<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, 1998
----------------------
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
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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
incorporation or organization) Identification Number)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 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 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
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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,
1997* 1998
--------------- ---------------
(Unaudited)
(Dollars in Thousands)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 620 $ 2,508
Receivables, less allowance of $42,000 and
$46,000 for possible losses 773 1,132
Prepaid expenses and other assets 1,065 494
Property, plant and equipment, less accumulated
depreciation and amortization of $22,419,000 and $776,000 30,563 820
Franchise cost and goodwill, less accumulated
amortization of $17,712,000 14,783 --
Customer lists and other intangible costs, less
accumulated amortization of $2,018,000 1,630 --
-------- -------
$ 49,434 $ 4,954
======== =======
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
LIABILITIES:
Notes payable $ 14,750 $ --
Accounts payable 592 948
Accrued expenses 3,422 2,796
Payable to general partner 274 35
Customer deposits and prepayments 143 148
-------- -------
TOTAL LIABILITIES 19,181 3,927
======== =======
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
General partner 395 110
Limited partners 30,080 917
Notes receivable from general partner (222) --
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TOTAL PARTNERS' EQUITY 30,253 1,027
-------- -------
$ 49,434 $ 4,954
======== =======
</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,
----------------------------------------
1997 1998
--------------- ---------------
(Dollars in thousands
except per unit information)
<S> <C> <C>
REVENUES $ 5,250 $ 3,796
-------- --------
EXPENSES:
Service costs 1,623 1,196
General and administrative expenses 729 599
Management fees and reimbursed expenses 420 304
Depreciation and amortization 1,746 1,321
-------- --------
Total Expenses 4,518 3,420
-------- --------
Operating income 732 376
INTEREST EXPENSE, NET (410) (86)
OTHER INCOME -- 28,991
-------- --------
NET INCOME $ 322 $ 29,281
======== ========
Net income allocated to General Partner $ 3 $ 293
======== ========
Net income allocated to Limited Partners $ 319 $ 28,988
======== ========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 4.44 $ 403.29
======== ========
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.
STATEMENTS OF CASH FLOWS
====================================================
<TABLE>
<CAPTION>
Unaudited
----------------------------------------
Three months ended
March 31,
----------------------------------------
1997 1998
--------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Net cash provided by (used in) operating activities $ 1,425 $ (143)
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (845) (1,487)
Increase in intangible assets (50) (13)
Proceeds on sale of cable assets -- 76,789
--------------- ---------------
Net cash provided by (used in) investing activities (895) 75,289
--------------- ---------------
Cash flows from financing activities:
Repayment of borrowings (1,013) (14,750)
Distributions to partners -- (58,730)
Repayment of note receivable from general partner -- 222
--------------- ---------------
Net cash used in financing activities (1,013) (73,258)
--------------- ---------------
Increase (decrease) in cash and cash equivalents (483) 1,888
Cash and cash equivalents at beginning of period 7,126 620
--------------- ---------------
Cash and cash equivalents at end of period $ 6,643 $ 2,508
=============== ===============
</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 BASIS OF PRESENTATION
Falcon Classic Cable Income Properties, L.P. (the "Partnership") was
formed in 1989 to acquire, own, operate and otherwise invest principally in
existing cable television systems in suburban and rural areas located in
California, Kentucky, Maryland, North Carolina and Oregon. The General Partner
of the Partnership is Falcon Classic Cable Investors, L.P., a California limited
partnership ("General Partner"). The general partner of the General Partner is
Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"). The
general partner of FHGLP is Falcon Holding Group, Inc., a California corporation
("FHGI").
The financial statements do not give effect to any assets that the
partners may have outside their interest in the Partnership, nor to any
obligations, including income taxes, of the partners.
These financial statements are presented on the basis that the
Partnership continues as a going concern. As more fully described in Note 2 to
the financial statements, the Partnership completed the sale of substantially
all of its assets, except the cable television system serving the City of
Somerset, Kentucky (the "Somerset System") to FHGLP in March 1998 and
distributed the net cash proceeds to its unitholders. The sale of the Somerset
System to FHGLP is pending regulatory approval from the City of Somerset, of
which there can be no assurance. The carrying value of the net assets presented
herein bear no relation to the fair value of the assets sold or expected to be
sold, and the resulting distributable value per unit.
NOTE 2 SALE OF PARTNERSHIP ASSETS
In March 1998 the Partnership received from FHGLP $76.8 million in
connection with the acquisition by FHGLP of substantially all of the assets of
the Partnership (the "Sold Systems"), other than the Somerset System. The $76.8
million represented the purchase price, accrued interest of $1.1 million on the
net purchase price attributable to the Sold Systems, less an appropriate portion
of the settlement notice cost. In addition, the defendant to certain litigation
(the "Lawsuit") arising from such sale transferred $1.2 million to a settlement
fund for the benefit of unitholders of record as of June 30, 1997. The sale of
the Somerset System will be completed as soon as regulatory approvals can be
obtained for the City of Somerset, of which there can be no assurance. For the
year ended December 31, 1997, the Somerset System had revenues of approximately
$1.5 million. In connection with the Partnership's receipt of the proceeds from
the sale of the Sold Systems on March 6, 1998, the Partnership retired its
outstanding bank debt and, on March 27, 1998, distributed approximately $58.2
million (approximately $809.92 per unit) to its unitholders. In addition, the
Partnership understands that counsel for the plaintiffs in the litigation
arising from the sale intend to distribute the settlement fund in late May or
early June 1998. If the Partnership obtains the requisite approvals from the
City of Somerset on or prior to September 30, 1998, the Partnership intends to
complete the sale of the Somerset System to FHGLP and to distribute to
unitholders at the time of such sale approximately $6.3 million, representing
the proceeds from the sale of the Somerset System (less certain deductions) and
the remainder of the interest required by the settlement agreement in connection
with the lawsuit. The approximately $6.3 million to be distributed upon the sale
of the Somerset System is only an estimate and may vary depending on transaction
costs and expenses and liabilities incurred prior to
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<PAGE> 6
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
============================================
NOTE 2 SALE OF PARTNERSHIP ASSETS (CONTINUED)
distribution. In addition, if the sale of the Somerset System occurs on or
before September 30, 1998, additional funds will be transferred to the
settlement fund for distribution to unitholders.
NOTE 3 INTERIM FINANCIAL STATEMENTS
The interim condensed financial statements for the three months ended
March 31, 1998 and 1997 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, 1998 are not indicative of the results for
the entire year due to the March 1998 sale of substantially all the
Partnership's assets (other than the Somerset System).
NOTE 4 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. The notes were repaid to the Partnership on March 30, 1998 in
connection with the sale of substantially all the Partnerships assets to FHGLP.
NOTE 5 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 have been allocated 99% to the limited
partners and 1% to the general partner. The General Partner does not own units
of partnership interest in the Partnership, but rather holds a participation
interest in the income, losses and distributions of the Partnership.
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<PAGE> 7
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") required the Federal Communications Commission ("FCC")
to, among other things, implement extensive regulation of the rates charged by
cable television systems for basic and programming service tiers, installation,
and customer premises equipment leasing. Compliance with those rate regulations
has had a negative impact on the Partnership's revenues and cash flow. The
Telecommunications Act of 1996 (the "1996 Telecom Act") substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of cable programming service tier ("CPST") rates
will be terminated on March 31, 1999. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, the
Partnership expects Congress and the FCC to explore additional methods of
regulating cable service rate increases, including deferral or repeal of the
March 31, 1999 termination of CPST rate regulation and legislation recently was
introduced in Congress to repeal the termination provision. 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.
RECENT DEVELOPMENTS
As previously reported, on March 6 and 9, 1998, the Partnership
consummated the sale of substantially all of the Partnership's assets, except
the Somerset System, to FHGLP, the general partner of the Partnership's general
partner. The sale of the Somerset System to FHGLP will be completed as soon as
the necessary regulatory approvals can be obtained from the City of Somerset, of
which there can be no assurance. If the sale of the Somerset System is
successfully completed, the General Partner intends, as soon as practicable
thereafter, to wind-up the affairs of the Partnership in accordance with the
terms of its partnership agreement, including the liquidation of the assets of
the Partnership, the discharge of all of the liabilities of the Partnership, and
the distribution of the remaining assets of the Partnership to its partners as
appropriate. 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, 1997 and its Current Reports on Form 8-K dated December 31, 1997,
March 3, 1998 and March 27, 1998. Unitholders are urged to review the referenced
materials carefully.
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<PAGE> 8
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
RESULTS OF OPERATIONS
The Partnership's revenues decreased from $5.3 million to $3.8
million, or by 27.7%, for the three months ended March 31, 1998 as compared to
1997. The $1.5 million decrease was primarily due to the sale of substantially
all the Partnerships assets, except the cable system serving the City of
Somerset Kentucky, to FHGLP.
Service costs decreased from $1.6 million to $1.2 million, or by
26.3%, for the three months ended March 31, 1998 as compared to 1997. The
$427,000 decrease was primarily due to the sale of the cable systems as
discussed above.
General and administrative expenses decreased from $729,000 to
$599,000 or by 17.8%, for the three months ended March 31, 1998 as compared to
1997. The $130,000 decrease was primarily due to the sale of the cable systems
as discussed above.
Management fees and reimbursed expenses remained constant as a percent
of revenues at 8%, and decreased from $420,000 to $304,000, or by 27.6%, for the
three months ended March 31, 1998 as compared to 1997. The decrease was
primarily due to the decrease in revenues due to the sale of the cable systems
as discussed above.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
47.2% to 44.7% during the three months ended March 31, 1998 as compared to 1997.
The decrease was primarily due to the sale of the cable systems as described
above. EBITDA decreased from $2.5 million to $1.7 million, or by 31.5%, during
the three months ended March 31, 1998 as compared to the corresponding period in
1997. EBITDA should be considered in addition to and not as a substitute for net
income and cash flows determined in accordance with generally accepted
accounting principles as an indicator of financial performance and liquidity.
Depreciation and amortization expense decreased from $1.7 million to
$1.3 million, or by 24.3%, for the three months ended March 31, 1998 as compared
to the corresponding period in 1997. The increase was primarily due to the sale
of the cable systems as discussed above.
Operating income decreased from $732,000 to $376,000, or by 48.6%, for
the three months ended March 31, 1998 as compared to 1997, primarily due to sale
of cable systems as discussed above.
Net interest expense, including the effects of interest rate hedging
agreements decreased from $410,000 to $86,000, or by 79.0%, for the three months
ended March 31, 1998 as compared to 1997, primarily due to the repayment of the
Partnership's bank term loan on March 6, 1998 in connection with the sale of
substantially all the Partnership's assets as discussed above.
Other income of $29 million for the three months ended March 31, 1998
primarily was due to the gain on the sale of the cable systems as discussed
above.
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<PAGE> 9
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
RESULTS OF OPERATIONS (CONTINUED)
Due to the factors described above, the Partnership's net income
increased from $322,000 to $29.3 million for the three months ended March 31,
1998 as compared to the corresponding period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net offering
proceeds in cable systems, has been 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. As discussed
above in "Recent Developments," the Partnership sold substantially all its
assets (except the Somerset System) to FHGLP in March 1998, and in connection
with such sale distributed approximately $58.2 million to its unitholders on
March 27, 1998. If the Partnership obtains the requisite approvals from the City
of Somerset on or prior to September 30, 1998, the Partnership intends to
complete the sale of the Somerset System to FHGLP and to distribute the proceeds
from such sale (less certain deductions) to unitholders at the time of such
sale. If such approvals are not received on or before September 30, 1998, the
Partnership intends to explore alternative options, including the sale of the
Somerset System to a third party.
The Partnership has relied upon the availability of cash generated
from operations and borrowings to fund its ongoing capital requirements. In
general, these requirements have involved expansion, improvement and upgrade of
the Partnership's cable systems. The Partnership 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 required 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 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.
In connection with the sale of assets as described above, the
Partnership fully repaid all of its $14.8 million of outstanding debt on March
6, 1998. The Partnership's management believes that the Partnership's
anticipated cash resources and cash flow from operations will be sufficient to
fund its working capital requirements until the planned dissolution of the
Partnership.
The Partnership's management agreement with the General Partner
requires deferral of the payment of up to 50% of the management fees for any
month, 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 deferred
$10,900 of management fees for the three months ended March 31, 1998.
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<PAGE> 10
FALCON CLASSIC CABLE INCOME PROPERTIES, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Beginning in August 1997, the General Partner elected to self-insure
the Partnership's cable distribution plant and subscriber connections against
property damage as well as possible business interruptions caused by such
damage. The decision to self-insure was made due to the geographical
diversification of the Partnership's asset base and due to significant increases
in the cost of insurance coverage and decreases in the amount of insurance
coverage available. The Partnership's remaining assets consist of the Somerset
System and any significant damage to such system due to weather conditions or
other events could have a material adverse effect on the Partnership. In January
1998, the Partnership suffered storm damage to its Somerset, Kentucky cable
television system. Management estimates that the cost to repair this damage will
be $1.0 million and will be funded through cash from the sale of the Sold
Systems. The Partnership continues to purchase insurance coverage in amounts its
management views as appropriate for all other property, liability, automobile,
workers' compensation and other types of insurable risks.
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Cash provided by operating activities decreased $1.6 million in the
three months ended March 31, 1998 as compared to the corresponding period in
1997, primarily due to the sale of substantially all the cable systems as
described above.
Cash provided by investing activities increased by $76.2 million in
the three months ended March 31, 1998 as compared to the corresponding period in
1997, primarily due to the proceeds from the sale of the cable systems as
described above. Cash used by financing activities increased by $72.2 million
due to the repayment of all of the Partnership's outstanding debt in 1998 and a
$58.7 million distribution to partners related to the sale of the cable systems
as described above.
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that it is able to increase its service rates
periodically, of which there can be no assurance, due to the re-regulation of
rates charged for certain cable services.
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<PAGE> 11
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) The Registrant filed a Form 8-K dated March
3, 1998, in which it reported under Item 5
the closing of the sale of the Sold Systems
to FHGLP and the approval of the Settlement
Agreement relating thereto.
The Registrant filed a Form 8-K dated March
13, 1998, in which it reported under Item 5
that an unsolicited offer to purchase
partnership units had been made without the
consent of the Corporate General Partner.
The Registrant filed a Form 8-K dated March
27, 1998, in which it reported under Item 5
the distribution to unitholders of the net
proceeds from the sale of the Sold Systems.
<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 15, 1998 By: /s/ Michael K. Menerey
----------------------------------
Michael K. Menerey,
Executive Vice President,
Chief Financial Officer
and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT MARCH 31, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1998 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,508
<SECURITIES> 0
<RECEIVABLES> 1,178
<ALLOWANCES> 46
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,596
<DEPRECIATION> 776
<TOTAL-ASSETS> 4,954
<CURRENT-LIABILITIES> 3,927
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,954
<SALES> 0
<TOTAL-REVENUES> 3,796
<CGS> 0
<TOTAL-COSTS> 3,420
<OTHER-EXPENSES> (28,991)
<LOSS-PROVISION> 70
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 29,281
<INCOME-TAX> 0
<INCOME-CONTINUING> 29,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,281
<EPS-PRIMARY> 403.29
<EPS-DILUTED> 0
</TABLE>
