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Exhibit No. 1A
Financial Statements
Falcon Cable Systems Company,
a California limited partnership
As of December 31, 1994, and 1995 and for
years ended December 31, 1993, 1994 and 1995
with Reports of Independent Auditors
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Falcon Cable Systems Company,
a California limited partnership
Financial Statements
As of December 31, 1994 and 1995 and for
years ended December 31, 1993, 1994 and 1995
CONTENTS
Report of Independent Auditors...............................................3
Report of Independent Certified Public Accountants ..........................4
Audited Financial Statements:
Balance Sheets..........................................................5
Statements of Operations ...............................................6
Statements of Partners' Equity (Deficit)................................7
Statements of Cash Flows................................................8
Summary of Accounting Policies...............................................9
Notes to Financial Statements...............................................12
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REPORT OF INDEPENDENT AUDITORS
Partners
Falcon Cable Systems Company (A California Limited Partnership)
We have audited the balance sheets of Falcon Cable Systems Company (a
California limited partnership) as of December 31, 1994 and 1995, and the
related statements of operations, partners' equity (deficit) and cash flows for
the years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of Falcon Cable Systems
Company at December 31, 1994 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1996, except for
Note 10 as to which the date is July 25, 1996
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Falcon Cable Systems Company
We have audited the accompanying statements of operations, partners' equity
(deficit), and cash flows of Falcon Cable Systems Company for the year ended
December 31, 1993. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on the
financial statements 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 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 presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Falcon
Cable Systems Company for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
February 16, 1994
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FALCON CABLE SYSTEMS COMPANY
BALANCE SHEETS
December 31,
-------------------------------------------
1994 1995
----------------- -----------
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 2,987 $ 2,018
Receivables, less allowance of $73,000
and $175,700 for possible losses 2,287 1,363
Prepaid expenses and other 1,390 1,835
Cable materials, equipment and supplies 1,206 1,418
Available-for-sale securities 7,110 -
Property, plant and equipment, less
accumulated depreciation 65,460 69,646
Franchise cost and goodwill, less
accumulated amortization of
$29,629,000 and $34,346,000 36,096 31,286
Customer lists and other intangible
costs, less accumulated amortization
of $9,480,000 and $1,862,000 2,890 2,299
----------------- -----------
$ 119,426 $ 109,865
================= ===========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
------------------------------------------
LIABILITIES:
Notes payable $ 170,439 $ 171,870
Accounts payable 2,487 1,694
Accrued expenses 9,463 10,905
Payable to general partner 3,003 4,621
Customer deposits and prepayments 684 632
----------------- -----------
TOTAL LIABILITIES 186,076 189,722
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY (DEFICIT)
General partner 42 (22)
Limited partners (73,600) (79,835)
Unrealized gain on available-for-sale securities 6,908 -
----------------- -----------
TOTAL PARTNERS' DEFICIT (66,650) (79,857)
----------------- -----------
$ 119,426 $ 109,865
================= ===========
See accompanying summary of accounting
policies and notes to financial statements.
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FALCON CABLE SYSTEMS COMPANY
STATEMENTS OF OPERATIONS
Year ended December 31,
------------------------------------------------------
1993 1994 1995
------------ ------------ ----------
(Dollars in thousands except net
loss per limited partnership unit)
REVENUES $ 53,743 $ 52,896 $ 52,935
EXPENSES:
Service costs 14,430 15,265 16,213
General and administrative expenses 7,986 8,367 8,188
General Partner management fees
and reimbursed expenses 4,742 4,625 4,619
Depreciation and amortization 17,223 17,345 16,825
------------ ------------ -----------
TOTAL EXPENSES 44,381 45,602 45,845
------------ ------------ -----------
Operating income 9,362 7,294 7,090
OTHER INCOME (EXPENSE)
Interest expense (14,553) (14,403) (16,897)
Interest income 43 91 102
Other income (expense) (350) (225) 5,901
------------ ------------ -----------
NET LOSS $ (5,498) $ (7,243) $ (3,804)
============ =========== ==========
NET LOSS PER LIMITED
PARTNERSHIP UNIT $ (0.85) $ (1.12) $ (0.59)
============ =========== ==========
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS OUTSTANDING
DURING PERIOD 6,398,913 6,398,913 6,398,913
See accompanying summary of accounting
policies and notes to financial statements.
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FALCON CABLE SYSTEMS COMPANY
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
Unrealized
Gain on
Available-
General Limited for-Sale
Partner Partners Securities Total
------- -------- ------------ -----
(Dollars in Thousands)
PARTNERS' EQUITY (DEFICIT),
January 1, 1993, $ 169 $ (60,986) $ - $ (60,817)
Net loss for year (55) (5,443) - (5,498)
----------- ------------ ---------- ----------
PARTNERS' EQUITY (DEFICIT),
December 31, 1993 114 (66,429) - (66,315)
Net loss for year (72) (7,171) - (7,243)
Unrealized gain on
available-for-sale
securities - - 6,908 6,908
----------- ------------ ---------- ----------
PARTNERS' EQUITY (DEFICIT),
December 31, 1994 42 (73,600) 6,908 (66,650)
Distributions to partners (25) (2,470) - (2,495)
Net loss for year (39) (3,765) - (3,804)
Sale of available-for-sale
securities - - (6,908) (6,908)
----------- ------------ ---------- ----------
PARTNERS' DEFICIT,
December 31, 1995 $ (22) $ (79,835) $ - $ (79,857)
=========== ============ ========== ==========
See accompanying summary of accounting
policies and notes to financial statements.
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FALCON CABLE SYSTEMS COMPANY
STATEMENTS OF CASH FLOWS
Year ended December 31
-----------------------------------------------------------
1993 1994 1995
------------------ ----------------- --------------
(Dollars in Thousands)
Cash flows from operating activities:
Net loss $ (5,498) $ (7,243) $ (3,804)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 17,223 17,345 16,825
Amortization of deferred loan costs - - 559
Gain on sale of available-for-sale securities - - (7,562)
Provision for losses on receivables 922 806 775
Deferred interest expense 595 685 957
Increase (decrease) from changes in:
Receivables (1,094) (1,870) 149
Prepaid expenses and other assets (176) (18) (446)
Cable materials and supplies 671 (536) (212)
Accounts payable 139 1,040 (793)
Accrued expenses and other 1,692 1,059 3,060
Customer deposits and prepayments (91) (174) (52)
Other 24 42 -
----------- ---------- --------
Net cash provided by
operating activities 14,407 11,136 9,456
----------- ---------- --------
Cash flows from investing activities:
Capital expenditures (7,789) (8,261) (14,926)
Increase in intangible assets (563) (308) (353)
Acquisition of cable television systems - (1,056) -
Proceeds from sale of available-for-sale
securities - - 7,764
----------- ---------- --------
Net cash used in
investing activities (8,352) (9,625) (7,515)
----------- ---------- --------
Cash flows from financing activities:
Borrowings under notes payable 11,324 14,927 13,329
Repayment of debt (15,360) (14,000) (12,854)
Distributions to partners (1,357) - (2,495)
Deferred loan costs (362) (637) (890)
----------- ---------- -------
Net cash provided by
(used in) financing activities (5,755) 290 (2,910)
----------- ---------- -------
Net increase (decrease) in cash 300 1,801 (969)
Cash and cash equivalents at
beginning of year 886 1,186 2,987
----------- ---------- -------
Cash and cash equivalents at end of year $ 1,186 $ 2,987 $ 2,018
=========== ========== =======
See accompanying summary of accounting
policies and notes to financial statements.
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FALCON CABLE SYSTEMS COMPANY
SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Falcon Cable Systems Company, a California limited partnership (the
"Partnership"), pays no income taxes as an entity. All of the income, gains,
losses, deductions and credits of the Partnership are passed through to its
partners. Congress has enacted legislation which should allow the Partnership
to retain its current tax status as a partnership through December 31, 1997, or
the term of the Partnership, which is scheduled to end on December 31, 1996.
The basis in the Partnership's assets and liabilities differs for financial and
tax reporting purposes. At December 31, 1995 the tax basis of the
Partnership's net assets exceeded its book basis by $39,114,700.
The financial statements do not give effect to any assets that the
partners may have outside of their interest in the Partnership, nor to any
obligations, including income taxes, of the partners.
CASH EQUIVALENTS
For purposes of the 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.
CABLE MATERIALS, EQUIPMENT AND SUPPLIES
Cable materials, equipment and supplies are stated at cost using the
first-in, first-out method. These items are capitalized until they are used for
system upgrades, customer installations or repairs to existing systems. At
such time, they are either transferred to property, plant and equipment or
expensed, as appropriate.
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 equipment 7-15 years
Trunk and distribution 7-15 years
Microwave equipment 7-10 years
Other:
Furniture and equipment 5-10 years
Vehicles 3-5 years
Leasehold improvements Life of lease
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FALCON CABLE SYSTEMS COMPANY
SUMMARY OF ACCOUNTING POLICIES
(CONTINUED)
FRANCHISE COST AND GOODWILL
The excess of cost over the fair value 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. These costs (primarily legal fees) are direct and
incremental to the acquisition of the franchise and are amortized using the
straight-line method over the lives of the franchises, ranging up to 12 years.
The Partnership periodically evaluates the amortization periods of these
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives. 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 and
organization costs which are amortized using the straight-line method over five
years and covenants not to compete which are amortized over the life of the
covenant.
DEFERRED LOAN COSTS
Costs related to borrowings are capitalized and amortized to interest
expense over the life of the related loan.
RECOVERABILITY OF ASSETS
The Partnership assesses on an on-going 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 estimate were less than net book value, net book
value would then be reduced to the undiscounted cash flow estimate. 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.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership will adopt Statement 121 in the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are provided.
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FALCON CABLE SYSTEMS COMPANY
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Partnership's management of financial market risk, and as
required by the Partnership's Bank Credit Agreement, the Partnership enters
into various transactions that involve contracts and financial instruments with
off-balance-sheet risk, including interest rate swap, interest rate cap and
interest rate collar 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.
EARNINGS AND LOSSES PER UNIT
Earnings and losses are allocated 99% to the limited partners and one
percent to the General Partner. Earnings and losses per limited partnership
unit is based on the weighted average number of limited partnership units
outstanding during the period.
RECLASSIFICATIONS
Certain 1994 amounts have been reclassified to conform to the 1995
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.
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FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
The Partnership, or its predecessors, commenced operations in May 1975.
The Partnership owns and operates cable television systems in California and
Western Oregon. Falcon Cable Investors Group, a California limited partnership
(the "General Partner"), is the general partner of the Partnership. The general
partner of the General Partner is Falcon Holding Group, L.P., a Delaware
limited partnership ("FHGLP"). The general partner of FHGLP is Falcon Holding
Group, Inc., ("FHGI"). On December 31, 1986, the Partnership was reorganized as
a Master Limited Partnership and sold 4,000,000 units of limited partnership
interests. On June 30, 1987, an additional 600,000 units were sold.
The term of the Partnership ends on December 31, 1996, unless extended as
described in the Partnership Agreement. The General Partner has begun the
process of terminating the Partnership which will result in the eventual sale
of the Partnership's assets to either affiliates of the General Partner or to
third parties on or before December 31, 1996. The financial statements have
been prepared on the basis that the Partnership's business will be sold as a
going concern. The fair market value of the Partnership's assets and the
proceeds generated from their sale will differ from the amounts reported in the
financial statements. (See Note 10).
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
-----------------------------
1994 1995
----------- -----------
(Dollars in Thousands)
Cable television systems $ 114,333 $ 127,192
Furniture and equipment 4,224 4,447
Vehicles 3,265 3,570
Leasehold improvements 2,648 2,659
----------- ----------
124,470 137,868
Less accumulated depreciation (59,010) (68,222)
----------- ----------
$ 65,460 $ 69,646
=========== ==========
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FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 1994, the Partnership adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," relating to, among other things, accounting for debt and
equity securities which will neither be held to maturity nor sold in the near
term. Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of partners' equity
(deficit). The Partnership's securities requiring treatment as
available-for-sale securities consisted solely of 168,780 shares of common
stock of QVC Network, Inc. ("QVC"), with a cost basis of $202,000 and an
aggregate fair value of $7,110,000 at December 31, 1994. On February 10, 1995
the Partnership received net proceeds of approximately $7,764,000 upon the
acquisition of its shares in QVC pursuant to a tender offer by Liberty Media
Corporation and Comcast Corporation for $46.00 per share. 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.
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:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity of
those instruments.
Available-for-sale securities
The fair value of available-for-sale securities is based on quoted market
prices.
Notes Payable
The fair value of the Partnership's notes payable is based on quoted
market prices for similar issues of debt with similar remaining maturities.
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 to the agreement
would have to pay or receive in order to terminate the agreement. During 1995,
as discussed in Note 4 to the financial statements, the Partnership entered
into interest rate derivative contracts on notional amounts aggregating
$100,000,000 with maturity dates which extend beyond the termination date of
the Partnership. These contracts are not considered hedges for accounting
purposes, and are recorded at fair value at December 31, 1995.
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FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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:
1994 1995
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Value (1) Value Value (1) Value
---------- --------- ---------- ------------
(Dollars in Thousands)
Assets:
Cash and cash equivalents $ 2,987 $ 2,987 $ 2,018 $ 2,018
Available-for-sale securities 7,110 7,110 - -
Liabilities:
Notes Payable (Note 4):
Bank credit agreement (3) 164,700 164,700 165,000 165,000
Other subordinated notes (2) 5,730 5,730 6,870 6,870
Interest rate swap agreements - - 1,407 1,407
Notional Fair Notional Fair
Amount(4) Value(5) Amount Value(5)
--------- --------- ---------- ------------
Off - Balance Sheet Interest Rate
Hedging Agreements (Note 4):
Interest rate swaps $ 135,000 $ (360) $ 195,000 $ (581)
Interest rate caps 55,000 598 55,000 -
Interest rate collar 10,000 5 - -
- -------------
(1) Carrying amounts represent cost basis, except for available-for-sale
securities and interest rate swap agreements, which are carried at fair
value.
(2) Determined based on quoted market prices for those or similar notes.
(3) Due to the variable rate nature of the indebtedness, the fair value
approximates the carrying value.
(4) The amount on which the interest has been computed is $135,000,000 for
swaps and $20,000,000 for caps. The balance of the contract totals
presented above reflect contracts entered into as of December 31, 1994
which did not become effective until 1995 and 1996 as existing 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.
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FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - NOTES PAYABLE
Notes payable consist of:
December 31,
--------------------------
1994 1995
--------- ----------
(Dollars in Thousands)
Notes to banks (a):
Term Loan $ 92,000 $ 92,000
Revolver 72,700 73,000
---------- ----------
164,700 165,000
Other (b) 5,739 6,870
---------- ----------
$ 170,439 $ 171,870
========== ==========
(a) Notes to Banks
On November 2, 1992, the Partnership entered into an Amended and Restated
Revolving Credit and Term Loan Agreement (the "Bank Credit Agreement") with
seven banks which, as amended, provides for aggregate borrowings of
$167,000,000. The Bank Credit Agreement replaced the Partnership's
$200,000,000 revolving line of credit agreement and consists of a $92,000,000
term loan (the "Term Loan") and a $75,000,000 revolving loan (the "Revolver").
The original principal balance under the Term Loan of $100,000,000 was payable
in twenty-eight quarterly installments, in varying amounts, commencing March
1993. The Revolver was scheduled to convert to a term loan on December 31,
1994 at which time the then outstanding balance would have become payable in
twenty-four quarterly installments, in varying amounts, commencing March 1995.
On March 13, 1995, the Partnership's management executed an amendment to the
Bank Credit Agreement (the "Amendment"), that was effective as of December 31,
1994. The Amendment extended the revolving credit period through December 31,
1996 and eliminates the scheduled principal repayments in 1995 and 1996 under
the Term Loan by making the entire facility due on December 31, 1996, to
coincide with the scheduled termination of the Partnership. Borrowings under
both facilities bear interest, at the Partnership's option, at (i) the prime
rate plus 1.375%; (ii) the CD rate plus 2.50%; or (iii) LIBOR plus 2.375%. The
Amendment also provides that if no transaction to dissolve the Partnership is
approved as of April 1, 1996, the interest rates outlined herein will increase
by 0.25%; and further provides that if no such transaction is approved by July
1, 1996, the interest rates will be increased an additional 0.25%.
At December 31, 1995, the weighted average interest rate on aggregate
borrowings (including the effects of the interest rate hedging agreements) was
9.6%. The Partnership is also required to pay a commitment fee of 0.5% per
annum on the unused portion of the Revolver. There is no additional borrowing
capacity under the Revolver. Borrowings under the Bank Credit Agreement are
collateralized by substantially all of the Partnership's assets. The lending
banks have no recourse rights against the assets of the Unitholders or the
General Partner.
The Bank Credit Agreement, as amended, contains various restrictions
relating to, among other items, mergers and acquisitions, investments,
indebtedness, contingent liabilities and sale of property.
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FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - NOTES PAYABLE (Continued)
The Bank Credit Agreement precludes the declaration or payment of
distributions for periods subsequent to December 31, 1992, except for a
special, one-time distribution declared on March 14, 1995 in connection with
a gain on the sale of certain securities owned by the Partnership (See
Note 3). The Amendment places certain additional restrictions on the
annual amount of management fees and reimbursed partnership expenses that
the Partnership may pay in cash.
The Bank Credit Agreement also contains financial covenants which may,
among other things, limit the amount the Partnership may borrow. The Bank
Credit Agreement as amended, currently provides that (i) the ratio of
annualized cash flow to pro forma interest expense, as defined, must not be
less than 1.5 to 1.0; (ii) the ratio of funded debt (borrowings less cash and
equivalents) to cash flow must not exceed 6.25 to 1.0 through June 30, 1996 and
6.0 to 1.0 through December 31, 1996; (iii) capital expenditures may not exceed
$12,500,000 in 1994, $19,500,000 in 1995 and $10,000,000 in 1996. Unused
capital expenditures in one year may be carried over to the following year.
Management believes that the Partnership was in compliance with all its
financial covenants at December 31, 1995.
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.
(b) Other
1) The Partnership issued a $3,000,000 subordinated installment note as
part of the consideration paid for three cable television systems acquired in
1990. On February 19, 1993, the Partnership amended the note agreement and
extended the maturity date until January 1997. The amended note agreement bore
interest at 15% until April 1, 1995 at which time it increased to 20% until
maturity. In August 1995, the note amount was increased to $6,206,000 to
reflect cumulative accrued but unpaid interest in the amount of $3,206,000.
2) In connection with the acquisition of three cable systems in 1994, the
Partnership has an agreement under which it is required to make equal annual
installments of $85,715 through 2001. The discounted present value of the
annual installments is $433,600 at December 31, 1995.
(c) Interest Rate Hedging Agreements
The Partnership utilizes interest rate hedging agreements to establish
long-term fixed interest rates on variable rate debt. The Bank Credit
Agreement requires that the Partnership maintain hedging arrangements with
respect to at least 50% of the outstanding borrowings in order to manage the
interest rate sensitivity on its borrowings. At December 31, 1995, the
Partnership participated in interest rate
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FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - NOTES PAYABLE (Continued)
hedging contracts with aggregate notional principal of $155,000,000 under which
the Partnership pays interest at fixed rates ranging from 5.53% to 11.08%,
(weighted average rate of 6.96%), and receives interest at variable LIBOR-based
rates. The Partnership has reduced this position by entering into an interest
rate hedging contract with a notional amount of $30,000,000 under which it
receives a fixed interest payment at 5.37% and pays interest at a variable
LIBOR-based rate. At December 31, 1995 the Partnership participated in interest
rate cap contracts aggregating $55,000,000 under which the Partnership will
receive LIBOR-based payments if LIBOR rates exceed 7% to 8%. Of these
contracts, $20,000,000 were not effective at December 31, 1995. The Partnership
also participates in an interest rate contract, effective in 1996, with a
notional amount of $10,000,000 under which the Partnership will pay a fixed
rate of 7.12% and receive interest at a variable LIBOR-based rate.
Contracts aggregating $100,000,000 have maturity dates significantly
beyond December 31, 1996, the termination date of the Partnership. The General
Partner entered into the contracts, which are assignable to affiliated entities
managed by FHGLP, because of favorable rates and in anticipation that the
contracts will either be assigned to a successor entity managed by FHGLP or to
existing entities managed by FHGLP. However, these contracts cannot be
considered hedges for accounting purposes, and as previously discussed in Note
3 to the financial statements, the Partnership recorded these contracts at
their fair value at December 31, 1995. FHGLP intends to assign the contracts to
affiliated entities upon dissolution of the Partnership.
The hedging agreements resulted in additional interest expense of
$4,674,000, $2,947,000 and $865,700 for the years ended December 31, 1993, 1994
and 1995, respectively. The Partnership does not believe that it has any
significant risk of exposure to non-performance by any of its counterparties.
(d) Debt Maturities
The Partnership's notes to banks mature contractually at December 31,
1996.
Given the scheduled termination of the Partnership at December 31, 1996,
it is likely that all other outstanding indebtedness will be repaid on or
before the Partnership's termination date.
17
18
FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - PARTNERS' EQUITY (DEFICIT)
Income and losses of the Partnership are allocated 99% to the Unitholders
and 1% to the General Partner. At December 31, 1995, there were 6,398,913
limited partnership units outstanding. Distributions with respect to units in
each year are made 99% to the Unitholders and 1% to the General Partner until
Unitholders have received cash equal to the Preferred Return (an 11%, or $2.20
per unit, non-compounded cumulative annual return on the $20.00 initial public
offering price of each unit computed for the period commencing from December
31, 1986). Any distributions in any year in excess of the Preferred Return
(Excess Distributions) are made 99% to the Unitholders and 1% to the General
Partner until such time as the aggregate amount of Excess Distributions to
Unitholders equals the initial public offering price of the units. Thereafter,
Excess Distributions are made 70% to Unitholders and 30% to the General Partner
until the Unitholders have received a 17%, or $3.40 per unit, non-compounded
cumulative annual return on the initial public offering price of the units
(computed from the period commencing from December 31, 1986), after which
Excess Distributions shall be made 50% to the Unitholders and 50% to the
General Partner. See Note 10.
NOTE 6 - MANAGEMENT COMPENSATION
The Partnership is obligated to pay the General Partner a 5% management
fee based on gross revenues of the Partnership. In addition, the General
Partner is entitled to reimbursement from the Partnership for certain expenses
relating to the performance of management functions as described in the
management agreement. The General Partner, in turn, has contracted with FHGLP
to provide the management services to the Partnership. In March 1993, FHGLP
assumed the operations of FHGI. As successor to the management service
operations of FHGI, FHGLP receives management fees and reimbursed expenses
which had previously been paid by the General Partner to FHGI.
Management fees and reimbursed expenses amounted to $4,742,000, $4,625,000
and $4,619,000 for the years ended December 31, 1993, 1994 and 1995. Payment
of approximately $1,618,000 was deferred in 1995 pursuant to restrictions in
the Bank Credit Agreement. The cumulative amount deferred as of December 31,
1995 amounted to approximately $4,621,000. As discussed in Note 4, the Amended
Bank Credit Agreement requires significant additional deferrals of management
fees and reimbursed expenses in 1996. The Partnership will be obligated to pay
these deferred management fees and reimbursed expenses at the point in time the
restrictions imposed by the Bank Credit Agreement are removed, or upon the
expiration of the Partnership or the sale of the Partnership's assets prior to
the distributions to the Unitholders. See Note 10.
18
19
FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 - COMMITMENTS
The Partnership leases land, office space and equipment under operating
leases expiring at various dates through the year 2008. Pole attachment fees
are excluded from the following table since those contracts can be canceled
with notice. Future minimum rentals for operating leases at December 31, 1995
are as follows:
Year Total
- ---- ----------------------
(Dollars in Thousands)
1996 173
1997 131
1998 111
1999 67
2000 45
Thereafter 243
----
$770
====
In most cases, management expects that, in the normal course of business,
these leases will be renewed or replaced by other leases. Rent expense for the
years ended December 31, 1993, 1994 and 1995 for all facilities amounted to
approximately $310,000, $329,000 and $343,000.
In addition, the Partnership rents line space on utility poles in some of
the franchise areas it serves. These rentals amounted to $346,000, $421,000
and $342,000 for the years ended December 31, 1993, 1994 and 1995. Generally
such pole rental agreements are short-term, but the Partnership expects such
rentals to continue in the future.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Partnership maintains a Key Executive Equity Program (the "Program")
for certain key employees designated by the Partnership. Participants become
vested over six years from the date of admission into the Program. Under the
terms of the Program, participants derive benefits, as defined, in the Program
based on achieving a specified operating margin percentage in conjunction with
a specific percentage increase in cash flow in relation to the immediately
preceding year. The effect of certain events and transactions, such as system
acquisitions and dispositions, are adjusted on a pro forma basis in the
determination of benefits. The Partnership incurred expenses under this
Program of $222,000, $19,000 and $35,000 in 1993, 1994 and 1995, respectively.
On February 14, 1995, the Board of Representatives of the General Partner
approved the termination of the Program. All current participants will continue
to vest in their contributions, but there will be no new participants or future
contributions.
19
20
FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8 - EMPLOYEE BENEFIT PLANS (Continued)
The Partnership also has a cash or deferred profit sharing plan (the
"Profit Sharing Plan") covering substantially all of its employees. The Profit
Sharing Plan provides that each participant may elect to make a contribution in
an amount up to 15% 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
charged against operations of the Partnership for the Profit Sharing Plan in
1993, 1994 or 1995.
NOTE 9 - CONTINGENCIES
The Partnership is subject to regulation 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 services 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 significant negative impact on its
operations and cash flow. The Partnership 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. This statute contains a significant overhaul of the
federal regulatory structure. As it pertains to cable television, the 1996
Telecom Act, among other things, (i) sunsets the regulation of certain nonbasic
programming services 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 FCC will
have to conduct a number of rulemaking proceedings in order to implement many
of the provisions of the 1996 Telecom Act.
The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
A recent federal court decision could if upheld and if adopted by other
federal courts, make the renewal of franchises more problematic in certain
circumstances. The United States District Court for the Western District of
Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision
has been appealed. The Partnership was not a party to this litigation.
20
21
FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9 - CONTINGENCIES (Continued)
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 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.
NOTE 10 - PARTNERSHIP EXPIRATION
As stated in Note 1 to the financial statements, the Partnership expires on
December 31, 1996. The Partnership Agreement provides the General Partner or its
affiliates the right to purchase for cash substantially all of the Partnership's
cable systems at any time after December 31, 1991 (the "Purchase Right") without
soliciting unaffiliated purchasers. Pursuant to the Partnership Agreement, the
purchase price under the Repurchase Right will be determined solely by
reference to an "appraised value" determined pursuant to an appraisal process
set forth in the Partnership Agreement (the "Appraisal Process"). Upon sale of a
cable system, including a sale to the General Partner or its affiliates, the
General Partner will be entitled to a fee equal to 2 1/2% of gross proceeds from
the sale less any amounts paid as brokerage or similar fees to third parties.
As a result of the publication of the results of the Appraisal Process,
certain unitholders have commenced litigation against the Partnership, the
General Partner, FHGLP, and certain other parties regarding the Appraisal
Process and other matters in connection with the General Partner's announced
intention to exercise the Purchase Right.
On July 12, 1996, the Partnership sold substantially all of its assets to
FHGLP, through a wholly-owned subsidiary, for $247,396,814 in cash pursuant to
the Purchase Right, and the Partnership was subsequently liquidated on July 24,
1996.
21
22
FALCON CABLE SYSTEMS COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
NOTE 11 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1993, 1994 and 1995, the Partnership
paid cash interest amounting to $15,117,000, $14,088,000 and $16,780,000.
22
23
Exhibit No. 1B
Unaudited Condensed Financial Statements
Falcon Cable Systems Company,
a California limited partnership
As of March 31, 1996 and for the
three months ended March 31, 1996
-1-
24
Falcon Cable Systems Company,
a California limited partnership
Unaudited Financial Statements
As of March 31, 1996 and for the
three months ended March 31, 1996
CONTENTS
Unaudited Condensed Balance Sheet............................................3
Unaudited Condensed Statements of Operations ................................4
Unaudited Condensed Statements of Cash Flows.................................5
Notes to Unaudited Condensed Financial Statements............................6
-2-
25
FALCON CABLE SYSTEMS COMPANY
UNAUDITED CONDENSED BALANCE SHEET
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS:
Cash and cash equivalents $ 1,479
Receivables, less allowance of
$71,900 for possible losses 1,089
Prepaid expenses and other 1,786
Cable materials, equipment and supplies 1,123
Property, plant and equipment, less accumulated depreciation
and amortization of $70,243,000 70,045
Franchise cost and goodwill, less
accumulated amortization of $35,594,000 30,052
Customer lists and other intangible
costs, less accumulated amortization
of $2,219,000 1,958
---------
$ 107,532
=========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable $ 171,749
Accounts payable 1,181
Accrued expenses 8,049
Payable to general partner 5,332
Customer deposits and prepayments 671
---------
TOTAL LIABILITIES 186,982
---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT:
General partner (18)
Limited partners (79,432)
---------
TOTAL PARTNERS' DEFICIT (79,450)
---------
$ 107,532
=========
See accompanying notes to condensed financial statements
-3-
26
FALCON CABLE SYSTEMS COMPANY
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS EXCEPT PER UNIT INFORMATION)
REVENUES $ 13,478
-----------
OPERATING EXPENSES:
Service costs 3,670
General and administrative expenses 1,922
General Partner management fees
and reimbursed expenses 1,180
Depreciation and amortization 3,643
-----------
10,415
-----------
Operating income 3,063
INTEREST EXPENSE, NET (4,136)
OTHER INCOME, NET 1,480
-----------
NET INCOME $ 407
===========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ .06
===========
AVERAGE LIMITED
PARTNERSHIP UNITS
OUTSTANDING DURING PERIOD 6,398,913
===========
See accompanying notes to condensed financial statements.
-4-
27
FALCON CABLE SYSTEMS COMPANY
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS)
Net cash provided by operating activities $ 2,305
-------
Cash flow from investing activities:
Capital expenditures (2,694)
Other intangibles (29)
-------
Net cash provided (used) in investing activities (2,723)
-------
Cash flow from financing activities:
Repayment of debt (121)
-------
Net cash used by financing activities (121)
-------
Decrease in cash (539)
Cash at beginning of period 2,018
-------
Cash at end of period $ 1,479
=======
See accompanying notes to condensed financial statements.
-5-
28
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, 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 2 - EARNINGS PER EQUIVALENT UNIT
Earnings per limited partnership unit are based on the 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.
NOTE 3 - LITIGATION
On April 4, 1996, the Partnership and certain of its affiliates and
their officers were served with a complaint entitled Frank O' Shea v. Waller
Capital Corp., et. al. alleging that the appraisal process undertaken in
connection with the Proposed Exchange transaction previously disclosed was
flawed and that as a result of the announcement of the results of the appraisal
process, Mr. O' Shea was damaged by a reduction in the trading price of the
units. The complaints seek class action status for a class consisting of all
persons and entities who held units of the Partnership as of April 1, 1996 and
unspecified damages for such partners. The Partnership believes that the suit is
without merit and is evaluating its response to it.
-6-