thereby at the dates thereof and the results of their operations for the periods covered thereby, subject only to normal year-end audit adjustments and the addition of footnotes. (b) Computations demonstrating, as of the end of such quarter, compliance with the Computation Covenants. (c) a report of a Financial Officer setting forth the number of Subscribers, homes passed and Subscribers receiving premium services with respect to the operating regions of the Borrowers as of the end of such quarter. (d) For each quarter, supplements to Exhibits 8.1 and 8.4 showing any changes in the information set forth in such Exhibits during such fiscal quarter, as well as any changes in the Charter, Bylaws or incumbency of officers of the Restricted Companies from those previously certified to the Documentation Agent. (e) A certificate signed by a Financial Officer to the effect that such officer has caused this Agreement to be reviewed and has no knowledge of any Default, or if such officer has such knowledge, specifying such Default and the nature thereof and what action the Restricted Companies have taken, are taking or propose to take with respect thereto. 7.4.3. TCI CLOSING REPORT. At least five Banking Days prior to the TCI Closing, the Restricted Companies will deliver to the Administrative Agent the reports, statements, certificates and computations described in Section 7.4.2, giving pro-forma effect to the TCI Transactions and in sufficient detail to enable the Lenders to calculate the Reference Leverage Ratio as of the TCI Closing (the "TCI CLOSING REPORT"). 7.4.4. OTHER REPORTS. The Restricted Companies will promptly furnish to the Lenders such registration statements, proxy statements and reports, including Forms S-1, -65- S-2, S-3, S-4, 10-K, 10-Q and 8-K, as may be filed for New Falcon I or any Restricted Company with the Securities and Exchange Commission. 7.4.5. NOTICE OF LITIGATION; NOTICE OF DEFAULTS. The Restricted Companies will promptly furnish to the Lenders notice of any litigation or any administrative or arbitration proceeding to which any Restricted Company may hereafter become a party which involves the risk of any judgment which resulted, or poses a material risk of resulting, after giving effect to any applicable insurance, of the payment by the Restricted Companies of at least $10,000,000. Promptly upon acquiring knowledge thereof, the Restricted Companies will notify the Lenders of the existence of any Default, specifying the nature thereof and what action the Restricted Companies have taken, are taking or propose to take with respect thereto. 7.4.6. FRANCHISE MATTERS. The Restricted Companies will promptly furnish to the Documentation Agent notice of any action by any federal, state or local governmental authority of the institution of proceedings to revoke, terminate or suspend any Franchise now or hereafter held by any Restricted Company, and any abandonment or expiration (without renewal) of a Franchise now or hereafter held by any Restricted Company, in either case, which would result, or be reasonably likely to result, in a Material Adverse Change. 7.4.7. ERISA REPORTS. The Restricted Companies will furnish to the Lenders as soon as available the following items with respect to any Plan: (a) any request for a waiver of the funding standards or an extension of the amortization period, (b) any reportable event (as defined in section 4043 of ERISA), unless the notice requirement with respect thereto has been waived by regulation, (c) any notice received by any ERISA Group Person that the PBGC has instituted or intends to institute proceedings to terminate any Plan, or that any Multiemployer Plan is insolvent or in reorganization, (d) notice of the possibility of the termination of any Plan by its administrator pursuant to section 4041 of ERISA, and (e) notice of the intention of any ERISA Group Person to withdraw, in whole or in part, from any Multiemployer Plan. 7.4.8. OTHER INFORMATION. From time to time upon request of any authorized officer of any Agent, each of the Restricted Companies will furnish to the Lenders such other information regarding the business, assets, financial condition, income or prospects -66- of the Restricted Companies as such officer may reasonably request, including copies of all tax returns, licenses, agreements, contracts, leases and instruments to which any of the Restricted Companies is party. The authorized officers and representatives of any Agent or, after the occurrence and during the continuation of an Event of Default, of any Lender shall have the right during normal business hours upon reasonable notice and at reasonable intervals to examine the books and records of the Restricted Companies, to make copies, notes and abstracts therefrom and to make an independent examination of its books and records, for the purpose of verifying the accuracy of the reports delivered by any of the Restricted Companies pursuant to this Section 7.4 or otherwise and ascertaining compliance with or obtaining enforcement of this Agreement or any other Credit Document. 7.5. CERTAIN FINANCIAL TESTS. 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:
Percentage in Effect Percentage in Effect Date Prior to TCI Closing After TCI Closing - ---- -------------------- ----------------- Initial Closing Date through March 30, 2001 550% 600% March 31, 2001 through December 30, 2001 525% 575% December 31, 2001 through June 29, 2002 500% 550% June 30, 2002 through June 29, 2003 450% 500% June 30, 2003 through June 29, 2004 350% 400% June 30, 2004 through June 29, 2005 300% 350% June 30, 2005 through June 29, 2006 225% 275% June 30, 2006 and thereafter 150% 200%
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 -67- such three-month period: (a) from the Initial Closing Date through December 31, 2000, 140%, (b) from January 1, 2001 through December 31, 2002, 150% and (c) thereafter, 200%. 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 110% 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.
Amount if the TCI Amount if TCI Closing Occurs Closing Does Not During Occur During Calendar Year Such Calendar Year Such Calendar Year ------------- ------------------ ------------------ 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 2002 and each year thereafter $ 80,000,000 $ 65,000,000
7.6. INDEBTEDNESS. The Restricted Companies shall not create, incur, assume or otherwise become or remain liable with respect to any Indebtedness other than the following: 7.6.1. The Credit Obligations. 7.6.2. Guarantees permitted by Section 7.7. 7.6.3. Current liabilities existing from time to time, other than for Financing Debt, incurred in the ordinary course of business. -68- 7.6.4. To the extent that payment thereof shall not at the time be required by Section 7.1, Indebtedness in respect of taxes, assessments, governmental charges and claims for labor, materials and supplies. 7.6.5. Indebtedness secured by Liens of carriers, warehousemen, mechanics and landlords permitted by Sections 7.8.5 and 7.8.6. 7.6.6. Indebtedness in respect of judgments or awards not in excess of $10,000,000 in the aggregate at any time outstanding (a) which have been in force for less than the applicable appeal period, so long as execution is not levied, or (b) in respect of which any Restricted Company shall at the time in good faith be prosecuting an appeal or proceedings for review, so long as execution thereof shall have been stayed pending such appeal or review and the Restricted Companies shall have taken appropriate reserves therefor consistent with GAAP. 7.6.7. Indebtedness in respect of Capitalized Lease Obligations or secured by purchase money security interests to the extent Liens securing such Indebtedness are permitted by Section 7.8.10; PROVIDED, HOWEVER, that the aggregate principal amount of all Indebtedness permitted by this Section 7.6.7 at any one time outstanding shall not exceed $25,000,000. 7.6.8. Indebtedness in respect of deferred taxes arising in the ordinary course of business. 7.6.9. Indebtedness in respect of inter-company loans and advances among the Restricted Companies which are not prohibited by Section 7.9. 7.6.10. Indebtedness evidenced by the Holding, L.P. Senior Subordinated Notes to the extent assumed by New Falcon II upon the TCI Closing. 7.6.11. Subject to Section 5.3.1, Indebtedness of Falcon Video and the other Indebtedness outstanding on the date hereof and described in Exhibit 8.4, except that only the Indebtedness of Falcon Video and the Indebtedness under the heading "Post-Closing Financing Debt" on Exhibit 8.4 is permitted by this Section 7.6.11 to remain outstanding after the Initial Closing Date. 7.6.12. Indebtedness on account of security deposits of Subscribers held by the Restricted Companies to secure the return of equipment placed by the Restricted Companies with Subscribers in the ordinary course of its business. 7.6.13. Binding obligations of the Restricted Companies to make acquisitions and Investments permitted by Section 7.9. -69- 7.6.14. Indebtedness of the Restricted Companies to Holding, L.P. or to New Falcon I pledged by Holding, L.P. or New Falcon I to the Documentation Agent in accordance with the Pledge and Subordination Agreement. 7.6.15. The TCI Debt and other Indebtedness of the Restricted Companies to TCI or its Affiliates, where such other Indebtedness is pledged by TCI or such Affiliates to the Documentation Agent in accordance with the Pledge and Subordination Agreement or a substantially similar agreement. 7.6.16. The MONY Subordinated Debt. 7.6.17. Minority interests in Subsidiaries and equity in losses of affiliated partnerships in excess of investment. 7.6.18. Other Indebtedness of the Restricted Companies not in excess of $50,000,000 in the aggregate at any one time outstanding. 7.7. GUARANTEES; LETTERS OF CREDIT. The Restricted Companies shall not become or remain liable with respect to any Guarantee, including reimbursement obligations under letters of credit and other financial guarantees by third parties, except the following: 7.7.1. Guarantees of the Credit Obligations. 7.7.2. Guarantees by the Restricted Companies of Indebtedness incurred by any other Restricted Company and permitted by Section 7.6. 7.7.3. Guarantees to governmental authorities in respect of performance under Franchises and to obligors upon indemnity, performance or similar bonds or letters of credit made in the ordinary course of business, not involving Guarantees of Financing Debt, and not exceeding $50,000,000 in aggregate principal amount at any one time outstanding. 7.7.4. Guarantees by the Restricted Companies of the MONY Subordinated Debt, which Guarantees shall be subordinated on the same terms as the MONY Subordinated Debt. 7.8. LIENS. The Restricted Companies shall not create, incur or enter into, or suffer to be created or incurred or to exist, any Lien, except the following: 7.8.1. Liens on any Credit Security which secure the Credit Obligations and restrictions on transfer contained in the Credit Documents. -70- 7.8.2. Liens to secure taxes, assessments and other governmental charges, to the extent that payment thereof shall not at the time be required by Section 7.1. 7.8.3. Deposits or pledges made (a) in connection with, or to secure payment of, workers' compensation, unemployment insurance, old age pensions or other social security, (b) in connection with casualty insurance maintained in accordance with Section 7.3, (c) to secure the performance of bids, tenders, contracts (other than contracts relating to Financing Debt) or leases, (d) to secure statutory obligations or surety or appeal bonds, (e) to secure indemnity, performance or other similar bonds in the ordinary course of business, (f) in connection with claims contested to the extent that payment thereof shall not at that time be required by Section 7.1 or (g) as acquisition or sale contract escrows in connection with transactions permitted under Sections 7.9 or 7.11. 7.8.4. Liens in respect of judgments or awards, to the extent that such judgments or awards are permitted by Section 7.6.6. 7.8.5. Liens of carriers, warehousemen, mechanics and similar Liens, in each case (a) in existence less than 90 days from the date of creation thereof or (b) being contested in good faith by any Restricted Company in appropriate proceedings (so long as the Restricted Company shall, in accordance with GAAP, have set aside on its books adequate reserves with respect thereto). 7.8.6. Encumbrances in the nature of (a) zoning restrictions, (b) easements, (c) restrictions of record on the use of real property, (d) landlords' and lessors' Liens on rented premises and (e) restrictions on transfers or assignment of leases, which in each case do not materially detract from the value of the encumbered property or impair the use thereof in the business of any Restricted Company. 7.8.7. Restrictions under federal and state securities laws on the transfer of securities. 7.8.8. Restrictions under the Communications Act, specific Franchises, pole agreements, leases and other documents entered into in the ordinary course of business on the transfer or licensing of certain assets of the Restricted Companies. 7.8.9. Set-off rights of depository institutions with which any Restricted Company maintains deposit accounts. 7.8.10. Liens constituting (a) purchase money security interests (including mortgages, conditional sales, Capitalized Leases and any other title retention or deferred purchase devices) in real property, interests in leases or tangible personal property existing or created on the date on which such property is acquired, and (b) the renewal, extension or refunding of any security interest referred to in the foregoing clause (a) in an -71- amount not to exceed the amount thereof remaining unpaid immediately prior to such renewal, extension or refunding; PROVIDED, HOWEVER, that each such security interest shall attach solely to the particular item of property so acquired, and the principal amount of Indebtedness (including Indebtedness in respect of Capitalized Lease Obligations) secured thereby shall not exceed the cost (including all such Indebtedness secured thereby, whether or not assumed) of such item of property; and PROVIDED, FURTHER, that the aggregate principal amount of all Indebtedness secured by Liens permitted by this Section 7.8.10 shall not exceed the amount permitted by Section 7.6.7. 7.8.11. Liens as of the date hereof described in Exhibit 8.4. 7.8.12. Arrangements constituting a qualified escrow account, qualified trust or qualified intermediary for funds included in an Asset Reinvestment Reserve Amount to facilitate a deferred like-kind exchange exempt from taxation under the Code. 7.8.13. Liens on the stock or other equity interests of any Person that is not a Restricted Company to secure loans from banks and other institutional lenders to such Person or Affiliates of such Person that are not Restricted Companies. 7.8.14. Subject to Section 5.3.1, Liens in respect of collateral granted by Falcon Video and Falcon Video Communications Investors, L.P. in respect of Indebtedness of Falcon Video. 7.9. INVESTMENTS AND ACQUISITIONS. The Restricted Companies shall not have outstanding, acquire, commit to acquire under a binding contract or a contract not conditioned on the receipt of customary Lenders' consents or hold any Investment (including any Investment consisting of the acquisition of any business) except for the following: 7.9.1. Investments of the Restricted Companies in other Restricted Companies. 7.9.2. Investments in Cash Equivalents. 7.9.3. Loans and other advances to employees, officers and directors in an aggregate principal amount at any one time outstanding not to exceed $10,000,000. 7.9.4. Prepaid royalties and fees paid in the ordinary course of business. 7.9.5. Guarantees permitted by Section 7.7. 7.9.6. Investments as of the date hereof described in Exhibit 8.4. 7.9.7. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, acquisitions by the Restricted Companies of businesses -72- engaged in activities permitted by Section 7.2.1, whether by acquisition of equity interests or assets or by merger, consolidation or as otherwise permitted by Section 7.11; PROVIDED, HOWEVER, that (a) the business is acquired by a Borrower or a Guarantor or, if the business is acquired by a new Subsidiary, the new Subsidiary becomes a Borrower or Guarantor hereunder; and (b) the aggregate consideration paid by the Restricted Companies in all such acquisitions (excluding any consideration paid through the issuance of equity interests in Holding, L.P. or New Falcon I) will not exceed (A) $25,000,000 in any fiscal year or (B) $50,000,000 cumulatively since the date hereof. 7.9.8. Loans from the Restricted Companies to Holding, L.P., New Falcon I or TCI not exceeding $1,000,000 in the aggregate at any one time outstanding, provided that this Section 7.9.8 shall not apply to the loan described in item C.2 of Exhibit 8.4 and such loan shall not be applied against the $1,000,000 cap in this Section 7.9.8. 7.9.9. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, Investments consisting of the contribution of Systems and other assets to Permitted Joint Ventures; PROVIDED, HOWEVER, that in no event shall (a) Consolidated Annualized Operating Cash Flow properly allocable to the Systems or other assets contributed to (or otherwise invested in) a single Permitted Joint Venture after the Initial Closing Date by the Restricted Companies, computed for the period of three consecutive months most recently ended prior to such contribution for which financial statements have been (or are required to have been) furnished in accordance with Section 7.4.2, constitute more than 15% of Consolidated Annualized Operating Cash Flow for the same period; or (b) the sum of the aggregate percentages in the foregoing clause (a) between the Initial Closing Date and the Final Term Loan C Maturity Date exceed 30%. 7.9.10. Investments (other than Investments of the type described in Sections 7.9.7, 7.9.8 and 7.9.9) at any one time outstanding not exceeding $20,000,000, except with the prior written consent of the Required Lenders; PROVIDED, HOWEVER, that in no event will the book value of Margin Stock owned by the Restricted Companies exceed 20% of the Consolidated assets of the Restricted Companies determined in accordance with GAAP. 7.9.11. Investments consisting of the acquisition of Systems or assets in exchange transactions permitted by Section 7.11.5. 7.9.12. So long as immediately before and after giving effect thereto no Default exists and is continuing, Falcon Community Cable, L.P., Falcon Cable Media, a California Limited Partnership and Falcon Cable Systems Company II, L.P. may acquire the remaining assets of Falcon Classic Cable Income Properties, L.P., a California limited partnership, pursuant to an Asset Purchase Agreement substantially in the form -73- previously furnished to the Agents for an aggregate purchase price not exceeding $7,500,000. 7.9.13. The Restricted Companies may consummate the TCI Transactions. 7.9.14. So long as immediately before and after giving effect thereto no Default exists and is continuing, acquisitions or Investments (other than acquisitions and Investments of the type described in Sections 7.9.7 and 7.9.9) by the Restricted Companies with the proceeds of cash equity contributions (other than those made in connection with the TCI Transactions) or subordinated debt investments that are subject to the Pledge and Subordination Agreement specified by written notice to the Documentation Agent at the time of receipt of such proceeds for the purpose of effecting such acquisition or Investment. 7.9.15. Acquisition deposits and deposits with a qualified intermediary in connection with transactions permitted by this Section 7.9. 7.10. DISTRIBUTIONS. The Restricted Companies shall not make any Distribution except for the following: 7.10.1. The Restricted Companies may make Distributions to other Restricted Companies. 7.10.2. Any Restricted Company may declare and pay dividends payable in common stock (or similar common equity) of such Restricted Company. 7.10.3. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, the Restricted Companies may make: (a) Distributions on or about each of September 15, 1998 and March 15, 1999 in an aggregate amount on each such date not exceeding $15,525,000, which Distributions are used exclusively for the obligor thereunder to pay accrued interest on the Holding, L.P. Senior Subordinated Notes. (b) Distributions on or about April 15 and October 15 in each year in an amount on each such date not exceeding mandatory scheduled cash payments then due of accrued interest on the New Falcon I Debentures, which Distributions are used exclusively for the obligor thereunder to pay such interest. (c) Distributions in an amount necessary for the obligor thereunder to pay in full the outstanding principal of, and interest and any premium on, the Holding, L.P. Senior Subordinated Notes, whether pursuant to a voluntary redemption on -74- or after September 15, 1998 or pursuant to an earlier tender offer (including any consent payments or other expenses incurred in connection therewith). (d) Distributions to New Falcon I, Holding, L.P. or TCI and its Affiliates in an amount necessary for them to make mandatory, scheduled payments of principal and interest on Indebtedness (including Indebtedness owed to the Restricted Companies) of New Falcon I, Holding, L.P. or TCI and its Affiliates not elsewhere described in this Section 7.10; PROVIDED, HOWEVER, that (i) at least three Banking Days prior to such Distribution the Documentation Agent shall receive a certificate signed by a Financial Officer demonstrating pro forma compliance as of the end of the most recent fiscal quarter of the Restricted Companies with Sections 7.5.2 and 7.5.3 after giving effect to such Distribution, and (ii) the proceeds of such Indebtedness are or were used to (A) prepay the Loan pursuant to Section 4.6 or (B) make equity or subordinated debt Investments in any Restricted Company for its own business purposes (other than Investments in Excluded Companies). 7.10.4. The Restricted Companies may make Distributions on account of management services provided to the Restricted Companies (in addition to any Distributions permitted by Section 7.10.3) in an aggregate amount not exceeding, in any fiscal year of the Restricted Companies, (i) in the case of such Distributions made in the first fiscal quarter of the Restricted Companies, the excess of 4.25% of Consolidated Revenues earned in such fiscal quarter over Distributions previously made during such fiscal quarter under this Section 7.10.4, (ii) in the case of such Distributions made in the second fiscal quarter of the Restricted Companies, the excess of 4.25% of Consolidated Revenues earned in the first two fiscal quarters of the Restricted Companies over Distributions previously made during such fiscal year under this Section 7.10.4, (iii) in the case of such Distributions made in the third fiscal quarter of the Restricted Companies, the excess of 4.25% of Consolidated Revenues earned in the first three fiscal quarters of the Restricted Companies over Distributions previously made in such fiscal year under this Section 7.10.4 and (iv) in the case of such Distributions made in the fourth fiscal quarter of the Restricted Companies, the excess of 4.25% of Consolidated Revenues earned in such fiscal year over Distributions previously made during such fiscal year under this Section 7.10.4. 7.10.5. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, the Restricted Companies that are partnerships or limited liability companies may, in any calendar year, pay Distributions to all the Holders of the equity of such Restricted Companies, in proportion to their ownership interests, sufficient to permit each such holder to pay income taxes that may be required to be paid by it with respect to its equity in the Restricted Companies for the prior calendar year, as estimated by such Restricted Company in good faith. -75- 7.10.6. Investments permitted by Sections 7.9.8 and 7.9.10 and Affiliate transactions permitted by Section 7.14 or described in the second sentence of Section 7.14. 7.10.7. So long as immediately before and after giving effect thereto no Event of Default exists, if New Falcon II does not assume the TCI Debt from New Falcon I pursuant to section 4.1 of the Contribution Agreement, New Falcon II may pay Distributions in an aggregate amount not to exceed $440,000,000 for the purpose of discharging the TCI Debt and all interest and premiums thereon pursuant to section 2.8(e) of the Contribution Agreement; PROVIDED, HOWEVER that any increase in the amount of the TCI Debt assumed pursuant to section 4.1 of the Contribution Agreement shall require the approval of the Required Lenders. 7.10.8. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, the Borrowers may make Distributions for any purpose; PROVIDED, HOWEVER, that, after giving effect to any such Distribution on a pro forma basis, the Reference Leverage Ratio shall not exceed 500%. 7.10.9. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, the Borrowers may make Distributions for any purpose; PROVIDED, HOWEVER, that if, after giving effect to any such Distribution on a pro forma basis, the Reference Leverage Ratio exceeds 500%, the cumulative, aggregate amount of all Distributions under this Section 7.10.9 shall not exceed the sum of (a) $25,000,000, PLUS (b) the net proceeds of cash equity contributions or subordinated debt investments that are subject to the Pledge and Subordination Agreement (and, with the written consent of at least two Specified Agents, which consent shall not be unreasonably withheld, the net equity value of non-cash equity contributions or proceeds of subordinated debt investments that are subject to the Pledge and Subordination Agreement) made to the Borrowers other than in connection with the TCI Transactions (to the extent not specified for acquisitions pursuant to Section 7.9.14), plus accrued interest thereon at a rate not exceeding the Base Rate PLUS (c) 25% of Consolidated Excess Cash Flow for the most recently completed fiscal year for which financial statements have been furnished to the Lenders in accordance with Section 7.4.1. 7.10.10. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, the Restricted Companies may make Distributions constituting the purchase, redemption, acquisition, cancellation or other retirement for value of equity interests in any Holding Company, options on any such interests or related equity appreciation rights or similar securities held by officers or employees or former officers or employees of such Holding Company (or their estates or beneficiaries under their estates), upon death, disability, retirement or termination of employment; PROVIDED, HOWEVER, that the aggregate consideration paid for such purchase, redemption, -76- acquisition, cancellation or other retirement does not in any one fiscal year of the Restricted Companies exceed $7,500,000 in the aggregate. 7.10.11. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, the Restricted Companies may make Distributions in respect of loans and other advances to employees, officers and directors permitted by Section 7.9.3. 7.10.12. The Restricted Companies may make required scheduled payments of principal and accrued interest with respect to the MONY Subordinated Debt in accordance with the terms thereof as in effect on the Initial Closing Date and as subsequently amended in accordance with Section 7.2.3, including the subordination terms, and, so long as immediately before and after giving effect thereto no Default exists and is continuing, the Restricted Companies may make voluntary prepayments of principal (together with accrued interest thereon and any premium with respect thereto) on the MONY Subordinated Debt, and special principal prepayments (together with accrued interest thereon) on such debt on account of risk-based capital requirements. 7.10.13. The Restricted Companies may make payments (the "FALCON CABLE SYSTEMS SETTLEMENT PAYMENTS") pursuant to any settlement, judgment or other resolution (the "FALCON CABLE SYSTEMS SETTLEMENT") relating to the Frank O'Shea IRA, et al, Plaintiffs, versus Falcon Cable Systems Company, et al, Defendants, litigation in amounts and on terms reasonably satisfactory to at least two Specified Agents. 7.10.14. The Restricted Companies may make any Distributions specified in the memorandum attached as Exhibit 1-A in connection with the TCI Transactions and may make any Distributions to Holding, L.P. and New Falcon I sufficient to permit Holding, L.P. and New Falcon I to make any Distributions specified in such memorandum. 7.10.15. Distributions in respect of Affiliate transactions permitted by Section 7.14 or described in the second sentence of Section 7.14. 7.11. MERGER, CONSOLIDATION AND DISPOSITIONS OF ASSETS. The Restricted Companies shall not merge or enter into a consolidation or sell, lease, sell and lease back, sublease or otherwise dispose of any of its assets, except the following: 7.11.1. Any Restricted Company may sell or otherwise dispose of (a) inventory in the ordinary course of business, (b) tangible assets to be replaced in the ordinary course of business by other tangible assets of equal or greater value, (c) tangible assets that are no longer used or useful in the business of the Restricted Companies, the fair market value (or book value if greater) of which shall not be material in any fiscal year and (d) cash and Cash Equivalents. -77- 7.11.2. Any Restricted Company may merge or be liquidated into, or transfer or make dispositions of assets to, any other Restricted Company. 7.11.3. Subject to Section 4.4, so long as no Event of Default exists and is continuing on the date a binding contract with respect to such sale is entered into and the Restricted Companies have furnished prior written notice of such sale to the Documentation Agent, the Restricted Companies may sell Systems or other assets for fair market value in transactions not constituting Permitted Asset Swaps; PROVIDED, HOWEVER, that the sum of the aggregate percentages of Consolidated Annualized Operating Cash Flow for the period of three consecutive months most recently ended prior to each such sale for which financial statements have been (or are required to have been) furnished in accordance with Section 7.4.2 properly allocable to all such Systems or other assets so sold between the Initial Closing Date and the Final Term Loan C Maturity Date shall not exceed 30%. 7.11.4. So long as immediately before and after giving effect thereto no Event of Default exists and is continuing, the Restricted Subsidiaries may contribute Systems and other assets to Permitted Joint Ventures as Investments permitted by Section 7.9.9. 7.11.5. So long as no Event of Default exists and is continuing on the date a binding contract with respect to any Permitted Asset Swap is entered into, the Restricted Companies may engage in such Permitted Asset Swap. 7.11.6. The Restricted Companies may consummate mergers or consolidations necessary to effect acquisitions and Investments permitted by Section 7.9. 7.12. ISSUANCE OF STOCK BY SUBSIDIARIES; SUBSIDIARY DISTRIBUTIONS. 7.12.1. ISSUANCE OF STOCK BY SUBSIDIARIES. No Subsidiary (other than an Excluded Company) of a Restricted Company shall issue or sell any shares of its capital stock or other evidence of beneficial ownership to any Person other than a Restricted Company unless (a) in the case of a stock dividend or other distribution of equity interests, such dividend or distribution is pro rata among existing equity owners or (b) in the case of purchased equity, the sale of such equity is on an arm's length basis. 7.12.2. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS. Except for restrictions contained in the Credit Documents, the Restricted Companies shall not enter into or be bound by any agreement (including covenants requiring the maintenance of specified amounts of net worth or working capital) restricting the right of any Subsidiary to make Distributions or extensions of credit to a Borrower (directly or indirectly through another Subsidiary). -78- 7.13. ERISA, ETC. Each of the Restricted Companies will comply, and will cause all ERISA Group Persons to comply, in all material respects, with the provisions of ERISA and the Code applicable to each Plan. Each of the Restricted Companies will meet, and will cause all ERISA Group Persons to meet, all minimum funding requirements applicable to them with respect to any Plan pursuant to section 302 of ERISA or section 412 of the Code, without giving effect to any waivers of such requirements or extensions of the related amortization periods which may be granted. At no time shall the Accumulated Benefit Obligations under any Plan that is not a Multiemployer Plan exceed the fair market value of the assets of such Plan allocable to such benefits by more than $10,000,000. The Restricted Companies will not withdraw, and will cause all other ERISA Group Persons not to withdraw, in whole or in part, from any Multiemployer Plan so as to give rise to withdrawal liability exceeding $10,000,000 in the aggregate. At no time shall the actuarial present value of unfunded liabilities for post-employment health care benefits, whether or not provided under a Plan, calculated in a manner consistent with Statement No. 106 of the Financial Accounting Standards Board, exceed $10,000,000. 7.14. TRANSACTIONS WITH AFFILIATES. Other than the Material Agreements, none of the Restricted Companies shall effect any transaction with any of their respective Affiliates on a basis less favorable to the Restricted Companies than would be the case if such transaction had been effected with a non-Affiliate. This Section 7.14 shall not apply to: (a) customary directors' fees, indemnification and similar arrangements and payments in respect thereof, consulting fees, employee salaries, bonuses or employment agreements, compensation or employee benefit arrangements and incentive arrangements with any officer, director or employee of a Restricted Company entered into in the ordinary course of business (including customary benefits thereunder), (b) the Contribution Agreement, the partnership agreements of New Falcon I and Holding, L.P., including any amendments or extensions thereof that do not otherwise violate any other covenant set forth in this Agreement, and any transactions undertaken or to be undertaken pursuant to any of such agreements or pursuant to any other contractual obligations in the ordinary course of business in existence on the Initial Closing Date (as in effect on the Initial Closing Date) or as set forth on Exhibit 7.14, (c) the issuance and sale by any Restricted Company to its partners, members or stockholders of capital stock or other equity interests (other than Redeemable Capital Stock), (d) loans and advances to officers, directors and employees of the Restricted Companies in the ordinary course of business, (e) customary commercial banking, investment banking, underwriting, placement agent or financial advisory fees paid in connection with services rendered to the Restricted Companies in the ordinary course of business, (f) the incurrence of intercompany indebtedness that does not otherwise violate any other provision of this Agreement, (g) the pledge of capital stock or other equity interests of Excluded Companies to support the Indebtedness thereof and (h) programming agreements, marketing and promotional agreements and other billing services, equipment agreements and agreements for other goods and services related to the business of the Restricted Companies entered into between TCI or its Affiliates and the Restricted Companies. Holding, L.P. shall deliver to the Documentation Agent as soon as reasonably practicable copies of all documents delivered pursuant to clause (ii) of the -79- first sentence of section 4.13 of the New Falcon I Debentures Indenture in connection with Affiliate transactions. 7.15. INTEREST RATE PROTECTION. Within 30 days after the Initial Closing Date, the Borrowers will obtain and thereafter keep in effect one or more Interest Rate Protection Agreements conforming to International Securities Dealers Association standards with any Lender or Affiliate of a Lender or other financial institution reasonably satisfactory to the Administrative Agent protecting against increases in interest rates, each in form and substance reasonably satisfactory to the Administrative Agent, covering a notional amount of at least 50% of the Financing Debt of New Falcon I, Holding, L.P. and the Restricted Companies for a two year period at rates reasonably satisfactory to the Administrative Agent; PROVIDED, HOWEVER, that Financing Debt with a fixed interest rate for a period of at least two years shall be deemed to be covered by an Interest Rate Protection Agreement for purposes of this Section 7.15. 7.16. COMPLIANCE WITH ENVIRONMENTAL LAWS. Each of the Restricted Companies will: 7.16.1. Use and operate all of its facilities and properties in compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and remain in compliance therewith, and handle all Hazardous Materials in compliance with all applicable Environmental Laws, except where the failure to comply with, or keep in effect, as applicable, such laws, permits, approvals, certificates, licenses and authorizations would not reasonably be expected to result in a Material Adverse Change. 7.16.2. Immediately notify the Documentation Agent, and provide copies upon receipt, of all written claims or complaints from governmental authorities relating to the condition of its facilities and properties or compliance with Environmental Laws, and in the case of potential liability in excess of $10,000,000 shall promptly cure and have dismissed with prejudice to the satisfaction of the Documentation Agent any actions and proceedings relating to compliance with Environmental Laws, except where contested in good faith by appropriate proceedings and sufficient reserves with respect thereto as required by GAAP have been established. 7.16.3. Provide such information and certifications which the Documentation Agent may reasonably request from time to time to evidence compliance with this Section 7.16. 7.17. NO OUTSIDE MANAGEMENT FEES. The Restricted Companies shall not pay in cash any management fees or other amounts in respect of management services to any Person other than another Restricted Company, except for Distributions to New Falcon I (or Holding, L.P.) permitted by Section 7.10.4 and payments permitted as an Affiliate transaction under Section 7.14 or described in the second sentence of Section 7.14; PROVIDED, HOWEVER, that this Section -80- 7.17 shall not prohibit the payment of fees for services rendered to the Restricted Companies on an arm's length basis in the ordinary course of business. 7.18. DERIVATIVE CONTRACTS. None of the Restricted Companies nor any of their Subsidiaries shall enter into any Interest Rate Protection Agreement, foreign currency exchange contract or other financial or commodity derivative contracts except to provide hedge protection for an underlying economic transaction in the ordinary course of business. 7.19. NEGATIVE PLEDGE CLAUSES. None of the Restricted Companies nor any of their Subsidiaries shall enter into any agreement, instrument, deed or lease which prohibits or limits the ability of the Restricted Companies or any of their Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of their respective properties, assets or revenues, whether now owned or hereafter acquired, or which requires the grant of any collateral for such obligation if collateral is granted for another obligation, except the following: 7.19.1. This Agreement and the other Credit Documents. 7.19.2. Covenants in documents creating Liens permitted by Section 7.8 prohibiting further Liens on the assets encumbered thereby. 7.19.3. Covenants in the note purchase agreement relating to the MONY Subordinated Debt prohibiting certain of the Restricted Companies from granting Liens, but in any event permitting the Liens provided by the Credit Documents. 7.19.4. Restrictions on transfer and pledges imposed in the ordinary course of business pursuant to Franchises, pole agreements, leases and other operating agreements. 7.20. FUTURE SECURITY INTEREST. If the TCI Closing has not occurred by December 31, 1998 (or such later date prior to June 30, 1999 as may be mutually agreed by TCI and Holding, L.P.), the Restricted Companies shall, within 20 Banking Days after December 31, 1998 (or such later mutually agreed date), duly authorize, execute and deliver to the Documentation Agent a Security Agreement in customary form reasonably satisfactory to the Documentation Agent and the Borrowers sufficient to grant as Credit Security to the Lenders a senior security interest in all assets (subject to customary exceptions) of the Restricted Companies. By the time of delivery of such Security Agreement, each Restricted Company shall have duly authorized, executed, delivered, filed, registered, and recorded such security agreements, notices, Uniform Commercial Code financing statements and other instruments as the Documentation Agent may have requested in order to perfect the security interests and encumbrances purported or required pursuant to the Security Agreement or the Credit Documents to be created in the Credit Security. 8. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders to extend credit to the Borrowers hereunder, each of the Restricted Companies jointly and severally represents and warrants to each Lender that: -81- 8.1. ORGANIZATION AND BUSINESS. 8.1.1. THE BORROWERS. Each Borrower is a duly organized and validly existing limited partnership (or, in the case of New Falcon II, a limited liability company, or, in the case of Falcon First, a corporation), in good standing under the laws of the jurisdiction in which it is organized, with all partnership (or limited liability company, or corporate) power and authority necessary to (a) enter into and perform this Agreement and each other Credit Document to which it is party, (b) borrow and guarantee the Credit Obligations, (c) grant the Lenders security interests in any Credit Security owned by it to secure the Credit Obligations and (d) own its properties and carry on the business now conducted or proposed to be conducted by it. Certified copies of the Charter and By-laws of each Borrower have been previously delivered to the Documentation Agent and are correct and complete. Exhibit 8.1, as from time to time hereafter supplemented in accordance with Sections 7.4.1 and 7.4.2, sets forth (i) the jurisdiction of organization of each Borrower, (ii) the address of each Borrower's principal executive office and chief place of business and (iii) the number of authorized and issued shares and ownership of each Borrower. 8.1.2. OTHER GUARANTORS. Each Restricted Company (other than the Borrowers) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized, with all partnership or corporate power and authority necessary to (a) enter into and perform this Agreement and each other Credit Document to which it is party, (b) guarantee the Credit Obligations, (c) grant the Lenders a security interest in Credit Security owned by such Restricted Company to secure the Credit Obligations and (d) own its properties and carry on the business now conducted or proposed to be conducted by it. Certified copies of the Charter and By-laws of each such Restricted Company have been previously delivered to the Documentation Agent and are correct and complete. Exhibit 8.1, as from time to time hereafter supplemented in accordance with Sections 7.4.1 and 7.4.2, sets forth (i) the name and jurisdiction of organization of each Restricted Company, (ii) the address of the chief executive office and principal place of business of each Restricted Company, and (iii) the number of authorized and issued shares and ownership of each Restricted Company. 8.1.3. QUALIFICATION. Except as set forth on Exhibit 8.1 as from time to time supplemented in accordance with Sections 7.4.1 and 7.4.2, each Restricted Company is duly and legally qualified to do business as a foreign limited partnership or other entity and is in good standing in each state or jurisdiction in which such qualification is required and is duly authorized, qualified and licensed under all laws, regulations, ordinances or orders of public authorities, or otherwise, to carry on its business in the places and in the manner in which it is conducted, except for failures to be so qualified, authorized or licensed which would not in the aggregate result, or pose a material risk of resulting, in any Material Adverse Change. -82- 8.1.4. CAPITALIZATION. Except as set forth in Exhibit 8.1, as from time to time supplemented in accordance with Sections 7.4.1 and 7.4.2, no options, warrants, conversion rights, preemptive rights or other statutory or contractual rights to purchase shares of capital stock or other securities of any Restricted Company now exist, nor has any Restricted Company authorized any such right, nor is any Restricted Company obligated in any other manner to issue shares of its capital stock or other securities. 8.2. FINANCIAL STATEMENTS AND OTHER INFORMATION; MATERIAL AGREEMENTS. 8.2.1. FINANCIAL STATEMENTS AND OTHER INFORMATION. The Restricted Companies have previously furnished to the Lenders copies of the following: (a) The unaudited Consolidated balance sheet of the Pre-TCI Borrowers and their Subsidiaries, and the audited Consolidated balance sheet of Holding, L.P. as at December 31 in each of 1996 and 1997 and the unaudited Consolidated statements of income and changes in partners' (or shareholders') equity and cash flows of the Pre-TCI Borrowers and their Subsidiaries, and the audited Consolidated statements of income and changes in partners' equity and cash flows of Holding, L.P., for the fiscal years then ended. (b) The ten-year financial and operational projections for the Restricted Companies dated April 1998. (c) Calculations demonstrating pro forma compliance with the Computation Covenants as of the Initial Closing Date. (d) The Offering Memorandum dated March 31, 1998 with respect to the New Falcon I Debentures. The audited Consolidated financial statements (including the notes thereto) referred to in clause (a) above were prepared in accordance with GAAP and fairly present the financial position of the Restricted Companies covered thereby on a Consolidated basis at the respective dates thereof and the results of their operations for the periods covered thereby. No Restricted Company has any known contingent liability material to the Restricted Companies on a Consolidated basis that is required to be reflected by GAAP which is not reflected in the most recent balance sheet referred to in clause (a) above (or delivered pursuant to Sections 7.4.1 or 7.4.2) or the notes thereto. In the judgment of the Restricted Companies, the financial and operational projections referred to in clause (b) above constitute a reasonable basis as of the Initial Closing Date for the assessment of the future performance of the Restricted Companies during the periods indicated therein, it being understood that any projected financial -83- information represents an estimate, based on various assumptions, of future results of operations which may or may not in fact occur. 8.2.2. MATERIAL AGREEMENTS. The Restricted Companies have previously furnished to the Documentation Agent correct and complete copies, including all exhibits, schedules and amendments thereto, of the agreements set forth in Exhibit 8.2.2, each as in effect on the date hereof (or, if such agreement is not in effect on the date hereof, in the form of the most recent draft as indicated in such Exhibit): 8.3. CHANGES IN CONDITION. No Material Adverse Change has occurred, and since December 31, 1997, no Restricted Company has entered into any material transaction outside the ordinary course of business except for the transactions contemplated by this Agreement or the other Material Agreements or as specifically described to the Lenders in writing. 8.4. AGREEMENTS RELATING TO FINANCING DEBT, INVESTMENTS, ETC. Exhibit 8.4, as from time to time hereafter supplemented in accordance with Sections 7.4.1 and 7.4.2, sets forth (a) the amounts (as of the dates indicated in Exhibit 8.4, as so supplemented) of all Financing Debt of the Restricted Companies and all agreements which relate to such Financing Debt, (b) all Liens and Guarantees with respect to such Financing Debt and (c) all agreements which directly or indirectly require any Restricted Company to make any Investment. The Restricted Companies have furnished the Documentation Agent with correct and complete copies of any agreements described in clauses (a), (b) and (c) above requested by the Required Lenders. 8.5. TITLE TO ASSETS. The Restricted Companies have good and valid title to all material assets necessary for the operations of their business as now conducted by them and reflected in the most recent balance sheet referred to in Section 8.2.1(a) (or the balance sheet most recently furnished to the Lenders pursuant to Sections 7.4.1 or 7.4.2), and to all material assets necessary for the operations of such business acquired subsequent to the date of such balance sheet, subject to no Liens except for those permitted by Section 7.8 and except for assets disposed of as permitted by Section 7.11. 8.6. LICENSES, ETC. The Restricted Companies have all patents, patent applications, patent licenses, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, licenses, FCC Licenses, Franchises, permits, authorizations and other rights including agreements with public utilities and microwave transmission companies, pole use, access or rental agreements and utility easements the lack, loss or termination of which would result, or is reasonably likely to result, in a Material Adverse Change. All of the foregoing are in full force and effect except as would not result in, or be reasonably likely to result in, a Material Adverse Change, and each of the Restricted Companies is in substantial compliance with the foregoing without any known conflict with the valid rights of others which has resulted, or poses a material risk of resulting, in any Material Adverse Change. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such license, Franchise or other right or affect the rights of any of the Restricted Companies thereunder so as -84- to result in any Material Adverse Change. Except as would not result, or create a material risk of resulting, in a Material Adverse Change: 8.6.1. FRANCHISES; FCC LICENSES. Each Franchise and FCC License held by any Restricted Company is validly issued, and no Restricted Company is in violation of the terms of any of its Franchises or FCC Licenses. 8.6.2. FCC AND OTHER MATTERS. Each Restricted Company has filed all cable television registration statements and other filings which are required to be filed by it under the Communications Act. Each Restricted Company is in all material respects in compliance with the Communications Act, including the rules and regulations of the FCC relating to the carriage of television signals. The execution, delivery and performance by the Restricted Companies of this Agreement does not require the approval of the FCC and will not result in any violation of the Communications Act. Each Restricted Company has recorded or deposited with and paid to the federal Copyright Office and the Register of Copyright all notices, statements of account, royalty fees and other documents and instruments required under Title 17 of the United States Code and all rules and regulations thereunder (collectively and as from time to time in effect, the "COPYRIGHT ACT"), including such of the foregoing required by section 111(d) of the Copyright Act by virtue of such Restricted Company having made any secondary transmission subject to compulsory licensing pursuant to section 111(c) of the Copyright Act. 8.7. LITIGATION. No litigation, at law or in equity, or any proceeding before any court, board or other governmental or administrative agency or any arbitrator, including the litigation described in Exhibit 8.7, is pending or, to the knowledge of the Restricted Companies, threatened which, in either case, involves any material risk of any final judgment, order or liability which, after giving effect to any applicable insurance, has resulted, or poses a material risk of resulting, in any Material Adverse Change or which seeks to enjoin (and poses a material risk of enjoining) the consummation, or which (except for litigation which does not pose a material risk of impairing the validity or effectiveness of the transactions contemplated by this Agreement or any other Credit Document) questions the validity, of any of the transactions contemplated by this Agreement or any other Credit Document. No judgment, decree or order of any court, board or other governmental or administrative agency or any arbitrator has been issued against or binds any Restricted Company which has resulted, or poses a material risk of resulting, in any Material Adverse Change. 8.8. TAX RETURNS. Except as would not result, or create a material risk of resulting, in a Material Adverse Change, each of the Restricted Companies has filed all material tax and information returns which are required to be filed by it and has paid, or made adequate provision for the payment of, all taxes which have or may become due pursuant to such returns or to any assessment received by it (except for taxes being disputed in good faith and for which sufficient reserves have been established) and no Restricted Company knows of any material additional assessments or any basis therefor and the Restricted Companies reasonably believe that the -85- charges, accruals and reserves on the books of the Restricted Companies in respect of taxes or other governmental charges are adequate. 8.9. AUTHORIZATION AND ENFORCEABILITY. Each Borrower and each other Guarantor has taken all partnership or corporate action required to execute, deliver and perform this Agreement and each other Credit Document to which it is party. Each of this Agreement and each other Credit Document constitutes the legal, valid and binding obligation of the Borrower or the Guarantor party thereto and is enforceable against such Person in accordance with its terms. 8.10. NO LEGAL OBSTACLE TO AGREEMENTS. Neither the execution and delivery of this Agreement or any other Credit Document, nor the making of any borrowings hereunder, nor the guaranteeing of the Credit Obligations, nor the securing of the Credit Obligations with any Credit Security, has constituted or resulted in or will constitute or result in: (a) any breach or termination of the provisions of any agreement, instrument, deed or lease to which any Holding Company is a party or by which it is bound, or of the Charter or By-laws of any Holding Company; (b) the violation of any law, statute, judgment, decree or governmental order, rule or regulation applicable to any Holding Company; (c) the creation under any agreement, instrument, deed or lease of any Lien (other than Liens on Credit Security which secure the Credit Obligations) upon any of the assets of any Holding Company; or (d) except as contemplated by section 2.6 of the Contribution Agreement, any redemption, retirement or other repurchase obligation of any Holding Company under any Charter, By-law, agreement, instrument, deed or lease. No approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person that has not been obtained or made is required to be obtained or made by any Holding Company in connection with the execution, delivery and performance of this Agreement, the Notes or any other Credit Document, the making of any borrowing hereunder, the guaranteeing of the Credit Obligations or the securing of the Credit Obligations with the Credit Security. 8.11. DEFAULTS. No Restricted Company is in default under any provision of its Charter or By-laws or of this Agreement or any other Credit Document. No Restricted Company is in default under any provision of any agreement, instrument, deed or lease to which it is party or by which it or its property is bound, or has violated any law, judgment, decree or governmental order, rule or regulation, in each case so as to result, or creates a material risk of resulting, in any Material Adverse Change. -86- 8.12. CERTAIN BUSINESS REPRESENTATIONS. 8.12.1. LABOR RELATIONS. No dispute or controversy between any Restricted Company and any of its employees has resulted, or is reasonably likely to result, in any Material Adverse Change, and no Restricted Company anticipates that its relationships with its unions or employees will result, or are reasonably likely to result, in any Material Adverse Change. Each Restricted Company is in compliance in all material respects with all federal and state laws with respect to (a) non-discrimination in employment with which the failure to comply, in the aggregate, has resulted in, or poses a material risk of resulting in, a Material Adverse Change and (b) the payment of wages, the failure of which to pay, in the aggregate, has resulted in, or creates a material risk of resulting in, a Material Adverse Change. 8.12.2. ANTITRUST. Each of the Restricted Companies is in compliance in all material respects with all federal and state antitrust laws relating to its business and the geographic concentration of its business. 8.12.3. CONSUMER PROTECTION. No Restricted Company is in violation of any rule, regulation, order, or interpretation of any rule, regulation or order of the Federal Trade Commission (including truth-in-lending), with which the failure to comply, in the aggregate, has resulted in, or poses a material risk of resulting in, a Material Adverse Change. 8.12.4. YEAR 2000 ISSUES. Based on a review of the operations of the Restricted Companies as they relate to the processing, storage and retrieval of data, the Restricted Companies do not believe that a Material Adverse Change is reasonably likely to occur as a result of computer software and hardware that will not function with respect to periods commencing January 1, 2000 at least as effectively as with respect to periods ending on or prior to December 31, 1999. 8.13. ENVIRONMENTAL REGULATIONS. 8.13.1. ENVIRONMENTAL COMPLIANCE. Each of the Restricted Companies is in compliance in all material respects with the Clean Air Act, the Federal Water Pollution Control Act, the Marine Protection Research and Sanctuaries Act, the Resource Conservation and Recovery Act, CERCLA and any similar state or local statute or regulation in effect in any jurisdiction in which any properties of any Restricted Company are located or where any of them conducts its business, and with all applicable published rules and regulations (and applicable standards and requirements) of the federal Environmental Protection Agency and of any similar agencies in states or foreign countries in which any Restricted Company conducts its business, other than any noncompliance which in the aggregate has not resulted in, and could not reasonably be expected to result in, a Material Adverse Change. -87- 8.13.2. ENVIRONMENTAL LITIGATION. Except as would not result in, or could not reasonably be expected to result in, a Material Adverse Change, no suit, claim, action or proceeding of which any Restricted Company has been given notice or otherwise to its knowledge is now pending before any court, governmental agency or board or other forum, or to any Restricted Company's knowledge, threatened by any Person (nor to any Restricted Company's knowledge, does any factual basis exist therefor) for, and the Restricted Companies have received no written correspondence from any federal, state or local governmental authority with respect to any of the following that has resulted in, or creates a material risk of resulting in, a Material Adverse Change: (a) noncompliance in any material respect by any Restricted Company with any such environmental law, rule or regulation; (b) material liabilities for personal injury, wrongful death or other tortious conduct relating to materials, commodities or products used, generated, sold, transferred or manufactured by any Restricted Company (including products made of, containing or incorporating asbestos, lead or other hazardous materials, commodities or toxic substances); or (c) the release into the environment by any Restricted Company of any material amount of Hazardous Material generated by any Restricted Company whether or not occurring at or on a site owned, leased or operated by any Restricted Company. 8.13.3. HAZARDOUS MATERIAL. The Restricted Companies have provided to the Lenders a written list as of the Initial Closing Date of all waste disposal or dump sites at which a material amount of Hazardous Material generated by any Restricted Company has been disposed of directly by the Restricted Companies and all independent contractors to whom the Restricted Companies have delivered Hazardous Material, or to any Restricted Company's knowledge, finally came to be located, and indicates all such sites which are or have been included (including as a potential or suspect site) in any published federal, state or local "superfund" or other list of hazardous or toxic waste sites. Any waste disposal or dump sites at which Hazardous Material generated by any Restricted Company has been disposed of directly by the Restricted Companies and all independent contractors to whom the Restricted Companies have delivered Hazardous Material, or to any Restricted Company's knowledge, finally came to be located, has not resulted in, and could not reasonably be expected to result in, a Material Adverse Change. 8.13.4. ENVIRONMENTAL CONDITION OF PROPERTIES. Except as would not result in, or could not reasonably be expected to result in, a Material Adverse Change, none of the properties owned or, to its knowledge, leased by any Restricted Company has been used as a treatment, storage or disposal site. No Hazardous Material is present in any real -88- property currently or formerly owned or operated by any Restricted Company except that which would not reasonably be expected to result in a Material Adverse Change. 8.14. PENSION PLANS. Each Plan is in material compliance with the applicable provisions of ERISA and the Code. No Plan is a Multiemployer Plan or a "defined benefit plan" (as defined in ERISA). Each ERISA Group Person has met all of the funding standards applicable to all Plans, and no condition exists which would permit the institution of proceedings to terminate any Plan under section 4042 of ERISA. 8.15. CONTRIBUTION AGREEMENT, ETC. The Contribution Agreement is a valid and binding contract as to each of the Restricted Companies that are parties thereto and, to the best of each Restricted Company's knowledge, as to the other parties thereto. As of the date of this Agreement, no Restricted Company that is a party to the Contribution Agreement is in default in any material respect of its obligations under the Contribution Agreement and, to the best of each Restricted Company's knowledge, as of the date of this Agreement the other parties thereto are not in default in any material respect of any of their obligations thereunder. The representations and warranties of the Holding Companies that are parties to the Contribution Agreement set forth therein are true and correct in all material respects as of the date hereof with the same force and effect as if made on and as of the date hereof. To the best of each Restricted Company's knowledge, as of the date hereof, all of the representations and warranties of the other parties thereto set forth in the Contribution Agreement are true and correct in all material respects with the same force and effect as though made on and as of the date hereof. 8.16. GOVERNMENT REGULATION; MARGIN STOCK. 8.16.1. GOVERNMENT REGULATION. No Restricted Company, nor any Person controlling any Restricted Company or under common control with any Restricted Company is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act, the Interstate Commerce Act or any similar federal or state statutes. Each Lender is aware that various aspects of the business conducted by Restricted Companies, including the nature of the services required to be furnished and the rates which may be charged therefor, are subject to regulation by federal, state and local governmental authorities. 8.16.2. MARGIN STOCK. The Restricted Companies do not own Margin Stock having a book value exceeding 20% of the Consolidated assets of the Restricted Companies determined in accordance with GAAP. 8.17. DISCLOSURE. Neither this Agreement nor any other Credit Document to be furnished to the Lenders by or on behalf of any Restricted Company in connection with the transactions contemplated hereby or by such Credit Document contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. -89- 9. DEFAULTS. 9.1. EVENTS OF DEFAULT. The following events are referred to as "EVENTS OF DEFAULT": 9.1.1. NON-PAYMENT. Any Borrower shall fail to make any payment in respect of: (a) interest or any fee on or in respect of any of the Credit Obligations owed by it as the same shall become due and payable, and such failure shall continue for a period of five days, or (b) principal of any of the Credit Obligations owed by it as the same shall become due, whether at maturity or by acceleration or otherwise. 9.1.2. BREACH OF DESIGNATED COVENANTS. Any Restricted Company shall fail to perform or observe any of the provisions of Sections 7.5 through 7.12, 7.14, 7.15, 7.17, 7.18 or 7.19. 9.1.3. BREACH OF OTHER COVENANTS. Any Restricted Company or any of its Affiliates party to any Credit Document shall fail to perform or observe any other covenant, agreement or provision to be performed or observed by it under this Agreement or any other Credit Document, and such failure shall not be rectified or cured to the reasonable satisfaction of the Required Lenders within 30 days after notice thereof by the Documentation Agent or Administrative Agent to the Company. 9.1.4. MISREPRESENTATION. Any representation or warranty of or with respect to any Restricted Company or any of its Affiliates party to any Credit Document made to the Lenders in, pursuant to or in connection with this Agreement or any other Credit Document or in any financial statement, report, notice, mortgage, assignment or certificate delivered to the Agent or any of the Lenders by any Restricted Company or any other Obligor in connection herewith or therewith, shall be materially false or misleading on the date as of which it was made. 9.1.5. CROSS-DEFAULT, ETC. (a) Holding, L.P., New Falcon I or any Restricted Company shall fail to make any payment when due (after giving effect to any applicable grace periods) in respect of any Material Financing Debt (including, in any event, the Holding, L.P. Senior Subordinated Notes, the New Falcon I Debentures, the MONY Subordinated Debt and the TCI Debt); (b) Holding, L.P., New Falcon I or any Restricted Company shall fail to perform or observe the terms of any agreement relating to any Material Financing Debt, and such failure shall continue, without having been duly cured, waived or consented to, beyond the period of grace, if any, specified in such agreement, and such failure shall permit the acceleration of such Material Financing Debt; -90- (c) all or any part of any Material Financing Debt of Holding, L.P., New Falcon I or any Restricted Company shall be accelerated or become due or payable prior to its stated maturity for any reason whatsoever (other than voluntary prepayments or any mandatory prepayment not resulting from a Default thereof); (d) any Lien on any property of Holding, L.P., New Falcon I or any Restricted Company securing any Material Financing Debt shall be enforced by foreclosure or similar action; or (e) any holder of any Material Financing Debt shall exercise any right of rescission with respect to the issuance thereof, or put or repurchase rights against any Obligor with respect to such Material Financing Debt (other than any such rights that may be satisfied with "payment in kind" notes or other similar securities). 9.1.6. CHANGE OF CONTROL, ETC. Except as permitted by Section 7.11, any of the following events shall occur: (a) any "person" or "group" (as such terms are used in sections 13(d) and 14(d) of the Exchange Act), other than the Falcon Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35% or more of the total voting power of the outstanding voting capital stock or other equity interests of Holding, L.P. or Holding, Inc., as the case may be, and such ownership represents a greater percentage of the total voting power of the voting capital stock or other equity interests of Holding, L.P. or Holding, Inc., as the case may be, on a fully diluted basis, than is held by the Falcon Permitted Holders in the aggregate on such date and, in the case of Holding, L.P. (if Holding, L.P. is then a partnership), any Person other than a Falcon Permitted Holder is a managing general partner of Holding, L.P.; (b) Holding, L.P. or Holding, Inc., as the case may be, consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, Holding, L.P. or Holding, Inc., as the case may be, in any such event pursuant to a transaction in which the outstanding voting capital stock or other equity interests of Holding, L.P. or Holding, Inc., as the case may be, is converted into or exchanged for cash, securities or other property and, immediately after such transaction, the Falcon -91- Permitted Holders in the aggregate or the holders of the voting capital stock or other equity interests of Holding, L.P. or Holding, Inc., immediately prior thereto own, directly or indirectly, less than 35% of the total voting power of the outstanding voting capital stock or other equity interests of the surviving or transferee Person and, in the case of Holding, L.P. (if Holding, L.P. is then a partnership), any Person other than a Falcon Permitted Holder is a managing general partner of Holding, L.P.; (c) the sale, lease, transfer, conveyance or other disposition (other than by way of a merger, consolidation, liquidation or dissolution), in one or a series of transactions, of all or substantially all of the assets of Holding, L.P. and its Subsidiaries, taken as a whole, to any "person" (as such term is used in section 13(d)(3) of the Exchange Act) other than to one or more Falcon Permitted Holders; (d) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of Holding, L.P. or Holding, Inc., as the case may be (together with any new directors whose election to such Board of Directors was approved by the Falcon Permitted Holders or by a vote of at least a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason (other than by action of the Falcon Permitted Holders) to constitute a majority of the Board of Directors of Holding, L.P. or Holding, Inc., as the case may be, then in office, in any such case in connection with any actual or threatened solicitation of proxies or consents; (e) Any Person other than a Falcon Permitted Holder "controls" (as defined in Rule 12b-2 under the Exchange Act) the Borrowers; or (f) Less than 100% of the outstanding capital stock or other equity interests of the Borrowers shall cease to be pledged to the Documentation Agent pursuant to the Pledge and Subordination Agreement or otherwise as security for the Credit Obligations. 9.1.7. ENFORCEABILITY, ETC. Any Credit Document shall cease, for any reason (other than the scheduled or other agreed termination thereof in accordance with its terms), to be in full force and effect; or any Restricted Company or any of its Affiliates party thereto shall so assert in a judicial or similar proceeding; or the security interests created by this Agreement and the other Credit Documents shall cease to be enforceable and of the same effect and priority purported to be created hereby, except to the extent expressly agreed by the Required Lenders. -92- 9.1.8. JUDGMENTS, ETC. A final judgment (other than in connection with the Falcon Cable Systems Settlement) (a) which, with other outstanding final judgments against the Restricted Companies, exceeds an aggregate of $10,000,000 (in excess of applicable insurance coverage) shall be rendered against any Restricted Company or its Affiliates party to any Credit Document, or (b) which grants injunctive relief that results in, or poses a material risk of resulting in, a Material Adverse Change, and if, within 30 days after entry thereof, such judgment shall not have been discharged or execution thereof stayed pending appeal, or if, within 30 days after the expiration of any such stay, such judgment shall not have been discharged. 9.1.9. FRANCHISE REVOCATION, ETC. Except as would not result in, or be reasonably likely to result in, a Material Adverse Change, Franchises covering a number of Subscribers greater than 25% of, prior to the TCI Closing, the number of Subscribers of the Restricted Companies at December 31, 1997 and, after the TCI Closing, the number of Subscribers of the Restricted Companies on the TCI Closing after giving effect to the TCI Transactions, shall have been revoked, or terminated with a notice from the applicable franchising authority that such Franchises will not be renewed. 9.1.10. ERISA. ERISA Group Persons shall fail to pay when due amounts (other than amounts being contested in good faith through appropriate proceedings) aggregating in excess of $10,000,000 for all ERISA Group Persons for which they shall have become liable under Title IV of ERISA to pay to the PBGC or to a Plan; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Plan or a proceeding shall be instituted by a fiduciary of any Plan against any ERISA Group Person to enforce sections 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist which would require the PBGC to obtain a decree adjudicating that any Plan must be terminated. 9.1.11. BANKRUPTCY, ETC. Any Restricted Company, New Falcon I, Holding, L.P., Holding, Inc. or any other Obligor shall: (a) commence a voluntary case under the Bankruptcy Code or authorize, by appropriate proceedings of its board of directors or other governing body, the commencement of such a voluntary case; (b) have filed against it a petition commencing an involuntary case under the Bankruptcy Code which shall not have been dismissed within 60 days after the date on which such petition is filed; or file an answer or other pleading within such 60-day period admitting or failing to deny the material allegations of such a petition or seeking, consenting to or acquiescing in the relief therein provided; -93- (c) have entered against it an order for relief in any involuntary case commenced under the Bankruptcy Code; (d) seek relief as a debtor under any applicable law, other than the Bankruptcy Code, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief; (e) have entered against it an order by a court of competent jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors or (iii) assuming custody of, or appointing a receiver or other custodian for, all or a substantial portion of its property; or (f) make an assignment for the benefit of, or enter into a composition with, its creditors, or appoint, or consent to the appointment of, or suffer to exist a receiver or other custodian for, all or a substantial portion of its property. 9.2. CERTAIN ACTIONS FOLLOWING AN EVENT OF DEFAULT. If any one or more Events of Default shall occur and be continuing, then in each and every such case: 9.2.1. NO OBLIGATION TO EXTEND CREDIT. The Documentation Agent may (and upon written request of such Lenders as own a majority of the Percentage Interests in the Revolving Loan shall) suspend or terminate the obligations of the Lenders to make any further extensions of credit under the Credit Documents by furnishing notice thereof to the Borrowers. 9.2.2. SPECIFIC PERFORMANCE; EXERCISE OF RIGHTS. The Documentation Agent may (and upon written request of the Required Lenders shall) proceed to protect and enforce the Lenders' rights by suit in equity, action at law and/or other appropriate proceeding, either for specific performance of any covenant or condition contained in this Agreement or any other Credit Document or in any instrument or assignment delivered to the Lenders pursuant to this Agreement or any other Credit Document, or in aid of the exercise of any power granted in this Agreement or any other Credit Document or any such instrument or assignment. 9.2.3. ACCELERATION. The Documentation Agent on behalf of the Lenders may (and upon written request of the Required Lenders shall) by notice in writing to the Borrowers declare all or any part of the unpaid balance of the Credit Obligations then outstanding to be immediately due and payable, and thereupon such unpaid balance or part thereof shall become so due and payable without presentation, protest or further demand or notice of any kind, all of which are hereby expressly waived; PROVIDED, -94- HOWEVER, that if a Bankruptcy Default shall have occurred, the unpaid balance of the Credit Obligations shall automatically become immediately due and payable. 9.2.4. ENFORCEMENT OF PAYMENT; CREDIT SECURITY; SETOFF. The Documentation Agent may (and upon written request of the Required Lenders shall) proceed to enforce payment of the Credit Obligations in such manner as it may elect (or have been instructed by the Required Lenders) and to realize upon any and all rights in any Credit Security. The Lenders may offset and apply toward the payment of the Credit Obligations (and/or toward the curing of any Event of Default) any Indebtedness from the Lenders to the respective Obligors, including any Indebtedness represented by deposits in any account maintained with the Lenders, regardless of the adequacy of any security for the Credit Obligations. The Lenders shall have no duty to determine the adequacy of any such security in connection with any such offset. 9.2.5. CUMULATIVE REMEDIES. To the extent not prohibited by applicable law which cannot be waived, all of the Lenders' rights hereunder and under each other Credit Document shall be cumulative. 9.3. ANNULMENT OF DEFAULTS. Any Default or Event of Default shall be deemed to exist and to be continuing for any purpose of this Agreement until the Required Lenders or the Documentation Agent (with the consent of the Required Lenders) shall have waived such Default or Event of Default in writing, stated in writing that the same has been cured to such Lenders' reasonable satisfaction or entered into an amendment to this Agreement which by its express terms cures such Default or Event of Default or until such Default or Event of Default is actually cured. No such action by the Lenders or the Documentation Agent shall extend to or affect any subsequent Default or Event of Default or impair any rights of the Lenders upon the occurrence thereof. The making of any extension of credit during the existence of any Default or Event of Default shall not constitute a waiver thereof. 9.4. WAIVERS. Each of the Restricted Companies waives to the extent not prohibited by the provisions of applicable law that cannot be waived: (a) all presentments, demands for performance, notices of nonperformance (except to the extent required by the provisions of this Agreement or any other Credit Document), protests, notices of protest and notices of dishonor; (b) any requirement of diligence or promptness on the part of any Lender in the enforcement of its rights under this Agreement, the Notes or any other Credit Document; (c) any and all notices (other than notices required by any other provision of this Agreement) of every kind and description which may be required to be given by any statute or rule of law; and -95- (d) any defense (other than indefeasible payment in full or dispute of facts) which it may now or hereafter have with respect to its liability under this Agreement, the Notes or any other Credit Document or with respect to the Credit Obligations. 10. EXPENSES; INDEMNITY. 10.1. EXPENSES. Whether or not the transactions contemplated hereby shall be consummated, the Obligors jointly and severally will pay: (a) all reasonable out-of-pocket expenses of the Documentation Agent, the Administrative Agent and the Syndication Agent (including the out-of-pocket expenses related to forming the group of Lenders and reasonable fees and disbursements of the special counsel to the Documentation Agent) in connection with the preparation and duplication of this Agreement, each other Credit Document, examinations by, and reports of, commercial financial examiners selected by the Documentation Agent, the transactions contemplated hereby and thereby and operations and amendments hereunder and thereunder, subject to the acceptance of the Obligors, which acceptance shall not be unreasonably withheld; (b) all recording and filing fees and transfer and documentary stamp and similar taxes at any time payable in respect of this Agreement, any other Credit Document, any Credit Security or the incurrence of the Credit Obligations; and (c) to the extent not prohibited by applicable law that cannot be waived, all other reasonable out-of-pocket costs and expenses (including a reasonable allowance for the hourly cost of attorneys employed by any of the Lenders on a salaried basis and any special counsel to the Lenders) incurred by the Lenders or the holder of any Credit Obligation in connection with the enforcement of any rights hereunder or under any other Credit Document, including such reasonable costs and expenses incurred after the occurrence of an Event of Default (i) in enforcing any Credit Obligation or in foreclosing against the Credit Security, or exercising or enforcing any other right or remedy available by reason of such Event of Default; (ii) in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement or any other Credit Document in the nature of a workout or in any insolvency or bankruptcy proceeding; (iii) in commencing, defending or intervening in any litigation or in filing a petition, complaint, answer, motion or other pleadings in any legal proceeding; (iv) in taking any other action in or with respect to any suit or proceeding (bankruptcy or otherwise); and (v) in protecting, preserving, collecting, leasing, selling, taking possession of or liquidating any of the Credit Security; PROVIDED, HOWEVER, that the foregoing indemnity in this paragraph (c) shall not apply (A) to litigation -96- commenced by the Borrowers against the Lenders which seeks enforcement of any of the rights of the Borrowers hereunder or under any other Credit Document and is determined adversely to the Lenders in a final nonappealable judgment and (B) to the extent such claims, damages, liabilities and expenses result from a Lender's gross negligence or willful misconduct. (d) all reasonable costs and expenses of the Syndication Agent in connection with the preparation and distribution of the Confidential Information Memorandum dated April 1998 and related items. 10.2. GENERAL INDEMNITY. The Obligors will, jointly and severally, indemnify the Lenders and hold them harmless from any claims, damages, liabilities, losses and reasonable expenses (including reasonable fees and disbursements of counsel with whom any Indemnified Party may consult in connection therewith and all reasonable expenses of litigation or preparation therefor) resulting from the violation by the Borrowers of Section 2.5. The Obligors will also, jointly and severally, indemnify each Lender, each of the Lenders' directors, officers and employees, and each Person, if any, who controls any Lender (each Lender and each of such directors, officers, employees and control Persons is referred to as an "INDEMNIFIED PARTY") and hold each of them harmless from and against any and all claims, damages, liabilities, losses and reasonable expenses (including reasonable fees and disbursements of counsel with whom any Indemnified Party may consult in connection therewith and all reasonable expenses of litigation or preparation therefor) which any Indemnified Party may incur or which may be asserted against any Indemnified Party in connection with (a) the Indemnified Party's compliance with or contest of any subpoena or other process issued against it in any proceeding involving any Restricted Company or Affiliates, (b) any litigation or investigation involving the Restricted Companies or their Affiliates, or any officer, director or employee thereof, (c) the existence or exercise of any security rights with respect to the Credit Security in accordance with the Credit Documents or (d) this Agreement, any other Credit Document or any transactions contemplated hereby or thereby, other than (i) litigation commenced by the Borrowers against the Lenders which seeks enforcement of any of the rights of the Borrowers hereunder or under any other Credit Document and is determined adversely to the Lenders in a final nonappealable judgment and (ii) to the extent such claims, damages, liabilities, losses and expenses result from a Lender's gross negligence or willful misconduct. 11. OPERATIONS. 11.1. INTERESTS IN CREDITS. The Percentage Interest of each Lender in the Loan and each Lender's related Commitments shall be computed based on the maximum principal amount for each Lender as set forth in the Register, as from time to time in effect. The Percentage Interests as of the Initial Closing Date and as of the Term Loan B-2 Closing Date are set forth in Exhibit 11.1, which may be updated by the Agent from time to time to conform to the Register. -97- 11.2. AGENTS' AUTHORITY TO ACT, ETC. Each of the Lenders appoints and authorizes the Agents (other than the Co-Agents) to act for the Lenders as the Lenders' Agents in connection with the transactions contemplated by this Agreement and the other Credit Documents on the terms set forth herein. In acting hereunder, each Agent (other than the Co-Agents) is acting for its own account to the extent of its Percentage Interest and for the account of each other Lender to the extent of the Lenders' respective Percentage Interests, and all action in connection with the enforcement of, or the exercise of any remedies (other than the Lenders' rights of set-off as provided in Section 9.2.4 or in any Credit Document) in respect of the Credit Obligations and Credit Documents shall be taken by the Documentation Agent or the Administrative Agent. The Co-Agents shall have no duties or responsibilities under this Agreement or the other Credit Documents except to the extent subsequently expressly agreed in writing by the Co-Agents and the Borrowers. 11.3. BORROWERS TO PAY AGENT, ETC. Each Borrower and each Guarantor shall be fully protected in making all payments in respect of the Credit Obligations to the Administrative Agent, in relying upon consents, modifications and amendments executed by the Documentation Agent purportedly on the Lenders' behalf, and in dealing with the Agents as herein provided. The Administrative Agent shall charge the accounts of each Borrower, on the dates when the amounts thereof become due and payable, with the amounts of the principal of and interest on the Loan, commitment fees and all other fees and amounts owing under any Credit Document. All payments of any Credit Obligation shall be made in United States Funds. 11.4. LENDER OPERATIONS FOR ADVANCES, ETC. 11.4.1. ADVANCES. On each Closing Date, each Lender shall advance to the Administrative Agent in immediately available funds such Lender's Percentage Interest in the portion of the Loan advanced on such Closing Date prior to noon (New York time). If such funds are not received at such time, but all the conditions set forth in Section 5 have been satisfied, each Lender authorizes and requests the Administrative Agent to advance for the Lender's account, pursuant to the terms hereof, the Lender's respective Percentage Interest in such portion of the Loan and agrees to reimburse the Administrative Agent in immediately available funds for the amount thereof prior to 2:00 p.m. (New York time) on the day any portion of the Loan is advanced hereunder; PROVIDED, HOWEVER, that the Administrative Agent is not authorized to make any such advance for the account of any Lender who has previously notified the Administrative Agent in writing that such Lender will not be performing its obligations to make further advances hereunder. 11.4.2. ADMINISTRATIVE AGENT TO ALLOCATE PAYMENTS, ETC. All payments of principal and interest in respect of the extensions of credit made pursuant to this Agreement, commitment fees and other fees under this Agreement shall, as a matter of convenience, be made by the Borrowers and the Guarantors to the Administrative Agent in immediately available funds. The share of each Lender shall be credited to such -98- Lender by the Administrative Agent in immediately available funds in such manner that the principal amount of the Credit Obligations to be paid shall be paid proportionately in accordance with the Lenders' respective Percentage Interests in such Credit Obligations. Under no circumstances shall any Lender be required to produce or present its Notes as evidence of its interests in the Credit Obligations in any action or proceeding relating to the Credit Obligations. 11.4.3. DELINQUENT LENDERS; NONPERFORMING LENDERS. In the event that any Lender fails to reimburse the Administrative Agent pursuant to Section 11.4.1 for the Percentage Interest of such Lender (a "DELINQUENT LENDER") in any credit advanced by the Administrative Agent pursuant hereto, overdue amounts (the "DELINQUENT PAYMENT") due from the Delinquent Lender to the Administrative Agent shall bear interest, payable by the Delinquent Lender on demand, at a per annum rate equal to (a) the Federal Funds Rate for the first three days overdue and (b) the sum of 2% PLUS the Federal Funds Rate for any longer period. Such interest shall be payable to the Administrative Agent for its own account for the period commencing on the date the Delinquent Payment was due and ending on the date the Delinquent Lender reimburses the Administrative Agent on account of the Delinquent Payment (to the extent not paid by a Restricted Company as provided below) and the accrued interest thereon (the "DELINQUENCY PERIOD"), whether pursuant to the assignments referred to below or otherwise. Within five Banking Days after the request by the Administrative Agent, the Borrowers will pay to the Administrative Agent the principal (but not the interest) portion of the Delinquent Payment. During the Delinquency Period, in order to make reimbursements for the Delinquent Payment and accrued interest thereon, the Delinquent Lender shall be deemed to have assigned to the Administrative Agent all payments made by the Borrowers under Section 4 which would have thereafter otherwise been payable under the Credit Documents to the Delinquent Lender. During any other period in which any Lender is not performing its obligations to extend credit under Section 2 (a "NONPERFORMING LENDER"), the Nonperforming Lender shall be deemed to have assigned to each Lender that is not a Nonperforming Lender (a "PERFORMING LENDER") all payment made by the Borrowers under Section 4 which would have thereafter otherwise been payable under the Credit Documents to the Nonperforming Lender, and the Administrative Agent shall credit a portion of such payments to each Performing Lender in an amount equal to the Percentage Interest of such Performing Lender divided by one MINUS the Percentage Interest of the Nonperforming Lender until the respective portions of the Loan owed to all the Lenders are the same as the Percentage Interests of the Lenders immediately prior to the failure of the Nonperforming Lender to perform its obligations under Section 2. The foregoing provisions shall be in addition to any other remedies the Administrative Agent, the Performing Lenders or the Borrowers may have under law or equity against the Delinquent Lender as a result of the Delinquent Payment or against the Nonperforming Lender as a result of its failure to perform its obligations under Section 2. -99- 11.5. SHARING OF PAYMENTS, ETC. Each Lender agrees that (a) if by exercising any right of set-off or counterclaim or otherwise, it shall receive payment of a proportion of the aggregate amount of principal and interest due with respect to its Percentage Interest in the Loan which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal and interest due with respect to the Percentage Interest in the Loan of such other Lender and (b) if such inequality shall continue for more than 10 days, the Lender receiving such proportionately greater payment shall purchase participations in the Percentage Interests in the Loan held by the other Lenders, and such other adjustments shall be made from time to time (including rescission of such purchases of participations in the event the unequal payment originally received is recovered from such Lender through bankruptcy proceedings or otherwise), as may be required so that all such payments of principal and interest with respect to the Loan held by the Lenders shall be shared by the Lenders pro rata in accordance with their respective Percentage Interests; PROVIDED, HOWEVER, that this Section 11.5 shall not impair the right of any Lender to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of Indebtedness of any Obligor other than such Obligor's Indebtedness with respect to the Loan. Each Obligor agrees, to the fullest extent permitted by applicable law, that any Credit Participant and any Lender purchasing a participation from another Lender pursuant to this Section 11.5 may exercise all rights of payment (including the right of set-off), and shall be obligated to share payments under this Section 11.5, with respect to its participation as fully as if such Credit Participant or such Lender were the direct creditor of the Obligors and a Lender hereunder in the amount of such participation. 11.6. AGENT'S RESIGNATION OR REMOVAL. Any Agent may resign at any time by giving at least 60 days' prior written notice of its intention to do so to each of the other Lenders and the Borrower pending the appointment by the Borrowers of a successor Agent reasonably satisfactory to the Required Lenders. If in the event of the resignation of any Agent, no successor Agent shall have been so appointed and shall have accepted such appointment within 45 days after the retiring Agent's giving of such notice of resignation, then the retiring Agent may with the consent of the Borrowers, which shall not be unreasonably withheld, appoint a successor Agent which shall be a bank or a trust company organized, or having a branch that is licensed, under the laws of the United States of America or any state thereof and having a combined capital, surplus and undivided profit of at least $100,000,000; PROVIDED, HOWEVER, that any successor Agent appointed under this sentence may be removed upon the written request of the Required Lenders, which request shall also appoint a successor Agent reasonably satisfactory to the Borrowers. Any Agent may be removed upon the written request of such Lenders as own at least two thirds of the Percentage Interests, which request shall also appoint a successor Agent reasonably satisfactory to the Borrowers. Upon the appointment of a new Agent hereunder, the term "AGENT" shall for all purposes of this Agreement thereafter include such applicable successor Agent. Upon the resignation or removal of the Documentation Agent, the Administrative Agent shall take over the duties of the Documentation Agent. In the event of the resignation or removal of any Agent that is not a Specified Agent, no successor need be appointed. After any retiring Agent's resignation hereunder as Agent, or the removal hereunder of -100- any Agent, the provisions of this Agreement shall continue to inure to the benefit of such Agent as to any actions taken or omitted to be taken by it while it was an Agent under this Agreement. 11.7. CONCERNING THE AGENTS. 11.7.1. ACTION IN GOOD FAITH, ETC. Each Agent and its officers, directors, employees and agents shall be under no liability to any of the Lenders or to any future holder of any interest in the Credit Obligations for any action or failure to act taken or suffered in good faith, and any action or failure to act in accordance with an opinion of its counsel shall conclusively be deemed to be in good faith; PROVIDED, HOWEVER, that the foregoing shall not extend to actions or omissions which are taken by an Agent with gross negligence or willful misconduct. Each Agent shall in all cases be entitled to rely, and shall be fully protected in relying, on instructions given to the Agent by the required holders of Credit Obligations as provided in this Agreement. 11.7.2. NO IMPLIED DUTIES, ETC. Each Agent shall have and may exercise such powers as are specifically delegated to the Agent under this Agreement or any other Credit Document together with all other powers incidental thereto. Each Agent shall have no implied duties to any Person or any obligation to take any action under this Agreement or any other Credit Document except for action specifically provided for in this Agreement or any other Credit Document to be taken by such Agent. Before taking any action under this Agreement or any other Credit Document, each Agent may request an appropriate specific indemnity satisfactory to it from each Lender in addition to the general indemnity provided for in Section 11.10. Until the Agent has received such specific indemnity, the Agent shall not be obligated to take (although it may in its sole discretion take) any such action under this Agreement or any other Credit Document. Each Lender confirms that the Agents do not have a fiduciary relationship to it under the Credit Documents. Each of the Restricted Companies confirms that neither of the Agents nor any other Lender has a fiduciary relationship to it under the Credit Documents. 11.7.3. VALIDITY, ETC. Subject to Section 11.7.1, the Agents shall not be responsible to any Lender or any future holder of any interest in the Credit Obligations (a) for the legality, validity, enforceability or effectiveness of this Agreement or any other Credit Document, (b) for any recitals, reports, representations, warranties or statements contained in or made in connection with this Agreement or any other Credit Document, (c) for the existence or value of any assets included in any security for the Credit Obligations, (d) for the perfection or effectiveness of any Lien purported to be included in such security or (e) for the specification or failure to specify any particular assets to be included in such security. 11.7.4. COMPLIANCE. The Agents shall not be obligated to ascertain or inquire as to the performance or observance of any of the terms of this Agreement or any other Credit Document; and in connection with any extension of credit under this Agreement or -101- any other Credit Document, the Agents shall be fully protected in relying on a certificate of any Borrower or any Guarantor as to the fulfillment by that Borrower of any conditions to such extension of credit. 11.7.5. EMPLOYMENT OF AGENTS AND COUNSEL. The Agents may execute any of their duties as Agent under this Agreement or any other Credit Document by or through employees, agents and attorneys-in-fact and shall not be responsible to any of the Lenders, any Restricted Company or any other Obligor (except as to money or securities received by the Agent or the Agent's authorized agents) for the default or misconduct of any such agents or attorneys-in-fact selected by the Agent with reasonable care. The Agents shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder or under any other Credit Document. 11.7.6. RELIANCE ON DOCUMENTS AND COUNSEL. Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any affidavit, certificate, cablegram, consent, instrument, letter, notice, order, document, statement, telecopy, telegram, telex or teletype message or writing reasonably believed in good faith by the Agent to be genuine and correct and to have been signed, sent or made by the Person in question, including any telephonic or oral statement made by such Person, and, with respect to legal matters, upon the opinion of counsel selected by the Agent. 11.7.7. AGENT'S REIMBURSEMENT. Each of the Lenders severally agrees to reimburse the Agents in the amount of such Lender's Percentage Interest, for any reasonable expenses not reimbursed by the Borrowers or the other Guarantors (without limiting the obligation of the Borrowers or the other Guarantors to make such reimbursement): (a) for which the Agents are entitled to reimbursement by the Borrowers or the other Guarantors under this Agreement or any other Credit Document, and (b) after the occurrence of a Default, for any other reasonable expenses incurred by the Agents on the Lenders' behalf in connection with the enforcement of the Lenders' rights under this Agreement or any other Credit Document; provided that the Agents shall not be reimbursed for any such expenses arising as a result of their gross negligence or willful misconduct. 11.8. RIGHTS AS A LENDER. With respect to any credit extended by it hereunder, each of BankBoston, Toronto Dominion and the other financial institutions serving as Agents hereunder shall have the same rights, obligations and powers hereunder as any other Lender and may exercise such rights and powers as though it were not an Agent, and unless the context otherwise specifies, each of BankBoston, Toronto Dominion and such other financial institutions shall be treated in its individual capacity as though it were not an Agent hereunder. Without limiting the generality of the foregoing, the Percentage Interest of BankBoston, Toronto Dominion and such other financial institutions shall be included in any computations of Percentage Interests. BankBoston, Toronto Dominion, such other financial institutions and their Affiliates may accept deposits from, lend money to, act as trustee for and generally engage in any kind of banking or -102- trust business with the Restricted Companies or any Affiliate of any of them and any Person who may do business with or own an equity interest in the Restricted Companies or any Affiliate of any of them, all as if BankBoston, Toronto Dominion or such other financial institutions were not an Agent and without any duty to account therefor to the other Lenders. 11.9. INDEPENDENT CREDIT DECISION. Each of the Lenders acknowledges that it has independently and without reliance upon the Agents, based on the financial statements and other documents referred to in Section 8.2, on the other representations and warranties contained herein and on such other information with respect to the Restricted Companies as such Lender deemed appropriate, made such Lender's own credit analysis and decision to enter into this Agreement and to make the extensions of credit provided for hereunder. Each Lender represents to the Agents that such Lender will continue to make its own independent credit and other decisions in taking or not taking action under this Agreement or any other Credit Document. Each Lender expressly acknowledges that neither the Agents nor any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to such Lender, and no act by the Agents taken under this Agreement or any other Credit Document, including any review of the affairs of the Restricted Companies, shall be deemed to constitute any representation or warranty by the Agents. Except for notices, reports and other documents expressly required to be furnished to each Lender by the Agents under this Agreement or any other Credit Document, the Agents shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition, financial or otherwise, or credit worthiness of any Restricted Company which may come into the possession of the Agents or any of their officers, directors, employees, agents, attorneys-in-fact or Affiliates. 11.10. INDEMNIFICATION. The holders of the Credit Obligations agree to indemnify the Agents (to the extent not reimbursed by the Obligors and without limiting the obligation of any of the Obligors to do so), pro rata according to their respective aggregate Percentage Interests, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits and reasonable costs, expenses or disbursements of any kind whatsoever which may at any time be imposed on, incurred by or asserted against the Agents in their capacity as Agents hereunder relating to or arising out of this Agreement, any other Credit Document, the transactions contemplated hereby or thereby, or any action taken or omitted by the Agents in connection with any of the foregoing; PROVIDED, HOWEVER, that the foregoing shall not extend to (a) litigation commenced by the holders of the Credit Obligations against the Agents which seeks enforcement of any of the rights of such holders hereunder or under any other Credit Document and is determined adversely to the Agents in a final nonappealable judgment or (b) actions or omissions which are taken by the Agents with gross negligence or willful misconduct. 12. SUCCESSORS AND ASSIGNS; LENDER ASSIGNMENTS AND PARTICIPATIONS. Any reference in this Agreement to any of the parties hereto shall be deemed to include the successors and assigns of such party, and all covenants and agreements by or on behalf of the Borrowers, the other Guarantors, the Agents or the Lenders that are contained in this Agreement or any other Credit -103- Document shall bind and inure to the benefit of their respective successors and assigns; PROVIDED, HOWEVER, that (a) the Restricted Companies may not assign their rights or obligations under this Agreement except for mergers or liquidations permitted by Section 7.11.2, and (b) the Lenders shall be not entitled to assign their respective Percentage Interests in the Loan hereunder except as set forth below in this Section 12. 12.1. ASSIGNMENTS BY LENDERS. 12.1.1. ASSIGNEES AND ASSIGNMENT PROCEDURES. Each Lender may (a) without the consent of the Administrative Agent or the Borrowers if the proposed assignee is already a Lender hereunder, a Related Fund, Affiliate or a Subsidiary of the same corporate parent of which the assigning Lender or any other Lender is a Subsidiary, or (b) otherwise with the consents of the Administrative Agent and (so long as no Event of Default has occurred and is continuing) the Borrowers (which consents will not be unreasonably withheld) in compliance with applicable laws in connection with such assignment, assign to one or more commercial banks or other financial institutions or other entity reasonably acceptable to the Borrowers (each, an "ASSIGNEE") all or a portion of its interests, rights and obligations under this Agreement and the other Credit Documents, including all or a portion of its Commitment, the portion of the Loan at the time owing to it and the Notes held by it; PROVIDED, HOWEVER, that: (i) the aggregate amount of the Commitment of the assigning Lender subject to each assignment described in clause (b) above (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall be not less than $5,000,000 and in increments of $1,000,000 (or, if smaller, the entire Commitment of such assigning Lender); and (ii) the parties to each such assignment shall execute and deliver to the Administrative Agent (with a copy to the Documentation Agent) an Assignment and Acceptance (the "ASSIGNMENT AND ACCEPTANCE") substantially in the form of Exhibit 12.1.1, together with the Note or Notes subject to such assignment and, in the case of an assignment described in clause (b) above, a processing and recordation fee of $3,000. Upon acceptance and recording pursuant to Section 12.1.4, from and after the effective date specified in each Assignment and Acceptance (which effective date shall be at least five Banking Days after the execution thereof unless waived by the Administrative Agent): (1) the Assignee shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and -104- (2) the assigning Lender shall, to the extent provided in such assignment, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.2.4, 3.4, 3.5, 3.6 and 10, as well as to any fees accrued for its account hereunder and not yet paid). 12.1.2. TERMS OF ASSIGNMENT AND ACCEPTANCE. By executing and delivering an Assignment and Acceptance, the assigning Lender and Assignee shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (a) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Credit Document or any other instrument or document furnished pursuant hereto; (b) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Restricted Companies or the performance or observance by the Borrowers or any other Guarantor of any of its obligations under this Agreement, any other Credit Document or any other instrument or document furnished pursuant hereto; (c) such Assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 8.2 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (d) such Assignee will independently and without reliance upon the Agents, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (e) such Assignee appoints and authorizes the Agents to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agents by the terms hereof, together with such powers as are reasonably incidental thereto; and -105- (f) such Assignee agrees that it will perform in accordance with the terms of this Agreement all the obligations which are required to be performed by it as a Lender. 12.1.3. REGISTER. The Administrative Agent shall maintain at the Houston Office a register (the "REGISTER") for the recordation of (a) the names and addresses of the Lenders and the Assignees which assume rights and obligations pursuant to an assignment under Section 12.1.1, (b) the Percentage Interest of each such Lender as set forth in Section 11.1 and (c) the amount of the Loan owing to each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Agents and the Lenders may treat each Person whose name is registered therein for all purposes as a party to this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. 12.1.4. ACCEPTANCE OF ASSIGNMENT AND ASSUMPTION. Upon its receipt of a completed Assignment and Acceptance executed by an assigning Lender and an Assignee together with the Note or Notes subject to such assignment, and the processing and recordation fee referred to in Section 12.1.1, the Administrative Agent shall (a) accept such Assignment and Acceptance, (b) record the information contained therein in the Register and (c) give prompt notice thereof to the Borrowers. Within five Banking Days after receipt of notice, the Borrowers, at their own expense, shall execute and deliver to the Administrative Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the order of such Assignee in a principal amount equal to the applicable Commitment and Loan assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment and Loan, a new Note to the order of such assigning Lender in a principal amount equal to the applicable Commitment and Loan retained by it. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, and shall be dated the date of the surrendered Notes which they replace. 12.1.5. FEDERAL RESERVE BANK. Notwithstanding the foregoing provisions of this Section 12, any Lender may at any time pledge or assign all or any portion of such Lender's rights under this Agreement and the other Credit Documents to a Federal Reserve Bank; PROVIDED, HOWEVER, that no such pledge or assignment shall release such Lender from such Lender's obligations hereunder or under any other Credit Document. 12.1.6. FURTHER ASSURANCES. The Restricted Companies shall sign such documents and take such other actions from time to time reasonably requested by an Assignee to enable it to share in the benefits of the rights created by the Credit Documents. 12.2. CREDIT PARTICIPANTS. Each Lender may, without the consent of any Borrower or any Agent, in compliance with applicable laws in connection with such participation, sell to one -106- or more Qualified Institutional Buyers (each a "CREDIT PARTICIPANT") participations in all or a portion of its interests, rights and obligations under this Agreement and the other Credit Documents (including all or a portion of its Commitment and the Loan owing to it and the Notes held by it); PROVIDED, HOWEVER, that: (a) such Lender's obligations under this Agreement shall remain unchanged; (b) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (c) the Credit Participant shall be entitled to the benefit of the cost protection provisions contained in Sections 3.2.4, 3.4, 3.5, 3.6 and 10, but shall not be entitled to receive any greater payment thereunder than the selling Lender would have been entitled to receive with respect to the interest so sold if such interest had not been sold; and (d) the Borrowers, the Agents and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loan and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers with respect to any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loan, or the final maturity date of any portion of the Loan). 12.3. REPLACEMENT OF LENDER. In the event that any Lender or, to the extent applicable, any Credit Participant (the "AFFECTED LENDER"): (a) fails to perform its obligations to fund any portion of the Loan on any Closing Date when required to do so by the terms of the Credit Documents, or fails to provide its portion of any Eurodollar Pricing Option on account of a Legal Requirement as contemplated by Section 3.2.5 or the unavailability of Eurodollar deposits as contemplated by the last sentence of Section 3.2.1; (b) demands payment under the Tax provisions of Section 3.4, the capital adequacy provisions of Section 3.5 or the regulatory change provisions in Section 3.6 in an amount the Restricted Companies deem materially in excess of the amounts with respect thereto demanded by the other Lenders; or (c) refuses to consent to a proposed amendment, modification, waiver or other action that is consented to by Lenders holding at least 80% of the Percentage -107- Interests the consent of which is requested in connection with the proposed amendment, modification, waiver or other action; then, so long as no Event of Default exists, the Restricted Companies shall have the right to seek a replacement lender or lenders reasonably satisfactory to the Documentation Agent (the "REPLACEMENT LENDER"). The Replacement Lender shall purchase the interests of the Affected Lender in the Loan and its Commitment and shall assume the obligations of the Affected Lender hereunder and under the other Credit Documents upon execution by the Replacement Lender of an Assignment and Acceptance and the tender by it to the Affected Lender of a purchase price agreed between it and the Affected Lender (or, if they are unable to agree, a purchase price in the amount of the Affected Lender's Percentage Interest in the Loan and all other outstanding Credit Obligations then owed to the Affected Lender). Such assignment by the Affected Lender shall be deemed an early termination of any Eurodollar Pricing Option to the extent of the Affected Lender's portion thereof, and the Restricted Companies will pay to the Affected Lender any resulting amounts due under Section 3.2.4. Upon consummation of such assignment, the Replacement Lender shall become party to this Agreement as a signatory hereto and shall have all the rights and obligations of the Affected Lender under this Agreement and the other Credit Documents with a Percentage Interest equal to the Percentage Interest of the Affected Lender, the Affected Lender shall be released from its obligations hereunder and under the other Credit Documents, and no further consent or action by any party shall be required. Upon the consummation of such assignment, the Restricted Companies, the Agent and the Affected Lender shall make appropriate arrangements so that new Notes are issued to the Replacement Lender. The Restricted Companies shall sign such documents and take such other actions reasonably requested by the Replacement Lender to enable it to share in the benefits of the rights created by the Credit Documents. Until the consummation of an assignment in accordance with the foregoing provisions of this Section 12.3, the Restricted Companies shall continue to pay to the Affected Lender (or to the Administrative Agent for the account of the Affected Lender, as applicable) any Credit Obligations as they become due and payable. 13. CONFIDENTIALITY. Each Lender agrees that it will make no disclosure of confidential information furnished to it by any Restricted Company unless such information shall have become public, except: (a) in connection with operations under or the enforcement of this Agreement or any other Credit Document; (b) pursuant to any statutory or regulatory requirement or any mandatory court order, subpoena or other legal process; (c) to any parent or corporate Affiliate of such Lender or to any Credit Participant, proposed Credit Participant or proposed Assignee; PROVIDED, HOWEVER, that any such Person shall agree to comply with the restrictions set forth in this Section 13 with respect to such information; -108- (d) to its independent counsel, auditors and other professional advisors with an instruction to such Person to keep such information confidential; and (e) to any direct or indirect contractual counterparty in swap agreements with the same professional advisor as the Lender or such contractual counterparty's professional advisor (so long as such contractual counterparty or professional advisor agrees to be bound by the provisions of this Section 13); and (f) with the prior written consent of the Borrowers, to any other Person. 14. FOREIGN LENDERS. If any Lender is not created or organized in, or under the laws of, the United States of America or any state thereof, such Lender, to the extent it may legally do so, shall deliver to the Borrower and the Administrative Agent the forms described in one of the following two clauses: (a) Two fully completed and duly executed United States Internal Revenue Service Forms 1001 or 4224 or any successor forms, as the case may be, certifying that such Lender is entitled to receive payments of the Credit Obligations payable to it without deduction or withholding of any United States federal income taxes; or (b) A statement, executed by such Lender under penalty of perjury, certifying that such Lender is not a "bank" within the meaning of section 881(c)(3)(A) of the Code and two fully completed and duly executed United States Internal Revenue Service Forms W-8 or any successor forms certifying that such Lender is not a "United States person" within the meaning of section 7701(a)(30) of the Code. Each Lender that delivers any form or statement pursuant to this Section 14 further undertakes to renew such forms and statements by delivering to the Borrower and the Administrative Agent any updated forms, successor forms or other certification, as the case may be, on or before the date that any form or statement previously delivered pursuant to this Section 13 expires or becomes obsolete or after the occurrence of any event requiring a change in such most recent form or statement. If at any time the Borrower and the Administrative Agent have not received all forms and statements (including any renewals thereof) required to be provided by any Lender pursuant to this Section 14, Section 3.4 shall not apply with respect to any amount of United States federal income taxes required to be withheld from payments of the Credit Obligations to such Lender. 15. NOTICES. Except as otherwise specified in this Agreement, any notice required to be given pursuant to this Agreement shall be given in writing. Any notice, demand or other communication in connection with this Agreement shall be deemed to be given if given in writing (including telecopy or similar teletransmission) addressed as provided below (or to the addressee at such other address as the addressee shall have specified by notice actually received -109- by the addressor), and if either (a) actually delivered in fully legible form to such address or (b) in the case of a letter, five days shall have elapsed after the same shall have been deposited in the United States mails, with first-class postage prepaid and registered or certified. If to any Restricted Company, to it at its address set forth in Exhibit 8.1 (as supplemented pursuant to Sections 7.4.1 and 7.4.2), to the attention of the chief financial officer. If to any Lender, to it at its address set forth on the signature page of this Agreement, to the attention of the account officer specified on the signature page, with copies to the Documentation Agent and the Administrative Agent. 16. LIMITED RECOURSE AGAINST PARTNERS. The remedies of the holders of the Credit Obligations, including any remedy which could be exercised upon the occurrence of an Event of Default, shall be limited to the extent that none of the partners, members or shareholders of any Restricted Company shall have any personal liability as a general partner or limited partner of any Restricted Company with respect to the Credit Obligations, and in no event shall any such partner be personally liable as a general partner or limited partner for any deficiency judgment for any Credit Obligation; PROVIDED, HOWEVER, that the provisions of this Section 16 shall not impair the ability of any holder of any Credit Obligation (a) to realize on the assets of any Obligor or any of its Subsidiaries or on any other security, including any personal property or partnership interests pledged to secure the Credit Obligations or (b) to pursue any remedy against any guarantor of the Credit Obligations or (c) to recover any Distribution made in violation of Section 7.10. 17. AMENDMENTS, CONSENTS, WAIVERS, ETC. 17.1. LENDER CONSENTS FOR AMENDMENTS. Except as otherwise set forth herein, the Documentation Agent may (and upon the written request of the Required Lenders the Documentation Agent shall) take or refrain from taking any action under this Agreement or any other Credit Document, including giving its written consent to any modification of or amendment to and waiving in writing compliance with any covenant or condition in this Agreement or any other Credit Document (other than an Interest Rate Protection Agreement) or any Default or Event of Default, all of which actions shall be binding upon all of the Lenders; PROVIDED, HOWEVER, that: (a) Except as provided below, without the written consent of the Lenders owning at least a majority of the Aggregate Percentage Interests (disregarding the Percentage Interest of any Delinquent Lender during the existence of a Delinquency Period or of any Nonperforming Lender so long as such Lender is treated equally with the other Lenders with respect to any actions enumerated below), no written modification of, amendment to, consent with respect to, waiver of compliance with or waiver of a Default under, any of the Credit Documents (other than an Interest Rate Protection Agreement) shall be made. -110- (b) Without the written consent of such Lenders as own 100% of the Percentage Interests (disregarding the Percentage Interest of any Delinquent Lender during the existence of a Delinquency Period or of any Nonperforming Lender so long as such Lender is treated equally with the other Lenders with respect to any actions enumerated below): (i) No release of all or substantially all of the Credit Security or release of any Borrower or any material Guarantor shall be made (in any event, without the written consent of the Lenders, the Documentation Agent may release particular items of Credit Security or particular Borrowers or Guarantors whose equity has been sold in dispositions permitted by Section 7.11, as modified by amendments thereto approved by the Required Lenders, and may release all Credit Security pursuant to Section 18.1 upon payment in full of the Credit Obligations and termination of the Commitments). (ii) No alteration shall be made of the Lenders' rights of set-off contained in Section 9.2.4. (iii) No amendment to or modification of this Section 17.1 or the definition of "Required Lenders" shall be made. (c) Without the written consent of each Lender that is directly affected thereby and of such Lenders as own at least a majority of the Percentage Interests (disregarding the Percentage Interest of any Delinquent Lender during the existence of a Delinquency Period of or any Nonperforming Lender so long as such Lender is treated equally with the other Lenders with respect to any actions enumerated below): (i) No reduction shall be made in (A) the amount of principal of the Loan owing to such Lender or (B) the interest rate on or fees with respect to the portion of the Loan owing to such Lender (other than amendments and waivers approved by the Required Lenders that modify defined terms used in calculating the Applicable Margin or Consolidated Excess Cash Flow or that waive an increase in the Applicable Rate as a result of an Event of Default). (ii) No change shall be made in the stated, scheduled time of payment of any portion of the Loan owing to such Lender under Sections 4.1 or 4.2 or interest thereon or fees relating to any of the foregoing payable to such Lender, and no waiver shall be made of any Default under Section 9.1.1 with respect to such Lender (other than amendments and waivers approved by the Required Lenders that modify defined terms used in calculating the Applicable Margin or Consolidated Excess Cash Flow). -111- (iii) No increase shall be made in the amount, or extension of the term, of the stated Commitments of such Lender beyond that provided for under Section 2. (d) Without the written consent of such Lenders owning at least a majority of the Percentage Interests in a particular Tranche (disregarding the Percentage Interest of any Delinquent Lender during the existence of a Delinquency Period or of any Nonperforming Lender so long as such Lender is treated equally with the other Lenders with respect to any actions enumerated below) voting as a separate class, no change may be made in the time of payment of any portion of such Tranche under Sections 4.3, 4.4 or 4.5 or in the allocation of mandatory prepayments under Sections 4.3, 4.4 or 4.5 between the respective Tranches. (e) Without the written consent of the Administrative Agent or the Documentation Agent, as the case may be, no amendment or modification of any Credit Document shall affect the rights or duties of the Administrative Agent or the Documentation agent, as the case may be, under the Credit Documents. 17.2. COURSE OF DEALING; NO IMPLIED WAIVERS. No course of dealing between any Lender, on the one hand, and any Restricted Company or its Affiliates, on the other hand, shall operate as a waiver of any of the Lenders' rights under this Agreement or any other Credit Document or with respect to the Credit Obligations. In particular, no delay or omission on the part of any Lender or any Agent in exercising any right under this Agreement or any other Credit Document or with respect to the Credit Obligations shall operate as a waiver of such right or any other right hereunder or thereunder. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. No waiver, consent or amendment with respect to this Agreement or any other Credit Document shall be binding unless it is in writing and signed by the Documentation Agent or the Required Lenders, as appropriate. 18. GENERAL PROVISIONS. 18.1. DEFEASANCE. When all Credit Obligations have been paid, performed and reasonably determined by the Agent to have been indefeasibly discharged in full, and if at the time no Lender continues to be committed to extend any credit to the Company hereunder or under any other Credit Document, this Agreement and the other Credit Documents shall terminate and, at the Company's written request, accompanied by such certificates and other items as the Agent shall reasonably deem necessary, any Credit Security shall revert to the Obligors and the right, title and interest of the Documentation Agent and the Lenders therein shall terminate. Thereupon, on the Obligors' demand and at their cost and expense, the Agent shall execute proper instruments, acknowledging satisfaction of and discharging this Agreement and the other Credit Documents, and shall redeliver to the Obligors any Credit Security then in its possession; PROVIDED, HOWEVER, that Sections 3.2.4, 3.5, 10, 11.7.7, 11.10, 12 and 18 shall survive the termination of this Agreement. -112- 18.2. NO STRICT CONSTRUCTION. The parties have participated jointly in the negotiation and drafting of this Agreement and the other Credit Documents with counsel sophisticated in financing transactions. In the event an ambiguity or question of intent or interpretation arises, this Agreement and the other Credit Documents shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement and the other Credit Documents. 18.3. CERTAIN OBLIGOR ACKNOWLEDGMENTS. Each of the Restricted Companies and the other Obligors acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Credit Documents; (b) neither the Agents nor any Lender has any fiduciary relationship with or duty to the Obligors arising out of or in connection with this Agreement or any other Credit Document, and the relationship between the Agents and Lenders, on one hand, and the Restricted Companies and the Obligors, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Credit Documents or otherwise exists by virtue of the transactions contemplated hereby or thereby among the Obligors, the Restricted Companies and the Lenders. 18.4. VENUE; SERVICE OF PROCESS; CERTAIN WAIVERS. Each of the Restricted Companies, the other Obligors, the Agents and the Lenders: (a) Irrevocably submits to the nonexclusive jurisdiction of the state courts of The Commonwealth of Massachusetts and to the nonexclusive jurisdiction of the United States District Court for the District of Massachusetts for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or any other Credit Document or the subject matter hereof or thereof; (b) Waives to the extent not prohibited by applicable law that cannot be waived, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding brought in any of the above-named courts, any claim that it is not subject personally to the jurisdiction of such court, that its property is exempt or immune from attachment or execution, that such proceeding is brought in an inconvenient forum, that the venue of such proceeding is improper, or that this Agreement or any other Credit Document, or the subject matter hereof or thereof, may not be enforced in or by such court; -113- (c) Consents to service of process in any such proceeding in any manner at the time permitted by Chapter 223A of the General Laws of The Commonwealth of Massachusetts and agrees that service of process by registered or certified mail, return receipt requested, at its address specified in or pursuant to Section 15 is reasonably calculated to give actual notice; and (d) Waives to the extent not prohibited by applicable law that cannot be waived any right it may have to claim or recover in any such proceeding any special, exemplary, punitive or consequential damages. 18.5. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, EACH OF THE RESTRICTED COMPANIES, THE OTHER OBLIGORS, THE AGENTS AND THE LENDERS WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY CREDIT OBLIGATION OR IN ANY WAY CONNECTED WITH THE DEALINGS OF THE LENDERS, THE AGENTS, THE RESTRICTED COMPANIES OR ANY OTHER OBLIGOR IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. Each of the Restricted Companies and the other Obligors acknowledges that it has been informed by the Documentation Agent that the foregoing sentence constitutes a material inducement upon which each of the Lenders has relied and will rely in entering into this Agreement and any other Credit Document. Any Lender, the Agents, the Borrower or any other Obligor may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of the Restricted Companies, the other Obligors, the Agents and the Lenders to the waiver of their rights to trial by jury. 18.6. INTERPRETATION; GOVERNING LAW; ETC. Time is (and shall be) of the essence in this Agreement and the other Credit Documents. All covenants, agreements, representations and warranties made in this Agreement or any other Credit Document or in certificates delivered pursuant hereto or thereto shall be deemed to have been relied on by each Lender, notwithstanding any investigation made by any Lender on its behalf, and shall survive the execution and delivery to the Lenders hereof and thereof. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof, and any invalid or unenforceable provision shall be modified so as to be enforced to the maximum extent of its validity or enforceability. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement and the other Credit Documents constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous understandings and agreements, whether written or oral. This Agreement may be executed in any number of counterparts which together shall constitute one instrument. This Agreement -114- shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of The Commonwealth of Massachusetts. [THE REST OF THIS PAGE IS INTENTIONALLY BLANK.] -115- Each of the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as an agreement under seal as of the date first above written. FALCON CABLE MEDIA, A CALIFORNIA LIMITED PARTNERSHIP FALCON CABLE SYSTEMS COMPANY II, L.P. FALCON CABLEVISION, A CALIFORNIA LIMITED PARTNERSHIP FALCON COMMUNITY CABLE, L.P. FALCON COMMUNITY VENTURES I LIMITED PARTNERSHIP FALCON TELECABLE, A CALIFORNIA LIMITED PARTNERSHIP FALCON COMMUNITY INVESTORS, L.P. FALCON INVESTORS GROUP, LTD., A CALIFORNIA LIMITED PARTNERSHIP FALCON MEDIA INVESTORS GROUP, A CALIFORNIA LIMITED PARTNERSHIP FALCON TELECABLE INVESTORS GROUP, A CALIFORNIA LIMITED PARTNERSHIP FALCON TELECOM, L.P. By FALCON HOLDING GROUP, INC., as general partner, or general partner of the general partner, of each of the foregoing Restricted Companies By /s/ Michael K. Menerey -------------------------------------- Title: SVP & Chief Financial Officer FALCON FIRST, INC. By /s/ Michael K. Menerey -------------------------------------- Title: SVP & Chief Financial Officer FALCON CABLE COMMUNICATIONS, LLC By FALCON HOLDING GROUP, INC., as general partner of the managing general partner of its sole member By /s/ Michael K. Menerey ----------------------------- Title: SVP & Chief Financial Officer ATHENS CABLEVISION, INC. AUSABLE CABLE TV, INC. CEDAR BLUFF CABLEVISION, INC. DALTON CABLEVISION, INC. EASTERN MISSISSIPPI CABLEVISION, INC. FALCON FIRST CABLE OF NEW YORK, INC. FALCON FIRST CABLE OF THE SOUTHEAST, INC. FALCON FIRST HOLDINGS, INC. FF CABLE HOLDINGS, INC. LAUDERDALE CABLEVISION, INC. MULTIVISION NORTHEAST, INC. MULTIVISION OF COMMERCE, INC. PLATTSBURG CABLEVISION, INC. SCOTTSBORO CABLEVISION, INC. SCOTTSBORO TV CABLE, INC. By /s/ Michael K. Menerey ----------------------------- Title: SVP & Chief Financial Officer As an authorized officer of each of the foregoing corporations BANKBOSTON, N.A. By /s/ David B. Herter ----------------------------- Title: Managing Director BankBoston, N.A. Media and Communications Department 100 Federal Street Boston, MA 02110 Telecopy: (617) 434-3401 Telex: 940581 TORONTO DOMINION (TEXAS) INC. By /s/ Neva Nesbitt ----------------------------- Title: Vice President Toronto Dominion (Texas) Inc. 909 Fannin Street, 17th Floor Houston, TX 77010 Telecopy: (713) 951-9921 NATIONSBANK, N.A. By /s/ Whitney L. Busse ----------------------------- Title: Vice President NationsBank, N.A. 901 Main Street, 64th Floor Dallas, TX 75202 Telecopy: (214) 508-9390 THE CHASE MANHATTAN BANK By /s/ Mitch Gervis ----------------------------- Title: Vice President The Chase Manhattan Bank 270 Park Avenue, 37th Floor New York, NY 10017 Telecopy: (212) 270-4584 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By /s/ Shannon T. Ward ----------------------------- Title: Vice President Bank of America National Trust & Savings Association Entertainment & Media Industry Group Dept. 3283 555 South Flower Street, 10th Floor Los Angeles, CA 90071 Telecopy: (213) 228-2641 ABN AMRO BANK N.V. By /s/ Frances O'R. Logan ----------------------------- Title: Vice President By /s/ William S, Bennett ----------------------------- Title: Vice President ABN AMRO Bank N.V. 500 Park Avenue, 2nd Floor New York, NY 10022 Telecopy: (212) 446-4203 ALLSTATE LIFE INSURANCE COMPANY By /s/ Charles D. Miles ----------------------------- Title: authorized signatory By /s/ Jerry D. Zinkula ----------------------------- Title: authorized signatory Its Authorized Signatories Allstate Life Insurance Company 3075 Sanders Road, Suite G5A Northbrook, IL 60062 Telecopy: (847) 402-9882 BANQUE NATIONALE DE PARIS By /s/ Clive Vettles ----------------------------- Title: SVP & Manager By /s/ Janice Ho ----------------------------- Title: Vice President Banque Nationale de Paris 725 South Figueroa, Suite 2090 Los Angeles, CA 90017 Telecopy: (213) 488-9602 BARCLAYS BANK PLC By /s/ James K. Downey ----------------------------- Title: Director Barclays Bank PLC 388 Mark Street, Suite 1700 San Francisco, CA 94111 Telecopy: (415) 765-4760 CIBC INC. By /s/ Cynthia M. Cahill ----------------------------- Title: Executive Director CIBC Oppenheimer Corp, as Agent CIBC Inc. 425 Lexington Avenue New York, NY 10017 Telecopy: (212) 856-3558 CITY NATIONAL BANK By /s/ David Burdge ----------------------------- Title: SVP City National Bank 400 N. Roxbury Drive, 3rd Floor Beverly Hills, CA 90210 Telecopy: (310) 888-6152 COOPERATIVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH By /s/ Alan E. McLintock ----------------------------- Title: Vice President By /s/ W. Pieter C. Kodde ----------------------------- Title: Vice President Rabobank Nederland Media & Telecommunications 300 South Wacker Drive, Suite 3500 Chicago, IL 60606 Telecopy: (312) 786-0052 CREDIT LOCAL DE FRANCE By /s/ Philippe Ducos ----------------------------- Title: Deputy General Manager By /s/ John W. Flaherty ----------------------------- Title: Vice President: Credit Local de France 450 Park Avenue, 3rd Floor New York, NY 10022 Telecopy: (212) 753-5522 CREDIT LYONNAIS NEW YORK BRANCH By /s/ Mark D. Thorsheim ----------------------------- Title: Vice President Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, NY 10019 Telecopy: (212) 261-3288 CYPRESSTREE INVESTMENT FUND LLC By CYPRESSTREE INVESTMENT MANAGEMENT COMANY its Managing Member By /s/ Peter Merrill ----------------------------- Title: Managing Director Cypresstree Investment Fund LLC 125 High Street Boston, MA 02110 Telecopy: (617) 946-5880 DEEP ROCK AND COMPANY By: Eaton Vance Management, as Investment Advisor By /s/ Payson F. Swaffield ----------------------------- Title: Vice President Eaton Vance Management Attn: Prime Rate Reserves 24 Federal Street, 6th Floor Boston, MA 02110 Telecopy: (617) 695-9594 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By /s/ William E. Lambert ----------------------------- Title: Assistant Vice President By /s/ Brian Haughney ----------------------------- Title: Assistant Treasurer Dresdner Bank AG, New York and Grand Cayman Branches 75 Wall Street New York, NY 10005 Telecopy: (212) 429-2374 FLEET NATIONAL BANK By /s/ Garrett Komjathy ----------------------------- Title: Vice President Fleet National Bank Media & Communications Group 1185 Avenue of the Americas, 16th Floor New York, NY 10036 Telecopy: (212) 819-6202 THE FUJI BANK, LIMITED, LOS ANGELES AGENCY By /s/ Masahito Fukuda ----------------------------- Title: Joint General Manager The Fuji Bank, Limited, Los Angeles Agency 333 South Hope Street, 39th Floor Los Angeles, CA 90071 Telecopy: (213) 253-4178 THE INDUSTRIAL BANK OF JAPAN, LIMITED LOS ANGELES AGENCY By /s/ Vicente L. Timiraos ----------------------------- Title: SVP & SDGM The Industrial Bank of Japan, Limited Los Angeles Agency 350 Grand South Avenue, Suite 1500 Los Angeles, CA 90071 Telecopy: (213) 488-9840 KZH HOLDING CORPORATION III By /s/ Virginia Conway ----------------------------- Title: Authorized Agent KZH Holding Corporation III c/o The Chase Manhattan Bank 450 West 33rd Street, 15th Floor New York, NY 10001 Telecopy: (212) 946-7776 KZH-SOLEIL-2 CORPORATION By /s/ Virginia Conway ----------------------------- Title: Authorized Agent KZH-Soleil-2 Corporation c/o Virginia Conway 450 West 33rd Street New York, NY 10001 Telecopy: (212) 946-7776 OAK HILL SECURITIES FUND, L.P. By: Oak Hill Securities GenPar, L.P., its General Partner By: Oak Hill Securities MPG, Inc., its General Partner By /s/ Scott D. Krase ----------------------------- Title: Vice President Oak Hill Securities Fund, L.P. Park Avenue Tower 65 East 55th Street, 32nd Floor New York, NY 10022 Telecopy: (212) 593-3596 OSPREY INVESTMENTS PORTFOLIO By: Citibank, N.A., as Manager By /s/ Hans L. Christensen ----------------------------- Title: Vice President Osprey Investments Portfolio 599 Lexington Avenue 26th Floor, Zone 10 New York, NY 10043 Telecopy: (212) 793-1871 PARIBAS By /s/ Darlynn Ernst ----------------------------- Title: Assistant Vice President By /s/ Tom Brandt ----------------------------- Title: Director Paribas 2029 Century Park East, Suite 3900 Los Angeles, CA 90067 Telecopy: (310) 556-3762 MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By /s/ Sheila Finnerty ----------------------------- Title: Vice President Prime Income Trust c/o Dean Witter InterCapital, Inc. Two World Trade Center, 72nd Floor New York, NY 10048 Telecopy: (212) 392-5345 SUMMIT BANK By /s/ Christopher J. Annas ----------------------------- Title: Vice President Summit Bank 512 Township Line Road, Suite 280 Blue Bell, PA 19422 Telecopy: (215) 619-4820 SUNTRUST BANK, CENTRAL FLORIDA, N.A. By /s/ Janet P. Sanmons ----------------------------- Title: Vice President Suntrust Bank, Central Florida, N.A. 200 South Orange Ave. MC 1109 Orlando, FL 32801 Telecopy: (407) 237-5126 TRANSAMERICA By /s/ John Casparian ----------------------------- Title: Investment Officer Transamerica 1100 South Olive Street, Suite 2700 Los Angeles, CA 90015 Telecopy: (213) 742-4160 THE TRAVELERS INSURANCE COMPANY By /s/ Allen R. Cantrell ----------------------------- Title: Investment Officer The Travelers Insurance Company One Tower Square Hartford, CT 06183-2030 Telecopy: (860) 954-3730 UNION BANK OF CALIFORNIA By /s/ Bill D. Gooch ----------------------------- Title: Senior Vice President Union Bank of California 445 South Figueroa Street Los Angeles, CA 90071 Telecopy: (213) 236-5747 VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By /s/ Jeffrey W. Maillet ----------------------------- Title: Senior Vice President & Director Van Kampen American Capital Prime Rate Income Trust One Parkview Plaza, 6th Floor Oakbrook Terrace, IL 60181 Telecopy: (630) 684-6740 VAN KAMPEN AMERICAN CAPITAL SENIOR INCOME TRUST By /s/ Jeffrey W. Maillet ----------------------------- Title: Senior Vice President & Director Van Kampen American Capital Senior Income Trust One Parkview Plaza, 6th Floor Oakbrook Terrace, IL 60181 Telecopy: (630) 684-6740 EX-12 7 EXHIBIT 12 EXHIBIT 12 FALCON HOLDING GROUP, L.P. COMPUTATION OF DEFICIENCY OF EARNINGS TO FIXED CHARGES
Year Ended December 31, ---------------------------------------------------------------------------------------------- New Falcon Pro Forma Pro Forma 1997 1997 1993 1994 1995 1996 1997 (Unaudited) (Unaudited) ---- ---- ---- ---- ---- ----------- ----------- (in thousands of dollars) Loss from continuing operations before extraordinary item $ (31,448) $ (33,513) $ (25,235) $ (49,985) $ (60,838) $ (75,106) $ (130,849) Equity in net income of investee partnerships - - (19) (145) (443) (447) (447) Income tax benefit - - - (1,122) (2,021) (2,021) (2,021) ---------- ---------- ---------- ---------- ---------- ---------- ----------- (31,448) (33,513) (25,254) (51,252) (63,302) (77,574) (133,317) Add: Interest on indebtedness 49,122 49,859 58,326 72,641 81,326 88,083 122,114 ---------- ---------- ---------- ---------- ---------- ---------- ----------- Income before fixed charges 17,674 16,346 33,072 21,389 18,024 10,509 (11,203) Fixed charges: Interest on indebtedness 49,122 49,859 58,326 72,641 81,326 88,083 122,114 ---------- ---------- ---------- ---------- ---------- ---------- ----------- Deficiency of earnings available to cover fixed charges $ (31,448) $ (33,513) $ (25,254) $ (51,252) $ (63,302) $ (77,574) $ (133,317) ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- Three Months Ended March 31, -------------------------------------------------------- New Falcon Pro Forma Pro Forma 1997 1998 1998 1998 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ----------- (in thousands of dollars) Loss from continuing operations before extraordinary item $ (15,335) $ (18,909) $ (21,262) $ (37,501) Equity in net income of investee partnerships (39) (45) (45) (45) Income tax benefit (566) (365) (365) (365) ---------- ---------- ---------- ---------- (15,940) (19,319) (21,672) (37,911) Add: Interest on indebtedness 20,384 20,487 21,408 30,433 ---------- ---------- ---------- ---------- Income before fixed charges 4,444 1,168 (264) (7,478) Fixed charges: Interest on indebtedness 20,384 20,487 21,408 30,433 ---------- ---------- ---------- ---------- Deficiency of earnings available to cover fixed charges $ (15,940) $ (19,319) $ (21,672) $ (37,911) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
EX-23.2 8 EX-23.2 Exhibit 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports on the consolidated financial statements of Falcon Holding Group, L.P. dated March 17, 1998 and the balance sheet of Falcon Funding Corporation dated March 31, 1998 in Amendment No. 1 to the Registration Statement (Form S-4 No. 333-55755) and related Prospectus of Falcon Holding Group, L.P. and Falcon Funding Corporation for the registration of 8.375% Senior Debentures and 9.285% Senior Discount Debentures. Our audits also included the financial statement schedule of Falcon Holding Group, L.P. listed in Item 16(b). This schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP ----------------------- Los Angeles, California July 16, 1998 EX-23.3 9 EX-23.3 Exhibit 23.3 Consent of Independent Auditors ------------------------------- The Board of Directors TCI Communications, Inc.: We consent to the inclusion in the registration statement (No. 333-55755) on Form S-4, as amended, of Falcon Holding Group, L.P. and Falcon Holding Corporation of our report, dated March 4, 1998, relating to the combined balance sheets of the TCI Falcon Systems (as defined in Note 1 to the combined financial statements) as of December 31, 1996 and 1997, and the related combined statements of operations and parent's investment and cash flows for each of the years in the three-year period ended December 31, 1997, and to the reference to our firm under the heading "Experts" in the registration statement. KPMG Peat Marwick LLP Denver, Colorado July 16, 1998 EX-25.1 10 EX-25.1 Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ----------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ----------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) _______ ----------------------- UNITED STATES TRUST COMPANY OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-3818954 (Jurisdiction of incorporation (I.R.S. Employer if not a U.S. national bank) Identification No.) 114 West 47th Street 10036-1532 New York, New York (Zip Code) (Address of principal executive offices) ----------------------- FALCON HOLDING GROUP, L.P. FALCON FUNDING CORPORATION (Exact name of obligor as specified in its charter) Delaware 95-4408577 California 95-4681480 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10900 Wilshire Boulevard - 15th Floor 90024 Los Angeles, CA (Zip Code) (Address of principal executive offices) -------------------------------- 8.375% Senior Debentures Due 2010 9.285% Senior Discount Debentures Due 2010 (Title of the indenture securities) 2 GENERAL 1. GENERAL INFORMATION Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of New York (2nd District), New York, New York (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Washington, D.C. New York State Banking Department, Albany, New York (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. 2. AFFILIATIONS WITH THE OBLIGOR If the obligor is an affiliate of the trustee, describe each such affiliation. None 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15: Falcon Holding Group, L.P. and Falcon Funding Corporation are not in default under any of their outstanding securities for which United States Trust Company of New York is Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required under General Instruction B. 16. LIST OF EXHIBITS T-1.1 -- Organization Certificate, as amended, issued by the State of New York Banking Department to transact business as a Trust Company, is incorporated by reference to Exhibit T-1.1 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.2 -- Included in Exhibit T-1.1. T-1.3 -- Included in Exhibit T-1.1. 3 16. LIST OF EXHIBITS (CONT'D) T-1.4 -- The By-Laws of United States Trust Company of New York, as amended, is incorporated by reference to Exhibit T-1.4 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.6 -- The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990. T-1.7 -- A copy of the latest report of condition of the trustee pursuant to law or the requirements of its supervising or examining authority. NOTE As of June 24, 1998, the trustee had 2,999,020 shares of Common Stock outstanding, all of which are owned by its parent company, U.S. Trust Corporation. The term "trustee" in Item 2, refers to each of United States Trust Company of New York and its parent company, U.S. Trust Corporation. In answering Item 2 in this statement of eligibility as to matters peculiarly within the knowledge of the obligor or its directors, the trustee has relied upon information furnished to it by the obligor and will rely on information to be furnished by the obligor and the trustee disclaims responsibility for the accuracy or completeness of such information. ------------------- Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, United States Trust Company of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 24th day of June, 1998. UNITED STATES TRUST COMPANY OF NEW YORK, Trustee By: /s/Margaret Ciesmelewski ----------------------------- Margaret Ciesmelewski Assistant Vice President EXHIBIT T-1.6 The consent of the trustee required by Section 321(b) of the Act. United States Trust Company of New York 114 West 47th Street New York, NY 10036 September 1, 1995 Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 Gentlemen: Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, and subject to the limitations set forth therein, United States Trust Company of New York ("U.S. Trust") hereby consents that reports of examinations of U.S. Trust by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. Very truly yours, UNITED STATES TRUST COMPANY OF NEW YORK /s/Gerard F. Ganey ------------------------ By: Gerard F. Ganey Senior Vice President EXHIBIT T-1.7 UNITED STATES TRUST COMPANY OF NEW YORK CONSOLIDATED STATEMENT OF CONDITION MARCH 31, 1998 ($ IN THOUSANDS)
ASSETS Cash and Due from Banks $ 303,692 Short-Term Investments 325,044 Securities, Available for Sale 650,954 Loans 1,717,101 Less: Allowance for Credit Losses 16,546 ---------- Net Loans 1,700,555 Premises and Equipment 58,868 Other Assets 120,865 ---------- Total Assets $3,159,978 ---------- ---------- LIABILITIES Deposits: Non-Interest Bearing $ 602,769 ---------- Interest Bearing 1,955,571 Total Deposits 2,558,340 Short-Term Credit Facilities 293,185 Accounts Payable and Accrued Liabilities 136,396 ---------- Total Liabilities $2,987,921 ---------- ---------- STOCKHOLDER'S EQUITY Common Stock 14,995 Capital Surplus 49,541 Retained Earnings 105,214 Unrealized Gains on Securities Available for Sale (Net of Taxes) 2,307 ---------- TOTAL STOCKHOLDER'S EQUITY 172,057 TOTAL LIABILITIES AND ---------- STOCKHOLDER'S EQUITY $3,159,978 ---------- ----------
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank do hereby declare that this Statement of Condition has been prepared in conformance with the instructions issued by the appropriate regulatory authority and is true to the best of my knowledge and belief. Richard E. Brinkmann, SVP & Controller May 6, 1998 EX-27.1 11 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMAITON EXTRACTED FROM BALANCE SHEET AT MARCH 31, 1998 AND STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1998 0000900346 FALCON HOLDING GROUP LP 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 11,162 0 24,381 781 0 0 633,880 275,806 800,326 63,563 0 0 0 0 0 800,326 0 64,557 0 62,322 1,022 1,056 20,487 (19,274) (365) (18,909) 0 0 0 (18,909) 0 0
EX-27.2 12 EX-27.2
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AT MARCH 27, 1998 0001060530 FALCON FUNDING CORPORATION 1,000 1-MO DEC-31-1998 MAR-16-1998 MAR-27-1998 1,000 0 0 0 0 1,000 0 0 1,000 0 0 0 0 1 999 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-99.1 13 EX-99.1 - -------------------------------------------------------------------------------- PURSUANT TO THE PROSPECTUS DATED , 1998: THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). - -------------------------------------------------------------------------------- FALCON HOLDING GROUP, L.P. FALCON FUNDING CORPORATION LETTER OF TRANSMITTAL 8.375% SERIES A SENIOR DEBENTURES DUE 2010 9.285% SERIES A SENIOR DISCOUNT DEBENTURES DUE 2010 To: U.S. Trust Company of New York, the Exchange Agent BY REGISTERED OR CERTIFIED BY OVERNIGHT COURIER: MAIL: U.S. Trust Company of New York U.S. Trust Company of New York 770 Broadway P.O. Box 844 New York, New York 10003 Cooper Station Attn: Corporate Trust, 13th New York, New York 10276-0844 Floor BY HAND: BY FACSIMILE: U.S. Trust Company of New York (212) 780-0592 111 Broadway, Lower Level Corporation Trust Window Confirm by telephone: New York, New York 10006 (800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS INSTRUMENT VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. The undersigned acknowledges receipt of the Prospectus, dated June , 1998 (the "Prospectus") of Falcon Holding Group, L.P. and Falcon Funding Corporation (collectively, the "Issuers") and this related Letter of Transmittal (the "Letter of Transmittal"), which together describe the Issuers' offer (the "Exchange Offer") to exchange (i) $1,000 original principal amount of 8.375% Series B Senior Debentures due 2010 of the Issuers (the "Senior Exchange Debentures") for each $1,000 original principal amount of the Issuers' issued and outstanding 8.375% Series A Senior Debentures due 2010 (the "Old Senior Debentures"), and (ii) $1,000 original principal amount at maturity of 9.285% Series B Senior Discount Debentures due 2010 of the Issuers (the "Senior Discount Exchange Debentures," and collectively with the Senior Exchange Debentures, the "Exchange Debentures") for each $1,000 original principal amount at maturity of the Issuers' issued and outstanding 9.285% Series A Senior Discount Debentures due 2010 (the "Old Senior Discount Debentures," and collectively with the Old Senior Debentures, the "Old Debentures"). As of the date of the Prospectus, $375,000,000 aggregate original principal amount of the Old Senior Debentures are outstanding, and $435,250,000 aggregate original principal amount at maturity of the Old Senior Discount Debentures are outstanding. The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 1998, unless the Issuers, in their sole discretion, extend the Exchange Offer, in which case the term shall mean the latest date and time to which the Exchange Offer is extended. The term "Holder" with respect to the Exchange Offer means any person: (i) in whose name Old Debentures are registered on the books of the Issuers or any other person who has obtained a properly completed bond power from the registered Holder or (ii) whose Old Debentures are held of record by The Depository Trust Company ("DTC") and who desires to deliver such Old Debentures by book entry transfer at DTC. Capitalized terms used but not defined herein have the respective meanings set forth in the Prospectus. This Letter of Transmittal is to be used by Holders if: (i) certificates representing Old Debentures are to be physically delivered to the Exchange Agent herewith by Holders; (ii) tender of Old Debentures is to be made by book-entry transfer to the Exchange Agent's account at DTC pursuant to the procedures set forth in the Prospectus under "The Exchange Offer--Procedures for Tendering" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Old Debentures (such participants, acting on behalf of Holders, are referred to herein as "Acting Holders"); or (iii) tender of Old Debentures is to be made according to the guaranteed delivery procedures described in the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery Procedures." See Instruction 2 below. Delivery of documents to DTC does not constitute delivery to the Exchange Agent. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Old Debentures must complete this Letter of Transmittal in its entirety. / / CHECK HERE IF TENDERED OLD DEBENTURES ARE BEING DELIVERED BY DTC TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: _____________________________________________ DTC Book-Entry Account No.: ________________________________________________ Transaction Code No.: ______________________________________________________ / / CHECK HERE IF TENDERED OLD DEBENTURES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING (SEE INSTRUCTION 2): Name of Registered or Acting Holder(s): ____________________________________ Window Ticket No. (if any): ________________________________________________ Date of Execution of Notice of Guaranteed Delivery: ________________________ Name of Eligible Institution that Guaranteed Delivery: _____________________ If Delivered by Book-Entry Transfer, DTC Book-Entry Account No.: ___________ Transaction Code Number: ___________________________________________________ / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. PLEASE NOTE: THE ISSUERS HAVE AGREED THAT, FOR A PERIOD OF 180 DAYS AFTER THE EXPIRATION DATE, THEY WILL MAKE COPIES OF THE PROSPECTUS AVAILABLE TO ANY PARTICIPATING BROKER-DEALER FOR USE IN CONNECTION WITH RESALES OF THE EXCHANGE DEBENTURES (PROVIDED THAT THE ISSUERS RECEIVE NOTICE FROM ANY PARTICIPATING BROKER-DEALER OF ITS STATUS AS A BROKER-DEALER). Name: _____________________________________________________________________ Address: __________________________________________________________________ ___________________________________________________________________________ Attention: ________________________________________________________________ PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX BELOW List below the Old Debentures to which this Letter of Transmittal relates. If the space provided below is inadequate, the certificate numbers and, with respect to the Old Senior Debentures, the principal amount and, with respect to the Old Senior Discount Debentures, the principal amount at maturity should be listed on a separate signed schedule affixed hereto. Box 1
- ---------------------------------------------------------------------------------------------------- DESCRIPTION OF 8.375% SERIES A SENIOR DEBENTURES DUE 2010 - ---------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT NAME(S) AND AGGREGATE TENDERED (MUST BE ADDRESS(ES) OF PRINCIPAL AMOUNT IN INTEGRAL REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY MULTIPLE OF (PLEASE FILL IN, IF BLANK) NUMBER(S)** CERTIFICATE(S) $1,000)* - ----------------------------------------------------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- TOTAL
Box 2
- ---------------------------------------------------------------------------------------------------- DESCRIPTION OF 9.285% SERIES A SENIOR DISCOUNT DEBENTURES DUE 2010 - ---------------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT AGGREGATE AT PRINCIPAL MATURITY TENDERED NAME(S) AND AMOUNT AT (MUST BE IN ADDRESS(ES)OF MATURITY INTEGRAL REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY MULTIPLE OF (PLEASE FILL IN, IF BLANK) NUMBER(S)** CERTIFICATE(S) $1,000)* - ----------------------------------------------------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- TOTAL
- -------------------------------------------------------------------------------- * Need not be completed by Holders who wish to tender with respect to all Old Debentures listed. See Instruction 4. ** Need not be completed by Holders tendering by book-entry transfer. Box 3 - ------------------------------------------------ SPECIAL REGISTRATION INSTRUCTIONS (SEE INSTRUCTIONS 4, 5 AND 6) To be completed ONLY if certificates for Old Debentures not tendered, or Exchange Debentures issued in exchange for Old Debentures accepted for exchange, are to be issued in a name other than the name appearing in Box 1 or 2 above. Issue certificate(s) to: Name _______________________________________________________________________ (PLEASE PRINT) Address ____________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________ (INCLUDE ZIP CODE) __________________________________________________________________________ (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER) ------------------------------------------------------------------ Box 4 ---------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 4, 5 AND 6) To be completed ONLY if certificates for Old Debentures not tendered, or Exchange Debentures issued in exchange for Old Debentures accepted for exchange, are to be sent to an address other than the address appearing in Box 1 or 2 above, or if Box 3 is filled in, to an address other than the address appearing in Box 3. Deliver certificate(s) to: Name ______________________________________________________________________ (PLEASE PRINT) Address ___________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ (INCLUDE ZIP CODE) _________________________________________________________________________ (TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER) ------------------------------------------------------------ Box 5 --------------------------------------------------------------------------- BROKER-DEALER STATUS / / Check this box if the beneficial owner of the Old Debentures is a Participating Broker-Dealer and such Participating Broker-Dealer acquired the Old Debentures for its own account as a result of market-making activities or other trading activities. NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Subject to the terms and conditions of the Exchange Offer, the undersigned hereby tenders to Falcon Holding Group, L.P. and Falcon Funding Corporation (collectively, the "Issuers") the principal amount of the Old Senior Debentures and principal amount at maturity of the Old Senior Exchange Debentures indicated above. Subject to and effective upon the acceptance for exchange of the Old Debentures tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Issuers all right, title and interest in and to the Old Debentures tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Issuers) with respect to the tendered Old Debentures with the full power of substitution to (i) present such Old Debentures and all evidences of transfer and authenticity to, or transfer ownership of, such Old Debentures on the account books maintained by DTC to, or upon, the order of, the Issuers, (ii) deliver certificates for such Old Debentures to the Issuers and deliver all accompanying evidences of transfer and authenticity to, or upon the order of, the Issuers and (iii) present such Old Debentures for transfer on the books of the Issuers and receive all benefits and otherwise exercise all rights of beneficial ownership of such Old Debentures, all in accordance with the terms of the Exchange Offer. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Debentures tendered hereby and that the Issuers will acquire good, valid and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims, when the same are acquired by the Issuers. The undersigned hereby further represents that (i) the Exchange Debentures are to be acquired by the Holder or the person receiving such Exchange Debentures, whether or not such person is the Holder, in the ordinary course of business, (ii) the Holder or any such other person is not engaging and does not intend to engage in the distribution of the Exchange Debentures, (iii) the Holder or any such other person has no arrangement or understanding with any person to participate in the distribution of the Exchange Debentures, and (iv) neither the Holder nor any such other person is an "affiliate" of the Issuers within the meaning of Rule 405 under the Securities Act. As indicated above, each Participating Broker-Dealer that receives an Exchange Debenture for its own account in exchange for Old Debentures must acknowledge that it (i) acquired the Old Debentures for its own account as a result of market-making activities or other trading activities, (ii) has not entered into any arrangement or understanding with the Issuers or any "affiliate" of the Issuers (within the meaning of Rule 405 under the Securities Act) to distribute the Exchange Debentures to be received in the Exchange Offer and (iii) will deliver a Prospectus in connection with any resale of such Exchange Debentures; however, by so acknowledging and by delivering a Prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. If applicable, the undersigned shall use its reasonable best efforts to notify the Issuers when it is no longer subject to such Prospectus delivery requirements. Unless otherwise notified in accordance with the instructions set forth herein in Box 5 under "Broker-Dealer Status," the Issuers will assume that the undersigned is not a Participating Broker-Dealer. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in and does not intend to engage in, a distribution of Exchange Debentures. For purposes of the Exchange Offer, the Issuers shall be deemed to have accepted validly tendered Old Debentures when, as and if the Issuers have given oral or written notice thereof to the Exchange Agent. If any Old Debentures tendered herewith are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Old Debentures will be returned (except as noted below with respect to tenders through DTC), without expense, to the undersigned at the address shown below or to a different address as may be indicated herein in Box 4 under "Special Delivery Instructions" as promptly as practicable after the Expiration Date. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned, and every obligation of the undersigned under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, successors and assigns. The undersigned understands that tenders of Old Debentures pursuant to the procedures described under the caption "The Exchange Offer--Procedures for Tendering" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Issuers upon the terms and subject to the conditions of the Exchange Offer, subject only to withdrawal of such tenders on the terms set forth in the Prospectus under the caption "The Exchange Offer--Withdrawal of Tenders." Unless otherwise indicated in Box 3 under "Special Registration Instructions," please issue the certificates representing the Exchange Debentures issued in exchange for the Old Debentures accepted for exchange and any certificates for Old Debentures not tendered or not exchanged, in the name(s) of the registered Holder of the Old Debentures appearing in Box 1 or 2 above (or in such event in the case of Old Debentures tendered by DTC, by credit to the account of DTC). Similarly, unless otherwise indicated in Box 4 under "Special Delivery Instructions," please send the certificates, if any, representing the Exchange Debentures issued in exchange for the Old Debentures accepted for exchange and any certificates for Old Debentures not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below in the undersigned's signature(s), unless tender is being made through DTC. In the event that the box entitled "Special Registration Instructions" and the box entitled "Special Delivery Instructions" both are completed, please issue the certificates representing the Exchange Debentures issued in exchange for the Old Debentures accepted for exchange in the name(s) of, and return any certificates for Old Debentures not tendered or not exchanged to, the person(s) so indicated. The undersigned understands that the Issuers have no obligation pursuant to the "Special Registration Instructions" and "Special Delivery Instructions" to transfer any Old Debentures from the name of the registered Holder(s) thereof if the Issuers do not accept for exchange any of the Old Debentures so tendered. Holders who wish to tender their Old Debentures and (i) whose Old Debentures are not immediately available, (ii) who cannot deliver the Old Debentures, this Letter of Transmittal or any other documents required hereby to the Exchange Agent prior to the Expiration Date, or (iii) who cannot complete the procedures for book-entry transfer prior to the Exchange Date, may tender their Old Debentures according to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery Procedures." See Instruction 2. The lines below must be signed by the registered Holder(s) exactly as their name(s) appear(s) on the Old Debentures or, if tendered by a participant in DTC, exactly as such participant's name appears on a security position listing as the owner of Old Debentures, or by person(s) authorized to become registered Holder(s) by a properly completed bond power from the registered Holder(s), a copy of which must be transmitted with this Letter of Transmittal. If Old Debentures to which this Letter of Transmittal relate are held of record by two or more joint Holders, then all such Holders must sign this Letter of Transmittal. PLEASE SIGN HERE WHETHER OR NOT OLD DEBENTURES ARE BEING PHYSICALLY TENDERED HEREBY - -------------------------------------------------------------------------------- x - -------------------------------------------------------------------------------- - -------------- DATE x - -------------------------------------------------------------------------------- - -------------- SIGNATURE(S) OF REGISTERED HOLDER(S) DATE OR AUTHORIZED SIGNATORY Area Code and Telephone Number: ------------------------- If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, then such person must (i) set forth his or her full title below and (ii) submit evidence satisfactory to the Issuers of such person's authority so to act. See Instruction 5. Name(s): ---------------------------------------------------------------------------- (PLEASE PRINT) Capacity: ---------------------------------------------------------------------------- Address: ---------------------------------------------------------------------------- (INCLUDE ZIP CODE) MEDALLION SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 5) CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION SIGNATURE(S) GUARANTEED BY AN ELIGIBLE INSTITUTION: ---------------------------------------------------------------------------- (AUTHORIZED SIGNATURE) -------------------------------------------------------------------------- (TITLE) -------------------------------------------------------------------------- (Name of Firm) -------------------------------------------------------------------------- (ADDRESS, INCLUDE ZIP CODE) -------------------------------------------------------------------------- (AREA CODE AND TELEPHONE NUMBER) Dated: -----------------------, 1998 ---------------------------------------------------------------------------- INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR OLD DEBENTURES OR BOOK-ENTRY CONFIRMATIONS. Certificates representing the tendered Old Debentures (or a confirmation of book-entry transfer of such Old Debentures into the Exchange Agent's account with DTC), as well as a properly completed and duly executed copy of this Letter of Transmittal (or facsimile thereof) (or, in the case of a book-entry transfer, an Agent's Message), a Substitute Form W-9 (or facsimile thereof) and any other documents required by this Letter of Transmittal must be received by the Exchange Agent at its address set forth herein prior to the Expiration Date. The method of delivery of certificates for Old Debentures and all other required documents is at the election and sole risk of the tendering Holder and delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. As an alternative to delivery by mail, the Holder may wish to use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. Neither the Issuers nor the Exchange Agent is under an obligation to notify any tendering Holder of the Issuers' acceptance of tendered Old Debentures prior to the completion of the Exchange Offer. 2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Old Debentures but whose Old Debentures are not immediately available and who cannot deliver their certificates for Old Debentures (or comply with the procedures for book-entry transfer prior to the Expiration Date), the Letter of Transmittal and any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their Old Debentures according to the guaranteed delivery procedures set forth below. Pursuant to such procedures: (i) such tender must be made by or through a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States (an "Eligible Institution"); (ii) prior to the Expiration Date, the Exchange Agent must have received from the Holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number or numbers of the tendered Old Debentures, the principal amount of tendered Old Senior Debentures and the principal amount at maturity of Old Senior Discount Debentures and stating that the tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) (or, in the case of a book-entry transfer, an Agent's Message), together with the tendered Old Debentures (or a confirmation of book-entry transfer of such Old Debentures into the Exchange Agent's account with DTC) and any other required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) the certificates representing the tendered Old Debentures in proper form for transfer (or a confirmation of book-entry transfer of such Old Debentures into the Exchange Agent's account with DTC), together with the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message) and all other documents required by the Letter of Transmittal must be received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. Failure to complete the guaranteed delivery procedures outlined above will not, of itself, affect the validity or effect a revocation of any Letter of Transmittal form properly completed and executed by a Holder who attempted to use the guaranteed delivery procedure. 3. TENDER BY HOLDER. Only a Holder or Acting Holder of Old Debentures may tender such Old Debentures in the Exchange Offer. Any beneficial owner of Old Debentures who is not the registered Holder and who wishes to tender should arrange with such Holder to execute and deliver this Letter of Transmittal on such owner's behalf or must, prior to completing and executing this Letter of Transmittal and delivering such Old Debentures, either make appropriate arrangements to register ownership of the Old Debentures in such owner's name or obtain a properly completed bond power from the registered Holder. 4. PARTIAL TENDERS. Tenders of Old Senior Debentures will be accepted only in integral multiples of $1,000 principal amount, and tenders of Old Senior Discount Debentures will be accepted only in integral multiples of $1,000 principal amount at maturity. If less than the entire principal amount or principal amount at maturity, as the case may be, of Old Debentures is tendered, the tendering Holder should fill in the principal amount tendered in the column labeled "Principal Amount Tendered" of the box entitled "Description of 8.375% Senior Debentures due 2010" (Box 1) above, and principal amount at maturity tendered in the column labeled "Principal Amount at Maturity Tendered" of the box entitled "Description of 9.285% Series A Senior Discount Debentures due 2010" (Box 2) above. The entire principal amount or principal amount at maturity, as the case may be, of Old Debentures delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of Old Senior Debentures is not tendered, Old Senior Debentures for the principal amount not tendered and Senior Exchange Debentures exchanged for any Old Senior Debentures tendered will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal or unless tender is made through DTC, as soon as practicable following the Expiration Date. If the entire principal amount or at maturity of Old Senior Discount Debentures is not tendered, Old Senior Discount Debentures for the principal amount at maturity not tendered and Senior Discount Exchange Debentures exchanged for any Old Senior Discount Debentures tendered will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal or unless tender is made through DTC, as soon as practicable following the Expiration Date. 5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS; MEDALLION GUARANTEE OF SIGNATURE. If this Letter of Transmittal is signed by the registered Holder(s) of the Old Debentures tendered herewith, the signatures must correspond with the name(s) as written on the face of the tendered Old Debentures without alteration, enlargement, or any change whatsoever. If any of the tendered Old Debentures are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any tendered Old Debentures are held in different names on several Old Debentures, it will be necessary to complete, sign, and submit as many separate copies of the Letter of Transmittal documents as there are names in which tendered Old Debentures are held. If this Letter of Transmittal is signed by the registered Holder, and Exchange Debentures are to be issued and any untendered or unaccepted Old Debentures are to be reissued or returned to the registered Holder, then the registered Holder need not and should not endorse any tendered Old Debentures nor provide a separate bond power. In any other case, the registered Holder must either properly endorse the Old Debentures tendered or transmit a properly completed separate bond power with this Letter of Transmittal (executed exactly as the name(s) of the registered Holder(s) appear(s) on such Old Debentures), with the signature(s) on the endorsement or bond power guaranteed by an Eligible Institution unless such certificates or bond powers are signed by an Eligible Institution. If this Letter of Transmittal or any Old Debentures or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations, or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and evidence satisfactory to the Issuers of their authority to so act must be submitted with this Letter of Transmittal. No medallion signature guarantee is required if (i) this Letter of Transmittal is signed by the registered Holder(s) of the Old Debentures tendered herewith and the issuance of Exchange Debentures (and any Old Debentures not tendered or not accepted) are to be issued directly to such registered Holder(s) and neither the "Special Registration Instructions" (Box 3) nor the "Special Delivery Instructions" (Box 4) has been completed. In all other cases, all signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution. 6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders should indicate, in the applicable box, the name and address in which the Exchange Debentures and/or substitute Old Debentures for Old Debentures not tendered or not accepted for exchange are to be sent, if different from the name and address or account of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification number or social security number of the person named must also be indicated and the indicated and the tendering Holders should complete the applicable box. If no such instructions are given, the Exchange Debentures (and any Old Debentures not tendered or not accepted) will be issued in the name of and sent to the registered Holder of the Old Debentures. 7. TRANSFER TAXES. The Issuers will pay all transfer taxes, if any, applicable to the sale and transfer of Old Debentures to the Issuers or their order pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the transfer and sale of Old Debentures to the Issuers or their order pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or on any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption from such taxes is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. Except as provided in this Instruction 7, it will not be necessary for transfer tax stamps to be affixed to the Old Debentures listed in this Letter of Transmittal. 8. TAX IDENTIFICATION NUMBER. Under the federal income tax laws, payments that may be made by the Issuers on account of Exchange Debentures issued pursuant to the Exchange Offer may be subject to backup withholding at the rate of 31%. In order to avoid such backup withholding, each tendering Holder should complete and sign the Substitute Form W-9 included in this Letter of Transmittal and either (a) provide the correct taxpayer identification number ("TIN") and certify, under penalties of perjury, that the TIN provided is correct and that (i) the Holder has not been notified by the Internal Revenue Service (the "IRS") that the Holder is subject to backup withholding as a result of failure to report all interest or dividends or (ii) the IRS has notified the Holder that the Holder is no longer subject to backup withholding; or (b) provide an adequate basis for exemption. If the tendering Holder has not been issued a TIN and has applied for one, or intends to apply for one in the near future, such holder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, sign and date the Substitute Form W-9 and sign the Certificate of Payee Awaiting Taxpayer Identification Number. If "Applied For" is written in Part I, the Issuers (or the Exchange Agent with respect to the Exchange Debentures or a broker or custodian) may still withhold 31% of the amount of any payments made on account of the Exchange Debentures until the Holder furnishes the Issuers or the Exchange Agent with respect to the Exchange Debentures, broker or custodian with its TIN. In general, if a Holder is an individual, the taxpayer identification number is the Social Security number of such individual. If the Exchange Agent or the Issuers are not provided with the correct TIN, the Holder may be subject to a $50 penalty imposed by the IRS. Certain Holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such Holder must submit a statement (generally, IRS Form W-8), signed under penalties of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Exchange Agent. Failure to complete the Substitute Form W-9 will not, by itself, cause Old Debentures to be deemed invalidly tendered, but may require the Issuers or the Exchange Agent with respect to the Exchange Debentures, broker or custodian to withhold 31% of the amount of any payments made on account of the Exchange Debentures. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of a person subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the IRS. 9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility (including time of receipt), and acceptance of tendered Old Debentures will be determined by the Issuers, in their sole discretion, which determination will be final and binding. The Issuers reserve the right to reject any and all Old Debentures not validly tendered or any Old Debentures, the Issuers' acceptance of which would, in the opinion of the Issuers or their counsel, be unlawful. The Issuers also reserve the right to waive any conditions of the Exchange Offer or defects or irregularities in tenders of Debentures as to any ineligibility of any Holder who seeks to tender Old Debentures in the Exchange Offer. The interpretation of the terms and conditions of the Exchange Offer (including this Letter of Transmittal and the instructions hereto) by the Issuers shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Debentures must be cured within such time as the Issuers shall determine. The Issuers will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Debentures, but shall not incur any liability for failure to give such notification. 10. WAIVER OF CONDITIONS. The Issuers reserve the absolute right to amend, waive, or modify specified conditions in the Exchange Offer in the case of any tendered Old Debentures. 11. NO CONDITIONAL TENDER. No alternative, conditional, irregular, or contingent tender of Old Debentures will be accepted. 12. MUTILATED, LOST, STOLEN, OR DESTROYED OLD DEBENTURES. Any tendering Holder whose Old Debentures have been mutilated, lost, stolen, or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance and requests for additional copies of the Prospectus may be directed to the Exchange Agent at the address set forth on the first page of this Letter of Transmittal. Holders may also contact their broker, dealer, commercial bank, trust company, or other nominee for assistance concerning the Exchange Offer. 14. ACCEPTANCE OF TENDERED OLD DEBENTURES AND ISSUANCE OF EXCHANGE DEBENTURES; RETURN OF OLD DEBENTURES. Subject to the terms and conditions of the Exchange Offer, the Issuers will accept for exchange all validly tendered Old Debentures as soon as practicable after the Expiration Date and will issue Exchange Debentures therefor as soon as practicable thereafter. For purposes of the Exchange Offer, the Issuers shall be deemed to have accepted tendered Old Debentures when, as and if the Issuers have given written and oral notice thereof to the Exchange Agent. If any tendered Old Debentures are not exchanged pursuant to the Exchange Offer for any reason, such unexchanged Old Debentures will be returned, without expense, to the undersigned at the address shown above or at a different address as may be indicated under "Special Delivery Instructions" (Box 4). 15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited withdrawal rights set forth in the Prospectus under the caption "The Exchange Offer--Withdrawal of Tenders." (DO NOT WRITE IN SPACE BELOW)
- ------------------------------------------------------------------------------------------------- CERTIFICATE OLD DEBENTURES OLD DEBENTURES SURRENDERED TENDERED ACCEPTED - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
Delivery Prepared By: - --------------------- Checked By: - --------------------- Date: - -------------- PAYERS' NAMES: FALCON HOLDING GROUP, L.P. FALCON FUNDING CORPORATION - -------------------------------------------------------------------------------------------------- SUBSTITUTE Name (if joint names, list first and circle the name of the person or FORM W-9 entity whose number you enter in Part 1 below. See instructions if your name has changed.) ------------------------------------------------------------------------ Department of Address the Treasury ------------------------------------------------------------------------ Internal Revenue Service City, State and ZIP Code ------------------------------------------------------------------------ PART 1 - PLEASE PROVIDE YOUR TAXPAYER Social Security IDENTIFICATION NUMBER ("TIN") IN THE BOX AT RIGHT Number or TIN AND CERTIFY BY SIGNING AND DATING BELOW ------------------------------------------------------------------------ PART 2 - Check the box if you are NOT subject to backup withholding under the provisions of section 3408(a)(1)(C) of the Internal Revenue Code because (1) you have not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to backup withholding. / /
- ------------------------------------------------------------------------------------------------- CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I PART 3 - CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS AWAITING TRUE, CORRECT AND COMPLETE. TIN Signature: ---------------------- Date: --------- / / - -------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a Taxpayer Identification Number has not been issued to me, and either (a) I have mailed or delivered an application to receive a Taxpayer Identification Number to the appropriate Internal Revenue Service Center or Social Security Administrative Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a Taxpayer Identification Number by the time of the exchange, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a Taxpayer Identification Number. - -------------------------------------------------------------------------- ------------------------ Signature Date
EX-99.2 14 EX-99.2 NOTICE OF GUARANTEED DELIVERY FOR 8.375% SERIES A SENIOR DEBENTURES DUE 2010 9.285% SERIES A SENIOR DISCOUNT DEBENTURES DUE 2010 OF FALCON HOLDING GROUP, L.P. FALCON FUNDING CORPORATION This form or one substantially equivalent hereto must be used to accept the Exchange Offer of Falcon Holding Group, L.P. and Falcon Funding Corporation (collectively, the "Issuers") made pursuant to the Prospectus dated July ____, 1998 (the "Prospectus") if Holders of certificates for the 8.375% Series A Senior Debentures due 2010 (the "Old Senior Debentures") and 9.285% Series A Senior Discount Debentures due 2010 (the "Old Senior Discount Debentures" and, collectively with the Old Senior Debentures, the "Old Debentures") who wish to tender their Old Debentures but whose Old Debentures are not immediately available and who cannot deliver their certificates for Old Debentures (or comply with the procedures for book-entry transfer prior to the Expiration Date), the Letter of Transmittal and any other documents required by the Letter of Transmittal to the Exchange Agent prior to 5:00 P.M., New York City time, on the Expiration Date (as defined in the Prospectus). Such form may be delivered by hand or transmitted by facsimile transmission, overnight courier or mail to the Exchange Agent. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. To: U.S. Trust Company of New York, the Exchange Agent
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER: - --------------------------------------------- --------------------------------------------- U.S. Trust Company of New York U.S. Trust Company of New York P.O. Box 844 770 Broadway Cooper Station New York, New York 10003 New York, New York 10276-0844 Attn: Corporate Trust, 13th Floor
BY HAND: BY FACSIMILE: - --------------------------------------------- --------------------------------------------- U.S. Trust Company of New York (212) 780-0592 111 Broadway, Lower Level Corporation Trust Window Confirm by telephone: New York, New York 10006 (800) 548-6565
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal to be used to tender Old Debentures is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to Falcon Holding Group, L.P. and Falcon Funding Corporation (collectively, the "Issuers"), upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal (which together constitute the "Exchange Offer"), receipt of which is hereby acknowledged, $____________ principal amount of Old Senior Debentures and $_______________ principal amount at maturity of Old Senior Discount Debentures pursuant to the guaranteed delivery procedures set forth in Instruction 2 of the Letter of Transmittal. NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW. OLD SENIOR DEBENTURES Certificate No(s). for Old Senior Name(s) of Record Holder(s) Debentures (if available) - -------------------------------------------- -------------------------------------------- - -------------------------------------------- -------------------------------------------- Please Print or Type Address -------------------------------------------- Telephone. No. () Signature(s) -------------------------------------------- Dated:
OLD SENIOR DISCOUNT DEBENTURES Certificate No(s). for Old Senior Name(s) of Record Holder(s) Debentures (if available) - -------------------------------------------- -------------------------------------------- - -------------------------------------------- -------------------------------------------- Please Print or Type Address -------------------------------------------- Telephone. No. () Signature(s) -------------------------------------------- Dated:
GUARANTEE (Not to be used for signature guarantee) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), hereby (a) represents that the above named person(s) "own(s)" the Old Debentures tendered hereby within the meaning of Rule 10b-4 under the Exchange Act, (b) represents that such tender of Old Debentures complies with Rule 10b-4 under the Exchange Act and (c) guarantees that delivery to the Exchange Agent of certificates for the Old Debentures tendered hereby, in proper form for transfer, with delivery of a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature and any other required documents, will be received by the Exchange Agent at one of its addresses set forth above within five business days after the Exchange Date. Name of Firm Authorized Signature Address Name Please Print or Type Title Zip Code Telephone. No. () Date:
Dated: , 1998 NOTE: DO NOT SEND OLD DEBENTURES WITH THIS FORM; OLD DEBENTURES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE EXCHANGE AGENT WITHIN FIVE BUSINESS DAYS AFTER THE EXPIRATION DATE. -----END PRIVACY-ENHANCED MESSAGE-----