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, 1998
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Numbers: 333-55755 and 333-55755-01
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FALCON HOLDING GROUP, L.P.
FALCON FUNDING CORPORATION*
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(Exact Names of Registrants as Specified in Their Charters)
Delaware 95-4408577
California 95-4681480
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Numbers)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 90024
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(Address of Principal Executive Offices) (Zip Code)
(310) 824-9990
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(Registrants' Telephone Number, Including Area Code)
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes No X
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Number of shares of common stock of Falcon Funding Corporation outstanding as
of August 10, 1998: 1,000.
* Falcon Funding Corporation meets the conditions set forth in General
Instruction H(1)(a) and (b) to the Form 10-Q and is therefore filing with
the reduced disclosure format.
PART I - FINANCIAL INFORMATION
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31, June 30,
1997* 1998
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(Unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 13,917 $ 109,453
Receivables:
Trade, less allowance of $825,000 and
$810,000 for possible losses 13,174 11,872
Affiliates 11,254 8,953
Other assets 14,576 15,374
Other investments 1,776 758
Property, plant and equipment, less accumulated depreciation
and amortization of $272,551,000 and $289,951,000 324,559 362,269
Franchise cost, less accumulated
amortization of $203,700,000 and $220,779,000 222,281 210,205
Goodwill, less accumulated amortization
of $18,531,000 and $21,587,000 66,879 69,910
Customer lists and other intangible costs, less
accumulated amortization of $25,517,000 and $34,003,000 59,808 82,558
Deferred loan costs, less accumulated amortization
of $7,144,000 and $2,667,000 12,134 24,303
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$ 740,358 $ 895,655
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LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable $ 911,221 $ 1,132,494
Accounts payable 9,169 8,568
Accrued expenses 52,789 56,711
Customer deposits and prepayments 1,452 1,794
Deferred income taxes 7,553 5,399
Minority interest 354 420
Equity in losses of affiliated partnerships in
excess of investment 3,202 3,268
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TOTAL LIABILITIES 985,740 1,208,654
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 171,373 171,373
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PARTNERS' DEFICIT:
General partner (13,200) (13,876)
Limited partners (403,555) (470,496)
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TOTAL PARTNERS' DEFICIT (416,755) (484,372)
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$ 740,358 $ 895,655
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*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
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Unaudited
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Three months ended
June 30,
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1997 1998
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(Dollars in Thousands)
REVENUES $ 63,983 $ 68,775
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EXPENSES:
Service costs 18,687 20,492
General and administrative expenses 11,728 12,838
Depreciation and amortization 28,840 32,927
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Total expenses 59,255 66,257
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Operating income 4,728 2,518
OTHER INCOME (EXPENSE):
Interest expense, net (18,937) (24,212)
Equity in net income (loss) of investee partnerships 42 (18)
Other expense, net (37) (50)
Income tax benefit 556 1,466
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Net loss before extraordinary items (13,648) (20,296)
Extraordinary items - (28,412)
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NET LOSS $ (13,648) $ (48,708)
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See accompanying notes to condensed consolidated financial statements.
-3-
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Unaudited
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Six months ended
June 30,
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1997 1998
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(Dollars in Thousands)
REVENUES $ 127,967 $ 133,332
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EXPENSES:
Service costs 36,982 40,057
General and administrative expenses 22,907 24,516
Depreciation and amortization 58,633 64,006
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Total expenses 118,522 128,579
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Operating income 9,445 4,753
OTHER INCOME (EXPENSE):
Interest expense, net (39,321) (44,699)
Equity in net loss of investee partnerships (29) (266)
Other expense, net (200) (824)
Income tax benefit 1,122 1,831
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Net loss before extraordinary items (28,983) (39,205)
Extraordinary items - (28,412)
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NET LOSS $ (28,983) $ (67,617)
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See accompanying notes to condensed consolidated financial statements.
-4-
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Unaudited
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Six months ended
June 30,
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1997 1998
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(Dollars in Thousands)
Net cash provided by operating activities $ 39,748 $ 13,558
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Cash flows from investing activities:
Acquisition of cable television systems - (76,789)
Capital expenditures (27,624) (38,609)
Increase in intangible assets (819) (1,102)
Other 27 1,065
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Net cash used in investing activities (28,416) (115,435)
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Cash flows from financing activities:
Borrowings from notes payable 11,500 1,445,957
Repayment of debt (25,856) (1,224,683)
Deferred loan costs (2) (23,944)
Other 192 83
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Net cash provided by (used in)
financing activities (14,166) 197,413
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Net increase (decrease) in cash
and cash equivalents (2,834) 95,536
Cash and cash equivalents
at beginning of period 13,633 13,917
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Cash and cash equivalents
at end of period $ 10,799 $ 109,453
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See accompanying notes to condensed consolidated financial statements.
-5-
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENTATION
Falcon Holding Group, L.P., a Delaware limited partnership (the
"Partnership" or "FHGLP"), owns and operates cable television systems serving
small to medium-sized communities and the suburbs of certain cities in 23
states (the "Owned Systems"). The Partnership also controls, holds varying
equity interests in and manages certain other cable television systems for a
fee (the "Affiliated Systems" and, together with the Owned Systems, the
"Systems"). The Affiliated Systems operate cable television systems in 14
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. The ECC ownership interests in the Enstar Partnerships
range from 0.5% to 1.0%.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three and six months ended June
30, 1998 and 1997 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, 1998 are not
necessarily indicative of results for the entire year. In addition, all
references to the TCI Transaction, including certain defined terms, can be
found in the Partnership's latest Annual Report on Form 10-K and are not
repeated or redefined in this Report on Form 10-Q.
NOTE 3 - ACQUISITION
In March 1998, the Partnership paid to Falcon Classic Cable Income
Properties, L.P. ("Falcon Classic") $76.8 million (including $1.1 million of
interest as required by an agreement settling certain litigation arising from
the acquisition by the Partnership of the assets of Falcon Classic) in order
to purchase substantially all of the assets of Falcon Classic, other than the
cable television system serving the City of Somerset, Kentucky. The
Partnership also paid approximately $1.2 million to the settlement fund
established in connection with the settlement of the above-referenced
litigation, $500,000 of which was reimbursed by insurance on May 1, 1998. The
acquisition of the City of Somerset assets occurred on July 16, 1998. The
Partnership paid an additional $6.6 million (including $300,000 of interest
as required by the agreement settling the above-referenced litigation) in
order to purchase the City of Somerset assets. Falcon Classic had
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - ACQUISITION (CONTINUED)
revenue of approximately $32.1 million for the year ended December 31, 1997,
including approximately $1.5 million from the City of Somerset.
NOTE 4 - NOTES PAYABLE
On April 3, 1998, the Partnership and its wholly-owned subsidiary, Falcon
Funding Corporation ("FFC" and, collectively with the Partnership, the
"Issuers"), consummated the issuance of $375,000,000 aggregate principal
amount of 8.375% Senior Debentures due 2010 (the "Senior Debentures") and
$435,250,000 aggregate principal amount at maturity of 9.285% Senior Discount
Debentures due 2010 (the "Senior Discount Debentures" and, collectively with
the Senior Debentures, the "Debentures") in a private placement exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"). FFC is a wholly owned subsidiary of FHGLP and was incorporated solely
for the purpose of serving as a co-issuer of the Debentures. FFC does not
have any material operations or assets and will not have any revenues. The
Issuers are obligated to consummate an offer to exchange, pursuant to an
effective registration statement under the Securities Act, the Debentures for
debentures with terms identical to the corresponding Debentures, or to cause
resales of the Debentures to be registered under the Securities Act pursuant
to a shelf registration statement. The Issuers filed the registration
statement with the Securities and Exchange Commission (the "SEC") on June 2,
1998 to register debentures (the "Exchange Debentures") to be exchanged for
the Debentures (the "Exchange Offer"). The form and terms of the Exchange
Debentures are the same as the corresponding Debentures except that the
Exchange Debentures will be registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and that the
holders of Exchange Debentures will not be entitled to certain registration
rights. The SEC declared the registration statement effective on August 6,
1998, and the Issuers commenced the Exchange Offer promptly thereafter.
The Senior Debentures were issued at a price of 99.732% of their
principal amount, for total gross proceeds to the Issuers of approximately
$374 million. The Senior Discount Debentures were issued at a price of
63.329% per $1,000 aggregate principal amount at maturity, for total gross
proceeds to the Issuers of approximately $275.6 million, and will accrete to
stated value at an annual rate of 9.285% until April 15, 2003. After giving
effect to offering discounts, commissions and estimated expenses of the
offering, the sale of the Debentures (representing aggregate indebtedness of
approximately $650.6 million as of the date of issuance) generated net
proceeds to the Issuers of approximately $631 million. The Partnership used
substantially all the net proceeds from the sale of the Debentures to repay
outstanding bank indebtedness.
On May 19, 1998, the Partnership repurchased approximately $247.8
million aggregate principal amount of its 11% Senior Subordinated Notes due
2003 (the "Notes") for an aggregate purchase price of $270.3 million pursuant
to a fixed spread tender offer for all outstanding Notes. The Notes tendered
represent approximately 88% of the Notes previously outstanding.
In conjunction with the tender offer, the Partnership also obtained the
requisite consents to certain amendments to the indenture governing the Notes
(the "Notes Indenture"). Holders who tendered Notes in
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 4 - NOTES PAYABLE (CONTINUED)
the tender offer were obligated to consent to the proposed amendments, which
were effectuated by a supplemental indenture to the Notes Indenture, which
became effective on May 19, 1998.
The approximate $34.4 million of Notes not validly tendered and
repurchased in the tender offer will be redeemed by FHGLP prior to October
15, 1998 in accordance with the Notes Indenture. Under the Notes Indenture,
the Partnership has the right to redeem all or a portion of the Notes on or
after September 15, 1998 at 105.5% of the outstanding principal amount, plus
accrued interest to the redemption date. The Partnership has notified the
trustee under the Notes Indenture of its intent to repurchase the remaining
outstanding Notes on September 15, 1998 and has requested that the trustee
mail notice of the redemption in accordance with the terms of the Notes
Indenture.
On June 30, 1998, the Partnership entered into a new $1.5 billion senior
credit facility (the "New Credit Facility"). The borrowers under the New
Credit Facility are: until the closing of the TCI Transaction, the Owned
Subsidiaries; immediately prior to the closing of the TCI Transaction, Falcon
Video with respect to a portion of the committed revolving credit facility;
and after the closing of the TCI Transaction, New Falcon II. The Restricted
Companies under the New Credit Facility are: until the closing of the TCI
Transaction, each of the Partnership's subsidiaries (but not including the
Partnership itself, New Falcon, certain subsidiaries designated as Excluded
Companies from time to time, Falcon Video and Falcon Video Communications
Investors, L.P.), and after the closing of the TCI Transaction, New Falcon II
and each of its subsidiaries (excluding certain subsidiaries designated as
Excluded Companies from time to time and excluding Falcon Video and Video
Investors until the existing senior indebtedness of Falcon Video has been
discharged). The New Credit Facility consists of three committed facilities
(one revolver and two term loans) and one uncommitted $350 million
supplemental credit facility (the terms of which will be negotiated at the
time the Partnership makes a request to draw on such facility). Facility A
is a $650 million revolving credit facility maturing December 29, 2006;
Facility B is a $200 million term loan maturing June 29, 2007; and Facility C
is a $300 million term loan maturing December 31, 2007. All of Facility C
and approximately $126 million of Facility B were funded at closing, and the
approximately $329 million debt outstanding under the Amended and Restated
Credit Agreement was repaid. The remainder of Facility B, together with
required amounts from Facility A, will be funded at the closing of the
pending TCI Transaction (see discussion in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1997). Until then, the Partnership
will have an excess cash balance of approximately $90 million (after payment
of approximately $4.5 million in fees and expenses related to the New Credit
Facility).
NOTE 5 - EXTRAORDINARY ITEMS
The Partnership incurred $17.9 million in fees and expenses in
connection with the repurchase of the Notes on May 19, 1998 and wrote-off
$10.5 million of deferred loan costs related to the Notes and to
extinguishment of debt outstanding under the Amended and Restated Credit
Agreement.
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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 cable programming service
tier ("CPST") rates will be terminated altogether on March 31, 1999. Because
cable service rate increases have continued to outpace inflation under the
FCC's existing regulations, the Partnership expects Congress and the FCC to
explore additional methods of regulating cable service rate increases,
including deferral or repeal of the March 31, 1999 termination of CPST rate
regulation. 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.
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, 1997 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.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The Partnership's revenues increased from $64 million to $68.8 million,
or by 7.5%, and from $128 million to $133.3 million, or by 4.2%, for the
three and six months ended June 30, 1998 compared to the corresponding
periods in 1997. Of the $4.8 million net increase in revenues for the three
months ended June 30, 1998 as compared to the corresponding period in 1997,
$4.7 million was due to the acquisition in March 1998 of the Falcon Classic
assets as discussed in Note 3 to the condensed consolidated financial
statements and $368,000 was due to increases in cable service revenues.
These increases were partially offset by a $310,000 decrease in management
fees. The $368,000 increase in cable service revenues was caused principally
by increases of $924,000 related to increases in regulated service rates
implemented during 1997 and 1998; $941,000 related to increases in other
cable service revenues and $848,000 related to increases in unregulated
service rates implemented during 1997. These increases were partially offset
by decreases of $1.3 million due to reductions in the number of regulated
subscriptions for cable service and $1.0 million due to reductions in the
number of premium subscriptions for cable service. Of the $5.3 million net
increase in revenues for the six months ended June 30, 1998 compared to the
corresponding period in 1997, $6 million was due to the acquisition of the
Falcon Classic assets. These increases were partially offset by a $740,000
decrease in management fees. Cable service revenues increased principally
due to $2.3 million related to increases in regulated service rates
implemented during 1997 and 1998, $1.6 million related to increases in
unregulated service rates implemented during 1997 and $1.0 million related to
increases in other cable service revenues. These increases were
substantially offset by decreases of $2.8 million due to reductions in the
number of regulated subscriptions for cable service and $2 million due to
reductions in the number of premium subscriptions for cable service. As of
June 30, 1998, the Owned Systems had approximately 636,000 basic subscribers
and 164,000 premium service units.
Management and consulting fees earned by the Partnership decreased from
$1.3 million to $1.0 million and from $2.8 million to $2 million for the
three and six months ended June 30, 1998 compared to the corresponding
periods in 1997 primarily due to the March 1998 sale of the Falcon Classic
assets to the Partnership and to the one-time receipt by the Partnership
during the three months ended March 31, 1997 of previously deferred fees from
Falcon Classic.
Service costs increased from $18.7 million to $20.5 million, or by 9.7%,
and from $37 million to $40.1 million, or by 8.3%, for the three and six
months ended June 30, 1998 compared to the corresponding periods in 1997.
Service costs represent costs directly attributable to providing cable
services to customers. The $1.8 million and $3.1 million increases in
service costs for the three and six months ended June 30, 1998 compared to
the corresponding periods in 1997 were primarily caused by increases in
programming fees paid to program suppliers (including primary satellite
fees), $1.3 million and $1.8 million of which was attributable to the
acquisition of the Falcon Classic assets.
General and administrative expenses increased from $11.7 million to
$12.8 million, or by 9.5%, and from $22.9 million to $24.5 million, or by 7%,
for the three and six months ended June 30, 1998 compared to the
corresponding periods in 1997. The $1.1 million and $1.6 million increases
for the three and six months ended June 30, 1998 compared to the
corresponding periods in 1997 related primarily to increases in marketing
expenses, $878,000 and $1.1 million of which related to the acquisition of
the Falcon Classic assets.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
Depreciation and amortization expense increased from $28.8 million to
$32.9 million, or by 14.2%, and from $58.6 million to $64 million, or by
9.2%, for the three and six months ended June 30, 1998 compared to the
corresponding periods in 1997. The $4.1 million and $5.4 million increases
in depreciation and amortization expense were primarily due to the
acquisition of the Falcon Classic assets.
Operating income decreased from $4.7 million to $2.5 million, or by
46.7%, and from $9.4 million to $4.7 million, or by 49.7%, for the three and
six months ended June 30, 1998 compared to the corresponding periods in 1997.
The $2.2 million and $4.7 million decreases were principally due to
increases in depreciation and amortization expense as discussed above.
Interest expense, net, including the effects of interest rate hedging
agreements, increased from $18.9 million to $24.2 million, or by 27.9%, and
from $39.3 million to $44.7 million, or by 13.7%, for the three and six
months ended June 30, 1998 compared to the corresponding periods in 1997.
The increases were primarily due to higher average debt balances outstanding
(as discussed in Note 4 to condensed consolidated financial statements) and
to higher average interest rates (9.4% and 9.1% during the three and six
months ended June 30, 1998 compared to 8.5% and 8.8% during the corresponding
periods in 1997). Due to the Partnership electing to pay interest expense on
the Notes in cash on March 15, 1998, there was no 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 Notes for the three and
six months ended June 30, 1998 compared to $7.4 million and $14.4 million of
payment-in-kind interest expense for the corresponding periods in 1997.
Payment-in-kind interest expense associated with the Senior Discount
Debentures issued on April 3, 1998 amounted to $6.2 million. Interest rate
hedging agreements resulted in additional interest expense of $162,000 and
$215,000 during the three and six months ended June 30, 1998 compared to
additional interest expense of $98,000 and $348,000 during the corresponding
periods in 1997.
Other expense, net, increased from $37,000 to $50,000 and from $200,000
to $824,000 for the three and six months ended June 30, 1998 compared to the
corresponding periods in 1997. The $624,000 increase for the six months
ended June 30, 1998 was primarily related to casualty losses recorded during
1998 as a result of property damage caused by a storm.
The Partnership recorded extraordinary items of $28.4 million during the
three months ended June 30, 1998, $17.9 million of which related to costs
associated with the repurchase of the Notes tendered on May 19, 1998 and
$10.5 million related to the write-off of deferred loan costs associated with
the Notes and with previously issued bank debt which was retired on June 30,
1998. (See Note 5 to condensed consolidated financial statements.)
Due to the factors described above, the Partnership's net loss increased
from $13.6 million to $48.7 million, or by 256.9%, and from $29 million to
$67.6 million, or by 133.3%, for the three and six months ended June 30, 1998
compared to the corresponding periods in 1997.
Based on its experience in the cable television industry, the Partnership
believes that operating income before depreciation and amortization ("EBITDA")
and related measures of cash flow serve as important financial analysis tools
for measuring and comparing cable television companies in several areas,
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
such as liquidity, operating performance and leverage. In addition, the
covenants in the primary debt instruments of FHGLP use EBITDA-derived
calculations as a measure of financial performance. EBITDA is not a
measurement determined under generally accepted accounting principles
("GAAP") and does not represent cash generated from operating activities in
accordance with GAAP. EBITDA should not be considered by the reader as an
alternative to net income as an indicator of the Partnership's financial
performance or as an alternative to cash flows as a measure of liquidity. In
addition, the Partnership's definition of EBITDA may not be identical to
similarly titled measures used by other companies. EBITDA as a percentage of
revenues decreased from 52.5% to 51.5% and from 53.2% to 51.6% for the three
and six months ended June 30, 1998 compared to the corresponding periods in
1997. The decrease was primarily caused by increases in programming costs
and marketing expenses in excess of revenue increases, as described above.
EBITDA increased from $33.6 million to $35.5 million, or by 5.6%, and from
$68.1 million to $68.8 million, or by 1.0%.
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 $76.3 million during 1997 on capital expenditures. In
addition to the purchase of substantially all of the Falcon Classic assets
(except for the cable system serving the City of Somerset, Kentucky) in March
1998 for $76.8 million and the subsequent July 1998 purchase of Falcon
Classic's City of Somerset system for approximately $6.6 million,
management's current plan calls for the expenditure of approximately $101
million in capital expenditures in 1998, including approximately $68.2
million to rebuild and upgrade certain of the Owned Systems. The Partnership
plans to finance capital expenditures with cash flow from operations and
borrowings under the New Credit Facility, subject to its ability to remain in
compliance with certain covenants of the New Credit Facility and the
Indenture for the Debentures. The Partnership's proposed spending plans
(including its plans for 1998) are frequently 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 New Credit Facility entered into on June 30, 1998 provides for
maximum committed available borrowings of $1.15 billion, reducing to $827.5
million at December 31, 2004 (see Note 4 to the condensed consolidated
financial statements). As of June 30, 1998, the amount outstanding under the
New Credit Facility was $425.8 million and, subject to complying with
covenants, the Partnership had available to it additional committed borrowing
capacity thereunder (excluding the supplemental credit facility) of
approximately $153 million. The New Credit Facility 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 plus any additional borrowings of the
Partnership and New Falcon, including the remaining Notes and the Debentures
for a two year period. As of June 30, 1998, borrowings under the New Credit
Facility bore interest at an average rate of 9.4% (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, 1998 of $535 million, which exceeds the amount outstanding under the New
Credit Facility. This is a temporary situation until the closing of the TCI
Transaction increases the
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
outstanding debt, and due to the favorable rates under the hedging
agreements, the Partnership's management elected not to terminate any of
these agreements. Agreements in effect at June 30, 1998 totaled $510 million,
with the remaining $25 million to become effective as certain of the existing
contracts mature during the balance of 1998. The agreements serve as a hedge
against interest rate fluctuations associated with the Partnership's variable
rate debt. These agreements expire at various times through July 2001. In
addition to these agreements, the Partnership has one interest rate swap
contract with a notional amount of $25 million under which it pays variable
LIBOR rates and receives fixed rate payments, and one $25 million interest
rate cap contract under which the Partnership pays variable LIBOR rates,
subject to a cap of 5.49%. The New Credit Facility 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, 1998. Management believes that borrowings under the New Credit
Facility together with cash flow from operations will be adequate to meet the
Partnership's liquidity needs for the foreseeable future.
On April 3, 1998, as discussed in Note 4 to the condensed consolidated
financial statements, the Partnership and FFC consummated offerings of $375
million aggregate principal amount of the Senior Debentures and $435.2
million aggregate principal amount at maturity of the Senior Discount
Debentures. FFC is a wholly owned subsidiary of FHGLP and was incorporated
solely for the purpose of serving as a co-issuer of the Debentures. FFC does
not have any material operations or assets and will not have any revenues.
The net proceeds of the Debentures of approximately $631 million were used to
repay certain outstanding indebtedness under the Amended and Restated Credit
Agreement. Semiannual interest payments with respect to the Senior Debentures
will be approximately $15.7 million in the aggregate, commencing on October
15, 1998. No interest on the Senior Discount Debentures will be payable prior
to April 15, 2003, unless the Issuers elect to pay cash interest. After
April 15, 2003, semiannual interest payments will be approximately $35.9
million in the aggregate. The Partnership anticipates that cash flow from
operations and, if necessary, borrowings under the New Credit Facility (or a
successor credit facility) will be adequate to meet its interest payment
obligations under the Debentures.
On May 19, 1998, the Partnership repurchased approximately $247.8
million aggregate principal amount of the Notes for an aggregate purchase
price of $270.3 million pursuant to a fixed spread tender offer for all
outstanding Notes. The Notes tendered represent approximately 88% of the
Notes outstanding. The repurchase was funded with borrowings under the
Amended and Restated Credit Agreement.
The approximate $34.4 million of Notes not validly tendered and
repurchased in the tender offer will be redeemed by FHGLP prior to October
15, 1998 in accordance with the Notes Indenture. Under the Notes Indenture,
FHGLP has the right to redeem all or a portion of the Notes on or after
September 15, 1998 at 105.5% of the outstanding principal amount, plus
accrued interest to the redemption date. The Partnership has notified the
trustee under the Notes Indenture of its intent to repurchase the remaining
outstanding Notes on September 15, 1998 and has requested that the trustee
mail notice of the redemption in accordance with the terms of the Notes
Indenture.
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As a result of payment-in-kind interest payments under the Notes, the
aggregate principal of the Notes outstanding as of March 31, 1998 had
increased to $282.2 million. The Partnership, as permitted by the terms of
the Notes Indenture, elected to begin to pay interest payments in cash
beginning with the payment due March 15, 1998. In connection with the
decision to make interest payments on the Notes in cash and the anticipated
redemption of the Notes, the Partnership entered into various interest rate
swap agreements with three banks on February 10, 1998 in order to reduce the
interest cost. The agreements call for the Partnership to receive payments at
11%; and to make payments at 7.625% for the period September 16, 1997 through
September 15, 1998 on a notional principal amount of $282.2 million. The
contracts further call for the Partnership to pay at a fixed rate of 7.625%
and receive interest at variable LIBOR-based rates for the period September
16, 1998 through September 15, 2003 on a notional principal amount of $297.7
million. Based on the May 19, 1998 tender and the planned September 15, 1998
redemption, the Partnership is considering terminating these agreements.
The Partnership (i.e., FHGLP) is a separate, stand-alone holding company
which employs all of the management personnel for the Systems. All of the
Owned Systems are owned by subsidiaries of the Partnership. Accordingly, to
fund its operations and to pay its expenses, including interest expense, the
Partnership is financially dependent on the receipt of funds from its Owned
Subsidiaries, management and consulting fees from domestic cable ventures,
and on the reimbursement of specified expenses by certain of the Affiliated
Systems. 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. The New Credit Facility permits the Owned
Subsidiaries to remit to FHGLP no more than 4.25% of their net cable revenues
in any year. For the six months ended June 30, 1998, the Amended and
Restated Credit Agreement permitted the Owned Subsidiaries to remit
approximately $5.6 million to FHGLP, and $5.5 million was actually remitted.
As a result of the 1998 acquisition of the Falcon Classic assets, the
Partnership will no longer receive management fees and reimbursed expenses
from Falcon Classic. Receivables from the Affiliated Systems for services and
reimbursements described above amounted to approximately $9 million at June
30, 1998, which amount includes $7.1 million of notes receivable from the
Enstar Partnerships.
The Partnership has historically pursued a strategy of seeking to
acquire attractive acquisition candidates, with an emphasis on the
acquisition of systems which can be integrated with its existing operations.
Over the past two years, the Partnership has emphasized the acquisition of
Affiliated Systems due to its familiarity with these assets and because, in
many cases, these assets were already operationally integrated with Owned
Systems located nearby. The Partnership cannot predict whether it will have
access to adequate capital in the future to make further acquisitions of
cable systems. The Partnership frequently considers opportunities to sell
assets that it views as non-strategic.
The existing FHGLP partnership agreement contains provisions that may
require FHGLP to purchase substantially all of the limited partnership
interests in FHGLP held by its Group I, Group II and Group III limited
partners (constituting approximately 60% of the common equity of FHGLP), at
the holders' option. Certain of these interests are mandatorily redeemable at
certain dates. Limited partnership interests held by the Group IV limited
partner become redeemable at a later date, subject to certain shared
liquidity rights. In contemplation of the TCI Transaction, by agreement of
the Group I, Group II, Group III and Group IV partners, the dates on which
the partners may exercise certain put rights and the dates by which FHGLP is
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FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
required to redeem certain partnership interests were tolled in accordance
with the Contribution Agreement. The new dates are determined by adding to
the original date the number of days in the period beginning on December 1,
1997 and ending ninety days after the earlier of December 31, 1998 or the
date that the Contribution Agreement is terminated in accordance with its
terms. As a result, assuming that the Contribution Agreement is not
terminated prior to December 31, 1998, FHGLP may be required to purchase the
partnership interests held by the Group I, Group II and Group III partners
during the period of January 2000 to October 2000, with the Class C
partnership interests held by the Group IV partner becoming mandatorily
redeemable in July 2005. If the Contribution Agreement is terminated prior to
December 31, 1998, FHGLP may be required to redeem certain partnership
interests earlier than the dates set forth above. Subject to certain
customary exceptions, the Contribution Agreement may not be terminated
without the consent of FHGLP prior to December 31, 1998. The purchase price
for such partnership interests (other than Class C partnership interests,
which had a liquidation value of $51.4 million at June 30, 1998) will
generally be determined through a third party appraisal mechanism, as
specified in the existing FHGLP partnership agreement, at the time such
interests are redeemed, or through negotiation. The estimated purchase price
of such non-preferred partnership interests at June 30, 1998 was
approximately $120 million, based on preliminary estimates by management
which are subject to change. The purchase price is to be paid in cash or,
under certain circumstances, may be paid through the issuance of debt or
equity securities. The redemption value of the Class C partnership interests
will generally be their liquidation value as determined in accordance with a
formula set forth in the existing FHGLP partnership agreement. Certain of the
Partnership's debt agreements (including the New Credit Facility) restrict
the Partnership's ability to (i) make distributions to fund the purchase of
these partnership interests pursuant to the provisions described above, (ii)
incur indebtedness or issue debt securities in connection with such purchase
or (iii) sell a substantial amount of its assets. The Indenture for the
Debentures does not restrict the Partnership's ability to make distributions
or to fund the purchase of the limited partnership interests in FHGLP so long
as the Partnership is otherwise in compliance with the covenant in the
Indenture relating to the incurrence of indebtedness. The obligations of
FHGLP to redeem any significant amount of its limited partnership interests
would result in a material liquidity demand on FHGLP, and there can be no
assurance that FHGLP would be able to raise such funds on terms acceptable to
FHGLP, or at all. FHGLP has not identified a source for funding any material
redemption obligation at this time. Upon completion of the TCI Transaction,
the existing liquidity rights will be terminated and be replaced by certain
new liquidity rights provided to the non-management limited partners in the
New FHGLP partnership agreement and the New Falcon Partnership Agreement.
The "Year 2000" issue refers to certain contingencies that could result
from computer programs being written using two digits rather than four to
define the year. Many existing computer systems, including certain of the
Partnership's computer systems, process transactions based on two digits for
the year of the transaction (for example, "98" for 1998). These computer
systems may not operate effectively when the last two digits become "00," as
will occur on January 1, 2000. The Partnership's management has commenced an
assessment of the Partnership's Year 2000 business risks and its exposure to
computer systems, to operating equipment which is date sensitive and to the
interface systems of its vendors and service providers. Based on a
preliminary study, the Partnership's management has concluded that certain of
the Partnership's information systems were not Year 2000 compliant and has
elected to replace such software and hardware with Year 2000 compliant
applications and equipment, although the decision to replace major portions
of such software and hardware had previously been made without regard to the
Year 2000 issue. Replacement costs will be
-15-
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
capitalized in accordance with generally accepted accounting principles and
amortized over the lives of the assets. Maintenance costs will be expensed as
incurred. The Partnership's management expects to install substantially all
of the new systems in 1998, with the remaining systems to be installed in the
first half of 1999. The total anticipated cost, including replacement
software and hardware, is expected to be approximately $1.5 million.
In addition to evaluating internal systems, the Partnership's management
is currently assessing its exposure to risks associated with its operating
and revenue generating equipment and has also initiated communications with
significant third party vendors and service suppliers to determine the extent
to which the Partnership's interface systems are vulnerable should those
third parties fail to solve their own Year 2000 problems on a timely basis.
Management currently expects that the cost to replace non-compliant equipment
will be determined during the third quarter of 1998, but estimates that the
cost may be $5-6 million. There can be no assurance that the systems of
other companies on which the Partnership's systems rely will be timely
converted and that the failure to do so would not have an adverse impact on
the Partnership's systems. The Partnership's management continues to closely
monitor Year 2000 developments with vendors and service suppliers.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Cash provided by operating activities (including interest expense and
management fee income) decreased from $39.7 million to $13.5 million, or by
65.9%, for the six months ended June 30, 1998 compared to the corresponding
period in 1997, a decrease of $26.2 million. The decrease resulted primarily
from a net decrease of $18 million in other operating items (receivables,
other assets, payables, accrued expenses and subscriber deposits and
prepayments) and to an $8.2 million reduction in payment-in-kind interest
expense resulting from the fact that in 1997, unlike 1998, the Partnership
recorded $14.4 million of payment-in-kind interest expense related to the
Notes, offset in 1998 by the recording of $6.2 million of payment-in-kind
interest expense related to the Senior Discount Debentures.
Cash used in investing activities increased from $28.4 million to $115.4
million, or by 306.2%, for the six months ended June 30, 1998 compared to the
corresponding period in 1997. The increase was primarily due to the March
1998 acquisition of the Falcon Classic assets for $76.8 million and to an
increase in capital expenditures of $11 million.
Cash from financing activities changed from a $14.2 million use of cash
to $197.4 million of cash provided for the six months ended June 30, 1998
compared to the corresponding period in 1997. The change was due primarily
to additional borrowings of debt in 1998 related to the New Credit Facility,
the acquisition of the Falcon Classic assets and to the increase in capital
expenditures. (See Note 4 to condensed consolidated financial statements.)
-16-
FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that it is able to increase its service rates
periodically, of which there can be no assurance, due to the re-regulation of
rates charged for certain cable services.
-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) None.
(b) Falcon Holding Group, L.P. filed a Form 8-K dated
April 3, 1998 reporting under Item 5 that it had
issued a press release announcing the consummation
of private offering of senior debentures and
senior discount debentures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
FALCON HOLDING GROUP, L.P.
By: Falcon Holding Group
General Partner
Date: August 11, 1998 By: /s/ Michael K. Menerey
---------------------------
Michael K. Menerey, Executive
Vice President, Secretary and
Chief Financial Officer
FALCON FUNDING CORPORATION
Date: August 11, 1998 By: /s/ Michael K. Menerey
---------------------------
Michael K. Menerey, Chief
Financial Officer and Secretary