<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
\x\ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
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OR
\ \ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission file number 1-9332
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FALCON CABLE SYSTEMS COMPANY, A CALIFORNIA LIMITED PARTNERSHIP
- ------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 95-4108170
- --------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10900 Wilshire Boulevard, 15th Floor, Los Angeles, CA 90024
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 824-9990
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FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [checkmark] No
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<PAGE> 2
PART I - FINANCIAL INFORMATION
FALCON CABLE SYSTEMS COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1995* 1996
------------ ---------
(unaudited)
(Dollars in Thousands)
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,018 $ 1,479
Receivables, less allowance of $175,700
and $71,900 for possible losses 1,363 1,089
Prepaid expenses and other 1,835 1,786
Cable materials, equipment and supplies 1,418 1,123
Property, plant and equipment, less accumulated depreciation
and amortization of $68,222,000 and $70,243,000 69,646 70,045
Franchise cost and goodwill, less
accumulated amortization of
$34,346,000 and $35,594,000 31,286 30,052
Customer lists and other intangible
costs, less accumulated amortization
of $1,862,000 and $2,219,000 2,299 1,958
---------- --------
$ 109,865 $107,532
========== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable $ 171,870 $171,749
Accounts payable 1,694 1,181
Accrued expenses 10,905 8,049
Payable to general partner 4,621 5,332
Customer deposits and prepayments 632 671
---------- --------
TOTAL LIABILITIES 189,722 186,982
---------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' DEFICIT:
General partner (22) (18)
Limited partners (79,835) (79,432)
---------- --------
TOTAL PARTNERS' DEFICIT (79,857) (79,450)
---------- --------
$ 109,865 $107,532
========== ========
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements
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<PAGE> 3
FALCON CABLE SYSTEMS COMPANY
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
------------------------------------
Three months ended
March 31,
------------------------------------
1995 1996
------------ ----------
(Dollars in thousands except
per unit information)
<S> <C> <C>
REVENUES $ 12,970 $ 13,478
--------- ----------
OPERATING EXPENSES:
Service costs 4,026 3,670
General and administrative expenses 1,748 1,922
General Partner management fees
and reimbursed expenses 1,128 1,180
Depreciation and amortization 4,524 3,643
--------- ----------
11,426 10,415
--------- ----------
Operating income 1,544 3,063
INTEREST EXPENSE, NET (4,081) (4,136)
OTHER INCOME, NET 7,502 1,480
--------- ----------
NET INCOME $ 4,965 $ 407
========= ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 0.77 $ .06
========= ==========
AVERAGE LIMITED
PARTNERSHIP UNITS
OUTSTANDING DURING PERIOD 6,398,913 6,398,913
========= ==========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE> 4
FALCON CABLE SYSTEMS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
-----------------------------------
Three months ended
March 31,
-----------------------------------
1995 1996
--------------- ------------
(Dollars in Thousands)
<S> <C> <C>
Net cash provided by operating activities $ 2,879 $ 2,305
-------- -------
Cash flow from investing activities:
Capital expenditures (2,270) (2,694)
Other intangibles (91) (29)
Sale of available-for-sale securities 7,764 -
-------- -------
Net cash provided (used) in investing activities 5,403 (2,723)
-------- -------
Cash flow from financing activities:
Repayment of debt (8,786) (121)
Borrowings 308 -
Distributions to partners (2,495) -
-------- -------
Net cash used by financing activities (10,973) (121)
-------- -------
Decrease in cash (2,691) (539)
Cash at beginning of period 2,987 2,018
-------- -------
Cash at end of period $ 296 $ 1,479
======== =======
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE> 5
FALCON CABLE SYSTEMS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The interim condensed financial statements for the three months ended
March 31, 1996 and 1995 are unaudited. These condensed interim financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Partnership's latest Annual Report on Form
10-K. In the opinion of management, such statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of such periods. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the results
for the entire year.
NOTE 2 - EARNINGS PER EQUIVALENT UNIT
Earnings per limited partnership unit are based on the average number
of limited partnership units outstanding during the periods presented. For this
purpose, earnings are allocated 99% to the limited partners and 1% to the
General Partner.
NOTE 3 - LITIGATION
On April 4, 1996, the Partnership and certain of its affiliates and
their officers were served with a complaint entitled Frank O' Shea v. Waller
Capital Corp., et. al. alleging that the appraisal process undertaken in
connection with the Proposed Exchange transaction previously disclosed was
flawed and that as a result of the announcement of the results of the appraisal
process, Mr. O' Shea was damaged by a reduction in the trading price of the
units. The complaints seek class action status for a class consisting of all
persons and entities who held units of the Partnership as of April 1, 1996 and
unspecified damages for such partners. The Partnership believes that the suit is
without merit and is evaluating its response to it.
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<PAGE> 6
FALCON CABLE SYSTEMS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 (the "1996 Telecom Act"). This statute
substantially changed the competitive and regulatory environment for
telecommunications providers by significantly amending the Communications Act of
1934, including certain of the rate regulation provisions previously imposed by
the Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act"). Compliance with those rate regulations has had a negative impact on
the Partnership's revenues and cash flow. However, the Partnership believes that
recent policy decisions by the Federal Communications Commission (the "FCC")
will permit it to increase regulated service rates in the future in response to
specified historical and anticipated future cost increases, although certain
costs may continue to rise at a rate in excess of that which the Partnership
will be permitted to pass on to its customers. The 1996 Telecom Act provides
that certain of the rate regulations will be phased-out altogether in 1999.
Further, the regulatory environment will continue to change pending, among other
things, the outcome of legal challenges and FCC rulemaking and enforcement
activity in respect of the 1992 Cable Act and the completion of a significant
number of FCC rulemakings under the 1996 Telecom Act. There can be no assurance
as to what, if any, future 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 historic interim financial results as
described below are not necessarily indicative of future performance.
In addition to the information set forth in this report, reference is
made to the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1995 for additional information regarding regulatory matters and
the effect thereof on the Partnership's business.
<TABLE>
<CAPTION>
March 31,
-------------------------
1995 1996
---- ----
<S> <C> <C>
Revenues 100% 100%
--- ---
Cost of services and expenses:
Service costs 31 27
Operating, general and
administrative expenses 13 14
General Partner management fees
and reimbursed expenses 9 9
Depreciation and amortization 35 27
--- ---
88 77
--- ---
Operating income 12 23
Interest expense, net (32) (31)
Other income (expense) 58 11
--- ---
Net income 38 % 3%
=== ===
</TABLE>
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<PAGE> 7
FALCON CABLE SYSTEMS COMPANY
RESULTS OF OPERATIONS
The Partnership's revenues increased from $13.0 million to $13.5
million, or by 3.9%, during the three months ended March 31, 1996 compared to
the corresponding period in 1995. Of the $507,000 net increase in revenues,
approximately $260,000 was due to increases in regulated service rates
implemented in April 1995, $131,000 related to increases in the number of
subscriptions for services and $116,000 related to other revenue producing
items. As of March 31, 1996, the Partnership had approximately 135,500 homes
subscribing to cable service and 50,300 premium service units.
Service costs decreased from $4.0 million to $3.7 million, or by 8.9%,
during the three months ended March 31, 1996 compared to the corresponding
period for 1995. Service costs represent costs directly attributable to
providing cable services to customers. Of the $357,000 decrease in service
costs, $499,000 related to decreased property taxes related to refunds of prior
year assessments in one of the California counties. This decrease was offset by
increases of approximately $100,000 in personnel costs and $87,000 in other
service costs. Personnel costs increased primarily due to cost of living
increases.
General and administrative expenses increased from $1.7 million to $1.9
million, or by 10.0%, during the three months ended March 31, 1996 compared to
the corresponding period in 1995. Of the $174,000 increase, $76,000 related to
increased marketing costs, $50,000 related to increased personnel costs due to
cost of living increases, $31,000 related to increased insurance costs and
$22,000 related to increases in customer billing and postage costs.
General partner management fees and reimbursed expenses increased from
$1.1 million to $1.2 million, or by 4.6%, during the three months ended March
31, 1996 compared to the corresponding period for 1995. Of the $52,000
increase, $27,000 related to increases in reimbursable operating expenses of
the general partner and $25,000 related to increases in management fees based
on the Partnership's revenue. See "Liquidity and Capital Resources."
Depreciation and amortization expense decreased from $4.5 million to
$3.6 million, or by 19.5%, during the three months ended March 31, 1996 compared
to the corresponding period in 1995. The $881,000 decrease related primarily to
certain tangible and intangible assets becoming fully amortized.
Operating income increased from $1.5 million to $3.1 million, or by
98.3%, during the three months ended March 31, 1996 compared to the
corresponding period in 1995. The $1.5 million increase was due primarily to
increased revenues of $507,000, and decreases of $881,000 in depreciation and
amortization expense and $174,000 in service costs. These changes were
partially offset by increases of $174,000 in general and administrative costs
and $52,000 in general partner management fees and reimbursed expenses.
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<PAGE> 8
FALCON CABLE SYSTEMS COMPANY
RESULTS OF OPERATIONS (CONCLUDED)
Interest expense net, including the effects of interest rate hedging
agreements, remained approximately the same at $4.1 million during the three
months ended March 31, 1996 compared to the corresponding period for 1995.
Lower average interest rates (9.0% during 1996 compared to 9.6% during 1995)
resulted in lower interest expense of approximately $258,000. Higher average
borrowings during 1996 compared to 1995 resulted in an increase of $130,000. An
increase of approximately $128,000 primarily relates to amortization of
deferred loan costs related to rate caps and bank credit amendment fees. The
hedging agreements resulted in additional interest expense of $142,000 during
the three months ended March 31, 1996 compared to additional interest expense
of $241,000 during the three months ended March 31, 1995.
Other income, net of expense, decreased approximately $6.0 million
during the three months ended March 31, 1996 compared to the corresponding
period for 1995. Of the $6.0 million decrease, $7.6 million ($1.17 per limited
partnership unit) was due to a non-recurring 1995 gain from the sale of
marketable securities. This was partially offset by non-cash earnings of $1.6
million recognized in the three months ended March 31, 1996 as required by
generally accepted accounting principles to record the fair value of interest
rate swap contracts maturing beyond the Partnership's expiration date of
December 31, 1996.
Due to the factors described above, the Partnership's net income
decreased from $5.0 million during the three months ended March 31, 1995 to
$407,000 for the three months ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary need for capital has been to finance plant
extensions, rebuilds and upgrades and to add addressable converters to certain
cable systems. The Partnership spent $14.9 million during 1995 on
non-acquisition capital expenditures. The Partnership had planned to spend
approximately $19 million during 1994 for upgrades of certain of its regions,
line extensions and new equipment. The Partnership postponed a number of rebuild
and upgrade projects that were planned for 1993 and 1994 because of the
uncertainty related to implementation of the 1992 Cable Act and the impact
thereof on the Partnership's business and access to capital. The Partnership's
access to capital remains severely restrained due not only to the adverse effect
of re-regulation but also because of the limited remaining life of the
Partnership. As a result, even after giving effect to certain upgrades and
rebuilds expected to be completed in early 1996, the Partnership's systems will
be significantly less technically advanced than had been expected prior to the
implementation of re-regulation. The Partnership believes that the delays in
upgrading many of its systems will, under present market conditions, most likely
have an adverse effect on the value of those systems compared to systems that
have been rebuilt to a higher technical standard.
The Partnership's management currently intends to spend approximately
$6.9 million in 1996 for capital expenditures, including $1.8 million to extend
its plant to new service areas and $1.9 million to complete rebuild and upgrade
projects that were started in 1995. These amounts assume the Partnership
operates for the full twelve months of 1996. However, the Partnership's ability
to fund these capital expenditures will continue to be dependent on it's ability
to remain in compliance with the financial covenants contained in the amended
Bank Credit Agreement, of which there can be no assurance.
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<PAGE> 9
FALCON CABLE SYSTEMS COMPANY
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At March 31, 1996, the amount outstanding under the Bank Credit
Agreement was $165 million, and such borrowings bore interest at an average rate
of 8.3% (including the effect of interest rate hedging transactions). The
amended Bank Credit Agreement has fixed the pricing at 1.375% over prime or
2.375% over LIBOR, or 2.5% over the CD rate. The amended agreement also provides
that if no transaction to dissolve the Partnership is approved as of April 1,
1996, (and no transaction was approved), the interest rates outlined above will
increase by 0.25%; and further provides that if no such transaction is approved
by July 1, 1996, the interest rates will be increased an additional 0.25%. The
Partnership has entered into interest rate hedging agreements aggregating a net
notional amount at March 31, 1996 of $235 million, $165 million of which are in
effect at March 31, 1996. The remaining $70 million of contracts are scheduled
to become effective as certain of the existing contracts mature during 1996 and
1997. The agreements serve as a hedge against interest rate fluctuations
associated with the Partnership's variable rate debt. These agreements expire
through July 19, 1999, which is beyond the scheduled termination date of the
Partnership. GAAP accounting requires treating the majority of the contracts
that expire after December 31, 1996 as speculative derivative financial
investments recorded at fair value rather than hedges. (See discussion above in
"Results of Operations"). These contracts are assignable to other affiliated
entities managed by FHGLP.
The Bank Credit Agreement also places certain restrictions on the
annual amount of management fees and reimbursed partnership expenses that the
Partnership may pay in cash, with any excess deferred. During the three months
ended March 31, 1996, the Partnership deferred additional payments of
approximately $1.2 million of fees and reimbursed expenses charged by its
General Partner in order to maintain compliance with certain cash flow
covenants. Total management fees and reimbursed expenses deferred as of March
31, 1996 amounted to approximately $5.3 million. The Partnership will continue
to defer a portion of such fees and expenses during 1996, and will be obligated
to pay these cumulatively deferred management fees and reimbursed expenses at
the point in time the restrictions imposed by the Bank Credit Agreement are
removed, which will coincide with the termination of the Partnership.
The Bank Credit Agreement also contains various restrictions relating
to, among other things, mergers and acquisitions, investments, capital
expenditures, a change in control and the incurrence of additional indebtedness,
and also requires compliance with certain financial covenants. The Partnership
believes that it was in compliance with all such requirements as of March 31,
1996.
The Partnership entered into an agreement as part of the consideration
paid for the cable systems acquired in Oregon in February 1994. Under the terms
of the agreement, the Partnership is required to make seven annual installments
of $85,715 on March 1st. The discounted present value of the annual installments
is $355,000 at March 31, 1996.
The Partnership issued a $3,000,000 installment note as part of the
consideration paid for three cable television systems acquired in 1990. The note
bore interest at 15 percent until April 1, 1995 at which time the rate increased
to 20 percent. The note is payable, with accrued interest, in January 1997. The
principal amount of the note is increased each August 1st to reflect accrued but
unpaid interest for the prior twelve months. At March 31, 1996, the outstanding
amount of the note was $6.2 million.
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<PAGE> 10
FALCON CABLE SYSTEMS COMPANY
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Partnership Agreement, as amended on January 23, 1990, provides
that without the approval of a majority of interests of limited partners, the
Partnership may not incur any borrowings unless the amount of such borrowings
together with all outstanding borrowings (less cash and cash equivalents) does
not exceed 65% of the greater of the aggregate cost or current fair market value
of the Partnership's assets as determined by the General Partner. The
Partnership may encounter difficulty complying with this provision depending
upon the ultimate impact of the 1992 Cable Act and the 1996 Telecom Act on the
fair market value of cable properties. In addition, as disclosed in the
Partnership's Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 12, 1996, the Partnership has obtained certain appraisals of
the Partnership's cable systems for purposes of a possible sale of the cable
systems to the General Partner in accordance with the terms of the Partnership
Agreement. Based on these appraisals, as of December 31, 1995, the "appraised
value" (as defined in the Partnership Agreement) of all of the cable systems
owned by the Partnership is $247.4 million. If it were to be assumed that the
current fair market value of the Partnership's assets as determined by the
General Partner is not in excess of the "appraised value" as so determined, the
Partnership would not be permitted to incur any additional borrowings. If the
Partnership should be unable to incur additional borrowings because of the
limitation in the Partnership Agreement, the Partnership's liquidity and
operations could be adversely effected.
The Partnership Agreement provides that the General Partner shall use
its best efforts to cause the Partnership to sell all of the Partnership's cable
systems between December 31, 1991 and December 31, 1996, the "termination date"
of the Partnership. See Item 13 - "Certain Relationships and Related
Transactions" in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1995. As discussed in Note 3 to Condensed Financial Statements, the
Partnership has been sued by a unitholder requesting class action status. At
this time, the Partnership is unable to predict the ultimate outcome of this
lawsuit.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Cash provided by operating activities decreased from $2.9 million to
$2.3 million for the three months ended March 31, 1996 compared to the
corresponding period of 1995. Of the $573,500 decrease, approximately $513,000
related to a decrease in accounts payable.
Cash from investing activities decreased from cash provided of $5.4
million for the three months ended March 31, 1995 to a use of cash of $2.7
million for the three months ended March 31, 1996, or a change of $8.1 million.
The decrease was due primarily to approximately $7.8 million of net proceeds
received by the Partnership in February 1995 upon the sale of marketable
securities and an increase of approximately $424,000 in capital expenditures
primarily related to system rebuilds. Cash used by financing activities
decreased by approximately $10.9 million during the three months ended March 31,
1996 compared to the corresponding period for 1995 and was due to a decrease in
repayment of debt of approximately $8.4 million and a decrease of $2.5 million
in distributions to Partners.
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<PAGE> 11
FALCON CABLE SYSTEMS COMPANY
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 46.8% to 49.8% during the three months
ended March 31, 1996 compared to the corresponding period for 1995. The increase
was primarily caused by an increase in revenues and a decrease in service costs.
EBITDA increased from $6.1 million to $6.7 million, or by 10.5%, for the three
months ended March 31, 1996 compared to the corresponding period for 1995.
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.
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<PAGE> 12
FALCON CABLE SYSTEMS COMPANY
PART II. OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
ITEM 6. Exhibits and Reports on Form 8-K
(a) None
(b) The Registrant filed a form 8-K
dated April 4, 1996 reporting other
events.
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<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALCON CABLE SYSTEMS COMPANY
a CALIFORNIA LIMITED PARTNERSHIP
--------------------------------
(Registrant)
By: Falcon Cable Investors Group
Managing General Partner
By: Falcon Holding Group, L.P.
General Partner
By: Falcon Holding Group, Inc.
General Partner
Date: May 9, 1996 By: /s/ Michael K. Menerey
--------------------------------
Michael K. Menerey, Secretary
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT MARCH 31, 1996, AND THE STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,479
<SECURITIES> 0
<RECEIVABLES> 1,161
<ALLOWANCES> 72
<INVENTORY> 1,123
<CURRENT-ASSETS> 0
<PP&E> 140,288
<DEPRECIATION> 70,243
<TOTAL-ASSETS> 107,532
<CURRENT-LIABILITIES> 15,233
<BONDS> 171,749
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 107,532
<SALES> 0
<TOTAL-REVENUES> 13,478
<CGS> 0
<TOTAL-COSTS> 10,415
<OTHER-EXPENSES> (1,480)
<LOSS-PROVISION> 156
<INTEREST-EXPENSE> 4,136
<INCOME-PRETAX> 407
<INCOME-TAX> 0
<INCOME-CONTINUING> 407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407
<EPS-PRIMARY> 0.6
<EPS-DILUTED> 0
</TABLE>
