1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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 33-60776
Falcon Holding Group, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-4408577
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 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
--- ---
The Exhibit Index is located at Page E-1.
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PART I - FINANCIAL INFORMATION
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
===========================================
December 31, March 31,
1995* 1996
----------- ----------
(unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 15,050 $ 11,019
Receivables:
Trade, less allowance of $830,000 and $618,900 for possible losses 7,378 6,943
Affiliates 10,023 11,809
Other assets 5,419 5,008
Cable materials, equipment and supplies 4,038 4,170
Investment in affiliated partnerships and other investments 11,934 12,279
Property, plant and equipment, less accumulated depreciation
and amortization of $186,274,000 and $194,679,000 228,249 224,703
Franchise cost, less accumulated amortization of
$149,105,000 and $156,634,000 221,057 212,203
Goodwill, less accumulated amortization of
$5,246,000 and $6,557,000 63,516 62,583
Customer lists and other intangible costs, less
accumulated amortization of $5,539,000 and $5,994,000 6,521 5,729
Deferred loan costs, less accumulated amortization
of $3,282,000 and $3,918,000 12,073 11,425
--------- ---------
$ 585,258 $ 567,871
========= =========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable $ 669,019 $ 673,238
Accounts payable 5,811 2,993
Accrued expenses and other 35,274 26,728
Customer deposits and prepayments 1,058 1,208
Deferred income taxes 9,085 7,440
Minority interest 227 219
Equity in losses of affiliated partnerships in excess of investment 4,563 4,551
--------- ---------
TOTAL LIABILITIES 725,037 716,377
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 271,902 271,902
--------- ---------
PARTNERS' DEFICIT:
General partner (12,091) (12,183)
Limited partners (399,423) (408,418)
Unrealized gain (loss) on available-for-sale securities (167) 193
--------- ---------
TOTAL PARTNERS' DEFICIT (411,681) (420,408)
--------- ---------
$ 585,258 $ 567,871
========= =========
*As presented in the audited financial statements.
See accompanying notes to condensed consolidated financial statements.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
===============================================
Unaudited
------------------------
Three months ended
March 31,
------------------------
1995 1996
-------- --------
Restated
(Dollars in Thousands)
REVENUES $ 36,911 $ 46,203
-------- --------
OPERATING EXPENSES:
Service costs 10,784 12,756
General and administrative expenses 6,979 7,984
Depreciation and amortization 13,610 20,150
-------- --------
Total expenses 31,373 40,890
-------- --------
Operating Income 5,538 5,313
INTEREST EXPENSE, NET (13,321) (15,602)
OTHER INCOME (EXPENSE):
Other, net 13,166 1,180
Equity in net loss of investee
limited partnerships (1,379) 15
Minority interest in net loss of
consolidated subsidiary 28 8
-------- --------
NET INCOME (LOSS) $ 4,032 $ (9,086)
======== ========
See accompanying notes to condensed consolidated financial statements.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
===============================================
Unaudited
--------------------
Three months ended
March 31,
--------------------
1995 1996
-------- --------
(Dollars in thousands)
Net cash provided by operating activities $ 6,611 $ 10,211
-------- --------
Cash flows from investing activities:
Capital expenditures (4,399) (5,563)
Increase in intangible assets (322) (501)
Proceeds from sale of property, plant and equipment 4 102
Distributions from investee limited partnerships 2 17
Sale of available-for-sale securities 13,490 -
Investments in affiliated partnerships and other investments (669) -
-------- --------
Net cash provided by (used in) investing activities 8,106 (5,945)
-------- --------
Cash flows from financing activities:
Borrowings from notes payable 3,700 2,555
Repayment of debt (19,537) (10,864)
Deferred loan costs (1,465) 12
Contributions from partners 260 -
Minority interest capital contributions 130 -
-------- --------
Net cash used in financing activities (16,912) (8,297)
-------- --------
Net decrease in cash and cash equivalents (2,195) (4,031)
Cash and cash equivalents at
beginning of period 10,468 15,050
-------- --------
Cash and cash equivalents at
end of period $ 8,273 $ 11,019
======== ========
See accompanying notes to condensed consolidated financial statements.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
=====================================================
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 Partnership was organized on March 29, 1993 to assume the cable
system management operations of FHGI and executed an agreement with Falcon
Cablevision, Falcon Telecable, Falcon Cable Media and Falcon Community Cable,
L.P. (the "Owned Partnerships"), whereby the Partnership issued partnership
units in exchange for the direct and indirect ownership of more than 99 percent
of each of the Owned Partnerships (the "Consolidation"). For accounting
purposes, the Consolidation was accounted for as a reorganization of affiliates
under common control and reported in a manner similar to a pooling-of-interests.
As noted in its latest Annual Report on Form 10-K, on December 28, 1995
the Partnership completed its acquisition of all of the direct and indirect
ownership interests in Falcon First, Inc., a Delaware corporation ("Falcon
First" or "First"), which it did not already own. Falcon First, through
wholly-owned subsidiaries, owns cable television systems in Georgia, Alabama,
Mississippi and New York. Prior to the transaction, the Partnership had managed
the First cable systems for a fee and held an indirect, minority interest in its
former parent company, Falcon First Communications, L.P. Falcon First was
previously managed by the Partnership and, as such, classified as an "Affiliated
Partnership" in prior periods. Commencing December 28, 1995. Falcon First has
been included as an Owned Partnership, and its systems included as Owned
Systems.
The acquisition was accounted for by the purchase method of accounting,
whereby the purchase price was allocated to the assets and liabilities assumed
based on the estimated fair values at the date of acquisition. 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 prior management agreement with First. As a result, the
historical results of operations for 1995 are not comparable to the 1996
results, which include the operations of First.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
=====================================================
The following table sets forth certain pro forma combined operating
data assuming that the acquisition of First by the Partnership had occurred on
January 1, 1995:
Unaudited
------------------------------------------------------
Three months ended March 31, 1995 Three months
------------------------------------------------------ ended
Historical Falcon Pro Forma Pro Forma March 31,
as Restated First Adjustments (1) Combined 1996
----------- -------- ----------------------------- ------------
(Dollars in thousands)
OPERATIONS STATEMENT
DATA
Revenues $ 36,911 $ 7,683 $ (379) $ 44,215 $ 46,203
Service, general and
administrative costs and
expenses 17,763 3,816 (379) 21,200 20,740
Depreciation and amortization 13,610 5,052 1,413 20,075 20,150
-------- -------- -------- -------- --------
Operating income 5,538 (1,185) (1,413) 2,940 5,313
Interest income (expense), net (13,321) (3,249) 815 (15,755) (15,602)
Other income (expense), net 11,815 (99) 2,954 14,670 1,203
-------- -------- -------- -------- --------
Net income (loss) $ 4,032 $ (4,533) $ 2,356 $ 1,855 $ (9,086)
======== ======== ======== ======== ========
CASH FLOWS STATEMENT DATA
Net cash provided by
operating activities $ 6,611 $ 2,841 $ 591 $ 10,043 $ 10,211
Net cash provided by (used in)
investing activities 8,106 (724) - 7,382 (5,945)
Net cash used in
financing activities (16,912) - - (16,912) (8,297)
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents (2,195) 2,117 591 513 (4,031)
Cash and cash equivalents
at beginning of period 10,468 3,749 - 14,217 15,050
-------- -------- -------- -------- --------
Cash and cash equivalents
at end of period $ 8,273 $ 5,866 $ 591 $ 14,730 $ 11,019
======== ======== ======== ======== ========
(1) The pro forma adjustments relate to the elimination of management
fee income and expense between the Partnership and Falcon First; to adjustments
to depreciation and amortization expense to reflect the acquisition; to
adjustments to interest expense to reflect the effects of the refinancing that
took place on December 28, 1995: and to record estimated future tax benefits
related to Falcon First.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
====================================================
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three months ended March 31,
1996 and 1995 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,
1996 are not necessarily indicative of the results for the entire year.
NOTE 3 - MINORITY INTEREST
Included in the operations of Falcon Telecable, one of the Owned
Partnerships, are the results of operations of Lake Las Vegas Cablevision, L.P.,
a Delaware limited partnership, 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 - SUBSEQUENT EVENTS
On April 10, 1996, the Partnership executed a contract to sell certain
Owned Systems located in Georgia and acquired from Falcon First in December 1995
to Teleview, Inc. for $15 million. These cable systems served approximately
9,500 homes subscribing to cable service at March 31, 1996. Closing of the sale
is dependent upon franchise and regulatory transfers and consents, and is
expected to occur during the third quarter.
NOTE 5 - RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
NOTE 6 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As a result of the December 28, 1995 acquisition of the stock of Falcon
First, Inc., the Partnership has restated the consolidated Statement of
Operations for the three months ended March 31, 1995 to reflect FHGLP's equity
in the net losses of Falcon First, Inc. which were not previously recorded. Such
losses were not previously recorded because FHGLP recorded losses only to the
extent of its obligation as the ultimate general partner of Falcon First
Communications, L.P., which previously owned 100% of the stock of Falcon First,
Inc. The effect of the restatement was to increase equity in net loss of
Affiliated Partnerships and net loss for the three months ended March 31, 1995
by $1,256,000 and to increase partner's deficit by $10,513,000 to reflect the
full effect of the restatement through December 31, 1995.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 (the "1996 Telecom Act"). This statute
substantially changed the competitive and regulatory environment for
telecommunications providers by significantly amending the Communications Act of
1934, including certain of the rate regulation provisions previously imposed by
the Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). Compliance with those rate regulations has had a negative impact on
the Partnership's revenues and cash flow. However, the Partnership believes that
recent policy decisions by the Federal Communications Commission (the "FCC")
will permit it to increase regulated service rates in the future in response to
specified historical and anticipated future cost increases, although certain
costs may continue to rise at a rate in excess of that which the Partnership
will be permitted to pass on to its customers. The 1996 Telecom Act provides
that certain of the rate regulations will be phased-out altogether in 1999.
Further, the regulatory environment will continue to change pending, among other
things, the outcome of legal challenges and FCC rulemaking and enforcement
activity in respect of the 1992 Cable Act and the completion of a significant
number of FCC rulemakings under the 1996 Telecom Act. There can be no assurance
as to what, if any, future action may be taken by the FCC, Congress or any other
regulatory authority or court, or the effect thereof on the Partnership's
business. Accordingly, the Partnership's historic interim financial results as
described below are not necessarily indicative of future performance.
In addition to the information set forth in this report, reference is
made to the Partnership's Annual Report on Form 10-K for the year ended December
31, 1995 for additional information regarding regulatory matters and the effect
thereof on the Partnership's business.
As discussed in Note 1 to Condensed Consolidated Financial Statements,
the historical results of operations of the Partnership for 1995 did not include
the results of Falcon First. In order to provide a more accurate description of
the changes in the Partnership's 1996 results of operations compared to 1995,
the discussion that follows is based upon 1996 results of operations compared to
the pro-forma combined 1995 results that are set forth in Note 1 to Condensed
Consolidated Financial Statements.
RESULTS OF OPERATIONS
The Partnership's revenues increased from $44.2 million to $46.2
million, or by 4.5%, for the three months ended March 31, 1996 compared to the
corresponding period in 1995. This net increase in revenues of $2.0 million
reflects increased cable service revenues. The $2.0 million increase in cable
service revenues was caused principally by increases of $1.5 million due to
increases in regulated service rates permitted under the 1992 Cable Act that
were implemented in April 1995 and by a $423,600 increase related to other
revenue producing items (primarily advertising sales). As of March 31, 1996, the
Owned Systems had approximately 420,900 homes subscribing to cable service and
181,500 premium service units.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
Management and consulting fees earned by the Partnership remained
relatively unchanged at $1.7 million for the three months ended March 31, 1996
compared to the corresponding period in 1995.
Service costs decreased from $13.3 million to $12.8 million, or by
3.8%, for the three months ended March 31, 1996 compared with the corresponding
period in 1995. Service costs represent costs directly attributable to providing
cable services to customers. The $533,800 decrease in service costs related
primarily to decreases in programming costs of $442,000 and increases of
$375,000 in capitalized labor related to increased construction activity,
partially offset by increases of $152,000 in franchise and copyright fees
(related to increased revenues) and increases in other service costs of
$131,000. The decrease in programming costs resulted from a decrease of $104,000
in the cost of program guides and to adjustments of estimated programming costs
to reflect actual contracts that have recently been negotiated.
General and administrative expenses increased from $7.9 million to $8.0
million, or by 1.3%, for the three months ended March 31, 1996 compared to the
corresponding period in 1995. The $73,700 increase related primarily to a
$290,700 increase in marketing costs, and a $145,300 increase in personnel costs
due to cost of living increases. These increases were partially offset by a
$329,700 reimbursement of expenses related to certain international investment
activities which were the responsibility of the Partnership until the third
quarter of 1995.
Depreciation and amortization expense remained relatively unchanged at
$20.1 million for the three months ended March 31, 1996 compared to the
corresponding period in 1995. Depreciation expense increased by approximately
$1.5 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 $700,000 due to the depreciation of property,
plant and equipment additions. These increase were substantially offset by
intangible assets becoming fully amortized and the estimated useful lives of
certain other intangible assets being revised.
Operating income increased from $2.9 million to $5.3 million, or by
82.8%, for the three months ended March 31, 1996 compared with the corresponding
period for 1995. The $2.4 million increase was due principally to revenue
increases of $2.0 million and to decreases in operating expenses of $385,000 as
discussed above.
Interest expense, including the effects of interest rate hedging
agreements, decreased from $15.8 million to $15.6 million, or by 1.3%, for the
three months ended March 31, 1996 compared to the corresponding period in 1995.
Lower average interest rates (9.3% during the three months ended March 31, 1996
compared to 10% during the corresponding period in 1995) accounted for the
majority of the decrease. Payment-in-kind interest expense (in which interest
payment requirements are met by an increase in the notes) associated with the
11% Senior Subordinated Notes amounted to $12.5 million for the three months
ended March 31, 1996 compared to $11.7 million for the corresponding period in
1995. Interest rate hedging agreements resulted in additional interest expense
of $171,000 during the three months ended March 31, 1996 compared to $154,000
during the corresponding period in 1995.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONCLUDED)
Other income was $1.2 million for the three months ended March 31, 1996
compared to $14.7 million for the corresponding period in 1995. The change was
primarily due to a $13.3 million non-recurring gain from the sale of marketable
securities during 1995.
Due to the factors described above, the Partnership's net income of
$1.8 million for the three months ended March 31, 1995 changed to a $9.1 million
net loss for the three months ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Partnership's primary need for capital has been to
finance plant extensions, rebuilds and upgrades, and to add addressable
converters to certain of the Owned Systems. The Partnership spent $37.1 million
during 1995 on non-acquisition capital expenditures. Management's current plan
calls for the expenditure of approximately $95.8 million and $96.6 million in
capital expenditures in 1996 and 1997, respectively, including approximately
$72.7 million and $61.1 million, respectively, to rebuild and upgrade certain of
the Owned Systems. The Partnership's proposed spending plans will require
continued compliance with certain covenants of the Partnership's loan
agreements, of which there can be no assurance. The Partnership spent $5.6
million on non-acquisition capital expenditures during the three months ended
March 31, 1996.
As previously discussed in more detail in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1995, on December 28, 1995
the Partnership acquired all of the direct and indirect ownership interests in
Falcon First that it did not already own. Falcon First was previously managed by
the Partnership. In connection with the acquisition of Falcon First, on December
28, 1995 the Partnership entered into a new $435 million Bank Credit Agreement.
The Partnership is currently in negotiations to sell certain of the
Falcon First cable assets, and, as disclosed in Note 1 to Condensed Consolidated
Financial Statements, an agreement to sell certain of the assets for $15 million
has been executed. The combined cable assets to be sold generated approximately
5.3% of consolidated revenues for the three months ended March 31, 1996. The
Partnership is under no obligation to consummate such transactions, although the
failure to do so would result in the reduction of capital expenditures permitted
under the Bank Credit Agreement. If such sales occur, of which there can be no
assurance, any resulting gain or loss on sale will be recorded as an adjustment
to goodwill, and the proceeds of the sales will be used to temporarily pay down
outstanding debt under the Bank Credit Agreement.
The new Bank Credit Agreement provides for maximum available borrowings
as follows: $435 million at December 31, 1996 and 1997; $389 million at December
31, 1998; $323 million at December 31, 1999; $241 million at December 31, 2000;
$228 million at December 31, 2001; and $157 million at December 31, 2002. As of
March 31, 1996, the amount outstanding under the Bank Credit Agreement
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
was $389 million and the Partnership had available to it additional borrowings
thereunder of approximately $46 million. The Bank Credit Agreement requires that
interest be tied to the ratio of consolidated total debt to consolidated
annualized cash flow (in each case, as defined therein), and further requires
that the Partnership must maintain hedging arrangements with respect to at least
50% of the outstanding borrowings thereunder. As of March 31, 1996, borrowings
under the Bank Credit Agreement bore interest at an average rate of 7.55%
(including the effect of interest rate hedging transactions). The Partnership
has entered into fixed interest rate hedging agreements with an aggregate
notional amount at March 31, 1996 of $430 million. Agreements in effect at March
31, 1996 totaled $280 million, with the remaining $150 million scheduled to
become effective as certain of the existing contracts mature during 1996 and
1997. The agreements serve as a hedge against interest rate fluctuations
associated with the Partnership's variable rate debt. These agreements expire
through May 27, 2000. The Bank Credit Agreement also contains various
restrictions relating to, among other things, mergers and acquisitions, a change
in control and the incurrence of additional indebtedness and also requires
compliance with certain financial covenants. The Partnership believes that it
was in compliance with all such requirements as of March 31, 1996.
The Partnership (i.e., FHGLP) is a separate, stand-alone holding
company which employs all of the management personnel. All of the Owned
Partnerships are subsidiaries of the Partnership. Accordingly, the Partnership
is financially dependent on the receipt of permitted payments from the Owned
Partnerships, management and consulting fees from both domestic and the
remaining international cable ventures, and the reimbursement of specified
expenses by certain of the Affiliated Partnerships to fund its operations.
Expected increases in the funding requirements of the Partnership combined with
limitations on its sources of cash may create liquidity issues for the
Partnership in the future. Specifically, the new Bank Credit Agreement permits
the Owned Partnerships to remit to FHGLP no more than 3.75% of their net cable
revenues, as defined, in any year. For 1995, that limit was approximately $4.9
million ($3.0 million was actually remitted). In addition, the management fees
and reimbursed expenses earned from the Affiliated Partnerships have been
adversely affected by the FCC's rate regulations (to the extent those fees are
based on revenues of the Affiliated Partnerships), as well as by payment
restrictions currently imposed, or which may be imposed in the future, by the
senior lenders to several of those entities As a result, a portion of the
payment of fees due to FHGLP has been deferred in prior years due to such
restrictions, which increases the amount required to be funded by the Owned
Partnerships. One such partnership, Falcon Cable Systems Company ("FCSC"), which
pays both management fees and reimbursement of certain of the Partnership's
expenses, is presently scheduled to terminate in 1996. Based on an amendment to
the FCSC credit agreement, deferrals of both management fees and reimbursement
of certain of FHGLP's expenses increased in 1995 and will be significantly
greater in 1996. If FHGLP is unable to retain the FCSC systems under management
and thereby ceases to receive management fees from those systems, the loss of
such fees as revenue, while being partially offset by a reduction in FHGLP's
operating costs, would nevertheless negatively impact the Partnership's cash
flow and liquidity. The Partnership earned management fees and reimbursed
expenses from FCSC of $1.2 million for the three months ended March 31, 1996.
Receivables from the Affiliated Partnerships for services and reimbursements
described above amounted to approximately $11.8 million at March 31, 1996 and
include approximately $6.6 million related to fees and reimbursements deferred
as a result of the limitations described above.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Due to the uncertainty regarding its ability to meet the projected
liquidity needs outlined above, the Partnership cannot presently determine
whether it will have access to the capital required for it to continue to pursue
its traditional acquisition strategy if and when attractive acquisition
opportunities become available. The Partnership also possesses the right, under
certain circumstances, to acquire some or all of the Affiliated Systems. Any
exercise of such rights is similarly dependent on the availability of adequate
capital, of which there can be no assurance. FHGLP is considering the
possibility of exercising its rights under the FCSC partnership agreement to
purchase the Affiliated Systems held by FCSC at their appraised value (which has
been determined to be $247.4 million at December 31, 1995). There can be no
assurance that such a transaction will be completed.
On March 29, 1993, the Partnership issued $175 million aggregate
principal amount of its 11% Senior Subordinated Notes (the "Notes") in
connection with the Consolidation. As a result of payment-in-kind interest
payments, the aggregate principal of the Notes outstanding as of March 31, 1996
had increased to $240.3 million. Future interest payments are expected to be
paid in kind until the year 2000, when cash payment is required.
As of March 31, 1996, the Partnership also had outstanding an aggregate
of $43.6 million in principal amount of subordinated debt (other than the
Notes).
Enstar Communications Corporation, a wholly-owned subsidiary of one of
the Owned Partnerships ("ECC"), has guaranteed the debt obligations of certain
Enstar partnerships in which it acts as general partner. The Enstar partnerships
own cable television systems through limited partnerships, most of which are
publicly-held. At March 31, 1996, the maximum exposure to ECC pursuant to such
guarantees was approximately $11.6 million, plus accrued interest. This
guarantee is recourse only to the assets of ECC, which consist primarily of
equity interests in the Enstar partnerships.
The Partnership Agreement contains provisions that may require FHGLP to
purchase substantially all of the limited partnership interests held by the
Group I, II and III limited partners (constituting approximately 60% of the
common equity of the Partnership), at the holders' option, during the period
from September 15, 1996 to June 30, 1999. Certain of these interests are
mandatorily redeemable in 1998. Limited partnership interests held by the Group
IV limited partner become redeemable in 2004, subject to certain shared
liquidity rights. The purchase price for such partnership interests (other than
Class C partnership interests), which would be negotiated based on market
conditions or determined by an appraisal, is to be paid in cash or, under
certain circumstances, through the issuance of debt or equity securities. The
redemption value of the Class C partnership interests will generally be
determined based on a formula due to its preferred status. Certain of the
Partnership's debt agreements (including the Bank Credit Agreement and the
Notes) will restrict the Partnership'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 obligation to
redeem any significant amount of the limited partnership interests in the
Partnership could result in a material liquidity demand on the Partnership and
there can be no assurance that the Partnership will be able to raise such funds
on terms acceptable to the Partnership, or at all.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (PRO FORMA)
Cash from operating activities (including interest expense and
management fee income) increased from $10.0 million to $10.2 million for the
three months ended March 31, 1996, compared to the corresponding period in 1995,
an increase of $167,800. The increase resulted primarily from a $781,100
increase in payment-in-kind interest expense related to the 11% Subordinated
Notes issued March 29, 1993 partially offset by a net decrease of $613,300 in
other operating items (receivables, cable materials and supplies, payables,
accrued expenses and subscriber deposits and prepayments).
Cash used in investing activities changed from cash provided of $7.4
million for the three months ended March 31, 1996 to a use of cash of $5.9
million for the three months ended March 31, 1996, or a change of $13.3 million.
The change was due primarily to approximately $13.5 million of net proceeds
received by the Partnership during 1995 from the sale of marketable securities
and an increase in capital expenditures of $486,400. These increases were
partially offset by $669,400 of investments in limited partnerships during 1995
that did not recur in 1996. Cash used in financing activities decreased by $8.6
million during the three months ended March 31, 1996, due to decreased repayment
of debt in 1996 of $7.5 million and due to a $1.5 million decrease in deferred
costs.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 52.0% during the three months ended March
31, 1995 to 55.0% for the corresponding period in 1996. The increase was
primarily caused by revenue increases as described above. EBITDA increased from
$23.0 million to $25.4 million, or by 10.4%, for the three months ended March
31, 1996 compared to the corresponding period in 1995.
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that it is able to increase its service rates
periodically, of which there can be no assurance.
-13-
14
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.30 - First Amendment to and Extension of office
Lease between Raymond Business Center and Falcon Holding
Group, L.P.
Exhibit 10.31 - Asset purchase agreement by and among
subsidiaries of Falcon Holding Group, L.P. and Teleview,
Inc.
Exhibit 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 from time to time
party thereto.
Exhibit 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
(b) On January 16, 1996 the Registrant filed a Form 8-K dated
December 28, 1995 reporting under Item 2 its acquisition of
all of the capital stock of Falcon First, Inc.
On February 9, 1996 the Registrant filed a Form 8-K/A to
include financial statements and Pro Forma financial
information not previously filed with the January 16, 1996
filing.
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15
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 HOLDING GROUP, L.P.
a DELAWARE LIMITED PARTNERSHIP
(Registrant)
By: Falcon Holding Group, Inc.
General Partner
Date: May 9, 1996 By: /s/ Michael K. Menerey
------------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number Description
10.30 First Amendment to and Extension of office Lease between Raymond
Business Center and Falcon Holding Group, L.P.
10.31 Asset purchase agreement by and among subsidiaries of Falcon
Holding Group, L.P. and Teleview, Inc.
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 from time to
time party thereto.
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
E-1