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 June 30, 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
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Falcon Holding Group, L.P.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4408577
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10900 Wilshire Boulevard, 15th Floor, Los Angeles, CA 90024
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 824-9990
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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 _____
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PART I - FINANCIAL INFORMATION
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
============================================
December 31, June 30,
1995* 1996
------------ ---------
(unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 15,050 $ 13,202
Receivables:
Trade, less allowance of $830,000 and $645,000 for possible losses 7,378 7,618
Affiliates 10,023 11,255
Other assets 5,419 4,344
Cable materials, equipment and supplies 4,038 3,851
Investment in affiliated partnerships and other investments 11,934 12,662
Property, plant and equipment, less accumulated depreciation
and amortization of $186,274,000 and $202,953,000 228,249 228,217
Franchise cost, less accumulated amortization of
$149,105,000 and $164,754,000 221,057 204,488
Goodwill, less accumulated amortization of
$5,246,000 and $8,792,000 63,516 60,348
Customer lists and other intangible costs, less
accumulated amortization of $5,539,000 and $6,410,000 6,521 5,433
Deferred loan costs, less accumulated amortization
of $3,282,000 and $4,469,000 12,073 10,824
----------------- ----------------
$ 585,258 $ 562,242
================= ================
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
LIABILITIES:
Notes payable $ 669,019 $ 666,147
Accounts payable 5,811 2,887
Accrued expenses and other 35,274 36,401
Customer deposits and prepayments 1,058 1,185
Deferred income taxes 9,085 7,492
Minority interest 227 211
Equity in losses of affiliated partnerships in excess of investment 4,563 4,501
----------------- ----------------
TOTAL LIABILITIES 725,037 718,824
----------------- ----------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 271,902 271,902
PARTNERS' DEFICIT:
General partner (12,091) (12,267)
Limited partners (399,423) (416,788)
Unrealized gain (loss) on available-for-sale securities (167) 571
TOTAL PARTNERS' DEFICIT (411,681) (428,484)
----------------- ----------------
$ 585,258 $ 562,242
================= ================
*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
June 30,
---------------------------------------
1995 1996
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Restated
(Dollars in Thousands)
REVENUES $ 37,696 $ 48,172
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OPERATING EXPENSES:
Service costs 10,753 12,528
General and administrative expenses 7,500 8,363
Depreciation and amortization 13,445 20,039
-------------- ---------------
Total expenses 31,698 40,930
-------------- ---------------
Operating Income 5,998 7,242
INTEREST EXPENSE, NET (13,499) (15,821)
OTHER INCOME (EXPENSE):
Other, net (33) 65
Equity in net income (loss) of investee
limited partnerships (890) 51
Minority interest in net income of
consolidated subsidiary 9 8
-------------- ---------------
NET INCOME (LOSS) $ (8,415) $ (8,455)
============== ===============
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
--------------------------------------
Six months ended
June 30,
--------------------------------------
1995 1996
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Restated
(Dollars in Thousands)
REVENUES $ 74,607 $ 94,375
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OPERATING EXPENSES:
Service costs 21,537 25,284
General and administrative expenses 14,479 16,347
Depreciation and amortization 27,095 40,189
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Total expenses 63,111 81,820
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Operating Income 11,496 12,555
INTEREST EXPENSE, NET (26,820) (31,423)
OTHER INCOME (EXPENSE):
Other, net 13,173 1,245
Equity in net income (loss) of investee
limited partnerships (2,269) 66
Minority interest in net income of
consolidated subsidiary 37 16
-------------- ---------------
NET INCOME (LOSS) $ (4,383) $ (17,541)
============== ===============
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
------------------------------------
Six months ended
June 30,
------------------------------------
1995 1996
---------------- ---------------
(Dollars in thousands)
Net cash provided by operating activities $ 22,217 $ 32,399
-------------- ---------------
Cash flows from investing activities:
Capital expenditures (14,648) (18,266)
Increase in intangible assets (1,276) (918)
Proceeds from sale of property, plant and equipment 281 255
Distributions from investee limited partnerships 8 20
Sale of available-for-sale securities 13,490 -
Investments in affiliated partnerships and other investments (669) -
-------------- ---------------
Net cash used in investing activities (2,814) (18,909)
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Cash flows from financing activities:
Borrowings from notes payable 3,700 42,235
Repayment of debt (23,074) (57,635)
Deferred loan costs (1,465) 62
Contributions from partners 260 -
Minority interest capital contributions 130 -
-------------- ---------------
Net cash used in financing activities (20,449) (15,338)
-------------- ---------------
Net decrease in cash and cash equivalents (1,046) (1,848)
Cash and cash equivalents at
beginning of period 10,468 15,050
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Cash and cash equivalents at
end of period $ 9,422 $ 13,202
============== ===============
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 periods prior to the acquisition date. Commencing
December 28, 1995, Falcon First has been included as an Owned Partnership, and
its systems included as Owned Systems.
The Falcon First acquisition was accounted for by the purchase method
of accounting, whereby the purchase price was allocated to the assets acquired
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 tables set 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 June 30, 1995 Three months
-------------------------------------------------------------------- ended
Historical Falcon Pro Forma Pro Forma June 30,
as Restated First Adjustments (1) Combined 1996
--------------- ------------- --------------- -------------- ----------------
(Dollars in thousands)
OPERATIONS STATEMENT
DATA
Revenues $ 37,696 $ 7,828 $ (386) $ 45,138 $ 48,172
Service, general and
administrative costs and
expenses 18,253 3,863 (386) 21,730 20,891
Depreciation and amortization 13,445 3,968 1,413 18,826 20,039
--------------- -------------- ---------------- -------------- ----------------
Operating income 5,998 (3) (1,413) 4,582 7,242
Interest income (expense), net (13,499) (3,275) 1,115 (15,659) (15,821)
Other income (expense), net (914) (204) 2,343 1,225 124
--------------- -------------- ---------------- --------------- ----------------
Net income (loss) $ (8,415) $ (3,482) $ 2,045 $ (9,852) $ (8,455)
=============== ============== ================ ============== ================
Unaudited
---------------------------------------------------------------------
Six months ended June 30, 1995 Six months
--------------------------------------------------------------------- ended
Historical Falcon Pro Forma Pro Forma June 30,
as Restated First Adjustments(1) Combined 1996
---------------- ------------- -------------- -------------- ----------------
(Dollars in thousands)
OPERATIONS STATEMENT
DATA
Revenues $ 74,607 $ 15,511 $ (765) $ 89,353 $ 94,375
Service, general and
administrative costs and
expenses 36,016 7,679 (765) 42,930 41,631
Depreciation and amortization 27,095 9,020 2,826 38,941 40,189
--------------- -------------- --------------- -------------- ---------------
Operating income 11,496 (1,188) (2,826) 7,482 12,555
Interest income (expense), net (26,820) (6,524) 1,930 (31,414) (31,423)
Other income (expense), net 10,941 (303) 5,297 15,935 1,327
--------------- -------------- --------------- -------------- ---------------
Net income (loss) $ (4,383) $ (8,015) $ 4,401 $ (7,997) $ (17,541)
=============== ============== =============== ============== ===============
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
====================================================
Unaudited
---------------------------------------------------------------------
Six months ended June 30, 1995 Six months
--------------------------------------------------------------------- ended
Historical Falcon Pro Forma Pro Forma June 30
as Restated First Adjustments(1) Combined 1996
--------------- -------------- ---------------- -------------- -----------------
(Dollars in thousands)
CASH FLOWS STATEMENT DATA
Net cash provided by
operating activities $ 22,217 $ 3,146 $ 1,543 $ 26,906 $ 32,400
Net cash used in
investing activities (2,814) (3,072) - (5,886) (18,910)
Net cash used in
financing activities (20,449) - - (20,449) (15,338)
--------------- -------------- ---------------- -------------- -----------------
Net increase (decrease) in cash
and cash equivalents (1,046) 74 1,543 571 (1,848)
Cash and cash equivalents
at beginning of period 10,468 3,749 - 14,217 15,050
--------------- -------------- ---------------- -------------- -----------------
Cash and cash equivalents
at end of period $ 9,422 $ 3,823 $ 1,543 $ 14,788 $ 13,202
=============== ============== ================ ============== =================
__________________________________
(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
(CONTINUED)
====================================================
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three and six months ended
June 30, 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 and six months ended June 30, 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 - SALE OF SYSTEMS
On July 1, 1996, the Partnership sold certain Owned Systems located in
Georgia that were acquired from Falcon First in December 1995. The sales price
of $15 million approximated book value. These cable systems served
approximately 9,500 homes subscribing to cable service at June 30, 1996.
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 and six months ended June 30, 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 and six months ended
June 30, 1995 by $965,000 and $2,221,000 respectively 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
=====================================================
NOTE 7 - SUBSEQUENT EVENTS
On July 12, 1996, the Partnership, through a newly-formed Owned
Partnership, Falcon Cable Systems Company II, L.P. ("FCSC II"), acquired the
assets of Falcon Cable Systems Company ("FCSC"), an Affiliated Partnership, for
approximately $247.4 million in cash. FCSC will be treated as an Affiliated
Partnership that pays management fees to, and reimburses certain expenses of,
FHGLP through July 11, 1996. The operations of FCSC II will be treated as an
Owned System from July 12, 1996.
The acquisition of these assets was funded primarily by bank
borrowings under a $775 million Amended and Restated Bank Credit Agreement.
The Partnership paid transaction and financing costs of approximately $5.6
million on July 12, 1996, and deferred management fees and reimbursed expenses
of approximately $5.2 million owed to FHGLP were paid by FCSC on July 16, 1996.
On August 1, 1996, certain existing limited partners of the
Partnership controlled by Marc B. Nathanson, Chairman and Chief Executive
Officer of the General Partner, purchased additional common partnership units
in the Partnership for $5.0 million in cash. The proceeds were utilized to
temporarily repay outstanding debt under the Partnership's Amended and Restated
Bank Credit Agreement.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
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, in accordance
with policy decisions by the Federal Communications Commission (the "FCC"), the
Partnership will 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.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership. Such forward looking statements involve risks and uncertainties
including, without limitation, the uncertainty of legislative and regulatory
changes and the rapid developments in the competitive environment facing cable
television operators such as the Partnership. In addition to the information
provided herein, reference is made to the Partnership's Annual Report on Form
10-K year ended December 31, 1995 for additional information regarding such
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 $45.2 million to $48.2
million, or by 6.6%, and $89.4 million to $94.4 million, or by 5.6%, for the
three and six months ended June 30, 1996 compared to the corresponding periods
in 1995. Of the $3.0 million net increase in revenues for the three months
ended June 30, 1996 as compared to the corresponding period in 1995, $2.9
million was due to increased cable service revenues and $102,000 was due to
increases in management fees. The $2.9 million increase in cable service
revenues was caused principally by increases of $2.7 million due to increases
in regulated service rates implemented in April 1996 and by a $652,000 increase
related to other revenue producing items (primarily advertising sales),
partially offset by decreases of $406,000 due to decreases in the number of
subscriptions for cable service. Of the $5.0 million net increase in revenues
for the six months ended June 30, 1996 compared to the corresponding period in
1995, $4.9 million was due to increased cable service revenues and $90,000 was
due to increased management fees. The $4.9 million increase in
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
cable service revenues was caused principally by increases of $4.2 million due
to increases in regulated service rates implemented in each of April 1995 and
1996 and by a $1.1 million increase related to other revenue producing items
(primarily advertising sales), partially offset by decreases of $344,000 due to
decreases in the number of subscriptions for cable service. As of June 30,
1996, the Owned Systems had approximately 423,700 homes subscribing to cable
service and 176,100 premium service units.
Management and consulting fees earned by the Partnership increased
from $1.8 million and $3.5 million for the three and six months ended June 30,
1995 to $1.9 million and $3.6 million for the three and six months ended June
30, 1996. The increased fees resulted primarily from increases in fees from the
Affiliated Partnerships related to increased revenues. The 1996 amounts
included $688,000 and $1.4 million earned from FCSC for the respective three
and six month periods. Payment of such fees ceased July 12, 1996 upon the
acquisition by the Partnership of the assets of FCSC.
Service costs decreased from $13.2 million to $12.5 million, or by
5.3%, and from $26.5 million to $25.3 million, or by 4.5 %, for the three and
six months ended June 30, 1996 compared to the corresponding periods in 1995.
Service costs represent costs directly attributable to providing cable services
to customers. Of the $722,000 decrease in service costs for the three months
ended June 30, 1996 as compared to 1995, $648,000 related to increases in
capitalized labor associated with increased construction activity, $314,000
related to decreases in programming fees paid to program suppliers (including
primary satellite fees) and $235,000 related to decreases in property taxes.
These decreases were partially offset by increases of $196,000 in franchise and
copyright fees (related to increased revenues), increases of $185,000 in other
service costs and increases of $94,000 in personnel costs. Of the $1.2 million
decrease in service costs for the six months ended June 30, 1996 as compared to
1995, $1.0 million related to increases in capitalized labor associated with
increased construction activity, $756,000 related to decreases in programming
fees paid to program suppliers (including primary satellite fees) and $277,000
related to decreases in property taxes. These decreases were partially offset
by increases of $348,000 in franchise and copyright fees (related to increased
revenues), increases of $328,000 in other service costs and increases of
$124,000 in personnel costs. The decrease in programming costs for the three
and six months ended June 30, 1996 compared to the corresponding periods in
1995 resulted from a decrease in the cost of program guides of $63,000 and
$168,000 and from adjustments of estimated programming costs to reflect actual
contracts that have recently been negotiated.
General and administrative expenses decreased from $8.5 million to
$8.3 million, or by 2.4%, and from $16.4 million to $16.3 million, or by 0.6%,
for the three and six months ended June 30, 1996 compared to the corresponding
periods in 1995. Of the $117,000 decrease for the three months ended June 30,
1996 as compared to 1995, $574,000 related to reimbursement of expenses
associated with certain international investment activities which were the
responsibility of the Partnership until the third quarter of 1995; and $329,000
related to increased construction activity. These decreases were partially
offset by a $235,000 increase in marketing costs, a $206,000 increase related
to costs associated with reregulation by the FCC and a $91,000 increase in
personnel costs. Various other expenses increased $254,000 primarily due to
increases in bad debt expense. Of the $43,000 decrease for the six months
ended June 30, 1996 as compared to 1995, $626,000 related to reimbursement of
expenses associated with certain international investment activities which were
the responsibility of the Partnership until the third quarter of 1995; and
$532,000 related to increased construction activity. These decreases were
partially
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONCLUDED)
offset by a $526,000 increase in marketing costs, a $236,000 increase in
personnel costs and a $182,000 increase related to costs associated with
reregulation by the FCC. Various other expenses increased $170,000 primarily
due to increases in bad debt expense.
Depreciation and amortization expense increased from $18.8 million to
$20.0 million, or by 6.4%, and from $39.0 million to $40.2 million, or by 3.1%,
for the three and six months ended June 30, 1996 compared to the corresponding
periods in 1995. Depreciation expense increased by approximately $1.7 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 $1.4 million due to the depreciation of property, plant and
equipment additions. These increases were substantially offset by intangible
assets becoming fully amortized and as a result of the estimated useful lives
of certain other intangible assets being extended.
Operating income increased from $4.6 million to $7.3 million, or by
58.7%, and from $7.5 million to $12.6 million, or by 68.0%, for the three and
six months ended June 30, 1996 compared with the corresponding periods for
1995. The $2.7 million increase for the three months ended June 30, 1996 was
due principally to revenue increases of $3.0 million, partially offset by
increases in operating expenses of $334,000 as discussed above. The $5.1
million increase for the six months ended June 30, 1996 was primarily due to
the $5.1 million net increase in revenues.
Interest expense, including the effects of interest rate hedging
agreements, increased from $15.6 million to $15.8 million, or by 1.3%, for the
three months ended June 30, 1996 compared to the corresponding period in 1995
and remained relatively unchanged at $31.4 million for the six months ended
June 30, 1996 compared to the corresponding period in 1995. Higher average
borrowings partially offset by lower average interest rates (9.4% during the
three and six months ended June 30, 1996 compared to 10.4% during the
corresponding periods in 1995) accounted for the majority of the increases.
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 and $20.0 million Falcon Telecable 11.56% notes payable amounted to $6.6
million and $12.9 million for the three and six months ended June 30, 1996
compared to $6.7 million and $13.2 million for the corresponding periods in
1995. Interest rate hedging agreements resulted in additional interest expense
of $196,000 and $368,000 during the three and six months ended June 30, 1996
compared to $34,000 and $189,000 during the corresponding periods in 1995.
Other income was $125,000 and $1.3 million for the three and six
months ended June 30, 1996 compared to $1.2 million and $15.9 million for the
corresponding periods in 1995. The $1.1 million decrease for the three months
ended June 30, 1996 was due principally to income tax adjustments related to
Falcon First. The $14.6 million decrease for the six months was primarily due
to a $13.3 million non-recurring gain from the sale of marketable securities
during 1995, and also was impacted by the income tax adjustments.
Due to the factors described above, the Partnership's net loss
decreased from $9.8 million to $8.0 million and increased from $8.4 million to
$17.5 million for the three and six months ended June 30, 1996 compared with
the corresponding periods of 1995.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
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. Including capital
expenditure requirements related to the FCSC assets acquired on July 12, 1996,
management's current plan calls for the expenditure of approximately $75.0
million and $125.0 million in capital expenditures in 1996 and 1997,
respectively, including approximately $51.0 million and $87.0 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 $18.3 million on non-acquisition capital
expenditures during the six months ended June 30, 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. As discussed in Note 7 to unaudited Condensed Consolidated
Financial Statements, on July 12, 1996 the Partnership replaced that Bank
Credit Agreement with a $775 million Amended and Restated Bank Credit Agreement
(the "Amended and Restated Bank Credit Agreement") in order to finance the
acquisition of the assets of FCSC and pay transaction and financing costs of
approximately $5.6 million. On July 16, 1996, the Partnership received payment
of approximately $5.2 million of previously deferred fees from FCSC. On August
1, 1996, the Partnership received $5.0 million from certain existing limited
partners who purchased additional partnership units, the proceeds of which were
used to temporarily repay outstanding debt under the Amended and Restated Bank
Credit Agreement.
The Partnership is currently in negotiations to sell certain of the
Falcon First cable assets, and, as disclosed in Note 4 to Condensed
Consolidated Financial Statements, sold certain of the assets for $15.0 million
on July 1, 1996, the proceeds being used to temporarily repay outstanding debt
under the former Bank Credit Agreement. The cable assets sold generated
approximately 1.9% of consolidated revenues for the six months ended June 30,
1996. The remaining cable assets to be sold generated approximately 3.4% of
consolidated revenues for the six months ended June 30, 1996. The Partnership
is under no obligation to consummate such transaction, although the failure to
do so would result in the reduction of capital expenditures permitted under the
Amended and Restated Bank Credit Agreement. If such sale occurs, of which
there can be no assurance, the proceeds of the sale would be used to
temporarily pay down outstanding debt under the Amended and Restated Bank
Credit Agreement.
The Amended and Restated Bank Credit Agreement provides for maximum
available borrowings as follows: $775 million at December 31, 1996; $774
million at December 31, 1997; $773 million at December 31, 1998; $706 million
at December 31, 1999; $611 million at December 31, 2000; $535 million at
December 31, 2001; and $439 million at December 31, 2002. As of June 30, 1996,
the amount outstanding under the former Bank Credit Agreement was $382 million
and the Partnership had available to it additional borrowings thereunder of
approximately $53.0 million. At closing of the acquisition of the
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
assets of FCSC on July 12, 1996, the amount outstanding under the Amended and
Restated Bank Credit Agreement was $646 million, which included $28.6 million
borrowed to prepay a portion of the $43.6 million of outstanding subordinated
debt discussed below, and the Partnership had approximately $43.0 million
available to it in additional borrowings. The Amended and Restated 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 maintain hedging arrangements with
respect to at least 50% of the outstanding borrowings thereunder. As of June
30, 1996, borrowings under the former Bank Credit Agreement bore interest at an
average rate of 8.07% (including the effect of interest rate hedging
agreements). The Partnership has entered into fixed interest rate hedging
agreements with an aggregate notional amount at July 12, 1996 of $715 million
(including $235 million of contracts purchased from FCSC). Agreements in
effect at July 12, 1996 totaled $495 million, with the remaining $220 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 Amended and Restated 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
June 30, 1996 and at the closing of the Amended and Restated Bank Credit
Agreement on July 12, 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 former Bank Credit Agreement
permitted the Owned Partnerships to remit to FHGLP no more than 3.75% of their
net cable revenues, as defined, in any year. The Amended and Restated Bank
Credit Agreement increased that amount to 4.25% effective July 12, 1996. For
1995, that limit was approximately $4.9 million ($3.0 million was actually
remitted), and for the six months ended June 30, 1996 the limit was
approximately $3.5 million. 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 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. Receivables from the
Affiliated Partnerships for services and reimbursements described above
amounted to approximately $11.3 million at June 30, 1996, (including the $5.2
million repaid by FCSC on July 12, 1996). Cash available to FHGLP has also
been adversely affected by the acquisition of Falcon First and FCSC which,
prior to such acquisition, paid management fees to FHGLP.
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
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16
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
available. The Partnership also possesses the right, under certain
circumstances, to acquire some or all of the remaining Affiliated Systems. Any
exercise of such rights is similarly dependent on the availability of adequate
capital, of which there can be no assurance.
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 June 30, 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 June 30, 1996, the Partnership also had outstanding an aggregate
of $43.6 million in principal amount of subordinated debt (other than the
Notes), including the $28.6 million repaid on July 12, 1996.
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 June 30, 1996, the maximum exposure to ECC pursuant
to such guarantees was approximately $10.7 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 Amended and Restated 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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17
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (PRO FORMA)
Cash from operating activities (including interest expense and
management fee income) increased from $26.9 million to $32.4 million for the
six months ended June 30, 1996, compared to the corresponding period in 1995,
an increase of $5.5. The increase resulted primarily from a net increase of
$5.8 million in other operating items (receivables, cable materials and
supplies, payables, accrued expenses and subscriber deposits and prepayments)
partially offset by a $295,000 decrease in payment-in-kind interest expense
related to the Notes issued March 29, 1993.
Cash used in investing activities increased from $5.9 million to $18.9
million for the six months ended June 30, 1996 compared to the corresponding
period in 1995. The change was due primarily to the absence in 1996 of
approximately $13.5 million of net proceeds received by the Partnership during
1995 from the sale of marketable securities, and to an increase in capital
expenditures of $651,000. These increases were partially offset by $669,000 of
investments in limited partnerships during 1995 that did not recur in 1996 and
to a $470,000 increase in intangible assets. Cash used in financing activities
decreased by $5.1 million during the six months ended June 30, 1996, due to
decreased repayment of debt in 1996 of $4.0 million and due to a $1.5 million
decrease in expenditures for deferred loan costs.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 52.0% to 56.8% and from 52.0% to 55.9%
for the three and six months ended June 30, 1996 compared to the corresponding
periods in 1995. The increases were primarily caused by revenue increases as
described above. EBITDA increased from $23.5 million to $27.4 million, or by
16.6%, and $46.5 million to $52.8 million, or by 13.5%, during the three and
six months ended June 30, 1996 compared to the corresponding periods 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.
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18
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As disclosed above, on July 12, 1996 the Partnership completed its
previously announced acquisition of the assets of Falcon Cable
Systems Company. As of the date of this Report, the Partnership or
its affiliates are named as defendants in three complaints: (i)
Frank O'Shea IRA v. Waller Capital Corporation, et al, case no.
BC147386 filed in the Superior Court of the State of California,
County of Los Angeles, on April 1, 1996; (ii) Alan R. Markizon, et
al v. Falcon Cable Systems Company, et al, case no. BC152485 filed
in the Superior Court of the State of California, County of Los
Angeles, on June 21, 1996; and (iii) Regina Needleman, et al v.
Falcon Cable Systems Company, et al, case no. BC152244 filed in the
Superior Court of the State of California, County of Los Angeles, on
June 19, 1996. Each of these lawsuits purports to be brought as a
class action and alleges, among other things, breach of fiduciary
duty by the Partnership and certain of its affiliates in respect of
the appraisal and sale of the assets of Falcon Cable Systems Company
and the related dissolution of that partnership. The full text of
each of these complaints has been filed with the Securities and
Exchange Commission as exhibits to Forms 8-K filed by Falcon Cable
Systems Company on April 4, 1996, June 28, 1996 and July 3, 1996,
respectively, and are hereby incorporated herein by this reference.
The Partnership believes that the allegations made in these
complaints are without merit and, to the extent that it is a
defendant in such lawsuits or has an indemnification obligation in
respect thereof, the Partnership intends vigorously to defend such
lawsuits.
ITEMS 2-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.34 - System Appraisal of Falcon Cable Systems
Company, as of December 31, 1995, by Malarkey-Taylor
Associates, Inc., dated April 29, 1996 (filed as Exhibit 1
to the June 13 Falcon Cable Systems Company Report file
no. 19332 and incorporated by reference).
Exhibit 10.35 - System Appraisal of Falcon Cable Systems
Company, as of December 31, 1995, by Kane-Reece
Associates, Inc., dated April 29, 1996 (filed as Exhibit 2
to the June 13 Falcon Cable Systems Company Report file
no. 19332 and incorporated by reference).
Exhibit 10.36 - System Appraisal of Falcon Cable Systems
Company, as of December 31, 1995, by Waller Capital
Corporation (filed as Exhibit 3 to the June 13 Falcon
Cable Systems Company Report file no. 19332 and
incorporated by reference).
Exhibit 10.37 - Asset Purchase Agreement by and between
the Partnership and New Falcon, dated as of June 13, 1996
(filed as Exhibit 4 to the June 13 Falcon Cable Systems
Company Report file no. 19332 and incorporated by
reference).
Exhibit 10.38 - Amended and Restated Credit Agreement dated
July 12, 1996.(1)
(b) On June 13, 1996 the Registrant filed a Form 8-K dated
June 13, 1996 reporting under Item 5 its intent to acquire
all of the assets of Falcon Cable Systems Company.
On July 12, 1996, the Registrant filed a Form 8-K dated
July 12, 1996 reporting under Item 5 that it had
consummated the acquisition of all of the assets of Falcon
Cable Systems Company.
On July 26, 1996, the Registrant filed a Form 8-K/A
Amendment number 1 to Form 8-K dated July 12, 1996 to
include financial statements and pro forma financial
information not previously filed with the July 12, 1996
filing.
__________________________________
(1) Incorporated by reference to the exhibits to the Registrant's Current Report
on Form 8-K dated July 12, 1996, file no. 33060776
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19
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: August 7, 1996 By: /s/ Michael K. Menerey
------------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer