<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
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Commission file number 0-18266
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Falcon Classic Cable Income Properties, L.P.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 95-4200409
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(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 CLASSIC CABLE INCOME PROPERTIES, L.P.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1995* 1996
------------------- ---------------
(unaudited)
(Dollars in thousands)
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 6,137 $ 6,620
Receivables, less allowance of $40,000
and $33,000 for possible losses 657 539
Prepaid expenses and other 713 696
Cable materials, equipment and supplies 740 659
Property, plant and equipment, less
accumulated depreciation and amortization
of $15,357,000 and $16,366,000 31,986 31,517
Franchise cost and goodwill, less accumulated
amortization of $12,358,000 and $13,048,000 20,056 19,376
Customer lists and other intangible
costs, less accumulated amortization
of $5,928,000 and $6,181,000 2,670 2,363
------- -------
$62,959 $61,770
======= =======
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Note payable $27,000 $27,000
Accounts payable 499 348
Accrued expenses 3,062 2,451
Payable to general partner 1,401 1,467
Customer deposits and prepayments 149 163
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TOTAL LIABILITIES 32,111 31,429
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COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
General partner 401 396
Limited partners 30,669 30,167
Notes receivable from general partner (222) (222)
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TOTAL PARTNERS' EQUITY 30,848 30,341
------- -------
$62,959 $61,770
======= =======
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements
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<PAGE> 3
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
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 $ 4,432 $ 4,706
------- ------
OPERATING EXPENSES:
Service costs 1,550 1,550
General and administrative expenses 608 633
Management fees and
reimbursed expenses 355 376
Depreciation and amortization 2,102 2,114
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4,615 4,673
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OPERATING INCOME (LOSS) (183) 33
INTEREST EXPENSE, NET (495) (540)
------- ------
NET LOSS $ (678) $ (507)
======= ======
NET LOSS PER LIMITED PARTNERSHIP UNIT $(9.34) $ (6.99)
======= ======
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 71,879 71,879
======= ======
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE> 4
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
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 $1,382 $1,148
------ ------
Cash flows from investing activities:
Capital expenditures (426) (651)
Other intangibles (22) (14)
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Net cash used in investing activities (448) (665)
------ ------
Cash flows from financing activities:
Repayment of borrowings (492) -
------ ------
Net cash used in financing activities (492) -
------ ------
Increase in cash and cash equivalents 442 483
Cash and cash equivalents at
beginning of period 1,031 6,137
------ ------
Cash and cash equivalents at
end of period $1,473 $6,620
====== ======
</TABLE>
See accompanying notes to condensed financial statements
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<PAGE> 5
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
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. 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.
It is suggested that these condensed interim financial statements be read in
conjunction with the audited financial statements and notes thereto included in
the Partnership's latest Annual Report on Form 10-K. 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 - NOTES RECEIVABLE
In accordance with the Partnership Agreement, the capital contribution
of the General Partner was contributed one-half in cash and one-half in General
Partner's notes. The notes are non-interest bearing and are payable on demand of
the holder.
NOTE 3 - EARNINGS PER EQUIVALENT UNIT
Earnings per equivalent 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 4 - RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
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<PAGE> 6
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
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.
RESULTS OF OPERATIONS
The Partnership's revenues increased from $4.4 million to $4.7 million,
or by 6.2%, for the three months ended March 31, 1996 compared to the
corresponding period for 1995. Of the $274,000 increase, approximately $201,000
was due to increases in regulated service rates implemented during April 1995,
$21,000 was due to increases in advertising sales, $11,000 was due to
commissions earned from the Home Shopping Network and $41,000 was due to
increases in other revenues. As of March 31, 1996, the Partnership had
approximately 47,980 homes subscribing to cable service and 21,394 premium
service units.
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<PAGE> 7
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
RESULT OF OPERATIONS (CONCLUDED)
Service costs remained relatively unchanged at $1.6 million for 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.
General and administrative expenses increased from $608,000 to
$633,000, or by 4.1%, for the three months ended March 31, 1996 compared to the
corresponding period of 1995. The $25,000 increase was primarily related to an
increase of $20,000 in costs associated with marketing activities.
General Partner management fees and reimbursed expenses remained
constant as a percent of revenue at 8.0%, and increased from $355,000 to
$376,000, for the three months ended March 31, 1996 compared to the
corresponding period of 1995. See "Liquidity and Capital Resources."
Depreciation and amortization expenses remained unchanged at $2.1
million, for the three months ended March 31, 1996 compared to the
corresponding period of 1995.
Operating income was $33,000 for the three months ended March 31, 1996
as compared to an operating loss of $183,000 for the corresponding period of
1995. The $216,000 increase in operating income was due primarily to increased
revenues partially offset by increases in costs associated with marketing
activities and General Partner management fees and reimbursed expenses.
Net interest expense, including the effects of interest rate hedging
agreements, increased from $495,000 to $540,000, or by 9.1%, for the three
months ended March 31, 1996 compared to the corresponding period of 1995. The
$45,000 increase was due primarily to increased outstanding bank debt. The
hedging agreements resulted in additional interest expense of $22,000 for the
period ended March 31, 1996 and resulted in a reduction in interest expense of
$2,000 for the period ended March 31, 1995.
Due to the factors described above, the Partnership's net loss
decreased from $678,000 to $507,000 during the three months ended March 31,
1996 compared to the corresponding period of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in cable systems, is to distribute to its partners all available cash
flow generated from operations and proceeds from the sale of cable systems, if
any, after providing for expenses, debt service and capital requirements
relating to possible improvement and upgrade of its cable systems. The
Partnership relies upon the availability of cash generated from operations and
possible borrowings to fund its ongoing capital requirements. In general, these
requirements involve expansion, improvement and upgrade of the Partnership's
existing cable television systems. The Partnership has encountered liquidity
difficulties due in part to the adverse effects of the 1992 Cable Act and new
competitive pressures resulting from both technological advances as well as from
the 1996 Telecom Act which will require that material amounts of capital be
invested in the Partnership's cable systems. As previously reported, in response
to the FCC's amended rate regulation rules, distributions to Unitholders were
discontinued subsequent to the April 15, 1994 payment in order to preserve cash
resources. The Partnership also suspended the majority of its rebuild and
upgrade capital expenditure programs that had been scheduled for 1994 and 1995
in order to preserve liquidity.
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<PAGE> 8
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Partnership's access to capital remains severely constrained
primarily due to the limitation on indebtedness imposed by the Partnership
Agreement. This limitation, which is discussed below, is at odds with the need
to increase leverage and to spend approximately $35 million to rebuild and
upgrade substantially all of the Partnership's systems and has caused the
Partnership to limit its 1996 rebuild and upgrade plans. Current plans are to
expend an aggregate of approximately $4.0 million in 1996 for all capital
expenditures, including approximately $1.6 million to upgrade a portion of one
system, which represents the minimum level of expenditures that management
believes are necessary, in the short term, to comply with franchise authority
and FCC technical requirements. As a result, 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 affect on the value of those systems compared to systems that
have been rebuilt to a higher technical standard.
On December 29, 1995, the Partnership borrowed $5.6 million under its
Bank Credit Agreement because the revolver portion of that credit was scheduled
to convert to a term loan on December 31, 1995. The Partnership's management
believes that the Partnership's anticipated cash flow from operations in 1996
will be sufficient to fund its capital expenditure plans (as adjusted) and to
repay required 1996 principal payments on its debt of $2.7 million.
As of March 31, 1996, the amount outstanding under the Partnership's
amended Bank Credit Agreement was $27.0 million. As discussed above, the
Partnership had no additional borrowings available to it. At March 31, 1996, the
Partnership's borrowings bore interest at an average rate of 8.5% (including the
effect of interest rate swap transactions). 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. Management believes that the Partnership was in compliance
with all such requirements as of March 31, 1996. The Bank Credit Agreement
requires principal repayments of $2.7 million in 1996, $4.1 million in 1997 and
$5.4 million in 1998. The Partnership made its first scheduled principal
repayment of $675,000 on April 1, 1996.
The Partnership Agreement 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 30% of the greater
of the aggregate cost or current fair market value of the Partnership's assets
as determined by the General Partner. As discussed above, in order to spend the
appropriate amount of capital to rebuild and upgrade the Partnership's systems,
this provision of the Partnership Agreement would need to be amended to
significantly increase the Partnership's leverage.
The Partnership's management agreement with the General Partner
requires deferral of the payment of up to 50% of the management fees, without
interest, unless adjusted operating cash (as defined) for such month exceeds a
10% annualized return calculated with respect to outstanding
-8-
<PAGE> 9
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
partnership Units. As a result, during the first three months of 1996, the
Partnership deferred payment of approximately $78,000 of management fees charged
by its General Partner. The Partnership anticipates deferring 50% of such fees
during 1996. Unless the Payback to the Unitholders is achieved, the Partnership
will not be required to pay the deferred fees to the General Partner. "Payback"
means, with respect to any limited partner, aggregate cash distributions to the
limited partner equal to such limited partner's capital contributions plus the
11% Preferred Return per year computed on such limited partner's Adjusted
Capital Contribution. The term "11% Preferred Return" means an 11% per annum
(cumulative but not compounded) cash return based on each limited partner's
Adjusted Capital Contribution and calculated with respect to any Units from the
date of the closing in which such Units were first issued by the Partnership.
The Partnership Agreement also limits borrowings incurred to make
distributions to partners to not more than 10% of Gross Proceeds from the public
offering of the Units (approximately $7.2 million). As of March 31, 1996, the
Partnership had incurred an aggregate of approximately $5.4 million in
borrowings to make distributions to partners. The Partnership discontinued
distributions subsequent to the April 15, 1994 payments.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Cash provided by operating activities decreased by $235,000 from $1.4
million to $1.1 million for the three months ended March 31, 1996 compared to
the corresponding period for 1995. The decrease resulted from an increase in the
net loss of $171,000, an increase of $18,000 in non-cash depreciation and
amortization and a decrease of $424,000 in other operating items (receivables,
prepaid assets, cable materials, equipment and supplies, payables, accrued
expenses and customer deposits and prepayments).
Cash used in investing activities increased by $217,000 during the
first three months of 1996 compared to the corresponding period for 1995,
primarily due to an increase in capital expenditures. Cash used by financing
activities decreased $492,000 because there was no repayment of debt during the
three months ended March 31, 1996.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 43.3% during the three months ended March
31, 1995 to 45.6% for the corresponding period in 1996. The increase was
primarily caused by increased revenues, as described above. EBITDA increased
from $1.9 million to $2.1 million, or by 11.9%, for the three months ended March
31, 1996 compared to the corresponding period in 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> 10
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
PART II. OTHER INFORMATION
ITEMS 1-5. Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during
the quarter for which this report is filed.
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<PAGE> 11
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 CLASSIC CABLE INCOME PROPERTIES, L. P.
a CALIFORNIA LIMITED PARTNERSHIP
---------------------------------
(Registrant)
By: Falcon Classic Cable Investors, L.P.
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> 6,620
<SECURITIES> 0
<RECEIVABLES> 572
<ALLOWANCES> 33
<INVENTORY> 659
<CURRENT-ASSETS> 0
<PP&E> 47,883
<DEPRECIATION> 16,366
<TOTAL-ASSETS> 61,770
<CURRENT-LIABILITIES> 4,429
<BONDS> 27,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 61,770
<SALES> 0
<TOTAL-REVENUES> 4,706
<CGS> 0
<TOTAL-COSTS> 4,673
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 52
<INTEREST-EXPENSE> 540
<INCOME-PRETAX> (507)
<INCOME-TAX> 0
<INCOME-CONTINUING> (507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507)
<EPS-PRIMARY> (6.99)
<EPS-DILUTED> 0
</TABLE>
