<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
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, 1997
----------------------------
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 0-18266
----------------
Falcon Classic Cable Income Properties, L.P.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
California 95-4200409
- ------------------------------------------ -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 90024
- ------------------------------------------ -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
---------------------------
- ------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
CONDENSED BALANCE SHEETS
============================================
<TABLE>
<CAPTION>
December 31, March 31,
1996* 1997
----------- ---------
(Unaudited)
(Dollars in Thousands)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 7,126 $ 6,643
Receivables, less allowance of $31,000 and
$39,000 for possible losses 660 572
Prepaid expenses and other assets 1,516 1,237
Property, plant and equipment, less accumulated
depreciation and amortization of $19,128,000 and $20,068,000 30,655 30,528
Franchise cost and goodwill, less accumulated
amortization of $15,029,000 and $15,697,000 17,409 16,749
Customer lists and other intangible costs, less
accumulated amortization of $2,684,000 and $2,790,000 1,968 1,904
-------- --------
$ 59,334 $ 57,633
======== ========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
LIABILITIES:
Notes payable $ 24,300 $ 23,288
Accounts payable 542 219
Accrued expenses 2,509 2,371
Payable to general partner 1,006 440
Customer deposits and prepayments 144 159
-------- --------
TOTAL LIABILITIES 28,501 26,477
-------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
General partner 401 404
Limited partners 30,654 30,974
Notes receivable from general partner (222) (222)
-------- --------
TOTAL PARTNERS' EQUITY 30,833 31,156
-------- --------
$ 59,334 $ 57,633
======== ========
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements.
2
<PAGE> 3
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
CONDENSED STATEMENTS OF OPERATIONS
============================================
<TABLE>
<CAPTION>
Unaudited
------------------------
Three months ended
March 31,
------------------------
1996 1997
-------- --------
(Dollars in thousands
except per unit information)
<S> <C> <C>
REVENUES $ 4,706 $ 5,250
-------- --------
EXPENSES:
Service costs 1,550 1,623
General and administrative expenses 633 729
Management fees and reimbursed expenses 376 420
Depreciation and amortization 2,114 1,746
-------- --------
Total Expenses 4,673 4,518
-------- --------
Operating income 33 732
INTEREST EXPENSE, NET (540) (410)
-------- --------
NET (LOSS) INCOME $ (507) $ 322
======== ========
NET (LOSS) INCOME PER LIMITED
PARTNERSHIP UNIT $ (6.99) $ 4.44
======== ========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 71,879 71,879
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
STATEMENTS OF CASH FLOWS
============================================
<TABLE>
<CAPTION>
Unaudited
---------------------
Three months ended
March 31,
---------------------
1996 1997
------- -------
(Dollars in Thousands)
<S> <C> <C>
Net cash provided by operating activities $ 1,148 $ 1,425
------- -------
Cash flows from investing activities:
Capital expenditures (651) (845)
Increase in intangible assets (14) (50)
------- -------
Net cash used in investing activities (665) (895)
------- -------
Cash flows from financing activities:
Repayment of borrowings - (1,013)
------- -------
Increase (decrease) in cash and cash equivalents 483 (483)
Cash and cash equivalents at beginning of period 6,137 7,126
------- -------
Cash and cash equivalents at end of period $ 6,620 $ 6,643
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
4
<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, 1997 and 1996 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, 1997 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 1996 amounts have been reclassified to conform to the 1997
presentation.
5
<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. 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 1996 Telecom Act. There can be no
assurance as to what, if any, further action may be taken by the FCC, Congress
or any other regulatory authority or court, or the effect thereof on the
Partnership's business. Accordingly, the Partnership's historical financial
results as described below are not necessarily indicative of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs, the possible sale of assets by the Partnership and
general business conditions applicable to the Partnership. Such forward looking
statements involve risks and uncertainties including, without limitation, the
uncertainty of legislative and regulatory changes and the rapid developments in
the competitive environment facing cable television operators such as the
Partnership, as discussed more fully elsewhere in this Report. 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, 1996 and its Current
Report on Form 8-K dated February 6, 1997 for additional information regarding
such matters and the effect thereof on the Partnership's business.
RECENT DEVELOPMENTS
Pursuant to the terms of the "Appraisal Process" provided for in the
Partnership Agreement, the Partnership may, in the sole discretion of the
General Partner, sell individual cable systems and may also sell all or
substantially all of the Partnership's assets to the General Partner or its
affiliates. Any such sale must be made in cash at the median of appraisals
undertaken by three nationally recognized experts in the cable television field.
As previously reported, the Partnership commenced the "Appraisal Process" in
August 1996 and received the results of the related appraisals in February 1997.
The full text of these appraisals has previously been filed with the Securities
and Exchange Commission. As of the date of this Report, the General Partner has
not made a decision as to whether or not it will further pursue the acquisition
of any Partnership assets at this time. Accordingly, there can be no assurance
that any such sale of any or all of the Partnership's assets in accordance with
the rights of the General Partner and its affiliates under the terms of the
Partnership Agreement will be pursued, or if pursued, when and if any such
transaction will be consummated. These matters are discussed more fully in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1996
and its Current Reports on Form 8-K dated August 27, 1996, October 17, 1996 and
February 6, 1997. Unitholders are urged to review the referenced materials
carefully.
6
<PAGE> 7
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
RESULTS OF OPERATIONS
The Partnership's revenues increased from $4.7 million to $5.3 million,
or by 11.6% for the three months ended March 31, 1997 as compared to the
corresponding period in 1996. Of the $544,000 increase, approximately $461,000
was due to increases in regulated service rates implemented during 1996,
$100,000 was due to the restructuring of The Disney Channel from a premium
channel to a tier channel on July 1, 1996, $55,000 was due to programmer
incentives and $51,000 was due to increases in advertising sales. These
increases were partially offset by revenue decreases of $123,000, primarily due
to reductions in the number of subscriptions for premium cable services. As of
March 31, 1997, the Partnership had approximately 47,880 homes subscribing to
cable service and 16,592 premium service units. The decrease of 4,802 premium
units from March 31, 1996 was due in part to approximately 2,950 Disney premium
units that became tier subscriptions under the restructuring discussed above.
Service costs remained relatively unchanged at approximately $1.6
million for the three months ended March 31, 1997 as compared to the
corresponding period in 1996. Service costs represent costs directly
attributable to providing cable services to customers. The $73,000 increase was
primarily due to an increase of $155,000 in programming fees charged by program
suppliers (including primary satellite fees), which included a $34,000 increase
related to the restructuring of The Disney Channel discussed above and an
increase of $39,000 in franchise fees. The increases in service costs discussed
above were partially offset by a $119,000 increase in capitalized labor,
primarily due to upgrading the existing cable television system in Maryland.
General and administrative expenses increased from $633,000 to
$729,000, or by 15.2%, for the three months ended March 31, 1997 as compared to
the corresponding period in 1996. Of the $96,000 increase, $46,000 was due to
increases in insurance cost, $10,000 was due to increases in compliance costs
associated with re-regulation by the FCC, $10,000 was due to increases in costs
associated with marketing activities and $30,000 was due to increases in other
expenses.
General Partner management fees and reimbursed expenses remained
constant as a percent of revenue at 8.0%, and increased from $376,000 to
$420,000 for the three months ended March 31, 1997 as compared to the
corresponding period in 1996.
Depreciation and amortization expenses decreased from $2.1 million to
$1.7 million, or by 17.4%, for the three months ended March 31, 1997 as compared
to the corresponding period in 1996. The $368,000 decrease was due primarily to
certain assets becoming fully amortized in 1996.
Operating income increased from $33,000 to $732,000 for the three
months ended March 31, 1997 as compared to the corresponding period in 1996. The
$699,000 increase in operating income was due primarily to increased revenues
and decreases in depreciation and amortization expense as discussed above.
Net interest expense, including the effects of interest rate hedging
agreements, decreased from $540,000 to $410,000, or by 24.1%, for the three
months ended March 31, 1997 as compared to the corresponding period in 1996. The
$130,000 decrease was due primarily to lower average debt balances and
7
<PAGE> 8
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
RESULTS OF OPERATIONS (CONCLUDED)
lower interest rates. The hedging agreements resulted in higher interest expense
of $29,000 and $22,000 for the three months ended March 31, 1997 and 1996,
respectively.
Due to the factors described above, the Partnership's net loss of
$507,000 for the three months ended March 31, 1996 changed to net income of
$322,000 for the three months ended March 31, 1997.
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 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 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 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 delayed the majority of its rebuild and upgrade capital
expenditure programs that had been scheduled for 1994, 1995, 1996 and 1997 in
order to preserve liquidity.
The Partnership's access to capital remains severely constrained
primarily due to the limitations imposed by the Partnership Agreement. This
limitation on indebtedness, which is discussed below, is at odds with the need
to increase leverage and to spend approximately $44 million to rebuild and
upgrade the Partnership's systems (of which approximately $650,000 is mandated
by franchise agreements) and has caused the Partnership to limit its 1997
rebuild and upgrade plans. Current plans are to expend an aggregate of
approximately $5 million in 1997 for all capital expenditures, including
approximately $1.0 million in upgrades to a portion of one system and $300,000
to upgrade portions of two other systems, which represents the minimum level of
expenditures that management believes are necessary, in the short term, to
comply with franchise authorities and FCC technical requirements. As a result,
the Partnership's systems are 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. Further, it should be noted that the approximate capital expenditure
amounts discussed above are current estimates only and are subject not only to
the normal uncertainties of construction projects but also to any changes in
materials requirements or design characteristics due to future developments in
the underlying technologies.
8
<PAGE> 9
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On December 29, 1995, the Partnership borrowed $5.6 million under its
Bank Credit Agreement because the revolving credit portion of that facility was
scheduled to convert to a term loan on December 31, 1995. The Partnership's
management believes that the Partnership's anticipated cash resources and cash
flow from operations in 1997 will be sufficient to fund its capital expenditure
plans (as adjusted) and the required principal payments on its debt of $4.1
million scheduled for 1997.
As of March 31, 1997, the amount outstanding under the Partnership's
amended Bank Credit Agreement was $23.3 million. As discussed above, the
Partnership had no additional borrowings available to it. At March 31, 1997,
such borrowings bore interest at an average rate of 7.8% (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, 1997. The Bank Credit Agreement requires
principal repayments of $1.0 million on June 30, 1997, September 30, 1997 and
December 31, 1997 and $5.4 million in 1998. The Partnership made its scheduled
principal repayment of $1.0 million on March 31, 1997.
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 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 because the Partnership's management does not believe
that it will be able to fund future rebuild requirements entirely from cash
resources and operating cash flow.
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 Partnership Units.
To the extent that Adjusted Operating Cash exceeds such amount, the General
Partner may recover previously deferred fees, without interest. In compliance
with these provisions, the General Partner received its standard management fee
for the three months ended March 31, 1997 and recovered $276,000 in previously
deferred management fees.
The Partnership Agreement also limits borrowings incurred to make
distributions to partners to not more than 10% of Gross Proceeds (as defined)
from the public offering of the Units (approximately $7.2 million). As of March
31, 1997, 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.
9
<PAGE> 10
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONCLUDED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Cash provided by operating activities increased from $1.1 million to
$1.4 million, or by $277,000, for the three months ended March 31, 1997 as
compared to the corresponding period in 1996. The increase resulted from an
increase in net income of $830,000, $368,000 of which resulted from a decrease
in non-cash depreciation and amortization; and from a decrease of $185,000 in
other operating items (receivables, prepaid expenses and other assets, cable
materials, equipment and supplies, payables, accrued expenses and customer
deposits and prepayments), which includes the $276,000 decrease in deferred
management fees discussed above.
Cash used in investing activities increased by $230,000 in the three
months ended March 31, 1997 as compared to the corresponding period in 1996,
primarily due to an increase in capital expenditures. Cash used by financing
activities increased by $1.0 million because of the repayment of debt of $1.0
million on March 31, 1997.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 45.6% to 47.2% in the three months ended
March 31, 1997 as compared to the corresponding period in 1996. The increase was
primarily caused by increased revenues, as described above. EBITDA increased
from $2.1 million to $2.5 million, or by 15.4%, in the three months ended March
31, 1997 as compared to the corresponding period in 1996.
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.
10
<PAGE> 11
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 February 6,
1997, in which it reported under Item 5 that the
General Partner received summaries of the results of
the appraisals from the three independent appraisers.
The full text of these appraisals has been filed as
Exhibits 10.30 through 10.32 to the Company's Form
10-K for the year ended December 31, 1996.
The Registrant filed a Form 8-K dated February 13,
1997, in which it reported under Item 5 that the
General Partner had mailed a letter to all limited
partners making them aware that an unsolicited offer
by Everest Cable Investors, LLC to buy partnership
units was, in the opinion of the General Partner,
inadequate and advising unitholders of the
recommendation of the General Partner that they not
accept the offer. The letter also advised
unitholders, among other things, that the offer was
made without the consent or involvement of the
General Partner.
<PAGE> 12
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 6, 1997 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, 1997, AND THE STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,643
<SECURITIES> 0
<RECEIVABLES> 611
<ALLOWANCES> 39
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 50,596
<DEPRECIATION> 20,068
<TOTAL-ASSETS> 57,633
<CURRENT-LIABILITIES> 3,189
<BONDS> 23,288
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 57,633
<SALES> 0
<TOTAL-REVENUES> 5,250
<CGS> 0
<TOTAL-COSTS> 4,518
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 56
<INTEREST-EXPENSE> 410
<INCOME-PRETAX> 322
<INCOME-TAX> 0
<INCOME-CONTINUING> 322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 322
<EPS-PRIMARY> 4.44
<EPS-DILUTED> 0
</TABLE>
