1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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 of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 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 mark 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
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December 31, March 31,
1996* 1997
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(Unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 13,633 $ 10,858
Receivables:
Trade, less allowance of $907,000 and
$1,048,000 for possible losses 11,607 11,060
Affiliates 5,793 5,546
Other assets 10,555 9,999
Other investments 3,446 3,462
Property, plant and equipment, less accumulated depreciation
and amortization of $230,920,000 and $244,191,000 309,128 304,835
Franchise cost, less accumulated
amortization of $173,742,000 and $182,551,000 256,461 247,804
Goodwill, less accumulated amortization
of $12,454,000 and $14,223,000 72,956 71,186
Customer lists and other intangible costs, less
accumulated amortization of $8,793,000 and $13,205,000 76,448 72,306
Deferred loan costs, less accumulated amortization
of $5,755,000 and $6,307,000 14,296 13,745
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$ 774,323 $ 750,801
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LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
LIABILITIES:
Notes payable $ 885,786 $ 892,552
Accounts payable 10,561 5,178
Accrued expenses and other 47,228 38,139
Customer deposits and prepayments 1,627 1,781
Deferred income taxes 10,301 9,576
Minority interest 193 185
Equity in losses of affiliated partnerships in excess of investment 3,224 3,297
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TOTAL LIABILITIES 958,920 950,708
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 271,902 271,902
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PARTNERS' DEFICIT:
General partner (12,591) (12,745)
Limited partners (443,908) (459,064)
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TOTAL PARTNERS' DEFICIT (456,499) (471,809)
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$ 774,323 $ 750,801
========= =========
*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
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Three months ended
March 31,
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1996 1997
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(Dollars in Thousands)
REVENUES $ 46,203 $ 63,984
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EXPENSES:
Service costs 12,756 18,295
General and administrative expenses 7,984 11,179
Depreciation and amortization 20,150 29,793
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Total expenses 40,890 59,267
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Operating income 5,313 4,717
OTHER INCOME (EXPENSE):
Interest expense (15,602) (20,384)
Equity in net loss of investee partnerships 15 (71)
Other income (expense), net 1,188 403
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NET LOSS $ (9,086) $(15,335)
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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
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Unaudited
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Three months ended
March 31,
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1996 1997
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(Dollars in Thousands)
Net cash provided by operating activities $ 10,211 $ 15,322
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Cash flows from investing activities:
Capital expenditures (5,563) (10,624)
Increase in intangible assets (501) (326)
Proceeds from sale of cable assets 102 7
Distributions from investee limited partnerships 17 2
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Net cash used in investing activities (5,945) (10,941)
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Cash flows from financing activities:
Borrowings from notes payable 2,555 8,000
Repayment of debt (10,864) (15,179)
Minority interest capital contributions -- 25
Deferred loan costs 12 (1)
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Net cash used in financing activities (8,297) (7,155)
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Net decrease in cash and cash equivalents (4,031) (2,774)
Cash and cash equivalents
at beginning of period 15,050 13,633
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Cash and cash equivalents
at end of period $ 11,019 $ 10,858
======== ========
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
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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 condensed consolidated financial statements include the
consolidated accounts of FHGLP, its subsidiary cable television operating
partnerships and corporations (the "Owned Subsidiaries") and those operating
partnerships' general partners, which are owned by FHGLP. The condensed
consolidated financial statements include the accounts of Enstar Communications
Corporation ("ECC"), a wholly-owned subsidiary of one of the operating
partnerships, which is the general partner of the 15 limited partnerships
operating under the name "Enstar" (which are Affiliated Systems).
As noted in its latest Annual Report on Form 10-K, on July 12, 1996
the Partnership acquired the assets of Falcon Cable Systems Company ("FCSC"), an
Affiliated Partnership. The results of operations of these Systems have been
included in the condensed consolidated financial statements of FHGLP from July
12, 1996. Management fees and reimbursed expenses received by the Partnership
from FCSC for the period of January 1, 1996 through March 31, 1996 are also
included in the condensed consolidated financial statements and have not been
eliminated in consolidation. Accordingly, the Partnership's results of
operations for the quarter ended March 31, 1997 are not comparable to the prior
year's amounts reported in the condensed consolidated financial statements.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three months ended March 31,
1997 and 1996 are unaudited. These condensed interim financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Partnership's latest Annual Report on Form 10-K. In the opinion
of management, such statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
of such periods. The results of operations for the three months ended March 31,
1997 are not necessarily indicative of results for the entire year.
NOTE 3 - MINORITY INTEREST
Included in the operations of Falcon Telecable, one of the Owned
Subsidiaries, 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.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONCLUDED)
===========================================
NOTE 4 - SALE OF SYSTEMS
On July 1, 1996, the Partnership sold certain Owned Systems located
in Georgia ("Eastern 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 1996 amounts have been reclassified to conform to the 1997
presentation.
NOTE 6 - ACQUISITION OF FALCON CABLE SYSTEMS COMPANY
The Partnership acquired FCSC on July 12, 1996. Had FCSC been
acquired on January 1, 1996, revenues would have been increased by $12.8 million
and net loss would have been increased by $10.3 million on a pro forma basis.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
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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. 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 1996 Telecom Act. There can be no
assurance as to what, if any, further 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 historical financial
results as described below are not necessarily indicative of future performance.
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 FCSC for approximately $247.4 million in cash. FCSC was
previously managed by the Partnership for a fee and, as such, its systems were
classified as Affiliated Systems in the periods prior to the acquisition date.
Commencing July 12, 1996, the FCSC II systems have been included as Owned
Systems. Management fees and reimbursed expenses received by the Partnership
from FCSC prior to July 12, 1996 are included as revenue from the Affiliated
Systems and have not been eliminated in consolidation. Such fees have been
eliminated in consolidation since July 12, 1996.
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 for the year ended December 31, 1996 for additional information regarding
such matters and the effect thereof on the Partnership's business.
RESULTS OF OPERATIONS (PRO FORMA)
The historical results of operations of the Partnership for 1996 did
not include the results of FCSC for the period January 1, 1996 through July 11,
1996. FCSC has been managed by the Partnership prior to and subsequent to the
acquisition and has been affected by the same general trends in operating costs
and revenues as all of the Partnership's cable systems. Accordingly, the
Partnership believes that it is more meaningful to compare 1997 operations to
1996 operations on a pro forma basis assuming that the acquisition of FCSC had
occurred on January 1, 1996. The pro forma results include the effect of
increased amortization relating to the allocated purchase price of the
intangible assets acquired, and the effect of increased interest expense related
to the increase in debt incurred to finance the acquisition. Set forth in the
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (PRO FORMA) (CONTINUED)
table below are pro forma results of operations prepared on this basis. These
results are not necessarily indicative of what would have occurred had the
acquisition been made as of that date or of results which may occur in the
future.
Pro Forma Actual
Three months Three months
ended ended
March 31, March 31,
1996 1997
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(Dollars in Thousands)
OPERATIONS STATEMENT DATA
Revenues $ 59,007 $ 63,984
Costs and expenses (26,837) (29,474)
Depreciation and amortization (31,471) (29,793)
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Operating income 699 4,717
Interest expense, net (21,152) (20,384)
Equity in net income (loss) of investee partnerships 15 (71)
Other income (expense), net (453) (162)
Income tax benefit 1,553 565
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Loss before extraordinary item $(19,338) $(15,335)
======== ========
The Partnership's revenues increased from $59 million to $64 million,
or by 8.4%, for the three months ended March 31, 1997 compared to the
corresponding period in 1996. Of the $5 million net increase in revenues, $4.5
million was due to increased cable service revenues and $447,000 was due to
increases in management fees. The $4.5 million increase in cable service
revenues was caused principally by increases of $4.8 million related to
increases in regulated service rates implemented during 1996, $733,000 due to
the restructuring of The Disney Channel from a premium channel to a tier channel
on July 1, 1996, $332,000 due to programmer incentives and $231,000 due to
increases in advertising sales. These increases were partially offset by
decreases of $877,000 related to the Eastern Georgia cable systems sold on July
1, 1996, $371,000 due to reductions in the number of premium subscriptions for
cable service, $171,000 due to reductions in the number of regulated
subscriptions for cable service and $122,000 related to decreases in other
revenues. As of March 31, 1997, the Owned Systems had approximately 547,000
homes subscribing to cable service and 196,500 premium service units. Excluding
the Eastern Georgia cable systems sold on July 1, 1996, the Partnership's
revenues increased 10.1%.
Management and consulting fees earned by the Partnership increased
from $1.1 million to $1.5 million for the three months ended March 31, 1997
compared to the corresponding period in 1996. The increased fees resulted
primarily from payment of previously deferred fees from one of the Affiliated
Partnerships, Falcon Classic.
Service costs increased from $16.4 million to $18.3 million, or by
11.4%, for the three months ended March 31, 1997 compared to the corresponding
period in 1996. Service costs represent costs directly
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (PRO FORMA) (CONTINUED)
attributable to providing cable services to customers. The $1.9 million increase
in service costs was primarily caused by a $1.9 million increase in programming
fees paid to program suppliers (including primary satellite fees), $518,000
related to increases in franchise and copyright fees associated with increased
revenues and $465,000 related to increases in property taxes. These increases
were partially offset by decreases of $726,000 related to increases in
capitalized labor associated with increased construction activity and $316,000
related to service costs attributable to the Eastern Georgia cable systems sold
on July 1, 1996. The increase in programming expense was due to a combination of
higher rates charged by program suppliers and expanded programming usage
relating to channel line-up restructuring and retransmission consent
arrangements implemented to comply with the 1992 Cable Act.
General and administrative expenses increased from $10.4 million to
$11.2 million, or by 7.4%, for the three months ended March 31, 1997 compared to
the corresponding period in 1996. The $768,000 increase related primarily to a
$563,000 increase in bad debt expense and a $333,000 increase related primarily
to costs associated with advertising sales and marketing. These increases were
partially offset by a $128,000 reduction of expenses related to the Eastern
Georgia cable systems sold on July 1, 1996.
Depreciation and amortization expense decreased from $31.5 million to
$29.8 million, or by 5.3%, for the three months ended March 31, 1997 compared to
the corresponding period in 1996. Depreciation and amortization expense
decreased $1.4 million primarily due to accelerated depreciation related to
asset retirements and to intangible assets becoming fully amortized. The Eastern
Georgia cable systems sold in July 1996 decreased depreciation and amortization
expense by $622,000. Property, plant and equipment additions resulted in an
increase of approximately $300,000 in depreciation expense.
Operating income increased from $699,000 to $4.7 million, or by
574.8%, for the three months ended March 31, 1997 compared to the corresponding
period in 1996. The $4 million increase was principally due to increases in
revenues in excess of increases in operating expenses and to a decrease in
depreciation and amortization expense as discussed above. Excluding the Eastern
Georgia cable systems sold on July 1, 1996, the Partnership's operating income
increased $4.5 million.
Interest expense, including the effects of interest rate hedging
agreements, decreased from $21.2 million to $20.4 million, or by 3.6%, for the
three months ended March 31, 1997 compared to the corresponding period in 1996.
The decrease was due to lower average debt balances outstanding partially offset
by the effect of higher average interest rates (9.1% during the three months
ended March 31, 1997 compared to 8.7% during 1996). Payment-in-kind interest
expense (in which interest payment requirements are met by an increase in the
principal amount of the notes) associated with the 11% Senior Subordinated Notes
amounted to $7 million for the three months ended March 31, 1997 compared to
$6.3 million for the corresponding period in 1996. Interest rate hedging
agreements resulted in additional interest expense of $250,000 during the three
months ended March 31, 1997 compared to $171,000 during the corresponding period
in 1996.
Other income decreased from $1.1 million to $403,000 for the three
months ended March 31, 1997 compared to the corresponding period in 1996
primarily due to a reduction in income tax benefits recorded during 1997.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (PRO FORMA) (CONCLUDED)
Due to the factors described above, the Partnership's net loss
decreased from $19.3 million to $15.3 million, or by 20.7%, for the three months
ended March 31, 1997 compared to the corresponding period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Partnership's primary need for capital has been to
acquire cable systems and to finance plant extensions, rebuilds and upgrades,
and to add addressable converters to certain of the Owned Systems. The
Partnership spent $57.7 million during 1996 on capital expenditures, excluding
the acquisition of FCSC. Management's current plan calls for the expenditure of
approximately $90 million in capital expenditures in 1997, including
approximately $50 million to rebuild and upgrade certain of the Owned Systems.
The Partnership's proposed spending plans, (including its plans for 1997), are
constantly being reviewed and revised with respect to changes in technology,
acceptable leverage parameters (including those specified in its debt
agreements), franchise requirements, competitive circumstances and other
factors. The Partnership spent $10.6 million on non-acquisition capital
expenditures during the three months ended March 31, 1997.
As previously discussed in more detail in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1996, on July 12, 1996 the
Partnership amended its principal credit facility with a $775 million Amended
and Restated Credit Agreement (the "Amended and Restated 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 1, 1996, the Partnership sold certain of its Eastern Georgia
cable systems for $15 million, the proceeds being used to temporarily repay
outstanding debt under the former Bank Credit Agreement. The Partnership has
decided not to sell certain other cable assets that were contemplated to be sold
under the Amended and Restated Credit Agreement due to offers it considered
inadequate. The failure to sell these assets may result in the reduction of
capital expenditures permitted under the Amended and Restated Credit Agreement.
The Partnership frequently considers opportunities to sell assets that it views
as non-strategic.
The Amended and Restated Credit Agreement provides for maximum
available borrowings as follows: $775 million through at December 30, 1997; $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 March 31, 1997, the
amount outstanding under the Amended and Restated Credit Agreement was $609
million and the Partnership had available to it additional borrowings thereunder
of approximately $136 million. The Amended and Restated 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 March 31, 1997,
borrowings under the Amended and Restated Credit Agreement bore interest at an
average rate of 7.93% (including the effect of interest rate hedging
agreements). The Partnership has entered into fixed interest rate hedging
agreements with an aggregate notional amount at March 31, 1997 of $655 million.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Agreements in effect at March 31, 1997 totaled $590 million, with the remaining
$65 million to become effective as certain of the existing contracts mature
during 1997 and 1998. The agreements serve as a hedge against interest rate
fluctuations associated with the Partnership's variable rate debt. These
agreements expire through July 21, 2001. The Amended and Restated 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's management believes that it was in compliance with all such
requirements as of March 31, 1997.
On March 29, 1993, the Partnership issued $175 million aggregate
principal amount of its 11% Senior Subordinated Notes (the "Notes") in
connection with the Partnership's formation. As a result of payment-in-kind
interest payments, the aggregate principal of the Notes outstanding as of March
31, 1997 had increased to $267 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 6.5 to 1
thereafter.
As of March 31, 1997, the Partnership also had outstanding an
aggregate of $15 million in principal amount of subordinated debt.
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 Systems 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 Amended and Restated Credit Agreement permits the Owned
Partnerships to remit to FHGLP no more than 4.25% of their net cable revenues,
as defined, in any year. For the period ended March 31, 1997 the limit was
approximately $2.6 million ($1.5 million was actually remitted). Receivables
from the Affiliated Systems for services and reimbursements described above
amounted to approximately $5.5 million at March 31, 1997.
The Partnership has historically pursued a strategy of seeking to
acquire attractive acquisition candidates, with an emphasis on the acquisition
of systems which can be integrated with its existing operations. Over the past
two years, the Partnership has emphasized the acquisition of Affiliated Systems
due to its familiarity with these assets and because, in many cases, these
assets were already operationally integrated with Owned Systems located nearby.
The Partnership cannot predict whether it will have access to adequate capital
in the future to make further acquisitions of cable systems from third parties
or affiliated parties.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Partnership continues to possess the right, under certain
circumstances, to acquire certain of the remaining Affiliated Systems. In August
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" or "Falcon Classic"), in
order to determine whether the Partnership should exercise its right under that
partnership agreement to acquire some or all of Falcon Classic's cable systems,
all of which constitute Affiliated Systems. As of the date of this Report, the
Partnership has not made a decision as to whether or not it will purchase any or
all of the five cable television systems owned by Falcon Classic. Accordingly,
there can be no assurance that any such purchase of any or all of the Falcon
Classic systems in accordance with the rights of the Partnership and its
affiliates under the terms of the Falcon Classic partnership agreement will be
pursued or, if pursued, when and if any such transaction will be consummated.
For further information regarding the Falcon Classic Appraisal Process, see the
information provided or referred to under the caption "Item 13., Certain
Relationships and Related Transactions - Affiliated Partnerships - Falcon
Classic Appraisal Process" in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1996.
Enstar Communications Corporation, a wholly-owned subsidiary of one
of the subsidiaries of the Partnership ("ECC"), has guaranteed the debt
obligations of certain Enstar partnerships in which it acts as general partner.
The Enstar partnerships, most of which are publicly-held, own cable television
systems. At March 31, 1997, the maximum exposure to ECC pursuant to such
guarantees was approximately $6.6 million, plus accrued interest. This guarantee
is recourse only to the assets of ECC, which consist primarily of 0.5% to 5%
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 Credit
Agreement and the Notes) will restrict the Partnership's ability to (i) make
distributions to fund the purchase of these partnership interests pursuant to
the provisions described above, (ii) incur indebtedness or issue debt securities
in connection with such purchase or (iii) sell a substantial amount of its
assets. The obligation to redeem any significant amount of the limited
partnership interests in the Partnership could result in a material liquidity
demand on the Partnership and there can be no assurance that the Partnership
will be able to raise such funds on terms acceptable to the Partnership, or at
all.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (HISTORICAL)
Cash provided by operating activities (including interest expense and
management fee income) increased from $10.2 million to $15.3 million for the
three months ended March 31, 1997 compared to the corresponding period in 1996,
an increase of $5.1 million. The increase resulted primarily from a net increase
of $4.4 million in other operating items (receivables, other assets, payables,
accrued expenses and subscriber deposits and prepayments) and a $720,000
increase in payment-in-kind interest expense related to the 11% Subordinated
Notes.
Cash used in investing activities increased from $5.9 million to
$10.9 million for the three months ended March 31, 1997 compared to the
corresponding period in 1996. The increase was due primarily to an increase in
capital expenditures of $5.1 million.
Cash from financing activities decreased from $8.3 million to $7.2
million for the three months ended March 31, 1997 compared to the corresponding
period in 1996 primarily due to decreased repayment of debt in 1997.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 55.1% during the three months ended March
31, 1996 to 53.9% for the corresponding period in 1997. On a pro forma basis for
the acquisition of FCSC, EBITDA as a percentage of revenues decreased from 54.5%
to 53.9%. The decrease was primarily caused by increases in programming costs
and other expenses in excess of revenue increases, as described above. EBITDA
increased from $25.5 million to $34.5 million, or by 35.5%. On a pro forma basis
for the acquisition of FCSC, EBITDA increased from $32.2 million to $34.5
million, or by 7.3%. Excluding the Eastern Georgia cable systems sold on July 1,
1996, the Partnership's EBITDA increased from $31.7 million to $34.5 million, or
by 8.7%.
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.
-13-
14
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.50 - Assignment and Acceptance Agreement,
dated December 4, 1996 between Banque Paribas and City
National Bank.
(b) No reports on Form 8-K were filed for the quarter for
which this report is filed.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALCON HOLDING GROUP, L.P.
a DELAWARE LIMITED PARTNERSHIP
------------------------------
(Registrant)
By: Falcon Holding Group
General Partner
Date: May 6, 1997 By: /s/ Michael K. Menerey
-----------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.50 Assignment and Acceptance Agreement, dated December 4, 1996,
between Banque Paribas and City National Bank.
E-1