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 September 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
---- ----
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,
1996* 1997
------------ -------------
(Unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 13,633 $ 13,776
Receivables:
Trade, less allowance of $907,000 and
$1,318,000 for possible losses 11,607 12,080
Affiliates 5,793 10,998
Other assets 10,555 11,732
Other investments 3,446 2,250
Property, plant and equipment, less accumulated depreciation
and amortization of $230,920,000 and $268,012,000 309,128 312,505
Franchise cost, less accumulated
amortization of $173,742,000 and $200,130,000 256,461 230,678
Goodwill, less accumulated amortization
of $12,454,000 and $17,011,000 72,956 68,398
Customer lists and other intangible costs, less
accumulated amortization of $8,793,000 and $21,696,000 76,448 63,990
Deferred loan costs, less accumulated amortization
of $5,755,000 and $7,400,000 14,296 12,653
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$ 774,323 $ 739,060
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
LIABILITIES:
Notes payable $ 885,786 $ 905,905
Accounts payable 10,561 6,103
Accrued expenses and other 47,228 42,517
Customer deposits and prepayments 1,627 1,693
Deferred income taxes 10,301 8,138
Minority interest 193 169
Equity in losses of affiliated partnerships in excess of investment 3,224 3,232
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TOTAL LIABILITIES 958,920 967,757
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 271,902 271,902
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PARTNERS' DEFICIT:
General partner (12,591) (13,034)
Limited partners (443,908) (487,565)
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TOTAL PARTNERS' DEFICIT (456,499) (500,599)
---------- ----------
$ 774,323 $ 739,060
========== ==========
* 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,
---------------------------
1996 1997
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(Dollars in Thousands)
REVENUES $ 59,428 $ 64,515
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EXPENSES:
Service costs 17,649 19,320
General and administrative expenses 9,711 11,165
Depreciation and amortization 26,413 28,637
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Total expenses 53,773 59,122
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Operating income 5,655 5,393
OTHER INCOME (EXPENSE):
Interest expense (19,560) (19,658)
Equity in net income of investee partnerships 68 212
Other expense, net (927) (1,216)
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NET LOSS $ (14,764) $(15,269)
========== ========
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,
------------------------------
1996 1997
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(Dollars in Thousands)
REVENUES $ 153,803 $ 192,482
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EXPENSES:
Service costs 42,933 56,302
General and administrative expenses 26,058 34,072
Depreciation and amortization 66,602 87,270
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Total expenses 135,593 177,644
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Operating income 18,210 14,838
OTHER INCOME (EXPENSE):
Interest expense (50,983) (58,979)
Equity in net income of investee partnerships 134 183
Other income (expense), net 334 (294)
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NET LOSS $ (32,305) $ (44,252)
========= =========
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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Nine months ended
September 30,
----------------------------
1996 1997
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(Dollars in Thousands)
Net cash provided by operating activities $ 64,866 $ 56,371
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Cash flows from investing activities:
Acquisition of cable television systems (247,397) -
Capital expenditures (35,380) (46,764)
Increase in intangible assets (3,904) (1,207)
Proceeds from sale of system 15,000 -
Proceeds from sale of cable assets 312 82
Distributions from investee limited partnerships 781 8
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Net cash used in investing activities (270,588) (47,881)
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Cash flows from financing activities:
Borrowings from notes payable 691,382 24,500
Repayment of debt (485,158) (33,038)
Minority interest capital contributions - 192
Contributions from partners 5,000 -
Deferred loan costs (4,676) (1)
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Net cash provided by (used in) financing activities 206,548 (8,347)
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Net increase in cash and cash equivalents 826 143
Cash and cash equivalents
at beginning of period 15,050 13,633
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Cash and cash equivalents
at end of period $ 15,876 $ 13,776
========= =========
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 also 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" (the "Enstar Partnerships"),
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 July 11, 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 nine months ended September 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 nine months ended
September 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 nine months ended September 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
====================================================
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 the
time of sale.
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 $1.7 million
and $27.6 million for the three and nine months ended September 30, 1996 and net
loss would have been increased by $3.3 million and $24.9 million for the three
and nine months ended September 30, 1996 on a pro forma basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations (Pro Forma)."
NOTE 7 - TRANSACTIONS WITH AFFILIATES
On June 6, 1997, the Partnership and ECC formed Enstar Finance
Company, LLC ("EFC"), an unrestricted subsidiary. On September 30, 1997, EFC
obtained a secured bank facility of up to $35 million from two agent banks in
order to provide funds that would in turn be advanced to certain of the Enstar
Partnerships. $7,500,000 was advanced to EFC, and in turn loaned by EFC to
certain of the Enstar Partnerships, at closing. The EFC loan is non-recourse to
the Partnership and matures on August 31, 2001 at which time all funds
previously advanced will be due in full. Both the EFC loans receivable from the
Enstar Partnerships and the EFC loan payable to its banks are consolidated for
reporting purposes, although this debt is not required to be included in the
Partnership's covenant compliance computations.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
On or about September 2, 1997, the Partnership was named in a
putative class action suit filed against Falcon Classic Cable Income Properties,
L.P. ("Classic" or "Falcon Classic"), its general partner and certain of its
directors and officers with respect to the planned purchase of the Falcon
Classic assets by certain of the Owned Subsidiaries. The Partnership and Falcon
Classic intend to vigorously defend themselves against this suit. For further
discussion, see "Recent Developments" and "Liquidity and Capital Resources."
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") required the Federal Communications Commission ("FCC")
to, among other things, implement extensive regulation of the rates charged by
cable television systems for basic and programming service tiers, installation,
and customer premises equipment leasing. Compliance with those rate regulations
has had a negative impact on the Partnership's revenues and cash flow. The
Telecommunications Act of 1996 (the "1996 Telecom Act") substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of programming service tiers will be phased out
altogether in 1999. 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,
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 ("Falcon Communications") and
the contribution to Falcon Communications 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 contribute to Falcon
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RECENT DEVELOPMENTS (CONCLUDED)
Communications its Owned Subsidiaries, representing approximately 592,000 homes
subscribing to cable service. The 592,000 includes approximately 48,000 homes
subscribing to cable service to be acquired from Falcon Classic pursuant to a
pending asset acquisition transaction. 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 Falcon
Communications. 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 Falcon Communications
and the Partnership will receive 57% of the equity of Falcon Communications.
In addition, in connection with the consummation of the transactions
with TCI and Falcon Communications, (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
Falcon Communications. TCI will purchase these interests from the Other Partners
for an aggregate cash payment of approximately $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 and entered into a
related asset purchase agreement. This transaction is pending while the parties
seek the requisite regulatory approvals. 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 Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1997 1996 1997
------------- ------------- ------------- -------------
(Dollars in Thousands)
OPERATIONS STATEMENT DATA
Revenues $ 61,138 $ 64,515 $181,388 $192,482
Costs and expenses 28,010 30,485 82,935 90,374
Depreciation and amortization 30,452 28,637 93,284 87,270
-------- -------- -------- --------
Operating income 2,676 5,393 5,169 14,838
Interest expense, net (19,945) (19,658) (62,714) (58,979)
Equity in net income of
investee partnerships 68 212 134 183
Other expense, net (109) (1,416) (398) (1,616)
Income tax benefit (expense) (740) 200 567 1,322
-------- -------- -------- --------
Loss before extraordinary item $(18,050) $(15,269) $(57,242) $(44,252)
======== ======== ======== ========
The Partnership's revenues increased from $61.1 million to $64.5
million, or by 5.5%, and $181.4 million to $192.5 million, or by 6.1%, for the
three and nine months ended September 30, 1997 compared to the corresponding
periods in 1996. Of the $3.4 million net increase in revenues for the three
months ended September 30, 1997 as compared to the corresponding period in 1996,
$3.3 million was due to increased cable service revenues and $82,000 was due to
increases in management fees. The $3.3 million increase in cable service
revenues was caused principally by increases of $2.6 million related to
increases in regulated service rates implemented during 1996 and 1997, $1.8
million related to increases in unregulated service rates implemented during
1996 and in May 1997 and $393,000 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 and $185,000 due to
reductions in the number of regulated subscriptions for cable service. Of the
$11.1 million net increase in revenues for the nine months ended September 30,
1997 compared to the corresponding period in 1996, $10.4 million was due to
increased cable service revenues and
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (PRO FORMA) (CONTINUED)
$664,000 was due to increased management fees. The $10.4 million increase in
cable service revenues was caused principally by increases of $13.5 million
related to increases in regulated ($10.5 million) and unregulated ($3 million)
service rates, $1.4 million due to the restructuring of The Disney Channel,
$930,000 due to increases in advertising sales and $311,000 due to programmer
incentives. These increases were partially offset by decreases of $3 million due
to reductions in the number of premium subscriptions for cable service, $1.8
million related to the Eastern Georgia cable systems sold on July 1, 1996,
$853,000 due to reductions in the number of regulated subscriptions for cable
service and $116,000 related to decreases in other revenues. As of September 30,
1997, the Owned Systems had approximately 544,400 homes subscribing to cable
service and 176,400 premium service units. Excluding the Eastern Georgia cable
systems sold on July 1, 1996, the Partnership's revenues increased 7.2% for the
nine months ended September 30, 1997 compared to the corresponding period in
1996.
Management and consulting fees earned by the Partnership increased
from $1.2 million and $3.4 million to $1.2 million and $4 million for the three
and nine months ended September 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 $18.1 million to $19.3 million, or by
6.5%, and from $51.6 million to $56.3 million, or by 9.2%, for the three and
nine months ended September 30, 1997 compared to the corresponding periods in
1996. Service costs represent costs directly attributable to providing cable
services to customers. The $1.2 million and $4.7 million increases in service
costs for the three and nine months ended September 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).
General and administrative expenses increased from $9.9 million to
$11.2 million, or by 13.2%, and from $31.4 million to $34.1 million, or by 8.7%,
for the three and nine months ended September 30, 1997 compared to the
corresponding periods in 1996. The $1.3 million and $2.7 million increases for
the three and nine months ended September 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
54.2% to 52.7% and from 54.3% to 53.0% for the three and nine months ended
September 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 $33.1
million to $34 million, or by 2.7%, and from $98.4 million to $102.1 million, or
by 3.7% during the three and nine months ended September 30, 1997 compared to
the corresponding periods in 1996. Excluding the Eastern Georgia cable systems
sold on July 1, 1996, the Partnership's EBITDA increased from $33.1 million to
$34 million, or by 2.7% and from $97.5 million to $102.1 million, or by 4.8%.
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.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (PRO FORMA) (CONCLUDED)
Depreciation and amortization expense decreased from $30.4 million to
$28.6 million, or by 6%, and from $93.3 million to $87.3 million, or by 6.4%,
for the three and nine months ended September 30, 1997 compared to the
corresponding periods in 1996. The $1.8 million and $6 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 $2.7 million to $5.4 million, or by
101.5%, and from $5.2 million to $14.9 million, or by 187.1%, for the three and
nine months ended September 30, 1997 compared to the corresponding periods in
1996. The $2.7 million and $9.7 million increases for the three and nine months
ended September 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 $2.7 million and $10.6 million for the
three and nine months ended September 30, 1997 compared to the corresponding
periods in 1996.
Interest expense, including the effects of interest rate hedging
agreements, decreased from $19.9 million to $19.7 million, or by 1.4%, and from
$62.7 million to $59 million, or by 6%, for the three and nine months ended
September 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 and nine months ended September 30, 1997 was partially offset
by the effect of slightly higher average interest rates (8.9% and 8.8% during
the three and nine months ended September 30, 1997 compared to 8.6% and 8.7%
during the corresponding periods 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 $21.8 million for the three and nine months ended September
30, 1997 compared to $6.7 million and $19.6 million for the corresponding
periods in 1996. Interest rate hedging agreements resulted in additional
interest income of $69,000 during the three months ended September 30, 1997 and
additional interest expense of $279,000 during the nine months ended September
30, 1997 compared to additional interest expense of $238,000 and $870,000 during
the corresponding periods in 1996.
Other, net increased from $849,000 of expense for the three months
ended September 30, 1996 to $1.2 million of expense for the corresponding period
in 1997 and changed from $169,000 of income for the nine months ended September
30, 1996 to $294,000 of expense for the corresponding period in 1997. The
$367,000 and $463,000 changes for the three and nine months ended September 30,
1997 were primarily due to an increase in income tax benefits recorded during
1997 and to a $1.4 million write down of the Partnership's investment in France
in the third quarter of 1997.
Due to the factors described above, the Partnership's net loss
decreased from $18.1 million to $15.3 million, or by 15.4%, and decreased from
$57.2 million to $44.2 million, or by 22.7%, for the three and nine months ended
September 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 $70 million in capital expenditures in 1997, including
approximately $40 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 $46.8 million on non-acquisition capital
expenditures during the nine months ended September 30, 1997, including
approximately $28.5 million for rebuilds and upgrades.
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 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 September 30, 1997, the
amount outstanding under the Amended and Restated Credit Agreement was $601
million and the Partnership had available to it additional borrowings thereunder
of approximately $98 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 September 30, 1997, borrowings
under the Amended and Restated Credit Agreement bore interest at an average rate
of 8% (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, 1997 of $600 million. Agreements in
effect at September 30, 1997 totaled $560 million, with the remaining $40
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 September 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.
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14
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Partnership frequently considers opportunities to sell assets that it views
as non-strategic.
On October 9, 1997, the Partnership sold its 98,431 shares of Reseaux
Cable de France stock for approximately $701,000.
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
September 30, 1997 had increased to $282 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 September 30, 1997, the Partnership also had outstanding an
aggregate of $15 million in principal amount of other subordinated debt.
On June 6, 1997, the Partnership and ECC formed EFC, an unrestricted
subsidiary. The sole purpose of EFC is to obtain a bank facility in order to
provide funds that will in turn be advanced to certain of the Enstar
Partnerships to repay existing bank obligations and other liabilities and to
provide capital to fund future rebuild and upgrade requirements. Based on
discussions with prospective lenders, ECC believes that this structure provides
capital to the Enstar Partnerships on terms more favorable than could be
obtained on a stand-alone basis. The Partnership's capital contribution to EFC
was $250,000. On September 30, 1997, EFC obtained a secured bank facility of $35
million from two agent banks. At closing, $7,500,000 was advanced to EFC, and in
turn loaned by EFC to certain of the Enstar Partnerships. EFC paid $515,000 in
transaction and financing costs, which in turn were charged to certain of the
Enstar Partnerships. The EFC loan is non-recourse to the Partnership; therefore,
while both the EFC loans receivable from the Enstar Partnerships and the EFC
loan payable to its banks are consolidated for reporting purposes, the debt is
not included in the Partnership's covenant compliance computations. As a result
of the EFC financing, on September 30, 1997 the Partnership also received
payment of $1.5 million of previously deferred management fees and reimbursed
expenses and $590,000 of deferred programming fees from certain Enstar
Partnerships.
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
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15
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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
September 30, 1997 the limit was approximately $7.8 million ($4.7 million was
actually remitted). Receivables from the Affiliated Systems for services and
reimbursements described above amounted to approximately $3.5 million at
September 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 are seeking the necessary regulatory and other
consents. As of September 30, 1997, the Falcon Classic cable systems had
approximately 48,000 homes subscribing to cable service.
The consummation of the Sale is 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. As of the date of this Report, a
number of these approvals have not yet been obtained, and if not obtained, may
jeopardize the ultimate consummation of the Sale. The Partnership presently
expects to finance the Sale with 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.
On or about September 2, 1997, Paul J. Issac, a Unitholder of Falcon
Classic, purporting to act on behalf of himself and other similarly situated
Unitholders, filed a putative class action suit in Los Angeles County Superior
Court against its general partner, the Partnership and certain of its directors
and officers alleging "Breach of Fiduciary Duty, Breach of Contract, [and]
Breach of the Implied Covenant of Good Faith and Fair Dealing" in connection
with the pending sale of Falcon Classic's assets to certain of the Owned
Subsidiaries pursuant to the terms of Falcon Classic's Partnership Agreement
(the "Lawsuit").
The Partnership and Falcon Classic believe the Lawsuit lacks merit
and intend to vigorously defend themselves and to proceed with the sale
transaction. There can be, however, no assurance that the pendency of the
lawsuit will not delay, or lead to the termination of, the pending Sale
transaction.
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16
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
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 September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (HISTORICAL)
Cash provided by operating activities (including interest expense and
management fee income) decreased from $64.9 million to $56.4 million for the
nine months ended September 30, 1997 compared to the corresponding period in
1996, a decrease of $8.5 million. The decrease resulted primarily from a net
decrease of $10.7 million in other operating items (receivables, other assets,
payables, accrued expenses and subscriber deposits and prepayments) partially
offset by a $2.2 million increase in payment-in-kind interest expense related to
the 11% Subordinated Notes.
Cash used in investing activities decreased from $270.6 million to
$47.9 million for the nine months ended September 30, 1997 compared to the
corresponding period in 1996. The decrease was primarily due to the absence in
1997 of a $247.4 million acquisition of cable assets and a $2.7 million decrease
in intangible assets, partially offset by the absence in 1997 of $15 million
cash provided in connection with the sale of a system and to an increase in
capital expenditures of $11.4 million.
Cash from financing activities decreased from cash provided of $206.5
million to a use of cash of $8.3 million for the nine months ended September 30,
1997 compared to the corresponding period in 1996 primarily due to decreased
borrowings 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 10.56 - Credit Agreement dated as of
September 30, 1997 among Enstar Finance
Company, LLC, Banque Paribas, as
Administrative Agent, and Bank of America
National Trust and Savings Association, as
Documentation Agent.
Exhibit 10.57 - Amended and Restated Credit
Agreement Consent No. 1 dated as of July 11,
1997 between the affiliates of Falcon
Holding Group, L.P., BankBoston, The First
National Bank of Boston, as Managing Agent,
Toronto-Dominion (Texas) Inc., as
Administrative Agent and NationsBank of
Texas, N.A., as Syndication Agent.
Exhibit 10.58 - Amended and Restated Credit
Agreement Amendment No. 2 dated as of
September 3, 1997, among the affiliates of
Falcon Holding Group, L.P., BankBoston,
N.A., as Managing Agent for itself and the
other lenders, Toronto-Dominion (Texas)
Inc., as Administrative Agent and
NationsBank of Texas, N.A., as Syndication
Agent.
(b) No Reports on Form 8-K were filed for the
quarter for which this Report is filed.
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: November 13, 1997 By: /s/ Michael K. Menerey
-----------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.56 Credit Agreement dated as of September 30, 1997 among Enstar Finance
Company, LLC, Banque Paribas, as Administrative Agent, and Bank of
America National Trust and Savings Association, as Documentation
Agent.
10.57 Amended and Restated Credit Agreement Consent No. 1 dated as of July
11, 1997 between the affiliates of Falcon Holding Group, L.P.,
BankBoston, The First National Bank of Boston, as Managing Agent,
Toronto-Dominion (Texas) Inc., as Administrative Agent and
NationsBank of Texas, N.A., as Syndication Agent.
10.58 Amended and Restated Credit Agreement Amendment No. 2 dated as of
September 3, 1997, among the affiliates of Falcon Holding Group,
L.P., BankBoston, N.A., as Managing Agent for itself and the other
lenders, Toronto-Dominion (Texas) Inc., as Administrative Agent and
NationsBank of Texas, N.A., as Syndication Agent.
E-1