1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
----------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ -----------------------
Commission file number 1-9332
--------
Falcon Cable Systems Company, a California limited partnership
- - - - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4108170
- - - - - ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
10900 Wilshire Boulevard, 15th Floor, Los Angeles, CA 90024
- - - - - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 824-9990
------------------------------
- - - - - --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Exhibit Page at E-1
2
FALCON CABLE SYSTEMS COMPANY
CONDENSED BALANCE SHEETS
December 31, March 31,
1994* 1995
------------ -----------
(unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 2,987 $ 296
Receivables, less allowance of $73,000
and $78,000 for possible losses 2,287 747
Prepaid expenses and other 1,390 635
Cable materials, equipment and supplies 1,206 613
Available-for-sale securities 7,110 -
Property, plant and equipment, less accumulated depreciation
and amortization of $59,010,000 and $61,901,000 65,460 64,822
Franchise cost and goodwill, less
accumulated amortization of
$29,629,000 and $30,880,000 36,096 34,886
Customer lists and other intangible
costs, less accumulated amortization
of $9,480,000 and $9,855,000 2,890 1,919
Deferred loan cost, less accumulated
amortization of $71,800 - 1,440
-------- --------
$119,426 $105,358
======== ========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
LIABILITIES:
Notes payable $170,439 $162,014
Accounts payable 2,487 1,722
Accrued expenses 9,463 8,528
Payable to general partner 3,003 3,460
Customer deposits and prepayments 684 722
-------- --------
TOTAL LIABILITIES 186,076 176,446
-------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY (DEFICIT)
General partner 42 66
Limited partners (73,600) (71,154)
Unrealized gain on available-for-sale securities 6,908 -
-------- --------
TOTAL PARTNERS' DEFICIT (66,650) (71,088)
-------- --------
$119,426 $105,358
======== ========
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements.
-2-
3
FALCON CABLE SYSTEMS COMPANY
CONDENSED STATEMENTS OF OPERATIONS
Unaudited
--------------------------------
Three months ended
March 31,
--------------------------------
1994 1995
-------- --------
(Dollars in thousands except
per unit information)
REVENUES $ 13,340 $ 12,970
--------- ---------
OPERATING EXPENSES:
Service costs 3,935 4,026
General and administrative expenses 1,994 1,748
General Partner management fees
and reimbursed expenses 1,195 1,128
Depreciation and amortization 4,559 4,524
--------- ---------
11,683 11,426
--------- ---------
Operating income 1,657 1,544
INTEREST EXPENSE, NET (3,199) (4,081)
OTHER INCOME (EXPENSE), NET (89) 7,502
--------- ---------
NET INCOME (LOSS) $ (1,631) $ 4,965
========= =========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ (0.25) $ 0.77
========= =========
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS
OUTSTANDING DURING PERIOD 6,398,913 6,398,913
========= =========
See accompanying notes to condensed financial statements.
-3-
4
FALCON CABLE SYSTEMS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
------------------------------
Three months ended
March 31,
------------------------------
1994 1995
-------- --------
(Dollars in Thousands)
Net cash provided by operating activities $ 1,807 $ 2,879
-------- --------
Cash flow from investing activities:
Capital expenditures (1,326) (2,270)
Other intangibles (55) (91)
Sale of available-for-sale securities - 7,764
Acquisitions of cable television systems (1,464) -
-------- --------
Net cash provided (used) in investing activities (2,845) 5,403
-------- --------
Cash flow from financing activities:
Borrowings 4,167 308
Repayment of debt (3,675) (8,786)
Distributions to partners - (2,495)
-------- --------
Net cash provided (used) by financing activities 492 (10,973)
-------- --------
Decrease in cash (546) (2,691)
Cash at beginning of period 1,186 2,987
-------- --------
Cash at end of period $ 640 $ 296
======== ========
See accompanying notes to condensed financial statements.
-4-
5
FALCON CABLE SYSTEMS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The interim condensed financial statements for the three months ended March
31, 1995 and 1994 are unaudited. It is suggested that these condensed interim
financial statements 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, 1995 are not necessarily indicative of the
results for the entire year.
NOTE 2 - SALE OF AVAILABLE-FOR-SALE SECURITIES
On February 10, 1995 the Partnership received net proceeds of approximately
$7,764,000 in connection with the closing of the tender offer to acquire QVC by
Liberty Media Corporation and Comcast Corporation for $46.00 per share. This
resulted in a gain of $7,562,000, which is included in other income. A special,
one-time distribution to Unitholders of approximately $2,495,000 related to this
transaction was declared on March 14, 1995. The remaining proceeds of $5,269,000
were used to temporarily pay down bank debt.
NOTE 3 - EARNINGS PER EQUIVALENT UNIT
Earnings per limited partnership unit are based on the weighted average
number of limited partnership units outstanding during the periods presented.
For this purpose, earnings are allocated 99% to the limited partners and 1% to
the General Partner.
-5-
6
FALCON CABLE SYSTEMS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
On February 22, 1994, the Federal Communications Commission (the "FCC")
announced the adoption of significant amendments to its regulations implementing
certain provisions of the 1992 Cable Act, including those relating to rate
regulation which had previously become effective on September 1, 1993. The
amended rate regulation rules were implemented by management during the quarter
ended September 30, 1994. Additional amendments were adopted November 10, 1994
and became effective January 1, 1995. Compliance with these rules has had, and
will most likely continue to have, a significant negative impact on the
Partnership's revenues and cash flow. Based on certain recent FCC decisions that
have been released, however, the Partnership's management presently believes
that revenues for the first quarter of 1995 fully reflect the impact of the 1992
Cable Act. Nonetheless, management expects that certain costs, including
programming costs, will continue to rise at a rate in excess of that which the
Partnership will be permitted to pass on to its customers. Furthermore, given
events since the enactment of the 1992 Cable Act, there can be no assurance as
to what, if any, future action may be taken by Congress, the FCC or any other
regulatory authority or court, or the effect thereof on the Partnership's
business. In addition to the information set forth in this report, reference is
made to the Partnership's Form 10-K for the year ended December 31, 1994 for
additional information regarding the negative impact of the 1992 Cable Act on
the Partnership's business. See "Liquidity and Capital Resources."
March 31,
---------------------
1994 1995
---- ----
Revenues 100% 100%
--- ---
Cost of services and expenses:
Service costs 30 31
Operating, general and
administrative expenses 15 13
General Partner management fees
and reimbursed expenses 9 9
Depreciation and amortization 34 35
--- ---
88 88
--- ---
Operating income 12 12
Interest expense, net (23) (32)
Other income (expense) ( 1) 58
--- ---
Net loss (12)% 38%
=== ===
-6-
7
RESULTS OF OPERATIONS
The Partnership's revenues decreased from $13.3 million to $12.9 million,
or by 2.8%, during the three months ended March 31, 1995 compared to the
corresponding period in 1994. Of the $370,000 net decrease in revenues,
approximately $737,000 was estimated to be due to decreases in rates implemented
in 1994 to comply with the 1992 Cable Act. This decrease was partially offset by
approximately $180,000 related to increases in the number of subscriptions for
services, approximately $117,000 in other revenue producing items, approximately
$41,000 related to an increase in premium service rates implemented during the
fourth quarter of 1994 and $29,000 from an acquisition. As of March 31, 1995,
the Partnership had approximately 133,731 homes subscribing to cable service and
52,976 premium service units.
Service costs increased from $3.9 million to $4.0 million, or by 2.3%,
during the three months ended March 31, 1995 compared to the corresponding
period for 1994. Service costs represent costs directly attributable to
providing cable services to customers. Of the $91,000 increase in service costs,
$101,000 related to increases in programming fees (including primary satellite
fees). The increase in programming fees was due to a combination of higher rates
charged by program suppliers and expanded programming usage relating to channel
line-up restructurings and retransmission consent arrangements implemented to
comply with the 1992 Cable Act. This increase was offset by a $10,000 decrease
in other service costs.
General and administrative expenses decreased from $2.0 million to $1.8
million, or by 12.3%, during the three months ended March 31, 1995 compared to
the corresponding period in 1994. Of the $246,000 decrease, $119,000 was related
to refunds of insurance costs primarily due to adjustments to workers
compensation premiums, $83,000 related to reductions in bad debt expense,
$58,000 related to decreased marketing costs and $27,000 related to decreases in
other general and administrative expenses. These decreases were partially offset
by an increase of approximately $41,000 in personnel costs.
General partner management fees and reimbursed expenses decreased from $1.2
million to $1.1 million, or by 5.6%, during the three months ended March 31,
1995 compared to the corresponding period for 1994. Of the $67,000 decrease,
$49,000 related to decreases in reimbursable operating expenses of the general
partner and $18,000 related to decreases in management fees based on the
Partnership's revenue. See "Liquidity and Capital Resources."
Depreciation and amortization expense was approximately $4.5 million during
both the 1994 and the 1995 three month periods ended March 31.
Operating income decreased from $1.6 million to $1.5 million, or by 6.8%,
during the three months ended March 31, 1995 compared to the corresponding
period in 1994. The $113,000 decrease was due primarily to decreased revenues of
$370,000, decreases of $246,000 in general and administrative costs, $67,000 in
general partner management fees and reimbursed expenses and
-7-
8
FALCON CABLE SYSTEMS COMPANY
RESULTS OF OPERATIONS (cont.)
$35,000 in depreciation and amortization expense. These decreases were partially
offset by increases of $91,000 in service related costs, principally programming
fees.
Interest expense net, including the effects of interest rate hedging
agreements, increased from $3.2 million to $4.1 million, or by 27.6%, during the
three months ended March 31, 1995 compared to the corresponding period for 1994.
Higher average interest rates (9.6% during 1995 compared to 7.6% during 1994)
resulted in higher interest expense of approximately $848,000. Lower average
borrowings during 1995 compared to 1994 resulted in a decrease of $11,000. An
increase of approximately $46,000 primarily relates to amortization of deferred
loan costs related to rate caps and bank credit amendment fees. The hedging
agreements resulted in additional interest expense of $241,000 during the three
months ended March 31, 1995 compared to additional interest expense of $824,000
during the three months ended March 31, 1994.
Other income increased approximately $7.6 million during the three months
ended March 31, 1995 compared to the corresponding period for 1994 due to a
non-recurring gain from the sale of marketable securities as discussed in Note 2
to Condensed Financial Statements. Other expense decreased from approximately
$89,000 to $59,000 during the three months ended March 31, 1995 compared to the
corresponding period for 1994 primarily due to reductions in the cost of
generating tax basis accounting information for the Unitholders.
Due to the factors described above, the Partnership's net income increased
from a $1.6 million loss during the three months ended March 31, 1994 to $5.0
million of income for the three months ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As previously stated, the FCC's amended rate regulation rules related to
the 1992 Cable Act were implemented by management during the quarter ended
September 30, 1994. Compliance with these rules has had, and most likely will
continue to have, a significant negative impact on the Partnership's revenues
and cash flow. Such reductions have required the Partnership to negotiate a
significant amendment to its Bank Credit Agreement, (the "Amendment"), which
provides relief in complying with certain financial covenants and permits a
specific level of capital expenditures in 1995 and 1996 that would not otherwise
have been available.
The Partnership's primary need for capital has been to finance plant
extensions, rebuilds and upgrades and to add addressable converters to certain
cable systems. The Partnership spent $7.8 million during 1993 and $8.3 million
during 1994 on non-acquisition capital expenditures, and also spent
approximately $1.7 million to acquire cable systems in Oregon in March 1994. The
Partnership had planned to spend approximately $19 million during 1994 for
upgrades of certain of
-8-
9
FALCON CABLE SYSTEMS COMPANY
LIQUIDITY AND CAPITAL RESOURCES (cont.)
its regions, line extensions and new equipment. As previously discussed, the
Partnership postponed a number of rebuild and upgrade projects that were planned
for 1993 and 1994 because of the uncertainty related to implementation of the
1992 Cable Act and the impact thereof on the Partnership's business and access
to capital. The Partnership's access to capital remains severely restrained due
not only to the adverse effect of re-regulation but also because of the limited
remaining life of the Partnership. As a result, even after giving effect to
certain upgrades and rebuilds expected to be completed in 1995, the
Partnership's systems will be significantly less technically advanced than had
been expected prior to the implementation of re-regulation. The Partnership
believes that the delays in upgrading many of its systems will, under present
market conditions, most likely have an adverse effect on the value of those
systems compared to systems that have been rebuilt to a higher technical
standard.
The Partnership's management currently intends to spend approximately
$18.4 million in 1995 and $7.5 million in 1996 for capital expenditures,
including amounts required to comply with FCC technical standards. However, the
Partnership's ability to fund these capital expenditures will continue to be
dependent on it's ability to remain in compliance with the financial covenants
contained in the amended Bank Credit Agreement, of which there can be no
assurance.
The Amendment, which became effective as of December 31, 1994, implements,
among other things, significant changes which are discussed in detail in the
Partnership's Form 10-K for the year ended December 31, 1994. In summary, the
Amendment reinstates a revolving credit facility through December 31, 1996,
thereby eliminating previously required principal payments of approximately $34
million. The Amendment also requires additional deferral of management fees,
increases the allowable capital expenditure levels for 1995 and 1996, changes
the maturity of the Bank Credit Agreement to December 31, 1996 to coincide with
the presently scheduled termination of the Partnership, and increases the
interest rates the Partnership will pay. The Partnership paid its lenders fees
of approximately $900,000 in March 1995 for this amendment.
At March 31, 1995, the amount outstanding under the Bank Credit Agreement
was $156.3 million and the Partnership had available to it additional borrowings
thereunder of $10.7 million. As of March 31, 1995, borrowings under the Bank
Credit Agreement bore interest at an average rate of 9.5% (including the effect
of interest rate hedging transactions). The amended Bank Credit Agreement has
fixed the pricing at 1.375% over prime, 2.375% over LIBOR, or 2.5% over the CD
rate. The Partnership has entered into interest rate hedging agreements
aggregating a net notional amount at March 31, 1995 of $95 million. The
agreements serve as a hedge against interest rate fluctuations associated with
the Partnership's variable rate debt. These agreements expire through February
3, 1997.
-9-
10
FALCON CABLE SYSTEMS COMPANY
LIQUIDITY AND CAPITAL RESOURCES (cont.)
The Bank Credit Agreement also places certain restrictions on the annual
amount of management fees and reimbursed partnership expenses that the
Partnership may pay in cash, with any excess deferred. During the three months
ended March 31, 1995, the Partnership deferred additional payments of
approximately $458,000 of fees and reimbursed expenses charged by its General
Partner in order to maintain compliance with certain cash flow covenants. Total
management fees and reimbursed expenses deferred as of March 31, 1995 amounted
to approximately $3.5 million. The Partnership will continue to defer a portion
of such fees and expenses during 1995 and 1996. The Partnership will be
obligated to pay these deferred management fees and reimbursed expenses as soon
as the restrictions imposed by the Bank Credit Agreement are removed.
The Bank Credit Agreement also contains various restrictions relating to,
among other things, mergers and acquisitions, investments, capital expenditures,
a change in control and the incurrence of additional indebtedness, and also
requires compliance with certain financial covenants. The Partnership believes
that it was in compliance with all such requirements as of March 31, 1995.
On February 10, 1995, the Partnership received net proceeds of
approximately $7.8 million in connection with the closing of the tender offer to
acquire QVC by Liberty Media Corporation and Comcast Corporation for $46.00 per
share. The net proceeds of approximately $5.3 million (after a $2.5 million
special distribution paid to Unitholders in March 1995) were used to temporarily
pay down bank debt.
The Partnership Agreement, as amended on January 23, 1990, provides that
without the approval of a majority of interests of limited partners, the
Partnership may not incur any borrowings unless the amount of such borrowings
together with all outstanding borrowings (less cash and cash equivalents) does
not exceed 65% of the greater of the aggregate cost or current fair market value
of the Partnership's assets as determined by the General Partner. The
Partnership may encounter difficulty complying with this provision depending
upon the ultimate impact of the 1992 Cable Act on the fair market value of cable
properties.
The Partnership Agreement provides that the General Partner shall use its
best efforts to cause the Partnership to sell all of the Partnership's cable
systems between December 31, 1991 and December 31, 1996, the "termination date"
of the Partnership. The Partnership has initiated preliminary discussions with
its financial advisors to identify appropriate methods for the sale of its
systems or other restructuring of the Partnership.
-10-
11
FALCON CABLE SYSTEMS COMPANY
LIQUIDITY AND CAPITAL RESOURCES (concluded)
Three months ended March 31, 1995 and 1994
Cash provided by operating activities increased from $1.8 million to $2.9
million for the three months ended March 31, 1995 compared to the corresponding
period of 1994. Of the $1.1 million increase, approximately $502,000 relates to
proceeds from a marketing incentive paid by the Home Shopping Network ("HSN").
Although advance payment was received during the quarter ended March 31, 1995,
recognition of the revenue is being deferred over ten years in accordance with
the HSN contract.
Cash from investing activities increased from a use of cash of $2.8
million for the three months ended March 31, 1994 to cash provided of $5.4
million for the three months ended March 31, 1995, or a change of $8.2 million.
The increase was due primarily to approximately $7.8 million of net proceeds
received by the Partnership upon the closing of the tender offer to acquire QVC
by Liberty Media Corporation and Comcast Corporation described above, partially
offset by an increase of approximately $944,000 in capital expenditures
primarily related to system rebuilds. In addition, the 1994 period included $1.5
million to acquire a cable system. There were no acquisitions in 1995. Cash used
by financing activities increased by approximately $11.5 million during the
three months ended March 31, 1995 compared to the corresponding period for 1994
and was due to the net increase in repayments of debt of approximately $9.0
million and $2.5 million in distributions to Partners as mentioned above.
Operating Income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 46.6% to 46.8% during the three months
ended March 31, 1995 compared to the corresponding period for 1994. The increase
was primarily caused by decreases in general and administrative expenses and
decreases in fees reimbursed to the General partner. EBITDA decreased from $6.2
million to $6.1 million, or by 2.4%, for the three months ended March 31, 1995
compared to the corresponding period for 1994.
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement and billing and marketing generally
increase with inflation. The Partnership does not believe that its financial
results have been, or will be, adversely affected by inflation, 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.
-11-
12
FALCON CABLE SYSTEMS COMPANY
PART II. OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.30 City of Silverton, Oregon
renewal of franchise for
an additional 5 years.
(b) No reports on Form 8-K were filed during the
quarter for which this report is filed.
-12-
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALCON CABLE SYSTEMS COMPANY
a CALIFORNIA LIMITED PARTNERSHIP
--------------------------------
(Registrant)
By: Falcon Cable Investors Group
Managing General Partner
By: Falcon Holding Group, L.P.
General Partner
By: Falcon Holding Group, Inc.
General Partner
Date: May 10, 1995 By: /s/ Michael K. Menerey
--------------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer
14
FALCON CABLE SYSTEMS COMPANY
EXHIBIT INDEX
Exhibit
Number Description
- - - - - ------- -----------
10.30 City of Silverton, Oregon renewal of franchise for
an additional 5 years.
E-1