FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership is required under various franchise agreements at December
31, 1998 to rebuild certain existing cable systems at a cost of approximately
The Partnership is regulated by various federal, state and local government
entities. The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), provides for among other things, federal and local
regulation of rates charged for basic cable service, cable programming service
tiers ("CPSTs") and equipment and installation services. Regulations issued in
1993 and significantly amended in 1994 by the Federal Communications Commission
(the "FCC") have resulted in changes in the rates charged for the Partnership's
cable services. The Partnership believes that compliance with the 1992 Cable Act
has had a negative impact on its operations and cash flow. It also presently
believes that any potential future liabilities for refund claims or other
related actions would not be material. The Telecommunications Act of 1996 (the
"1996 Telecom Act") was signed into law on February 8, 1996. As it pertains to
cable television, the 1996 Telecom Act, among other things, (i) ends the
regulation of certain CPSTs in 1999; (ii) expands the definition of effective
competition, the existence of which displaces rate regulation; (iii) eliminates
the restriction against the ownership and operation of cable systems by
telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions.
The Partnership has various contracts to obtain basic and premium
programming from program suppliers whose compensation is generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures or
offer marketing support to the Partnership. The Partnership's programming
contracts are generally for a fixed period of time and are subject to negotiated
renewal. The Partnership does not have long-term programming contracts for the
supply of a substantial amount of its programming. Accordingly, no assurances
can be given that the Partnership's programming costs will not continue to
increase substantially or that other materially adverse terms will not be added
to the Partnership's programming contracts. Management believes, however, that
the Partnership's relations with its programming suppliers generally are good.
Effective December 1, 1998, the Partnership elected to obtain certain of
its programming services through an affiliate of TCI. This election resulted in
a reduction in the Partnership's programming costs, the majority of which will
be passed on to its customers in the form of reduced rates in compliance with
FCC rules. The Partnership has elected to continue to acquire its remaining
programming services under its existing programming contracts, but may elect to
acquire additional programming services through the TCI affiliate in the future.
The Partnership, in the normal course of business, purchases cable programming
services from certain program suppliers owned in whole or in part by an
affiliate of TCI.
The Partnership is periodically a party to various legal proceedings. Such
legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership's business, and management presently believes that
the outcome of all pending legal proceedings will not, in the aggregate, have a
material adverse effect on the financial condition of the Partnership.
The Partnership, certain of its affiliates, and certain third parties have
been named as defendants in an action entitled Frank O'Shea I.R.A. et al. v.
Falcon Cable Systems Company, et al., Case No. BC 147386, pending in the
Superior Court of the State of California, County of Los Angeles (the "Action").
Plaintiffs in the Action are certain former unitholders of FCSC purporting to
represent a class consisting of former unitholders of FCSC other than those
affiliated with FCSC and/or its controlling persons. The complaint in the Action
alleges, among other things,