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 September 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
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 OF INCORPORATION (I.R.S. EMPLOYER
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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The Exhibit Index is located at Page E-1.
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PART I - FINANCIAL INFORMATION
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1995* 1996
------------- -------------
(unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 15,050 $ 15,876
Receivables:
Trade, less allowance of $830,000 and $754,000 for possible losses 7,378 9,855
Affiliates 10,023 6,755
Other assets 5,419 5,408
Cable materials, equipment and supplies 4,038 4,716
Investment in affiliated partnerships and other investments 11,934 11,305
Property, plant and equipment, less accumulated depreciation
and amortization of $186,274,000 and $214,241,000 228,249 304,800
Franchise cost, less accumulated amortization of
$149,105,000 and $164,683,000 221,057 265,114
Goodwill, less accumulated amortization of
$5,246,000 and $10,351,000 63,516 71,158
Customer lists and other intangible costs, less
accumulated amortization of $5,539,000 and $9,121,000 6,521 80,670
Deferred loan costs, less accumulated amortization
of $3,282,000 and $4,972,000 12,073 15,059
--------- ---------
$ 585,258 $ 790,716
========= =========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
LIABILITIES:
Notes payable $ 669,019 $ 900,989
Accounts payable 5,811 5,109
Accrued expenses and other 35,274 39,795
Customer deposits and prepayments 1,058 1,733
Deferred income taxes 9,085 7,140
Minority interest 227 202
Equity in losses of affiliated partnerships in excess of investment 4,563 3,451
--------- ---------
TOTAL LIABILITIES 725,037 958,419
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 271,902 271,902
--------- ---------
PARTNERS' DEFICIT:
General partner (12,091) (12,415)
Limited partners (399,423) (426,405)
Unrealized gain (loss) on available-for-sale securities (167) (785)
--------- ---------
TOTAL PARTNERS' DEFICIT (411,681) (439,605)
--------- ---------
$ 585,258 $ 790,716
========= =========
*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
September 30,
----------------------------------
1995 1996
--------- -------
Restated
(Dollars in Thousands)
REVENUES $ 38,182 $ 59,428
-------- --------
OPERATING EXPENSES:
Service costs 10,411 17,649
General and administrative expenses 6,471 9,711
Depreciation and amortization 13,498 26,413
-------- --------
Total expenses 30,380 53,773
-------- --------
Operating Income 7,802 5,655
INTEREST EXPENSE, NET (13,553) (19,560)
OTHER INCOME (EXPENSE):
Other, net (25) (927)
Equity in net income (loss) of investee
limited partnerships (755) 68
-------- --------
NET LOSS $ (6,531) $(14,764)
======== ========
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
-----------------------------------
Nine months ended
September 30,
-----------------------------------
1995 1996
-------- --------
Restated
(Dollars in Thousands)
REVENUES $112,789 $153,803
-------- --------
OPERATING EXPENSES:
Service costs 31,948 42,933
General and administrative expenses 20,950 26,058
Depreciation and amortization 40,593 66,602
-------- --------
Total expenses 93,491 135,593
-------- --------
Operating Income 19,298 18,210
INTEREST EXPENSE, NET (40,373) (50,983)
OTHER INCOME (EXPENSE):
Other, net 13,185 334
Equity in net income (loss) of investee
limited partnerships (3,024) 134
-------- --------
NET LOSS $(10,914) $(32,305)
======== ========
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
------------------------------
Nine months ended
September 30,
------------------------------
1995 1996
-------- --------
(Dollars in thousands)
Net cash provided by operating activities $ 30,153 $ 64,866
-------- --------
Cash flows from investing activities:
Acquisition of cable television systems - (247,397)
Capital expenditures (25,763) (35,380)
Increase in intangible assets (1,604) (3,904)
Proceeds from sale of system - 15,000
Proceeds from sale of property, plant and equipment 300 312
Distributions from investee limited partnerships 10 781
Sale of available-for-sale securities 13,490 -
Investments in affiliated partnerships and other investments (668) -
-------- --------
Net cash used in investing activities (14,235) (270,588)
-------- --------
Cash flows from financing activities:
Borrowings from notes payable 8,707 691,382
Repayment of debt (29,139) (485,158)
Deferred loan costs (1,465) (4,676)
Contributions from partners 260 5,000
Minority interest capital contributions 130 -
-------- --------
Net cash (used in) provided by financing activities (21,507) 206,548
-------- --------
Net (decrease) increase in cash and cash equivalents (5,589) 826
Cash and cash equivalents at
beginning of period 10,468 15,050
-------- --------
Cash and cash equivalents at
end of period $ 4,879 $ 15,876
======== ========
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 four
partnerships that owned certain of the Owned Systems whereby the Partnership
issued partnership units in exchange for the direct and indirect ownership of
more than 99 percent of each of the 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. As of December 28,
1995, Falcon First, through wholly-owned subsidiaries, owned 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, the systems owned by Falcon
First have been 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.
On July 12, 1996, the Partnership, through a newly-formed and
wholly-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 was previously
managed by the Partnership for a fee and, as such, classified as an "Affiliated
Partnership" in periods prior to the acquisition date. Commencing July 12,
1996, the FCSC II systems have been included as Owned Systems.
The acquisition of the FCSC 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
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - BASIS OF PRESENTATION (Continued)
approximately $5.6 million on July 12, 1996. Also in connection with the
acquisition, FCSC paid to the Partnership in cash deferred management fees and
reimbursed expenses of approximately $5.2 million.
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - BASIS OF PRESENTATION (Continued)
The following tables set forth certain pro forma combined operating
data assuming that the acquisition of the stock of First and the assets of FCSC
had occurred on January 1, 1995:
Unaudited
----------------------------------------------------------------------------------
Three months ended September 30, 1995
Historical
-------------------------------------------
FHGLP as Falcon Pro Forma Pro Forma
Restated First FCSC Adjustments(1) Combined
-------- ------- ------ ------------ ---------
(Dollars in thousands)
OPERATIONS
STATEMENT DATA
Revenues $ 38,182 $ 7,953 $13,398 $(1,061) $ 58,472
Service, general and
administrative costs and
expenses 16,882 3,933 7,219 (1,061) 26,973
Depreciation and amortization 13,498 3,387 3,785 4,032 24,702
-------- ------- ------- ------- --------
Operating income 7,802 633 2,394 (4,032) 6,797
Interest income (expense), net (13,553) (3,325) (4,314) 826 (20,366)
-------- ------- ------- ------- --------
Other income (expense), net (780) (201) (32) 1,972 959
-------- ------- ------- ------- --------
Net loss $ (6,531) $(2,893) $(1,952) $(1,234) $(12,610)
======== ======= ======= ======= ========
Unaudited
Three months ended September 30, 1996
-------------------------------------------------------------------
Historical Historical Pro Forma Pro Forma
FHGLP FCSC Adjustments(1) Combined
------------ ----------- ------------ ----------
(Dollars in Thousands)
OPERATIONS
STATEMENT DATA
Revenues $ 59,428 $1,800 $ (90) $ 61,138
Service, general and
administrative costs and
expenses 27,360 741 (90) 28,011
Depreciation and 26,413 546 310 27,269
-------- ------ ----- --------
amortization
Operating income 5,655 513 (310) 5,858
Interest income (expense), (19,560) (386) (106) (20,052)
net
Other income (expense), net (859) 78 - (781)
-------- ------ ----- --------
Net income (loss) $(14,764) $ 205 $(416) $(14,975)
======== ====== ===== ========
__________________________________
(1) The pro forma adjustments relate to the elimination of management fee income
and expense between the Partnership, Falcon First and FCSC; to adjustments to
depreciation and amortization expense to reflect the acquisitions; to
adjustments to interest expense to reflect the effects of the refinancing that
took place on December 28, 1995, as amended on July 12, 1996; to record
estimated future tax benefits related to Falcon First; and to the elimination
for the nine month period of non-recurring other income related to the
FCSC acquisition.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unaudited
Nine months ended September 30, 1995
---------------------------------------------------------------------------------
Historical
------------------------------------------
FHGLP as Falcon Pro Forma Pro Forma
Restated First FCSC Adjustments(1) Combined
-------- ------- ------- ------------ ---------
(Dollars in thousands)
OPERATIONS
STATEMENT DATA
Revenues $112,789 $ 23,464 $ 39,546 $ (3,133) $172,666
Service, general and
administrative costs and
expenses 52,898 11,612 21,363 (3,133) 82,740
Depreciation and amortization 40,593 12,407 13,037 12,096 78,133
-------- -------- -------- -------- --------
Operating income 19,298 (555) 5,146 (12,096) 11,793
Interest income (expense), (40,373) (9,849) (12,482) 1,087 (61,617)
net
Other income (expense), net 10,161 (504) 7,427 7,268 24,352
-------- -------- -------- -------- --------
Net income (loss) $(10,914) $(10,908) $ 91 $ (3,741) $(25,472)
======== ======== ======== ======== ========
Unaudited
Nine months ended September 30, 1996
------------------------------------------------------------------
Historical Historical Pro Forma Pro Forma
FHGLP FCSC Adjustments(1) Combined
------------- ----------- ------------- ----------
(Dollars in Thousands)
OPERATIONS
STATEMENT DATA
Revenues $153,803 $29,037 $(1,452) $181,388
Service, general and
administrative costs and
expenses 68,991 15,397 (1,452) 82,936
Depreciation and
amortization 66,602 7,952 5,548 80,102
-------- ------- ------- --------
Operating income 18,210 5,688 (5,548) 18,350
Interest income (expense), (50,983) (8,705) (1,352) (61,040)
net
Other income (expense), net 468 1,402 (1,567) 303
-------- ------- ------- --------
Net loss $(32,305) $(1,615) $(8,467) $(42,387)
======== ======= ======= ========
__________________________________
(1) The pro forma adjustments relate to the elimination of management fee income
and expense between the Partnership, Falcon First and FCSC; to adjustments to
depreciation and amortization expense to reflect the acquisitions; to
adjustments to interest expense to reflect the effects of the refinancing that
took place on December 28, 1995, as amended on July 12, 1996; to record
estimated future tax benefits related to Falcon First; and to the elimination
for the nine month period of non-recurring other income related to the
FCSC acquisition.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three and nine months ended
September 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 and the 1995 Form 10-K filed by FCSC. 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 nine months ended September 30,
1996 are not necessarily indicative of the results for the entire year.
NOTE 3 - MINORITY INTEREST
Included in the operations of Falcon Telecable, a wholly-owned
subsidiary partnership, 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 nine months ended September 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
nine months ended September 30, 1995 by $801,000 and $3,022,000 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 (the "1996 Telecom Act"). This statute
substantially changed the competitive and regulatory environment for
telecommunications providers by significantly amending the Communications Act
of 1934, including certain of the rate regulation provisions previously imposed
by the Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"). Compliance with those rate regulations has had a negative
impact on the Partnership's revenues and cash flow. However, 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, the possible purchase or sale of assets by the
Partnership 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 or
referred to herein, reference is made to the Partnership's Annual Report on
Form 10-K for the 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 or FCSC, and for the period January 1, 1996 through
July 11, 1996 did not include the results of FCSC. 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 the pro
forma 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 (Pro forma)
The Partnership's revenues increased from $58.5 million to $61.1
million, or by 4.6%, and $172.7 million to $181.4 million, or by 5.1%, for the
three and nine months ended September 30, 1996 compared to the corresponding
periods in 1995. The $2.6 million net increase in revenues for the three months
ended September 30, 1996 as compared to the corresponding period in 1995 was due
to increased cable service revenues, which was caused principally by increases
of $2.9 million due to increases in regulated service rates implemented in April
1996, $748,000 due to the restructuring of The Disney Channel from a premium
channel to a tier channel on July 1,
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
1996, and $582,400 due to increases related to other revenue producing items
(primarily advertising sales), partially offset by decreases of $855,700
related to cable systems sold during 1996, $604,800 due primarily to reductions
in the number of premium subscriptions for cable service and $123,000 related
to decreases implemented in 1996 to comply with the 1992 Cable Act. The $8.7
million net increase in revenues for the nine months ended September 30, 1996
compared to the corresponding period in 1995 was due to increased cable service
revenues, caused principally by increases of $7.8 million due to increases in
regulated service rates implemented in each of April 1995 and 1996. An
additional $748,000 due to the restructuring of The Disney Channel discussed
above and $2.0 million related to increases in other revenue producing items
(primarily advertising sales). These increases were partially offset by
decreases of $855,700 related to cable systems sold during 1996, $780,700
primarily due to reductions in the number of premium subscriptions for cable
service and to $123,000 related to decreases implemented in 1996 to comply with
the 1992 Cable Act. As of September 30, 1996, the Owned Systems had
approximately 544,000 homes subscribing to cable service and 211,400 premium
service units. Management and consulting fees remained relatively unchanged at
$1.2 million and $3.3 million for the three and nine months ended September 30,
1996 compared to the corresponding periods in 1995.
Service costs increased from $16.9 million to $18.1 million, or by
7.1%, for the three months ended September 30, 1996 compared to the
corresponding period in 1995 and remained relatively unchanged at $51.6 million
for the nine months ended September 30, 1996 compared to the corresponding
period in 1995. Service costs represent costs directly attributable to
providing cable services to customers. Of the $1.2 million increase in service
costs for the three months ended September 30, 1996 as compared to 1995, $1.5
million related to increases in programming fees paid to program suppliers
(including primary satellite fees), $338,100 related to increases in franchise
and copyright fees associated with increased revenues and $121,700 related to
increases in other service costs. These increases were partially offset by
decreases of $719,800 related to increases in capitalized labor associated with
increased construction activity. Of the $77,000 decrease in service costs for
the nine months ended September 30, 1996 as compared to 1995, $1.6 million
related to increases in capitalized labor associated with increased
construction activity, and $852,900 related to decreases in property taxes.
These decreases were partially offset by increases of $1.3 million in franchise
and copyright fees (related to increased revenues), increases of $652,300 in
other service costs, increases of $255,300 in personnel costs and increases of
$206,100 in programming fees paid to program suppliers (including primary
satellite fees). The increase in programming costs for the three and nine
months ended September 30, 1996 compared to the corresponding periods in 1995
included a $275,500 increase related to the restructuring of The Disney Channel
discussed above.
General and administrative expenses decreased from $10.0 million to
$9.9 million, or by 1.6%, for the three months ended September 30, 1996
compared to the corresponding period in 1995, and increased from $31.1 million
to $31.4 million, or by 0.9%, for the nine months ended September 30, 1996
compared to the corresponding period in 1995. Of the $161,100 decrease for the
three months ended September 30, 1996 as compared to 1995, $360,400 related to
decreases in personnel costs and $312,100 related to increases in capitalized
labor associated with increased construction activity. These decreases were
partially offset by a $511,500 increase in various other expenses primarily
related to the 1995 reimbursement of expenses associated with certain
international investment activities. Of the $273,100 increase for the nine
months ended September 30, 1996 as compared to 1995, $606,600 related to
increases in marketing costs, $216,300 related to costs associated with re-
regulation by the FCC and various other expenses increased $297,900, primarily
due to the 1995 reimbursement of expenses
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
associated with certain international investment activities. These increases
were partially offset by decreases of $847,700 related to increases in
capitalized labor associated with increased construction activity.
Depreciation and amortization expense increased from $24.7 million to
$27.3 million, or by 10.4%, and from $78.1 million to $80.1 million, or by
2.5%, for the three and nine months ended September 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 increased by approximately $2.6 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 decreased from $6.8 million to $5.9 million, or by
13.8%, for the three months ended September 30, 1996 compared with the
corresponding period in 1995, and increased from $11.8 million to $18.4
million, or by 55.6%, for the nine months ended September 30, 1996 compared
with the corresponding period in 1995. The $937,400 decrease for the three
months ended September 30, 1996 was due principally to increases in operating
expenses of $3.6 million in excess of revenue increases of $2.6 million as
discussed above. The $6.6 million increase for the nine months ended September
30, 1996 was primarily due to the $8.7 million net increase in revenues
partially offset by increases in operating expenses as discussed above.
Interest expense, including the effects of interest rate hedging
agreements, decreased from $20.4 million to $20.1 million, or by 1.5%, and from
$61.6 million to $61.0 million, or by 0.9% for the three and nine months ended
September 30, 1996 compared to the corresponding periods in 1995. Lower average
interest rates (8.6% and 8.7% during the three and nine months ended September
30, 1996 compared to 9.2% and 9.4% during the corresponding periods in 1995)
partially offset by higher average borrowings accounted for the majority of the
decreases. 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, in 1995 only, with the $20 million Falcon
Telecable 11.56% notes payable), amounted to $6.7 million and $19.6 million for
the three and nine months ended September 30, 1996 compared to $6.8 million and
$20.0 million for the corresponding periods in 1995. Interest rate hedging
agreements resulted in additional interest expense of $238,000 and $870,000
during the three and nine months ended September 30, 1996 compared to $556,000
and $1.0 million during the corresponding periods in 1995.
Other income and expense was $781,000 expense for the three months
ended September 30, 1996 and was $303,000 income for the nine months ended
September 30, 1996 compared to $958,900 and $24.3 million of income for the
corresponding periods in 1995. The $1.7 million change for the three months
ended September 30, 1996 was due principally to a reduction in income tax
benefits related to Falcon First in the 1995 period. The $24.0 million
decrease in income for the nine months was primarily due to a $20.8 million
non-recurring gain from the sale of marketable securities during 1995, and to a
$3.2 million reduction in income tax benefits recorded in the 1995 period.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
Due to the factors described above, the Partnership's net loss
increased from $12.6 million to $15.0 million and from $25.5 million to $42.4
million for the three and nine months ended September 30, 1996 compared with
the corresponding periods of 1995.
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 $60.0
million and $125.0 million in capital expenditures in 1996 and 1997,
respectively, including approximately $24.0 million and $80.0 million,
respectively, to rebuild and upgrade certain of the Owned Systems. The
Partnership's proposed spending plans, in general, and including those plans for
1997, are constantly being reviewed and revised with respect to changes in
technology, acceptable leverage parameters, franchise requirements and other
factors. The Partnership will also need to continue to maintain compliance with
certain covenants of the Partnership's loan agreements, of which there can be no
assurance. The Partnership spent $35.4 million on non-acquisition capital
expenditures during the nine months ended September 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 1 to unaudited Condensed Consolidated
Financial Statements, on July 12, 1996 the Partnership entered into 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, pay transaction and financing costs of approximately $5.6 million and
prepay $28.6 million of subordinated debt. 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.
On July 1, 1996 the Partnership sold certain of the Falcon First
assets for $15.0 million, 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 Partnership has decided not to sell certain other cable
assets that were contemplated to be sold under the Amended and Restated Bank
Credit Agreement due to offers it considered inadequate, and, as a result, the
failure to sell these assets may result in the reduction of capital
expenditures permitted under the Amended and Restated Bank Credit Agreement.
The Partnership frequently considers opportunities to sell assets that it views
as non-strategic.
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15
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 September 30,
1996, the amount outstanding under the Amended and Restated Bank Credit
Agreement was $632 million and the Partnership had available to it additional
borrowings thereunder of approximately $77 million. At closing of the
acquisition of the 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 outstanding subordinated
debt. 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 September 30, 1996, borrowings under
the Amended and Restated Bank Credit Agreement bore interest at an average rate
of 7.9% (including the effect of interest rate hedging agreements). The
Partnership has entered into fixed interest rate hedging agreements with an
aggregate notional amount at September 30, 1996 of $600 million (including $210
million of contracts purchased from FCSC). Agreements in effect at September
30, 1996 totaled $495 million, with the remaining $105 million 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 September 30, 1996.
The Partnership (i.e., FHGLP) is a separate, stand-alone holding
company which employs all of the management personnel. All of the Owned
Systems are owned by subsidiaries of the Partnership. Accordingly, the
Partnership is financially dependent on the receipt of permitted payments from
the Owned Systems, 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 nine months ended September 30, 1996 the limit was
approximately $6.0 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 Systems. Receivables from the Affiliated
Partnerships for services and reimbursements described above amounted to
approximately $6.8 million at September 30, 1996.
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16
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Due to the uncertainty regarding its ability to meet the projected
liquidity needs outlined above, the Partnership cannot presently determine
whether it will have access to the capital required for it to continue to
pursue its traditional acquisition strategy if and when attractive acquisition
opportunities become available. The Partnership also possesses the right,
under certain circumstances, to acquire some or all of the remaining Affiliated
Systems. During the three months ended September 30, 1996, the Partnership's
Board of Representatives authorized its management to commence the "Appraisal
Process," as defined in the partnership agreement of Falcon Classic Cable
Income Properties, L.P. ("Classic"), one of the Affiliated Partnerships, in
order to determine whether the Partnership should exercise its right under that
partnership agreement to acquire some or all of Classic's cable systems. The
three appraisal firms were selected in October 1996, and the appraisal work has
commenced. Any exercise of the Partnership's right to purchase some or all of
Classic's assets (which will not take place prior to January 1, 1997, at the
earliest) will be dependent on the results of the appraisals and will also be
subject to approval of the Board of Representatives. Any exercise of such
rights is similarly dependent on the availability of adequate capital, of which
there can be no assurance. The costs of the Appraisal Process, anticipated to
be approximately $200,000, will be borne by FHGLP. Further information
regarding the Appraisal Process is provided in Forms 8-K filed by Classic on
August 27 and October 17, 1996.
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 September 30,
1996 had increased to $253 million. Future interest payments are expected to be
paid in kind until the year 2000, when cash payment is required. The Notes
also contain various restrictions relating to, among other things, mergers and
acquisitions, a change in control and the incurrence of additional
indebtedness. The incurrence of additional indebtedness test limits the ratio
of the total debt of the Partnership to Operating Cash Flow (as defined in the
indenture) to 7.5 to 1 if such indebtedness is incurred through December 31,
1999 and to 6.5 to 1 thereafter.
As of September 30, 1996, the Partnership also had outstanding an
aggregate of $15.0 million in principal amount of subordinated debt (other than
the Notes).
Enstar Communications Corporation, a wholly-owned subsidiary of one of
the Owned Partnerships ("ECC"), has guaranteed the debt obligations of certain
Enstar partnerships in which it acts as general partner. The Enstar
partnerships own cable television systems through limited partnerships, most of
which are publicly-held. At September 30, 1996, the maximum exposure to ECC
pursuant to such guarantees was approximately $9.8 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
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17
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Cash from operating activities (including interest expense and
management fee income) increased from $30.2 million to $64.9 million for the
nine months ended September 30, 1996, compared to the corresponding period in
1995, an increase of $34.7 million. The increase resulted primarily from a net
increase of $35.1 million in other operating items (receivables, cable
materials and supplies, payables, accrued expenses and subscriber deposits and
prepayments) partially offset by a $428,900 decrease in payment-in-kind
interest expense related primarily to the $20 million Falcon Telecable 11.56%
notes payable repaid on July 12, 1996.
Cash used in investing activities increased from $14.2 million to
$270.6 million for the nine months ended September 30, 1996 compared to the
corresponding period in 1995. The change was due primarily to the July 12, 1996
$247.4 million acquisition of the FCSC assets as previously discussed, the
absence in 1996 of approximately $13.5 million of net proceeds received by the
Partnership during 1995 from the sale of marketable securities, to an increase
in capital expenditures of $9.6 million and to an increase in intangible assets
of $2.3 million. These increases were partially offset by $15.0 million of cash
provided in 1996 in connection with the sale of a system, by $770,400
distributions received from investee limited partnerships and by $668,100 of
investments in limited partnerships during 1995 that did not recur in 1996.
Cash from financing activities increased from a use of cash of $21.5
million for the nine months ended September 30, 1995 to cash provided of $206.5
million for the nine months ended September 30, 1996, or a change of $228.0
million. The increase was due primarily to increased borrowings of debt in 1996
of $226.7 million and to increased capital contributions of $4.7 million,
partially offset by a $3.2 million increase in expenditures for deferred loan
costs.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 53.9% to 54.2% and from 52.1% to 54.3%
for the three and nine months ended September 30, 1996 compared to the
corresponding periods in 1995. The increases were primarily caused by revenue
increases as described above. EBITDA increased from $31.5 million to $33.1
million, or by 5.2%, and from $89.9 million to $98.4 million, or by 9.5%,
during the three and nine months ended September 30, 1996 compared to the
corresponding periods in 1995.
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18
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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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19
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.39 - Limited Partnership Interest Purchase
Agreement dated July 15, 1996, by and among Falcon
Holding Group, L.P., Marc B. Nathanson, Trustee of
the Falcon Cable Trust and Advance TV of California,
Inc.
Exhibit 10.40 - Partnership Option Agreement dated
July 15, 1996, by and among Marc B. Nathanson,
Trustee of the Falcon Cable Trust and Falcon Holding
Group, L.P.
Exhibit 10.41 - Partnership Option Agreement dated
July 15, 1996, between Advance TV of California, Inc.
and Falcon Holding Group, L.P.
Exhibit 10.42 - Fourth Amendment to Note Purchase and
Exchange Agreement dated July 12, 1996, between
Falcon Telecable, AUSA Life Insurance Company, Inc.
and MONY Life Insurance Company of America.
Exhibit 10.43 - Second Restated Subordination
Agreement between Registrant and AUSA Life Insurance
Company, Inc. and MONY Life Insurance Company of
America dated July 12, 1996.
Exhibit 10.44 - Second Restated Guaranty Agreement,
dated July 12, 1996, by Falcon Cablevision, Falcon
Cable Media, Falcon Community Cable, L.P., Falcon
Community Ventures I Limited Partnership, Falcon
Investors Group, LTD., Falcon Telecable Investors
Group, Falcon Media Investors Group, Falcon Community
Investors, L.P., Falcon Telecom, L.P., Falcon Cable
Systems Company II, L.P., and Falcon First, Inc. in
favor of each of AUSA Life Insurance Company, Inc.
and MONY Life Insurance Company of America with
respect to the Notes.
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
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20
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: November 12, 1996 By: /s/ Michael K. Menerey
-------------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer
21
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.39 Limited Partnership Interest Purchase Agreement dated
July 15, 1996, by and among Falcon Holding Group,
L.P., Marc B. Nathanson, Trustee of the Falcon Cable
Trust and Advance TV of California, Inc.
10.40 Partnership Option Agreement dated July 15, 1996, by
and among Marc B. Nathanson, Trustee of the Falcon
Cable Trust and Falcon Holding Group, L.P.
10.41 Partnership Option Agreement dated July 15, 1996,
between Advance TV of California, Inc. and Falcon
Holding Group, L.P.
10.42 Fourth Amendment to Note Purchase and Exchange
Agreement dated July 12, 1996, between Falcon
Telecable, AUSA Life Insurance Company, Inc. and MONY
Life Insurance Company of America.
Second Restated Subordination Agreement between
Registrant and AUSA Life Insurance Company,
Inc. and MONY Life Insurance Company of
America dated July 12, 1996.
10.44 Second Restated Guaranty Agreement, dated July 12,
1996, by Falcon Cablevision, Falcon Cable Media,
Falcon Community Cable, L.P., Falcon Community
Ventures I Limited Partnership, Falcon Investors
Group, LTD., Falcon Telecable Investors Group, Falcon
Media Investors Group, Falcon Community Investors,
L.P., Falcon Telecom, L.P., Falcon Cable Systems
Company II, L.P., and Falcon First, Inc. in favor of
each of AUSA Life Insurance Company, Inc. and MONY
Life Insurance Company of America with respect to the
Notes.
E-1