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 June 30, 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 ____________________
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
===================================================
December 31, June 30,
1996* 1997
--------- ---------
(Unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 13,633 $ 10,799
Receivables:
Trade, less allowance of $907,000 and
$1,006,000 for possible losses 11,607 12,509
Affiliates 5,793 4,479
Other assets 10,555 10,402
Other investments 3,446 3,462
Property, plant and equipment, less accumulated depreciation
and amortization of $230,920,000 and $257,369,000 309,128 307,446
Franchise cost, less accumulated
amortization of $173,742,000 and $191,360,000 256,461 239,275
Goodwill, less accumulated amortization
of $12,454,000 and $15,492,000 72,956 69,918
Customer lists and other intangible costs, less
accumulated amortization of $8,793,000 and $17,393,000 76,448 68,135
Deferred loan costs, less accumulated amortization
of $5,755,000 and $6,853,000 14,296 13,199
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$ 774,323 $ 739,624
========= =========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
LIABILITIES:
Notes payable $ 885,786 $ 885,374
Accounts payable 10,561 4,537
Accrued expenses and other 47,228 49,126
Customer deposits and prepayments 1,627 1,790
Deferred income taxes 10,301 8,755
Minority interest 193 177
Equity in losses of affiliated partnerships in excess of investment 3,224 3,253
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TOTAL LIABILITIES 958,920 953,012
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 271,902 271,902
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PARTNERS' DEFICIT:
General partner (12,591) (12,881)
Limited partners (443,908) (472,409)
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TOTAL PARTNERS' DEFICIT (456,499) (485,290)
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$ 774,323 $ 739,624
========= =========
*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,
-------------------------
1996 1997
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(Dollars in Thousands)
REVENUES $ 48,172 $ 63,983
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EXPENSES:
Service costs 12,528 18,687
General and administrative expenses 8,363 11,728
Depreciation and amortization 20,039 28,840
-------- --------
Total expenses 40,930 59,255
-------- --------
Operating income 7,242 4,728
OTHER INCOME (EXPENSE):
Interest expense (15,821) (18,937)
Equity in net income of investee partnerships 51 42
Other income, net 73 519
-------- --------
NET LOSS $ (8,455) $(13,648)
======== ========
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,
--------------------------
1996 1997
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(Dollars in Thousands)
REVENUES $ 94,375 $ 127,967
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EXPENSES:
Service costs 25,284 36,982
General and administrative expenses 16,347 22,907
Depreciation and amortization 40,189 58,633
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Total expenses 81,820 118,522
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Operating income 12,555 9,445
OTHER INCOME (EXPENSE):
Interest expense (31,423) (39,321)
Equity in net income (loss) of investee partnerships 66 (29)
Other income, net 1,261 922
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NET LOSS $(17,541) $ (28,983)
======== =========
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
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Six months ended
June 30,
-------------------------
1996 1997
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(Dollars in Thousands)
Net cash provided by operating activities $ 32,399 $ 39,748
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Cash flows from investing activities:
Capital expenditures (18,266) (27,624)
Increase in intangible assets (918) (819)
Proceeds from sale of cable assets 255 22
Distributions from investee limited partnerships 20 5
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Net cash used in investing activities (18,909) (28,416)
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Cash flows from financing activities:
Borrowings from notes payable 42,235 11,500
Repayment of debt (57,635) (25,856)
Minority interest capital contributions -- 192
Deferred loan costs 62 (2)
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Net cash used in financing activities (15,338) (14,166)
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Net decrease in cash and cash equivalents (1,848) (2,834)
Cash and cash equivalents
at beginning of period 15,050 13,633
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Cash and cash equivalents
at end of period $ 13,202 $ 10,799
======== ========
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 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 June 30, 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 three and six months ended June 30, 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 and six months ended
June 30, 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 and six months ended June 30, 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 $13.1 million and
$25.9 million for the three and six months ended June 30, 1996 and net loss
would have been increased by $11.4 million and $21.7 million for the three and
six months ended June 30, 1996 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 Federal Communications Commission (the
"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,
pending business combination and acquisition transactions, 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 and the other periodic reports filed by the Partnership
with the Securities and Exchange Commission from time to time for additional
information regarding such matters and the effect thereof on the Partnership's
business.
RECENT DEVELOPMENTS
On June 3, 1997, the Partnership entered into a non-binding memorandum
of understanding (the "MOU") with TCI Communications, Inc. ("TCI"). The MOU was
approved by the requisite vote of the Partnership's Board of Representatives and
Partners on June 23, 1997. The MOU contemplates the formation of a newly-formed
limited partnership ("Newco") and the contribution to Newco by TCI of the assets
of certain cable television systems serving approximately 300,000 homes
subscribing to cable service, subject to certain indebtedness. FHGLP will
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RECENT DEVELOPMENTS (CONCLUDED)
contribute to Newco its Owned Subsidiaries, representing approximately 594,000
homes subscribing to cable service. (The 594,000 includes 48,000 homes
subscribing to cable service to be acquired from Falcon Classic Cable Income
Properties, L.P. ("Classic" or "Falcon Classic") prior to the consummation of
the contemplated transactions with TCI). The Partnership also intends to acquire
the cable television systems owned by Falcon Video Communications, L.P.
("Video"), an affiliated partnership, and contribute those systems to Newco in
exchange for limited partnership interests in the Partnership. Video owns cable
television systems which serve approximately 70,000 homes subscribing to cable
service. The requisite approval of the owners of Video to this transaction has
not, however, been received as of the date of this Report. As consideration for
the contribution of these assets (including Video), it is currently contemplated
that TCI will receive limited partnership interests representing approximately
43% of the equity of Newco and the Partnership will receive 57% of the equity of
Newco.
In addition, in connection with the consummation of the transactions
with TCI and Newco, (i) all of the Partnership's outstanding Class C limited
partnership units; and (ii) certain of the Class A and B limited partnership
units of other partners ("Other Partners") in the Partnership (other than those
interests held by Falcon Holding Group, Inc., the general partner, members of
management of the Partnership and entities controlled by or affiliated with Marc
B. Nathanson or members of the Nathanson family, the foregoing, collectively,
"Falcon Management") will be redeemed for interests in Newco. TCI will purchase
these interests from the Other Partners for an aggregate cash payment of $156.3
million. Assuming completion of these transactions as currently contemplated
(including ultimate approval by the owners of Video), the equity interests in
the Partnership will thereafter be owned approximately 58% by Falcon Management,
33% by the Other Partners and 9% by the former owners of Video. In exchange for
such partial redemption, the Class A and B limited partnership holders will
waive their liquidity rights and substantially all of their voting rights. See
"Liquidity and Capital Resources."
The consummation of the transactions described above is subject to TCI,
the Partnership and certain other parties entering into definitive agreements;
to the Partnership entering into a definitive agreement with Video; to the
Partnership and TCI obtaining numerous required regulatory and other related
consents and to obtaining satisfactory financing arrangements on acceptable
terms. Further, the ultimate terms of certain of the transactions described
above, including the contribution of assets by TCI and the acquisition of Video,
are subject to changes that may be necessary to accommodate the tax, accounting,
regulatory and other similar constraints applicable to the parties involved.
Separately, in June 1997 the Partnership also exercised its right to
acquire the cable television systems operated by Falcon Classic for $82 million
in cash, representing the appraised value of those assets. See "Liquidity and
Capital Resources."
Although the foregoing reflects activities which the Partnership and
certain of its affiliates are currently pursuing with respect to the
Partnership, the foregoing is subject to change at any time. Accordingly, there
can be no assurance that the transactions described above will be successfully
consummated or, if successfully completed, when they might be completed or the
ultimate terms thereof.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
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 assets
acquired, and the effect of increased interest expense related to the increase
in debt incurred to finance the acquisition. Set forth in the 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 actually
been made as of that date or of results which may occur in the future.
Pro Forma Actual Pro Forma Actual
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
-------- -------- --------- ---------
(Dollars in Thousands)
OPERATIONS STATEMENT DATA
Revenues $ 61,243 $ 63,983 $ 120,250 $ 127,967
Costs and expenses (28,088) (30,415) (54,925) (59,889)
Depreciation and amortization (31,361) (28,840) (62,832) (58,633)
-------- -------- --------- ---------
Operating income 1,794 4,728 2,493 9,445
Interest expense, net (21,617) (18,937) (42,769) (39,321)
Equity in net income (loss)
of investee partnerships 52 42 67 (29)
Other income (expense), net 164 (38) (290) (200)
Income tax benefit (247) 557 1,307 1,122
-------- -------- --------- ---------
Loss before extraordinary item $(19,854) $(13,648) $ (39,192) $ (28,983)
======== ======== ========= =========
The Partnership's revenues increased from $61.2 million to $64 million,
or by 4.5%, and $120.3 million to $128 million, or by 6.4%, for the three and
six months ended June 30, 1997 compared to the corresponding periods in 1996. Of
the $2.8 million net increase in revenues for the three months ended June 30,
1997 as compared to the corresponding period in 1996, $2.6 million was due to
increased cable service revenues and $136,000 was due to increases in management
fees. The $2.6 million increase in cable service revenues was caused principally
by increases of $3.5 million related to increases in regulated service rates
implemented during 1996, $820,000 due to the restructuring of The Disney Channel
from a premium channel to a tier channel on July 1, 1996, $819,000 related to
increases in unregulated service rates implemented during 1996 and in May 1997
and $307,000 due to increases in advertising sales. These increases were
partially offset by decreases of $1.3 million due to reductions in the number of
premium subscriptions for cable service, $907,000 related to the Eastern Georgia
cable systems sold on July 1, 1996, $497,000 due to reductions in the number of
regulated subscriptions for cable service and $143,000 related to decreases in
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (PRO FORMA) (CONTINUED)
other revenues. Of the $7.7 million net increase in revenues for the six months
ended June 30, 1997 compared to the corresponding period in 1996, $7.1 million
was due to increased cable service revenues and $583,000 was due to increased
management fees. The $7.1 million increase in cable service revenues was caused
principally by increases of $9.1 million related to increases in regulated ($7.8
million) and unregulated ($1.3 million) service rates, $1.6 million due to the
restructuring of The Disney Channel, $311,000 due to programmer incentives and
$537,000 due to increases in advertising sales. These increases were partially
offset by decreases of $1.8 million related to the Eastern Georgia cable systems
sold on July 1, 1996, $1.6 million due to reductions in the number of premium
subscriptions for cable service, $668,000 due to reductions in the number of
subscriptions for cable service and $264,000 related to decreases in other
revenues. As of June 30, 1997, the Owned Systems had approximately 546,300 homes
subscribing to cable service and 184,100 premium service units. Excluding the
Eastern Georgia cable systems sold on July 1, 1996, the Partnership's revenues
increased 6% and 8% for the three and six months ended June 30, 1997 compared to
the corresponding periods in 1996.
Management and consulting fees earned by the Partnership increased from
$1.1 million and $2.2 million to $1.3 million and $2.8 million for the three and
six months ended June 30, 1997 compared to the corresponding periods in 1996.
The increased fees resulted primarily from recording in 1997 the balance of
previously deferred 1995 fees from one of the Affiliated Partnerships, Falcon
Classic.
Service costs increased from $17 million to $18.7 million, or by 9.9%,
and from $33.4 million to $37 million, or by 10.6%, for the three and six months
ended June 30, 1997 compared to the corresponding periods in 1996. Service costs
represent costs directly attributable to providing cable services to customers.
The $1.7 million and $3.6 million increases in service costs for the three and
six months ended June 30, 1997 compared to the corresponding periods in 1996
were primarily caused by an increase in programming fees paid to program
suppliers (including primary satellite fees). The increase in programming
expense was due to a combination of higher rates charged by program suppliers.
General and administrative expenses increased from $11.1 million to
$11.7 million, or by 5.8%, and from $21.5 million to $22.9 million, or by 6.6%,
for the three and six months ended June 30, 1997 compared to the corresponding
periods in 1996. The $646,000 and $1.4 million increases for the three and six
months ended June 30, 1997 compared to the corresponding periods in 1996 related
primarily to increases in bad debt expense and higher costs associated with
advertising sales and marketing.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
54.1% to 52.5% and from 54.3% to 53.2% for the three and six months ended June
30, 1997 compared to the corresponding periods in 1996. The decrease was
primarily caused by increases in programming costs and other expenses in excess
of revenue increases, as described above. EBITDA increased from $33.2 million to
$33.6 million, or by 1.2%, and from $65.3 million to $68.1 million, or by 4.2%
during the three and six months ended June 30, 1997 compared to the
corresponding periods in 1996. Excluding the Eastern Georgia
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (PRO FORMA) (CONCLUDED)
cable systems sold on July 1, 1996, the Partnership's EBITDA increased from
$32.7 million to $33.6 million, or by 2.8% and from $64.3 million to $68.1
million, or by 5.8%. EBITDA should be considered in addition to and not as a
substitute for net income and cash flows determined in accordance with generally
accepted accounting principles as an indicator of financial performance and
liquidity.
Depreciation and amortization expense decreased from $31.4 million to
$28.8 million, or by 8.3%, and from $62.8 million to $58.6 million, or by 6.7%,
for the three and six months ended June 30, 1997 compared to the corresponding
periods in 1996. The $2.5 million and $4.2 million decreases in depreciation and
amortization expense were primarily due to accelerated 1996 depreciation related
to asset retirements and to intangible assets becoming fully amortized.
Operating income increased from $1.8 million to $4.7 million, or by
164%, and from $2.5 million to $9.4 million, or by 279%, for the three and six
months ended June 30, 1997 compared to the corresponding periods in 1996. The
$2.9 million and $6.9 million increases for the three and six months ended June
30, 1997 compared to the corresponding periods in 1996 were 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 $3.4 million and $7.9 million for the three and six
months ended June 30, 1997 compared to the corresponding periods in 1996.
Interest expense, including the effects of interest rate hedging
agreements, decreased from $21.6 million to $18.9 million, or by 12.4%, and from
$42.8 million to $39.3 million, or by 8.1%, for the three and six months ended
June 30, 1997 compared to the corresponding periods in 1996. The decrease was
primarily due to lower average debt balances outstanding. The decrease during
the three months ended June 30, 1997 included the impact of lower average
interest rates in 1997 versus 1996 (8.5% compared to 8.7%). The decrease during
the six months ended June 30, 1997 was partially offset by the effect of
slightly higher average interest rates (8.8% during the six months ended June
30, 1997 compared to 8.7% during the corresponding period in 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 $7.4 million and $14.4 million for the
three and six months ended June 30, 1997 compared to $6.6 million and $12.9
million for the corresponding periods in 1996. Interest rate hedging agreements
resulted in additional interest expense of $98,000 and $348,000 during the three
and six months ended June 30, 1997 compared to $196,000 and $368,000 during the
corresponding periods in 1996.
Other, net changed from $83,000 of expense for the three months ended
June 30, 1996 to $519,000 of income for the corresponding period in 1997 and
from $1.0 million of income for the six months ended June 30, 1996 to $922,000
of income for the corresponding period in 1997. The $601,000 and $96,000 changes
for the three and six months ended June 30, 1997 were primarily due to a
reduction in income tax benefits recorded during 1997.
Due to the factors described above, the Partnership's net loss
decreased from $19.9 million to $13.6 million, or by 31.3%, and decreased from
$39.2 million to $29 million, or by 26%, for the three and six months ended June
30, 1997 compared to the corresponding periods in 1996.
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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
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 $85 million in capital expenditures in 1997, including
approximately $45 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 $27.6 million on non-acquisition capital
expenditures during the six months ended June 30, 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.
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 June 30, 1997, the amount
outstanding under the Amended and Restated Credit Agreement was $602 million and
the Partnership had available to it additional borrowings thereunder of
approximately $123 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 June 30, 1997, borrowings under
the Amended and Restated Credit Agreement bore interest at an average rate of
8.2% (including the effect of interest rate hedging agreements). The Partnership
has entered into fixed interest rate hedging agreements with an aggregate
notional amount at June 30, 1997 of $650 million. Agreements in effect at June
30, 1997 totaled $590 million, with the remaining $60 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 June 30,
1997.
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.
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14
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 June
30, 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 June 30, 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 June 30, 1997 the limit was
approximately $5.2 million ($3.1 million was actually remitted). Receivables
from the Affiliated Systems for services and reimbursements described above
amounted to approximately $4.5 million at June 30, 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.
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, 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. On June 27, 1997, certain of the Owned Subsidiaries entered into a
definitive purchase agreement to acquire the cable television systems operated
by Classic for $82 million in cash, representing the appraised value of those
assets (the "Sale"). The parties have begun to seek the necessary regulatory and
other consents. As of June 30, 1997, the Falcon Classic cable systems had
approximately 48,200 homes subscribing to cable service.
The consummation of the Sale will be conditioned upon the receipt of
the necessary regulatory approvals, principally including those required
pursuant to certain cable television system franchises and federal
communications law . There can be no assurance that the receipt of the remainder
of such approvals will occur in a timely manner, if at all. The Partnership
presently expects to finance the Sale with
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15
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
borrowings under its Amended and Restated Credit Agreement. 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 and the related reports filed by Falcon Classic.
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
June 30, 1997, the maximum exposure to ECC pursuant to such guarantees was
approximately $5.9 million, plus accrued interest. This guarantee is recourse
only to the assets of ECC, which consist primarily of equity interests in the
Enstar partnerships. On June 6, 1997, ECC and FHGLP formed Enstar Finance
Company, LLC ("EFC"). The sole purpose of EFC is to obtain a bank facility of up
to $35 million in order to provide funds that would in turn be advanced to
certain of the partnerships managed by ECC. Such funds would be used to repay
existing bank obligations and other liabilities of such partnerships and to
provide capital to fund future rebuild and upgrade requirements. Based on
discussions with prospective lenders, ECC believes that this structure, if
implemented, will provide capital to the individual partnerships on terms more
favorable than could be obtained on a "stand-alone" basis. ECC has received a
commitment letter from two agent banks regarding the terms of a bank facility
for EFC, although a definitive credit agreement has not been executed as of the
date of this Report. ECC presently expects the EFC facility to be completed in
the third quarter. FHGLP will incur no liability in respect of these
transactions except for a commitment to contribute $250,000 in cash to the
capital of EFC, and this transaction should have no impact on the borrowing
ability of FHGLP.
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. As previously discussed in "Recent Developments," if the proposed
transaction with TCI is consummated, the Group I, II, III and IV limited
partners will waive these liquidity rights. If the TCI transaction is not
consummated, 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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16
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (HISTORICAL)
Cash provided by operating activities (including interest expense and
management fee income) increased from $32.4 million to $39.7 million for the six
months ended June 30, 1997 compared to the corresponding period in 1996, an
increase of $7.3 million. The increase resulted primarily from a net increase of
$5.8 million in other operating items (receivables, other assets, payables,
accrued expenses and subscriber deposits and prepayments) and a $1.5 million
increase in payment-in-kind interest expense related to the 11% Subordinated
Notes.
Cash used in investing activities increased from $18.9 million to $28.4
million for the six months ended June 30, 1997 compared to the corresponding
period in 1996. The increase was due primarily to an increase in capital
expenditures of $27.6 million.
Cash from financing activities decreased from $15.3 million to $14.2
million for the six months ended June 30, 1997 compared to the corresponding
period in 1996 primarily due to decreased repayment of debt in 1997.
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.
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17
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 10.51 - Enstar Finance Company, LLC Limited Liability
Company Agreement dated June 6, 1997.
Exhibit 10.52 - Asset Purchase Agreement,
dated as of June 27, 1997, by and among
Falcon Community Cable, L.P., Falcon Cable
Media, Falcon Cable Systems Company II, L.P.
and Falcon Classic Cable Income Properties,
L.P.
Exhibit 10.53 - Second Amendment to the 1993
Incentive Performance Plan of FHGLP.
Exhibit 10.54 - Third Amendment to the 1993
Incentive Performance Plan of FHGLP.
Exhibit 10.55 - Fourth Amendment to the 1993
Incentive Performance Plan of FHGLP.
(b) The Registrant filed a Form 8-K dated June 3, 1997 reporting
under Item 5 that it had entered into a non-binding Memorandum
of Understanding (MOU) with TCI Communications, Inc. The MOU
contemplates the contribution by TCI of the assets of certain
cable television systems to the Registrant. As part of the
foregoing transaction with TCI, the Registrant also announced
it intended to acquire the cable television systems owned by
Falcon Video Communications, L.P. The Registrant also
separately announced its intent to acquire the assets of Falcon
Classic Cable Income Properties, L.P. as previously disclosed.
18
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: August 13, 1997 By: /s/ Michael K. Menerey
-----------------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit
Number Description
10.51 Enstar Finance Company, LLC Limited Liability Company Agreement dated
June 6, 1997.
10.52 Asset Purchase Agreement, dated as of June 27, 1997, by and among
Falcon Community Cable, L.P., Falcon Cable Media, Falcon Cable Systems
Company II, L.P. and Falcon Classic Cable Income Properties, L.P.
10.53 Second Amendment to the 1993 Incentive Performance Plan of FHGLP.
10.54 Third Amendment to the 1993 Incentive Performance Plan of FHGLP.
10.55 Fourth Amendment to the 1993 Incentive Performance Plan of FHGLP.
E-1