[LETTERHEAD OF WALLER CAPITAL CORPORATION]
March 11, 1996
Mr. Michael K. Menerey
Chief Financial Officer
Falcon Holding Group, L.P.
474 So. Raymond Avenue
Suite 200
Pasadena, CA 91105
Dear Mike:
Reference is made to the Fee Agreement between Falcon Holding
Group, L.P. ("FHGLP") and Waller Capital Corporation ("Waller
Capital") whereby FHGLP wishes to determine the appraised value
of the cable systems ("Cable Systems") owned by Falcon Cable
Systems, a California Limited Partnership ("Falcon"), of which
FHGLP is the general partner. The following discusses the
method of appraisal, limiting factors and the results of the
appraisal performed by Waller Capital pursuant to Section II(i)
of the Waller Fee Agreement.
The Falcon cable systems are comprised of seven regions in two
states referred to by Falcon as Gilroy, Tulare, Hesperia, and
San Louis Obispo in California and Coos Bay, Dallas and Central
Oregon all located in Oregon (the "Regions"). The general
methodology of the appraisal is to evaluate the Discounted Cash
Flow ("DCF") stream generated by each Region over a ten-year
period (fiscal 1996 to 2005) by applying relevant market and
economic factors.
Ten-year projections have been prepared by Waller Capital as
part of the DCF analysis. Developing projections required a
general understanding of each Region's current business and
future plans. This understanding was obtained through a review
of: i) each Regions' December 31, 1995 fiscal year-end
unaudited financial statements; ii) Falcon's 1993 and 1994
unaudited regional and audited consolidated financial state-
ments; iii) other operating and subscriber data including pro-
jections; iv) demographic data as it relates to the service
areas of the Regions; and (v) the Cable Systems as a result of
on site due diligence.
Projections for the years 1996 to 2005 were made by Waller
Capital based upon each Regions' 1995 unaudited financial
statements which we believe to be generally reasonable. The
general expense structure of the Systems was projected
according to market and inflationary factors as it was judged
to be efficient. In addition, specific adjustment was made for
partnership expenses, as determined by Waller Capital, which
are not allowed back to each Region by FHGLP.
A sale is assumed to occur in the tenth year (2005) of the DCF
model. The cash flow sales multiples selected reflect the
long-term prospects for cash flow growth and the cash flow
quality. The multiples
Mr. Michael K. Menerey
March 11, 1996
Page Two
selected also account for the presumed technical condition of
each Region at the time of sale. The multiples selected are
applied against the full tenth-year of each Regions' cash flow.
Waller Capital's analysis was further supported by comparable
system sales. Waller Capital examined specific transactions to
determine if an appropriate multiple of cash flow could be
derived from current market information. Waller Capital
examined multiples from announced and completed cable
television transactions for the twelve months preceding Decem-
ber 31, 1995 relying upon data from transactions executed by
Waller Capital, from Paul Kagan Associates, Inc., and general
industry information. However, comparable sales data is dif-
ficult to generalize from because of the variability of factors
such as system size, growth prospects, penetration, location,
demographics, technical system condition and franchise terms,
which are often not publicly available. Given these limita-
tions, Waller Capital is of the opinion that comparable sales
data offers only an approximation of fair market value.
The value assigned by Waller Capital for each Region is as
follows:
ADJ. CASH APPRAISED CASH FLOW VALUE PER
REGION FLOW(000s)1 SUBSCRIBERS1 VALUE MULTIPLE SUBSCRIBER
------ ----------- ------------ ---------- --------- ----------
Gilroy, CA $6,898 33,073 $57,640,720 8.4x $1,743
Hesperia, CA 3,767 18,513 28,865,947 7.7x 1,559
San Louis 2,221 15,635 21,988,550 9.9x 1,406
Obispo, CA
Tulare, CA 2,796 15,249 22,269,159 8.0x 1,460
Coos Bay, 4,252 21,847 35,486,280 8.3x 1,624
OR
Dallas, OR 3,304 16,928 27,257,132 8.2x 1,610
Central 2,429 14,225 20,164,654 8.3x 1,418
Oregon, OR
TOTAL $25,667 135,470 213,672,442 8.33x $1,577
-----------------------
1 FYE 1995 (Cash Flows adjusted for unallocated partnership
expenses as determined by Waller Capital)
Mr. Michael K. Menerey
March 11, 1996
Page Three
The cash flow multiple is the appraised value divided by the
adjusted operating cash flow (adjusted to reflect unallocated
partnership expenses as determined by Waller Capital) and the
value per subscriber is the appraised value divided by December
31, 1995 basic subscribers. The total values reflect the
simple addition of the values and results of each Region.
Given the geographic diversity of the Cable Systems and the
diverse group of logical potential purchasers, no incremental
value was attributed to the possible sale of the consolidated
entity.
Waller Capital is preparing a presentation of the detailed
analysis which supports the appraised values and includes the
Discounted Cash Flow analysis from which these results were
derived.
If there are any questions or comments please feel free to
contact me.
Best regards,
/s/ Joseph P. Duggan
Joseph P. Duggan
Vice President