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, 1999
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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: 33-60776 and 333-55755
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FALCON COMMUNICATIONS, L.P.
FALCON FUNDING CORPORATION*
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(Exact Names of Registrants as Specified in Their Charters)
California 95-4654565
California 95-4681480
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) 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 X No
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Number of shares of common stock of Falcon Funding Corporation outstanding as
of August 9, 1999: 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 COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31, June 30,
1998* 1999
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(Unaudited)
(Dollars in Thousands)
ASSETS:
Cash and cash equivalents $ 14,284 $ 11,852
Receivables:
Trade, less allowance of $670,000 and
$699,000 for possible losses 15,760 19,102
Affiliates 2,322 6,949
Other assets 16,779 35,007
Property, plant and equipment, less accumulated depreciation
and amortization of $320,209,000 and $349,316,000 505,894 522,587
Franchise cost, less accumulated
amortization of $226,526,000 and $251,998,000 397,727 384,197
Goodwill, less accumulated amortization
of $25,646,000 and $30,547,000 135,308 133,480
Customer lists and other intangible costs, less
accumulated amortization of $59,422,000 and $97,912,000 333,017 300,314
Deferred loan costs, less accumulated amortization
of $2,014,000 and $2,352,000 24,331 23,354
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$ 1,445,422 $ 1,436,842
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LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable $ 1,611,353 $ 1,665,676
Accounts payable 10,341 6,088
Accrued expenses 83,077 138,804
Customer deposits and prepayments 2,257 2,630
Deferred income taxes 8,664 2,287
Minority interest 403 387
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TOTAL LIABILITIES 1,716,095 1,815,872
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 133,023 400,471
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PARTNERS' EQUITY (DEFICIT):
General partner (408,369) (783,100)
Limited partners 4,673 3,599
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TOTAL PARTNERS' DEFICIT (403,696) (779,501)
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$ 1,445,422 $ 1,436,842
============ ============
*As presented in the audited financial statements.
See accompanying notes to condensed consolidated financial statements.
-2-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
Unaudited
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Three months ended
June 30,
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1998 1999
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(Dollars in Thousands)
REVENUES $ 68,775 $ 106,396
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OPERATING COSTS AND EXPENSES:
Programming costs 13,285 24,247
Service costs 7,207 11,731
General and administrative expenses 12,838 21,369
Equity-based deferred compensation - 42,000
Depreciation and amortization 32,927 55,622
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Total operating costs and expenses 66,257 154,969
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Operating income (loss) 2,518 (48,573)
OTHER INCOME (EXPENSE):
Interest expense, net (24,212) (32,407)
Equity in net income (loss) of investee partnerships (18) 273
Other expense, net (50) (1,041)
Income tax benefit 1,466 1,325
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Net loss before extraordinary items (20,296) (80,423)
Extraordinary items (28,412) -
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NET LOSS $ (48,708) $ (80,423)
============ ============
See accompanying notes to condensed consolidated financial statements.
-3-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
Unaudited
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Six months ended
June 30,
----------------------------
1998 1999
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(Dollars in Thousands)
REVENUES $ 133,332 $ 212,205
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OPERATING COSTS AND EXPENSES:
Programming costs 25,933 47,233
Service costs 14,124 25,545
General and administrative expenses 24,516 39,779
Equity-based deferred compensation - 44,600
Depreciation and amortization 64,006 110,048
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Total operating costs and expenses 128,579 267,205
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Operating income (loss) 4,753 (55,000)
OTHER INCOME (EXPENSE):
Interest expense, net (44,699) (64,852)
Equity in net income (loss) of investee partnerships (266) 163
Other income (expense), net (824) 9,807
Income tax benefit 1,831 2,459
------------ ------------
Net loss before extraordinary items (39,205) (107,423)
Extraordinary items (28,412) -
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NET LOSS $ (67,617) $ (107,423)
============ ============
See accompanying notes to condensed consolidated financial statements.
-4-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
Unaudited
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Six months ended
June 30,
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1998 1999
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(Dollars in Thousands)
Net cash provided by operating activities $ 13,558 $ 36,697
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Cash flows from investing activities:
Acquisition of cable television systems (76,789) (16,450)
Capital expenditures (38,609) (59,034)
Increase in intangible assets (1,102) (2,151)
Other 1,065 (2,107)
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Net cash used in investing activities (115,435) (79,742)
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Cash flows from financing activities:
Borrowings from notes payable 1,445,957 68,500
Repayment of debt (1,224,683) (27,871)
Deferred loan costs (23,944) (16)
Other 83 -
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Net cash provided by financing activities 197,413 40,613
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Net increase (decrease) in cash
and cash equivalents 95,536 (2,432)
Cash and cash equivalents
at beginning of period 13,917 14,284
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Cash and cash equivalents
at end of period $ 109,453 $ 11,852
============ ============
See accompanying notes to condensed consolidated financial statements.
-5-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Falcon Communications, L.P., a California limited partnership (the
"Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"), owns
and operates cable television systems serving small to medium-sized
communities and the suburbs of certain cities in 23 states. On September 30,
1998, pursuant to a Contribution and Purchase Agreement dated as of December
30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired the
assets and liabilities of Falcon Video Communications, L.P. ("Falcon Video"
or the "Falcon Video systems"), in exchange for ownership interests in FHGLP.
Simultaneously with the closing of that transaction, in accordance with the
Contribution Agreement, FHGLP contributed substantially all of the existing
cable television system operations owned by FHGLP and its subsidiaries
(including the Falcon Video systems) to the Partnership and TCI Falcon
Holdings, LLC ("TCI") contributed certain cable television systems owned and
operated by affiliates of TCI (the "TCI systems") to the Partnership (the
"TCI Transaction"). In March 1999, AT&T and Tele-Communications, Inc.
completed a merger under which Tele-Communications, Inc. became a unit of
AT&T called AT&T Broadband & Internet Services, which became the owner of TCI
Falcon Holdings, LLC as a result of the merger. As a result, AT&T Broadband
and Internet Services holds approximately 46% of the equity interests of the
Partnership and FHGLP holds the remaining 54% and serves as the managing
general partner of the Partnership. The TCI Transaction has been accounted
for as a recapitalization of FHGLP into the Partnership and the concurrent
acquisition by the Partnership of the TCI systems.
On May 26, 1999, the Partnership and Charter Communications ("Charter")
announced a definitive agreement in which Charter will acquire the
Partnership in a cash and stock transaction valued at approximately $3.6
billion. Closing of the pending sale is subject to obtaining all necessary
government approvals, and is anticipated to take place in the fourth quarter
of 1999.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three and six months ended June
30, 1999 and 1998 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, 1999 are not indicative of results
for the entire year.
NOTE 3 - REDEEMABLE PARTNERS' EQUITY
Redeemable partners' equity has been adjusted as of June 30, 1999 based
on the estimated redemption value to be recognized from the pending sale to
Charter.
NOTE 4 - EQUITY-BASED DEFERRED COMPENSATION
In connection with the pending sale of the Partnership to Charter
discussed in Note 1, the Partnership recorded a non-cash charge of $42
million during the three months ended June 30, 1999 related to both the 1993
Incentive Performance Plan ($17.2 million) and the 1999 Employee Restricted
Unit Plan ($24.8 million). The amounts were determined based on the value of
the underlying ownership units, as established by the pending sale of the
Partnership to Charter. $2.6 million of additional compensation related to
the 1993 Incentive Performance Plan was recorded in the three
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FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 4 - EQUITY-BASED DEFERRED COMPENSATION (CONTINUED)
months ended March 31, 1999 based on management's estimate of the increase in
value of the underlying ownership interests since December 31, 1998. Payments
under the plans are subject to closing of the sale to Charter, and will be
paid from net sales proceeds. The total deferred compensation of $44.6
million under these plans is included in accrued expenses.
NOTE 5 - ACQUISITIONS
In March 1998, the Partnership acquired substantially all of the assets
of Falcon Classic Cable Income Properties, L.P. As discussed in Note 1, on
September 30, 1998 the Partnership acquired the TCI systems and the Falcon
Video systems in accordance with the Contribution Agreement. The following
unaudited condensed consolidated pro forma statement of operations presents
the consolidated results of operations of the Partnership as if the
acquisitions had occurred at January 1, 1998 and is not necessarily
indicative of what would have occurred had the acquisitions been made as of
that date or of results which may occur in the future.
Three Six
Months Ended Months Ended
June 30, 1998 June 30, 1998
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(Dollars in Thousands)
Revenues $ 108,090 $ 213,639
Expenses (108,745) (221,238)
------------ ------------
Operating loss (655) (7,599)
Interest and other expenses (31,168) (63,951)
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Loss before extraordinary items $ (31,823) $ (71,550)
============ =============
In January 1999, the Partnership acquired the assets of certain cable
systems located in Oregon for $800,700. The acquired systems serve
approximately 591 customers, and are being operated as part of the Medford
region. On March 15, 1999, the Partnership acquired the assets of certain
cable systems located in Utah for $6.8 million. This system serves
approximately 7,928 customers and is being operated as part of the St. George
region. On March 22, 1999, the Partnership acquired the assets of the
Franklin, Virginia system in exchange for the assets of its Scottsburg,
Indiana systems and $8 million in cash and recognized a gain of $8.3 million.
The Franklin system serves approximately 9,042 customers and the Scottsburg
systems served approximately 4,507 customers. The effects of this transaction
on results of operations are not material. On July 30, 1999, the Partnership
acquired the assets of certain cable systems serving 6,500 customers located
in Oregon for $9.5 million.
NOTE 6 - RECENT DEVELOPMENTS
On April 8, 1999, the Partnership announced that it had executed a term
sheet with regard to a joint venture to be formed called @Home Solutions
which would offer turnkey, fully managed and comprehensive high speed
Internet access to cable operators serving small to medium-sized
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FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
NOTE 6 - RECENT DEVELOPMENTS (CONTINUED)
communities, including the Partnership. In connection with the sale of the
Partnership to Charter as discussed in Note 1, the Partnership withdrew from
the @Home Solutions joint venture and reimbursed @Home Solutions $500,000 for
costs incurred.
NOTE 7 - SALE OF SYSTEMS
On March 1, 1999, the Partnership contributed $2.4 million cash and
certain systems located in Oregon with a net book value of $5.6 million to a
joint venture with Bend Cable Communications, Inc., who manages the joint
venture. The Partnership owns 17% of the joint venture. These systems had
been acquired from Falcon Classic in March 1998, and served approximately
3,471 subscribers at March 1, 1999.
On March 26, 1999, the Partnership sold certain systems serving
approximately 2,550 subscribers in Kansas for $3.2 million and recognized a
gain of $2.5 million.
-8-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of 1992
required the 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 our
revenues and cash flow. The Telecommunications Act of 1996 substantially
changed the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the
Telecommunications Act of 1996 ended regulation of cable programming service
tier rates on March 31, 1999. The FCC, Congress or other regulatory
authorities could take actions in the future that could negatively impact the
Partnership's business. Accordingly, the historical financial results
described below are not necessarily indicative of future performance.
REVENUE. Substantially all of our revenue is earned from subscriber fees
for cable television programming services, the sale of advertising,
commissions for products sold through home shopping networks, fees for
ancillary services (such as the rental of set top and remote control
devices), and installations.
OPERATING COSTS AND EXPENSES. Operating costs and expenses consist of
programming expenses, service costs, general and administrative expenses and
depreciation and amortization expense. Programming expenses have historically
increased at rates in excess of inflation due to system acquisitions, as well
as increases in the number, quality and costs of programming services
offered. Service costs primarily include expenses related to wages and
employee benefits of technical personnel, franchise fees, copyright fees,
property taxes, electricity, systems supplies and vehicles. General and
administrative expenses include wages and employee benefits of customer
service, accounting and administrative personnel, marketing and advertising
costs and expenses related to billing, payment processing, office
administration, insurance and corporate overhead. Depreciation and
amortization expense relates to depreciation of tangible assets and the
amortization of intangible costs.
This report includes certain forward looking statements regarding, among
other things, future results of operations, regulatory requirements,
acquisition transactions, competition, capital needs and general business
conditions applicable to us. 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 us. In
addition to the information provided herein, reference is made to our annual
report on Form 10-K for the year ended December 31, 1998 and the other
periodic reports and registration statements filed by Falcon Holding Group,
L.P. and Falcon Communications, L.P. with the Securities and Exchange
Commission from time to time for additional information regarding such
matters and the effect thereof on our business.
-9-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following table sets forth the historical statement of operations
data and the components of net earnings and EBITDA expressed as a percentage
of revenue for the periods indicated.
Unaudited
------------------------------------------------------
Three months Ended Six months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
Statement of Operations Data:
Revenue 100.0% 100.0% 100.0% 100.0%
------------ ------------ ------------ ------------
Operating costs and expenses:
Programming costs 19.3% 22.8% 19.4% 22.3%
Service costs 10.5% 11.0% 10.6% 12.0%
General and administrative expenses 18.7% 20.1% 18.4% 18.7%
Depreciation and amortization 47.9% 52.3% 48.0% 51.9%
Equity-based deferred compensation - 39.5% - 21.0%
------------ ------------ ------------ ------------
Total operating costs and expenses 96.4% 145.7% 96.4% 125.9%
------------ ------------ ------------ ------------
Operating income (loss) 3.6% (45.7%) 3.6% (25.9%)
Interest expense, net (35.2%) (30.5%) (33.5%) (30.6%)
Other income 2.0% 0.5% 0.6% 5.9%
------------ ------------ ------------ ------------
Net loss before extraordinary items (29.6%) (75.7%) (29.3%) (50.6%)
Extraordinary items (41.3%) - (21.3%) -
------------ ------------ ------------ ------------
Net Loss (70.9%) (75.7%) (50.6%) (50.6%)
============ ============ ============ ============
EBITDA 51.5% (6.6%) 51.6% 26.0%
Our revenues increased from $68.8 million to $106.4 million, or by
54.7%, and from $133.3 million to $212.2 million, or by 59.2%, for the three
and six months ended June 30, 1999 compared to the corresponding periods in
1998. Of the $37.6 million net increase in revenues for the three months
ended June 30, 1999 as compared to the corresponding period in 1998, $30.5
million was due to the acquisition in September 1998 of the TCI systems, $8.7
million was due to the acquisition in September 1998 of the Falcon Video
systems and $384,000 was due to the acquisition in July 1998 of the rest of
the Falcon Classic systems. These increases were partially offset by
decreases of $1.3 million related to reductions in the number of regulated
and premium subscriptions for cable service and to a $554,000 reduction in
management fees. Of the $78.9 million net increase in revenues for the six
months ended June 30, 1999 compared to the corresponding period in 1998,
$60.5 million was due to the acquisition of the TCI systems, $16.7 million
was due to the acquisition of the Falcon Video systems, $4.6 million was due
to the acquisition in July 1998 of the Falcon Classic systems and $440,000
was due to increases in regulated service rates implemented during 1998 and
1999. These increases were partially offset by decreases of $2.1 million
related to reductions in the number of regulated and premium subscriptions
for cable service and to a $1.2 million reduction in management fees. As of
June 30, 1999, we had approximately 1,008,000 basic subscribers and 276,000
premium service units.
Management and consulting fees decreased from $1.0 million to $397,000
and from $2 million to $796,000 for the three and six months ended June 30,
1999 compared to the corresponding periods
-10-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
in 1998 primarily due to our acquisition of cable systems we managed. Of the
total reduction for the three and six months ended June 30, 1999 as compared
to the corresponding periods in 1998, $431,000 and $811,000 related to the
acquisition of the Falcon Video systems, $189,000 for the six months ended
June 30, 1999 related to the acquisition of the Falcon Classic systems and
$123,000 and $242,000 was due to a reduction in the amounts received from
Enstar Communications Corporation, the general partner of partnerships owning
approximately 93,000 subscribers that we manage.
Programming costs increased from $13.3 million to $24.2 million, or by
82.0%, and from $25.9 million to $47.2 million, or by 82.2%, for the three
and six months ended June 30, 1999 compared to the corresponding periods in
1998. Of the $10.9 million and $21.3 million increase in programming fees
paid to programming suppliers (including primary satellite fees) for the
three and six months ended June 30, 1999 compared to the corresponding
periods in 1998, $8.8 million and $17.4 million related to the acquisition of
the TCI systems, $1.9 million and $3.6 million related to the acquisition of
the Falcon Video systems and $936,000 for the six month period only related
to the acquisition of the Falcon Classic systems. These increases were
partially offset by reductions in the number of subscriptions for cable
service and by reductions in rates payable for certain programming services
due to the TCI transaction.
Service costs increased from $7.2 million to $11.7 million, or by 62.5%,
and from $14.1 million to $25.5 million, or by 80.9%, for the three and six
months ended June 30, 1999 compared to the corresponding periods in 1998.
Service costs represent costs other than programming costs that are directly
attributable to providing cable services to customers. Of the $4.5 million
and $11.4 million increase in service costs, for the three and six months
ended June 30, 1999 compared to the corresponding periods in 1998, $3.6
million and $7.8 million related to the acquisition of the TCI systems,
$943,000 and $1.9 million related to the acquisition of Falcon Video systems
and $709,000 for the six months ended June 30, 1999 related to the
acquisition of the Falcon Classic systems. The remainder of the increase in
service costs for the six months ended June 30, 1999 were the result of
increases in a number of categories, primarily personnel costs and property
taxes.
General and administrative expenses increased from $12.8 million to
$21.4 million, or by 67.2 %, and from $24.5 million to $39.8 million, or by
62.4%, for the three and six months ended June 30, 1999 compared to the
corresponding periods in 1998. Of the $8.6 million increase for the three
months ended June 30, 1999 compared to the corresponding period in 1998, $5.6
million related to the acquisition of the TCI systems, $1.2 million related
to the acquisition of Falcon Video systems, $820,000 related to personnel
costs and $768,000 related to increases in other general and administrative
expenses, primarily related to workman's compensation claims recorded during
1999. Of the $15.3 million increase for the six months ended June 30, 1999,
$10.5 million related to the acquisition of the TCI systems, $2.3 million
related to the acquisition of the Falcon Video systems, $1.5 million related
to increases in personnel costs and $607,000 related to the acquisition of
the Falcon Classic systems.
As discussed in Note 4 to the financial statements, we recorded a
non-cash charge of $42 million during the three months ended June 30, 1999
related to both the 1993 Incentive Performance Plan ($17.2 million) and the
1999 Employee Restricted Unit Plan ($24.8 million). In the three months ended
March 31, 1999, $2.6 million related to the 1993 Incentive Performance Plan
was recorded.
-11-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
Payments under the plans are subject to closing of our pending sale to
Charter, and will be paid from net sales proceeds.
Depreciation and amortization expense increased from $32.9 million to
$55.6 million, or by 69.0%, and from $64 million to $110 million, or by
71.9%, for the three and six months ended June 30, 1999 compared to the
corresponding periods in 1998. Of the $22.7 million and $46 million increase
in depreciation and amortization expense for the three and six months ended
June 30, 1999 compared to the corresponding periods in 1998, $17.6 million
and $35.2 million related to the acquisition of the TCI systems, $5.1 million
and $9.9 million related to the acquisition of the Falcon Video systems,
$240,000 and $2.9 million related to the acquisition of the Falcon Classic
systems. These increases were partially offset by accelerated depreciation
related to asset retirements.
Operating income of $2.5 million and $4.8 million changed to operating
loss of $48.6 million and $55 million for the three and six months ended June
30, 1999 compared to the corresponding periods in 1998. The $51.1 million and
$59.8 million changes were principally due to the equity-based deferred
compensation expense discussed above and to the depreciation and amortization
expense associated with the acquisition of the TCI, Falcon Video and Falcon
Classic systems (which had a combined operating loss of $5.5 million and $12
million for the three and six month periods in 1999).
Interest expense, net, including the effects of interest rate hedging
agreements, increased from $24.2 million to $32.4 million, or by 33.9%, and
from $44.7 million to $64.9 million, or by 45.2%, for the three and six
months ended June 30, 1999 compared to the corresponding periods in 1998. The
increases were primarily due to higher average debt balances outstanding
partially offset by the effect of lower average interest rates (7.4% and 7.5%
during the three and six months ended June 30, 1999 compared to 9.4% and 9.1%
during the corresponding periods in 1998). Non-cash interest expense
associated with our senior discount debentures amounted to $7 million and
$13.7 million for the three and six months ended June 30, 1999. Interest rate
hedging agreements resulted in additional interest expense of $1.8 million
and $3.2 million during the three and six months ended June 30, 1999 compared
to additional interest expense of $162,000 and $215,000 during the
corresponding periods in 1998.
Other expense, net, increased from $50,000 to $1.0 million for the three
months ended June 30, 1999 and changed from $824,000 of expense to $9.8
million of income for the six months ended June 30, 1999 compared to the
corresponding periods in 1998. We recorded $804,000 of expenses during the
second quarter of 1999 related to our pending sale to Charter. The change for
the six months ended June 30, 1999 as compared to the corresponding period in
1998 was primarily related to the recognition of $11 million gain from the
exchange of cable systems located in Indiana ($8.5 million) and Kansas ($2.5
million) during the first quarter of 1999.
Due to the factors described above, our net loss increased from $48.7
million to $80.4 million, or by 65.1%, and from $67.6 million to $107.4
million, or by 58.9% for the three and six months ended June 30, 1999
compared to the corresponding periods in 1998.
Based on our experience in the cable television industry, we believe
that operating income before depreciation and amortization, commonly referred
to as "EBITDA", and related measures of cash flow serve as important
financial analysis tools for measuring and comparing cable television
-12-
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
companies in several areas, such as liquidity, operating performance and
leverage. In addition, the covenants in our primary debt instruments use
EBITDA-derived calculations as a measure of financial performance. EBITDA is
not a measurement determined under generally accepted accounting principles
and does not represent cash generated from operating activities in accordance
with these accounting principles. EBITDA should not be considered by the
reader as an alternative to net income as an indicator of our financial
performance or as an alternative to cash flows as a measure of liquidity. In
addition, our definition of EBITDA may not be identical to similarly titled
measures used by other companies. EBITDA decreased from $35.5 million to $7
million, or by 80.3% and from $68.8 million to $55 million, or by 20.1%.
EBITDA as a percentage of revenues decreased from 51.5% to 6.6% and from
51.6% to 25.9% for the three and six months ended June 30, 1999 compared to
the corresponding periods in 1998. The decrease was primarily caused by the
deferred compensation costs, as described above and by impact of the systems
acquired from TCI (which had an EBITDA margin of 41.1% and 41.0% for the
three and six months 1999 periods). Absent the impact of the equity-based
deferred compensation adjustments, EBITDA for the three and six months ended
June 30, 1999 would have been $49 million and $99.6 million, respectively,
and EBITDA as a percentage of revenues would have been 46.1% and 47.0%.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary need for capital has been to acquire cable
systems, to finance plant extensions, rebuilds and upgrades and to add
addressable set top devices to certain of our cable systems. We spent $96.4
million during 1998 on capital expenditures. Our 1999 plan called for capital
expenditures of approximately $190 million, consisting of approximately $111
million to rebuild and upgrade certain cable systems and $79 million for line
extensions and other new equipment. Due to various factors, we do not
currently anticipate spending that much, and for the six months ended June
30, 1999 we spent $29 million to rebuild and upgrade certain cable systems
and $30 million for line extensions and other new equipment. We plan to
finance capital expenditures with cash flow from operations and borrowings
under our bank credit facility, subject to our ability to remain in
compliance with certain covenants of the bank credit facility and the
indenture for our outstanding debentures. The restriction on incurring
indebtedness contained in our partnership agreement was waived pending the
completion of our pending sale to Charter. Our proposed spending plans are
frequently reviewed and revised with respect to changes in technology,
acceptable leverage parameters (including those specified in our debt
agreements), franchise requirements, competitive circumstances and other
factors, and may change under Charter's management.
The bank 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. As of June 30, 1999, the amount outstanding
under the bank credit facility was $967 million and, subject to complying
with covenants, we had available additional committed borrowing capacity
(excluding the supplemental credit facility) of approximately $179.1 million.
The bank credit facility requires that interest be tied to the ratio of
consolidated total debt to consolidated annualized cash flow, and further
requires that we maintain hedging arrangements with respect to at least 50%
of the outstanding borrowings thereunder plus any of our additional
borrowings, including the debentures, for a two-year period. As of June 30,
1999 borrowings under the bank credit facility bore interest at an average
rate of 7.4% (including the effect of interest rate hedging agreements). We
have entered into fixed interest
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FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
rate hedging agreements with an aggregate notional amount at June 30, 1999 of
$1.5 billion. Agreements in effect at June 30, 1999 totaled $885 million,
with the remaining $575 million to become effective as certain of the
existing contracts mature during 1999 through October of 2004. The agreements
serve as a hedge against interest rate fluctuations associated with our
variable rate debt. These agreements expire at various times through October
2006. In addition to these agreements, we had one interest rate swap contract
with a notional amount of $25 million under which we paid variable LIBOR
rates and received fixed rate payments. This contract expired on July 1, 1999.
Our earnings are affected by changes in short-term interest rates
applied to the portion of our debt that is not protected by hedging
agreements. Because most of our debt is protected by hedging agreements, a 1%
change in average interest rates would have an immaterial impact on our
reported interest expense for the six months ended June 30, 1999.
The bank 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. We believe that we were in compliance with all
such requirements as of June 30, 1999. We believe that borrowings under the
credit facility together with cash flow from operations will be adequate to
meet our liquidity needs for the foreseeable future. Charter has indicated
its intent to keep the bank credit facility in place, and is obtaining an
amendment which will become effective upon closing.
We have outstanding $375 million aggregate principal amount of senior
debentures and $435.2 million aggregate principal amount at maturity of
senior discount debentures. Semiannual interest payments with respect to the
senior debentures are approximately $15.7 million. Interest on the senior
discount debentures accrete semiannually until April 15, 2003, unless we
elect to pay cash interest. After April 15, 2003, semiannual cash interest
payments will be approximately $35.9 million in the aggregate. We anticipate
that cash flow from operations and, if necessary, borrowings under the bank
credit facility (or a successor credit facility) will continue to be adequate
to meet our interest payment obligations under the debentures. Charter has
also indicated its intent to assume the outstanding senior debentures and
senior discount debentures upon closing.
Falcon Communications is a separate, stand-alone holding company which
employs all of the management personnel for its cable television systems. All
of the Falcon systems are owned by the subsidiaries of Falcon Communications.
Accordingly, to fund its operations and to pay our expenses, including
interest expense, we are financially dependent on the receipt of funds from
our subsidiaries, management fees from domestic cable ventures, and the
reimbursement of specified expenses by Enstar Communications Corporation.
Expected increases in funding requirements combined with limitations on our
sources of cash could create liquidity issues in the future. The bank credit
facility permits our subsidiaries to remit to us no more than 4.5% of their
net cable revenues in any year. For the six months ended June 30, 1999, our
credit agreements permitted our subsidiaries to remit approximately $9.4
million to us, and $9.4 million was actually remitted. As a result of the
1998 acquisition of the Falcon Video and Falcon Classic systems, we no longer
receive management fees and reimbursed expenses from Falcon Classic or
management fees from Falcon Video. Receivables from Enstar Communications
Corporation for services and reimbursements described above amounted
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FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
to approximately $6.9 million at June 30, 1999. It is anticipated that our
expenses for managing our systems will decrease upon closing our pending sale
to Charter due to personnel reductions and amendments to certain provisions
in the bank credit agreement.
We have historically pursued a strategy of seeking to acquire attractive
acquisition candidates, with an emphasis on the acquisition of systems which
can be integrated with our existing operations. Over the past few years, we
have emphasized the acquisition of our affiliated systems due to our
familiarity with these assets and because, in many cases, these assets were
already operationally integrated with our systems located nearby. Except for
one acquisition of an affiliated Enstar partnership for approximately $10.5
million and the July 30, 1999 acquisition discussed in Note 5 to the
financial statements, we do not anticipate making additional acquisitions
until after the closing of our pending sale to Charter.
In October 1998, we reinstated third-party insurance coverage against
damage to its cable distribution plant and subscriber connections and against
business interruptions resulting from such damage. Although this coverage is
subject to a significant annual deductible, the policy is intended to insure
us against catastrophic losses, if any, in future periods.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Cash provided by operating activities (including interest expense and
management fee income) increased from $13.5 million to $36.7 million for the
six months ended June 30, 1999 compared to the corresponding period in 1998,
an increase of $23.2 million. The increase resulted primarily from a net
increase of $15.7 million in other operating items (receivables, other
assets, payables, accrued expenses and subscriber deposits and prepayments)
and to an increase of $7.5 million in non-cash interest expense recorded in
1999 related to the senior discount debentures.
Cash used in investing activities decreased from $115.4 million to $79.7
million, or by 30.9%, for the six months ended June 30, 1999 compared to the
corresponding period in 1998. The $35.7 million decrease was primarily due to
the 1998 acquisition of the Falcon Classic assets for $76.8 million partially
offset by increases of $20.4 million in capital expenditures, a $16.4 million
related to the 1999 acquisition of certain cable systems located in Virginia,
Utah and Oregon and a $2.4 million investment in a joint venture with Bend
Cable Communications, Inc.
Cash from financing activities decreased from $197.4 million to $40.6
million, or by 79.4%, for the six months ended June 30, 1999 compared to the
corresponding period in 1998. The decrease was primarily related to a
reduction in net borrowings of approximately $180.6 million from the 1998 six
month period related to the bank credit facility, partially offset by the
expenditure of $23.9 million in 1998 on deferred loan costs.
YEAR 2000
During the second quarter of 1999, we continued identification,
evaluation and remediation of our Year 2000 business risks associated with
operations directly under our control and those risks that are dependent on
third parties related to our exposure to computer systems, to operating
equipment
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FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
which is date sensitive and to the interface systems of our vendors and
service providers. The evaluation has focused on identification, assessment
and remediation of systems and equipment that may fail to distinguish between
the year 1900 and the year 2000 and, as a result, may cease to operate or may
operate improperly when dates after December 31, 1999 are introduced. Most of
our exposure to Year 2000 issues is dependent in large part on third parties.
Failure to identify and remediate a critical Year 2000 issue could result in
an interruption of services to customers or in the interruption of critical
business functions, either of which could result in a material adverse impact
on our financial results.
We have concluded that certain of our internal information systems were
not Year 2000 compliant and elected to replace such software and hardware
with applications and equipment certified by the vendors as Year 2000
compliant. Replacement costs are capitalized in accordance with generally
accepted accounting principles and amortized over the lives of the assets.
Maintenance costs are expensed as incurred. We installed the new systems in
the first quarter of 1999. We are continuing to utilize internal and external
resources to extend the functionality of the new systems. The total
anticipated cost, including replacement software and hardware, is expected to
be approximately $2.7 million and is being funded through operating cash
flow. As of June 30, 1999, we had spent approximately $2.3 million. We do not
believe that any other significant information technology projects affecting
us have been delayed due to efforts to identify or address Year 2000 issues.
Additionally, we continue to inventory internal operating and revenue
generating equipment to identify items that need to be upgraded or replaced
and survey cable equipment manufacturers to determine which of their models
require upgrade or replacement to become Year 2000 compliant. Identification
and evaluation, while ongoing, are substantially completed and a plan has
been developed to remediate or replace non-compliant equipment. Of the total
number of potentially non-compliant items identified in the inventory,
approximately 1.5% are in the assessment stage. Approximately 14.4% of
non-compliant items are in the remediation planning phase and 85.6% are in
the implementation stage. We plan to conduct limited testing of our systems,
software and equipment in the third quarter of 1999 and place significant
reliance on test results provided by AT&T Broadband & Internet Services. The
cost of such replacement or remediation is currently estimated to be $1.7
million, of which $1.4 million had been incurred as of June 30, 1999. We have
also substantially completed the assessment and replacement or remediation of
the majority of our internal equipment containing embedded computer chips.
We continue to survey our significant third party vendors and service
suppliers to determine the extent to which our interface systems are
vulnerable should those third parties fail to solve their own Year 2000
problems on a timely basis. We are heavily dependent on third parties and
these parties are themselves heavily dependent on technology. For example, in
a situation impacting the entire cable industry, much of our headend
equipment that controls cable set-top devices was not Year 2000 compliant.
The manufacturers have been working with cable industry groups to develop
solutions that we are installing in our head-end equipment. It is currently
expected that these solutions will be substantially implemented by the end of
the third quarter of 1999. In addition, if a television broadcaster or cable
programmer encounters Year 2000 problems that impede its ability to deliver
its programming, we will be unable to provide that programming to our cable
customers, which would result in a loss of revenues, although we would
attempt to provide our customers with alternative
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FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
program services. Virtually all of our most critical equipment vendors have
responded to the surveys regarding the Year 2000 compliance of their products
and indicated that they are already compliant or have indicated their intent
to be compliant. Additional compliance information has been obtained for
specific products from vendor Web sites, interviews, on-site visits, system
interface testing and industry group participation. Among the most
significant third party service providers upon which we rely are programming
suppliers, power and telephone companies, various banking institutions and
our customer billing service. We are taking steps to attempt to satisfy
ourselves that the third parties on which we are heavily reliant are Year
2000 compliant and are developing satisfactory contingency plans, or that
alternative means of meeting our business requirements are available, but
cannot predict the likelihood of such compliance nor the direct or indirect
costs to us of non-compliance by those third parties or of securing such
services from alternate compliant third parties. In areas in which we are
uncertain about the anticipated Year 2000 readiness of a significant third
party, we are investigating available alternatives, if any.
We believe that we have established an effective program to resolve all
significant Year 2000 issues in our control in a timely manner. As noted
above, however, we have not yet completed all phases of our program and are
dependent on third parties whose progress is not within our control. In the
event that we do not complete our currently planned additional remediation
prior to the Year 2000, we could experience significant difficulty in
producing and delivering our products and services and conducting our
business in the year 2000. In addition, disruptions experienced by third
parties with which we do business as well as by the economy generally could
also materially adversely affect us. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
We have focused our efforts on identification and remediation of Year
2000 exposures and are beginning to develop specific contingency plans in the
event we do not successfully complete our remaining remediation as
anticipated or experience unforeseen problems. Considerable effort has been
directed toward distinguishing between those contingencies with a greater
probability of occurring from those whose occurrence is considered remote,
and on those systems whose failure poses a material risk to our results of
operations and financial condition. We are also examining our business
interruption strategies to evaluate whether they would satisfactorily meet
the demands of failures arising from Year 2000 related problems. We intend to
examine our status periodically to determine the necessity of establishing
and implementing such contingency plans or additional strategies, which could
involve, among other things, manual workarounds, adjusting staffing
strategies and sharing resources.
INFLATION
Certain of our expenses, such as those for wages and benefits, equipment
repair and replacement, and billing and marketing generally increase with
inflation. However, we do not believe that our financial results have been,
or will be, adversely affected by inflation in a material way, provided that
we are able to increase our service rates periodically, of which there can be
no assurance.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2., "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
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FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT 10.36 Purchase and Contribution Agreement, dated as of
May 26, 1999, by and among Charter Communications, Inc.,
Falcon Communications, L.P., Falcon Holding Group L.P., TCI
Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding
Group, Inc., and DHN Inc. (incorporated herein by reference to
Exhibit 2.1 to the partnership's 8-K dated June 9, 1999.
EXHIBIT 10.37 First Amendment to Purchase and Contribution
Agreement, dated as of June 22, 1999, by and among Charter
Communications, Inc., Charter Communications Holding Company,
LLC, Falcon Communications, L.P., Falcon Holding Group, L.P.,
TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding
Group, Inc., and DHN Inc.
EXHIBIT 10.38 Consent under Credit Agreement among Falcon
Cable Communications, LLC, certain of its subsidiaries,
BankBoston, N.A. and a group of lenders for which it is acting
as documentation agent.
EXHIBIT 27.1 Financial Data Schedule
(b) The Registrant filed a form 8-K dated June 9, 1999, reporting
under Item 5 that it had issued certain press releases in
which Charter will acquire Falcon in a cash and stock
transaction valued at approximately $3.6 billion.
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 COMMUNICATIONS, L.P.
By: Falcon Holding Group, L.P.
General Partner
By: Falcon Holding Group, Inc., its
General Partner
Date: August 13, 1999 By: /s/ MICHAEL K. MENEREY
---------------------------------
Michael K. Menerey, Executive
Vice President, Secretary and
Chief Financial Officer
FALCON FUNDING CORPORATION
Date: August 13, 1999 By: /s/ MICHAEL K. MENEREY
---------------------------------
Michael K. Menerey, Chief
Financial Officer and Secretary
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
10.37 First Amendment to Purchase and Contribution Agreement dated
as of June 22, 1999 by and among Charter Communications, Inc.,
Charter Communications Holding Company, LLC, Falcon
Communications, L.P., Falcon Holding Group, L.P., TCI Falcon
Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc.,
and DHN Inc.
10.38 Consent under Credit Agreement among Falcon Cable
Communications, LLC, certain of its subsidiaries, BankBoston,
N.A. and a group of lenders for which it is acting as
documentation agent.
E-1