<PAGE>
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 September 30, 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 Numbers: 33-60776 and 333-55755
------------------------------
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
FALCON FUNDING CORPORATION*
- -------------------------------------------------------------------------------
(Exact Names of Registrants as Specified in Their Charters)
California 95-4654565
California 95-4681480
- -------------------------------- ----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Numbers)
Incorporation or Organization)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 90024
- -------------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
(310) 824-9990
----------------------------------------------------
(Registrants' Telephone Number, Including Area Code)
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Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report.
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes No X
----- -----
Number of shares of common stock of Falcon Funding Corporation outstanding as of
November 10, 1998: 1,000.
* Falcon Funding Corporation meets the conditions set forth in General
Instruction H(1)(a) and (b) to the Form 10-Q and is therefore filing with
the reduced disclosure format.
<PAGE>
PART I - FINANCIAL INFORMATION
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997* 1998
------------ -------------
(Unaudited)
(Dollars in Thousands)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 13,917 $ 9,269
Receivables:
Trade, less allowance of $825,000 and
$524,000 for possible losses 13,174 15,675
Affiliates 11,254 959
Other assets 14,576 15,847
Other investments 1,776 119
Property, plant and equipment, less accumulated depreciation
and amortization of $272,551,000 and $306,183,000 324,559 483,536
Franchise cost, less accumulated
amortization of $203,700,000 and $229,788,000 222,281 410,929
Goodwill, less accumulated amortization
of $18,531,000 and $24,663,000 66,879 140,006
Customer lists and other intangible costs, less
accumulated amortization of $25,517,000 and $39,996,000 59,808 353,795
Deferred loan costs, less accumulated amortization
of $7,144,000 and $1,735,000 12,134 24,847
------------ -------------
$ 740,358 $ 1,454,982
------------ -------------
------------ -------------
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable $ 911,221 $ 1,578,140
Accounts payable 9,169 7,833
Accrued expenses 52,789 91,242
Customer deposits and prepayments 1,452 1,916
Deferred income taxes 7,553 9,916
Minority interest 354 412
Equity in losses of affiliated partnerships in excess of investment 3,202 --
------------ -------------
TOTAL LIABILITIES 985,740 1,689,459
------------ -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY 171,373 135,385
------------ -------------
PARTNERS' EQUITY (DEFICIT):
General partner (13,200) (374,910)
Limited partners (403,555) 5,048
------------ -------------
TOTAL PARTNERS' DEFICIT (416,755) (369,862)
------------ -------------
$ 740,358 $ 1,454,982
------------ -------------
------------ -------------
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
--------------------
Three months ended
September 30,
--------------------
1997 1998
-------- --------
(Dollars in Thousands)
<S> <C> <C>
REVENUES $ 64,515 $ 68,457
-------- --------
EXPENSES:
Service costs 19,320 21,080
General and administrative expenses 11,165 20,226
Depreciation and amortization 28,637 34,278
-------- --------
Total expenses 59,122 75,584
-------- --------
Operating income (loss) 5,393 (7,127)
OTHER INCOME (EXPENSE):
Interest expense, net (19,658) (25,045)
Equity in net income of investee partnerships 212 67
Other expense, net (1,416) (338)
Income tax benefit (expense) 200 (4,679)
-------- --------
Net loss before extraordinary items (15,269) (37,122)
Extraordinary item, retirement of debt -- (2,230)
-------- --------
NET LOSS $(15,269) $(39,352)
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
---------------------
Nine months ended
September 30,
---------------------
1997 1998
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
REVENUES $ 192,482 $ 201,789
--------- ---------
EXPENSES:
Service costs 56,302 61,137
General and administrative expenses 34,072 44,742
Depreciation and amortization 87,270 98,284
--------- ---------
Total expenses 177,644 204,163
--------- ---------
Operating income (loss) 14,838 (2,374)
OTHER INCOME (EXPENSE):
Interest expense, net (58,979) (69,744)
Equity in net income (loss) of investee partnerships 183 (199)
Other expense, net (1,616) (1,162)
Income tax benefit (expense) 1,322 (2,848)
--------- ---------
Net loss before extraordinary items (44,252) (76,327)
Extraordinary item, retirement of debt -- (30,642)
--------- ---------
NET LOSS $ (44,252) $(106,969)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
--------------------------
Nine months ended
September 30,
--------------------------
1997 1998
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Net cash provided by operating activities $ 56,371 $ 44,361
----------- -----------
Cash flows from investing activities:
Acquisition of cable television systems -- (83,391)
Capital expenditures (46,764) (63,357)
Increase in intangible assets (1,207) (7,692)
Cash retained by FHGLP -- (1,546)
Other 90 37
----------- -----------
Net cash used in investing activities (47,881) (155,949)
----------- -----------
Cash flows from financing activities:
Borrowings from notes payable 24,500 2,357,607
Repayment of debt (33,038) (2,225,120)
Deferred loan costs (1) (25,630)
Other 192 83
----------- -----------
Net cash provided by (used in) financing activities (8,347) 106,940
----------- -----------
Net increase (decrease) in cash and cash equivalents 143 (4,648)
Cash and cash equivalents at beginning of period 13,633 13,917
----------- -----------
Cash and cash equivalents at end of period $ 13,776 $ 9,269
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Falcon Communications, L.P., a California limited partnership (the
"Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"), owns
and operates cable television systems serving small to medium-sized
communities and the suburbs of certain cities in 26 states. On September 30,
1998, pursuant to a Contribution and Purchase Agreement dated as of December
30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired the
assets and liabilities of Falcon Video Communications, L.P. ("Falcon Video"
or the "Falcon Video Systems"), in exchange for ownership interests in FHGLP.
Simultaneously with the closing of that transaction, in accordance with the
Contribution Agreement, FHGLP contributed substantially all of the existing
cable television system operations owned by FHGLP and its subsidiaries
(including the Falcon Video Systems) to the Partnership and TCI Falcon
Holdings, LLC ("TCI") contributed certain cable television systems owned and
operated by affiliates of TCI (the "TCI Systems") to the Partnership (the
"TCI Transaction"). As a result, TCI holds approximately 46% of the equity
interests of the Partnership and FHGLP holds the remaining 54% and serves as
the managing general partner of the Partnership. The TCI Transaction is being
accounted for as a recapitalization of FHGLP into the Partnership and the
concurrent acquisition by the Partnership of the TCI Systems.
The condensed consolidated financial statements include the consolidated
accounts of the Partnership and its subsidiary cable television operating
partnerships and corporations (the "Owned Subsidiaries"). The condensed
consolidated balance sheet for the Partnership as of September 30, 1998 also
includes the assets acquired and liabilities assumed with respect to the TCI
Systems and the Falcon Video Systems. The assets contributed by FHGLP to the
Partnership excluded certain immaterial investments, principally FHGLP's
ownership of 100% of the outstanding stock of Enstar Communications
Corporation ("ECC"), which is the general partner and manager of fifteen
limited partnerships operating under the name "Enstar" (the "Enstar
Partnerships", whose cable television systems are referred to as the "Enstar
Systems"). Upon the consummation of the TCI Transaction, the management of
the Enstar Partnerships was assigned to the Partnership by FHGLP. The
condensed consolidated statements of operations and statements of cash flows
for the three months and the nine months ended September 30, 1998 do not
include results from the TCI Systems or the Falcon Video Systems; however,
such statements include FHGLP's interest in ECC. The effects of ECC's
operations on all previous periods presented are immaterial and therefore the
Partnership has not restated prior periods to give effect to the
recapitalization of the Partnership.
Prior to closing the TCI Transaction, FHGLP owned and operated cable
television systems in 23 states (the "Owned Systems"). FHGLP also controlled,
held varying equity interests in and managed certain other cable television
systems for a fee (the "Affiliated Systems" and, together with the Owned
Systems, the "Systems"). The Affiliated Systems operated cable television
systems in 14 states. FHGLP is a limited partnership, the sole general
partner of which is Falcon Holding Group, Inc., a California corporation
("FHGI"). FHGI also holds a 1.0% interest in certain of the subsidiaries of
the Partnership. At the beginning of 1998, the Affiliated Systems were
comprised of systems owned by Falcon
-6-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
Classic Cable Income Properties, L.P. ("Falcon Classic") whose cable
television systems are referred to as the "Falcon Classic Systems", Falcon
Video and the Enstar Partnerships. As discussed in Note 3, the Falcon Classic
Systems were acquired by FHGLP during 1998. The Falcon Video Systems were
acquired on September 30, 1998 in connection with the TCI Transaction.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three and nine months ended
September 30, 1998 and 1997 are unaudited. These condensed interim financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in FHGLP's latest Annual Report on Form
10-K. In the opinion of management, such statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of such periods. The results of operations for
the three and nine months ended September 30, 1998 are not indicative of
results for the entire year, particularly due to the TCI Transaction.
NOTE 3 - ACQUISITIONS
As discussed in Note 1, on September 30, 1998 the Partnership acquired
the TCI Systems and the Falcon Video Systems in accordance with the
Contribution Agreement.
In March and July 1998, FHGLP paid to Falcon Classic $83.4 million in
order to purchase the Falcon Classic Systems. Falcon Classic had revenue of
approximately $20.3 million for the year ended December 31, 1997.
-7-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (CONTINUED)
The acquisitions of the TCI Systems, the Falcon Video Systems and the
Falcon Classic Systems were accounted for by the purchase method of accounting,
whereby the purchase prices were allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the dates of
acquisition, as follows:
<TABLE>
<CAPTION>
Falcon Video Falcon Classic
TCI Systems Systems Systems
------------------ ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
PURCHASE PRICE:
General partnership interests issued $ 231,937 $ 43,168 $ --
Debt assumed 275,000 112,196 --
Debt incurred -- -- 83,391
Other liabilities assumed 999 6,158 2,804
Transaction costs 2,879 -- --
------------------ ------------------ ------------------
510,815 161,522 86,195
------------------ ------------------ ------------------
FAIR MARKET VALUE OF ASSETS AND LIABILITIES ACQUIRED:
Property, plant and equipment 74,533 36,659 33,539
Franchise costs 166,486 41,604 7,847
Customer lists and other intangible assets 217,443 53,602 34,992
Other assets 7,118 2,285 3,164
------------------ ------------------ ------------------
465,580 134,150 79,542
------------------ ------------------ ------------------
Excess of Purchase Price over Fair Value of
Assets and Liabilities Acquired $ 45,235 $ 27,372 $ 6,653
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
The excess of purchase price over the fair value of net assets acquired
has been recorded as goodwill and is being amortized using the straight-line
method over 20 years. The allocation of the purchase price and the pro forma
information presented below is based on preliminary information and are subject
to possible adjustment once complete information on the fair value of the assets
is developed. The allocation may also be subject to possible adjustment pursuant
to the Contribution Agreement.
The general partnership interests issued in the TCI Transaction were
valued in proportion to the estimated fair value of the TCI Systems and the
Falcon Video Systems as compared to the estimated fair value of the
Partnership's assets, which was agreed upon in the Contribution Agreement by
all holders of Partnership interests.
-8-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (CONTINUED)
Sources and uses of funds for each of the transactions were as follows:
<TABLE>
<CAPTION>
Falcon Video Falcon Classic
TCI Systems Systems Systems
------------------ ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
SOURCES OF FUNDS:
Cash in Owned Systems $ 11,429 $ 59,038 $ 6,591
Advance under bank credit facilities 429,739 56,467 76,800
------------------ ------------------ ------------------
Total sources of funds $ 441,168 $ 115,505 $ 83,391
------------------ ------------------ ------------------
------------------ ------------------ ------------------
USES OF FUNDS:
Repay debt assumed from TCI and existing debt of Falcon Video,
including accrued interest $ 429,739 $ 115,505 $ --
Purchase price of assets -- -- 83,391
Payment of assumed obligations at closing 6,495 -- --
Transaction fees and expenses 2,879 -- --
Available funds 2,055 -- --
------------------ ------------------ ------------------
Total uses of funds $ 441,168 $ 115,505 $ 83,391
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
The following unaudited condensed consolidated pro forma statement of
operations present the consolidated results of operations of the Partnership as
if the acquisitions had occurred at January 1, 1997 and are not necessarily
indicative of what would have occurred had the acquisitions been made as of that
date or of results which may occur in the future. The pro forma results for the
three and nine months ended September 30, 1997 and 1998, respectively, are not
available as of the filing date of this report, but will be submitted at a later
date.
<TABLE>
<CAPTION>
Year Ended
------------------------
December 31, 1997
------------------------
(Dollars in Thousands)
<S> <C>
Revenues $ 424,994
Expenses (437,952)
------------------------
Operating income (12,958)
Interest and other expenses (115,507)
------------------------
Net loss $ (128,465)
------------------------
------------------------
</TABLE>
-9-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE
On April 3, 1998, FHGLP and its wholly-owned subsidiary, Falcon Funding
Corporation ("FFC" and, collectively with FHGLP, the "Issuers"), sold
$375,000,000 aggregate principal amount of 8.375% Senior Debentures due 2010
(the "Senior Debentures") and $435,250,000 aggregate principal amount at
maturity of 9.285% Senior Discount Debentures due 2010 (the "Senior Discount
Debentures" and, collectively with the Senior Debentures, the "Debentures")
in a private placement exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"). The Issuers filed a registration
statement with the Securities and Exchange Commission (the "SEC") on June 2,
1998 to register debentures (the "Exchange Debentures") to be exchanged for
the Debentures (the "Exchange Offer"). The form and terms of the Exchange
Debentures are the same as the corresponding Debentures except that the
Exchange Debentures are registered under the Securities Act and, therefore,
do not bear legends restricting their transfer and that the holders of
Exchange Debentures are not entitled to certain registration rights.
All of the outstanding Debentures were tendered for exchange in the
Exchange Offer. In connection with consummation of the TCI Transaction,
pursuant to Section 5.01 of the Indenture governing the Exchange Debentures
(the "Debentures Indenture"), the Partnership was substituted for FHGLP as an
obligor under the Exchange Debentures and the Debentures Indenture and
thereupon FHGLP was released and discharged from any further obligation with
respect to the Exchange Debentures and the Debentures Indenture. FFC remains
as an obligor under the Exchange Debentures and the Debentures Indenture and
is now a wholly owned subsidiary of the Partnership. FFC was incorporated
solely for the purpose of serving as a co-issuer of the Debentures and does
not have any material operations or assets and will not have any revenues.
The Senior Debentures were issued at a price of 99.732% of their
principal amount, for total gross proceeds of approximately $374 million. The
Senior Discount Debentures were issued at a price of 63.329% per $1,000
aggregate principal amount at maturity, for total gross proceeds of
approximately $275.6 million, and will accrete to stated value at an annual rate
of 9.285% until April 15, 2003. After giving effect to offering discounts,
commissions and estimated expenses of the offering, the sale of the Debentures
(representing aggregate indebtedness of approximately $650.6 million as of the
date of issuance) generated net proceeds of approximately $631 million. The
Partnership used substantially all the net proceeds from the sale of the
Debentures to repay outstanding bank indebtedness.
On May 19, 1998, FHGLP repurchased approximately $247.8 million
aggregate principal amount of its 11% Senior Subordinated Notes due 2003 (the
"Notes") for an aggregate purchase price of $270.3 million pursuant to a fixed
spread tender offer for all outstanding Notes. The Notes tendered represented
approximately 88% of the Notes previously outstanding. The approximate $34.4
million of Notes not
-10-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE (CONTINUED)
repurchased in the tender offer were redeemed on September 15, 1998 in
accordance with the terms of the indenture governing the Notes at 105.5% of
the outstanding principal amount, plus accrued interest to the redemption
date (the "Redemption Price").
On June 30, 1998, the Partnership entered into a new $1.5 billion senior
credit facility (the "New Credit Facility"). The borrowers under the New
Credit Facility were the Owned Subsidiaries prior to consummation of the TCI
Transaction and, following the TCI Transaction, the borrower is Falcon Cable
Communications LLC, a Delaware limited liability company and a wholly owned
subsidiary of the Partnership ("Falcon LLC"). The restricted companies, as
defined under the New Credit Facility, are Falcon LLC and each of its
subsidiaries (excluding certain subsidiaries designated as excluded companies
from time to time) and each restricted company (other than Falcon LLC) is
also a guarantor of the New Credit Facility.
The New Credit Facility consists of three committed facilities (one
revolver and two term loans) and one uncommitted $350 million supplemental
credit facility (the terms of which will be negotiated at the time the
Partnership makes a request to draw on such facility). Facility A is a $650
million revolving credit facility maturing December 29, 2006; Facility B is a
$200 million term loan maturing June 29, 2007; and Facility C is a $300
million term loan maturing December 31, 2007. All of Facility C and
approximately $126 million of Facility B were funded on June 30, 1998, and
the approximately $329 million debt outstanding under the then existing bank
credit agreement was repaid. As a result, from June 30, 1998 until September
29, 1998, FHGLP had an excess cash balance of approximately $90 million.
Immediately prior to closing the TCI Transaction, approximately $39.0 million
was borrowed under Facility A to discharge certain indebtedness of Falcon
Video. In connection with consummation of the TCI Transaction, Falcon LLC
assumed the approximately $433 million of indebtedness outstanding under the
New Credit Facility. In addition to utilizing cash on hand of approximately
$63 million, Falcon LLC borrowed the approximately $74 million remaining
under Facility B and approximately $366 million under Facility A to discharge
approximately $73 million of Falcon Video indebtedness and to retire
approximately $430 million of TCI indebtedness assumed as part of the
contribution of the TCI Systems. As a result of these borrowings, the amount
outstanding under the New Credit Facility at September 30, 1998 was $912
million.
NOTE 5 - EXTRAORDINARY ITEMS
Fees and expenses incurred in connection with the repurchase of the
Notes on May 19, 1998 and the retirement of the remaining Notes on September
15, 1998 were $19.7 million in the aggregate. In addition, the unamortized
portion of deferred loan costs related to the Notes and to extinguishment of
debt outstanding under the then existing bank credit agreement, which
amounted to $10.9 million in the aggregate, were written off as an
extraordinary charge.
-11-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Falcon Communications, L.P., a California limited partnership (the
"Partnership"), owns and operates cable television systems serving more than one
million customers throughout 26 states and 800 communities, principally in
Alabama, California, Missouri, Oregon and Washington. References to the
Partnership in this section also include FHGLP, as the Partnership's
predecessor, unless the context requires otherwise. As discussed in Note 1 to
the condensed consolidated financial statements, the results of operations
discussion that follows does not include the results of the TCI Systems or the
Falcon Video Systems.
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 altogether on March 31, 1999. Because cable service rate
increases have continued to outpace inflation under the FCC's existing
regulations, it is possible that Congress and the FCC will consider additional
methods of regulating cable service rate increases, including deferral or repeal
of the March 31, 1999 termination of CPST rate regulation. 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 historical financial results 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,
acquisition transactions, competition, capital needs 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. In addition to the information provided herein, reference is made
to FHGLP's Annual Report on Form 10-K for the year ended December 31, 1997 and
the other periodic reports and registration statements filed by FHGLP and the
Partnership with the Securities and Exchange Commission from time to time for
additional information regarding such matters and the effect thereof on the
Partnership's business.
-12-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
RESULTS OF OPERATIONS
The Partnership's revenues increased from $64.5 million to $68.4
million, or by 6.1%, and from $192.5 million to $201.8 million, or by 4.8%, for
the three and nine months ended September 30, 1998 compared to the corresponding
periods in 1997. The $3.9 million net increase in revenues for the three months
ended September 30, 1998 as compared to the corresponding period in 1997 was
caused by a $5 million increase related to the acquisition in March and July
1998 of the Falcon Classic Systems, as discussed in Note 3 to the condensed
consolidated financial statements, partially offset by a $756,000 decrease in
cable service revenues and a $307,000 decrease in management fees. The $756,000
decrease in cable service revenues was caused principally by a $1.1 million
decrease due to reductions in the number of premium subscriptions for cable
service and a $209,000 decrease due to reductions in the number of regulated
subscriptions for cable service, partially offset by an increase of $558,000
related to increases in regulated service rates implemented during 1997 and
1998. Of the $9.3 million net increase in revenues for the nine months ended
September 30, 1998 compared to the corresponding period in 1997, $11 million was
due to the acquisition of the Falcon Classic Systems. This increase was
partially offset by a $1.0 million decrease in management fees and a $677,000
decrease in cable service revenues. The $677,000 decrease in cable service
revenues was principally due to decreases of $3.1 million from
reductions in the number of premium subscriptions for cable service and $3
million from reductions in the number of regulated subscriptions for cable
service. These decreases were partially offset by $3 million related to
increases in regulated service rates implemented during 1997 and 1998, $1.8
million related to increases in unregulated service rates implemented during
1997 and $598,000 related to increases in other cable service revenues. As of
September 30, 1998, the Owned Systems had approximately 636,000 basic
subscribers and 172,000 premium service units. Giving effect to the TCI
Transaction, including Falcon Video, would increase the numbers to approximately
1,000,000 basic subscribers and 273,000 premium service units.
Management and consulting fees earned by the Partnership decreased from
$1.2 million to $937,000 and from $4 million to $3 million for the three and
nine months ended September 30, 1998 compared to the corresponding periods in
1997 primarily due to the sale of the Falcon Classic Systems to the
Partnership and to the one-time receipt by the Partnership during the three
months ended March 31, 1997 of previously deferred fees from Falcon Classic.
Service costs increased from $19.3 million to $21.1 million, or by 9.1%,
and from $56.3 million to $61.1 million, or by 8.6%, for the three and nine
months ended September 30, 1998 compared to the corresponding periods in
1997. Service costs represent costs directly attributable to providing cable
services to customers. The $1.8 million and $4.8 million increases in service
costs for the three and nine months ended September 30, 1998 were primarily
caused by increases in programming fees paid to program suppliers (including
primary satellite fees) and by $1.3 million and $3 million, respectively, of
costs which were attributable to the acquisition of the Falcon Classic
Systems. These increases were partially offset by decreases in copyright fees
of approximately $650,000 and $1.4 million, respectively. The copyright fee
decreases were primarily the result of an industry-wide change in the status
of one satellite service that resulted in lower fees.
-13-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses increased from $11.2 million to
$20.2 million, or by 81.2%, and from $34.1 million to $44.8 million, or by
31.3%, for the three and nine months ended September 30, 1998 compared to the
corresponding periods in 1997. The $9 million and $10.7 million increases for
the three and nine months ended September 30, 1998 related primarily to
approximately $7.7 million of non-recurring compensation expenses related to the
TCI Transaction, including approximately $6.5 million representing payments in
September 1998 to certain FHGLP employees of amounts due under FHGLP's 1993
incentive performance plan, as required by the Contribution Agreement. General
and administrative costs also increased $871,000 and $2 million for the three
and nine months, respectively, related to the acquisition of the Falcon Classic
Systems.
Depreciation and amortization expense increased from $28.6 million to
$34.3 million, or by 19.7%, and from $87.3 million to $98.3 million, or by
12.6%, for the three and nine months ended September 30, 1998 compared to the
corresponding periods in 1997. The $5.7 million and $11 million increases in
depreciation and amortization expense were primarily due to the acquisition of
the Falcon Classic Systems.
Operating income of $5.4 million and $14.9 million changed to operating
loss of $7.1 million and $2.4 million, respectively, for the three and nine
months ended September 30, 1998 compared to the corresponding periods in 1997.
The $12.5 million and $17.3 million changes were principally due to
non-recurring compensation expense and increases in amortization expense, as
discussed above.
Interest expense, net, including the effects of interest rate hedging
agreements, increased from $19.7 million to $25 million, or by 27.4%, and from
$59 million to $69.7 million, or by 18.3%, for the three and nine months ended
September 30, 1998 compared to the corresponding periods in 1997. The increases
were primarily due to higher average debt balances outstanding (as discussed in
Note 4 to condensed consolidated financial statements) and to higher average
interest rates (9.3% and 9.2% during the three and nine months ended September
30, 1998 compared to 8.9% and 8.8% during the corresponding periods in 1997).
Due to the Partnership electing to pay interest expense on the Notes in cash on
March 15, 1998, there was no non-cash interest expense associated with the Notes
for the three and nine months ended September 30, 1998 compared to $7.4 million
and $21.8 million of non-cash interest expense for the corresponding periods in
1997. Non-cash interest expense associated with the Senior Discount Debentures
issued on April 3, 1998 amounted to $6.2 million and $12.7 million for the three
and nine months ended September 30, 1998. Interest rate hedging agreements
resulted in additional interest expense of $104,000 and $319,000 during the
three and nine months ended September 30, 1998 compared to additional interest
income of $69,000 during the three months ended September 30, 1997 and
additional interest expense of $279,000 during the nine months ended September
30, 1997.
Other expense, net, decreased from $1.4 million to $338,000 and from
$1.6 million to $1.2 million for the three and nine months ended September 30,
1998 compared to the corresponding periods in 1997. The $1.1 million and
$454,000 decreases for the three and nine months ended September 30, 1998 were
primarily related to a $1.4 million loss on the sale of an investment in France
during the third quarter of
-14-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
RESULTS OF OPERATIONS (CONTINUED)
1997, partially offset by additional legal fees incurred in 1998 related to a
lawsuit.
The Partnership recorded $5 million in tax expense for the quarter and
nine months ended September 30, 1998 to establish a valuation reserve for
federal net operating loss benefits ("NOLs") that were previously recorded by
Falcon First, Inc., its subsidiary corporation. The Partnership determined that
a reserve is required due to uncertainties surrounding the Partnership's ability
to realize the deferred tax benefits of the NOLs prior to their expiration.
The Partnership recorded extraordinary items of $2.2 million and $30.6
million during the three and nine months ended September 30, 1998, $1.8 and
$19.7 million of which related to costs associated with the repurchase of the
Notes tendered on May 19, 1998 and $411,000 and $10.9 million related to the
write-off of deferred loan costs associated with the Notes and with previously
issued bank debt which was retired on June 30 and September 30, 1998 as
discussed in Note 5 to condensed consolidated financial statements.
Due to the factors described above, the Partnership's net loss
increased from $15.3 million to $39.4 million, or by 157.7%, and from $44.2
million to $106.9 million, or by 141.7%, for the three and nine months ended
September 30, 1998 compared to the corresponding periods in 1997.
Based on its experience in the cable television industry, the
Partnership believes that operating income before depreciation and amortization
("EBITDA") and related measures of cash flow serve as important financial
analysis tools for measuring and comparing cable television companies in several
areas, such as liquidity, operating performance and leverage. In addition, the
covenants in the Partnership's primary debt instruments use EBITDA-derived
calculations as a measure of financial performance. EBITDA is not a measurement
determined under generally accepted accounting principles ("GAAP") and does not
represent cash generated from operating activities in accordance with GAAP.
EBITDA should not be considered by the reader as an alternative to net income as
an indicator of the Partnership's financial performance or as an alternative to
cash flows as a measure of liquidity. In addition, the Partnership's definition
of EBITDA may not be identical to similarly titled measures used by other
companies. EBITDA as a percentage of revenues decreased from 52.7% to 39.7% and
from 53.0% to 47.5% for the three and nine months ended September 30, 1998
compared to the corresponding periods in 1997. The decrease was primarily caused
by non-recurring compensation costs and increases in programming costs in excess
of revenue increases, as described above. EBITDA decreased from $34 million to
$27.1 million, or by 20.2%, and from $102.1 million to $95.9 million, or by
6.1%. Adjusted for the non-recurring compensation costs discussed above, EBITDA
as a percentage of revenues would have been 50.9% and 51.4%, respectively, for
the three and nine months ended September 30, 1998, and would have increased by
2.5% and 1.5%, respectively, over the similar 1997 periods.
-15-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Partnership's primary need for capital has been to
acquire cable systems and to finance plant extensions, rebuilds and upgrades,
and to add addressable converters to certain of its cable systems. The
Partnership spent $76.3 million during 1997 on capital expenditures. In
addition to the purchase of the Falcon Classic Systems for $83.4 million,
management's current plan calls for the expenditure of approximately $87
million in capital expenditures in 1998, including approximately $48 million
to rebuild and upgrade certain cable systems. The Partnership plans to
finance capital expenditures with cash flow from operations and borrowings
under the New Credit Facility, subject to its ability to remain in compliance
with certain covenants of the New Credit Facility and the Debentures
Indenture. The Partnership's proposed spending plans are frequently reviewed
and revised with respect to changes in technology, acceptable leverage
parameters (including those specified in its debt agreements), franchise
requirements, competitive circumstances and other factors.
The New Credit Facility entered into on June 30, 1998 provides for
maximum committed available borrowings of $1.15 billion, reducing to $827.5
million at December 31, 2004 (see Note 4 to the condensed consolidated financial
statements). As of September 30, 1998, the amount outstanding under the New
Credit Facility was $912 million and, subject to complying with covenants, the
Partnership had available to it additional committed borrowing capacity
thereunder (excluding the supplemental credit facility) of approximately $238
million. However, limitations imposed by the Partnership's partnership agreement
would limit available borrowings at September 30, 1998 to $61 million. The New
Credit Facility requires that interest be tied to the ratio of consolidated
total debt to consolidated annualized cash flow (in each case, as defined
therein), and further requires that the Partnership maintain hedging
arrangements with respect to at least 50% of the outstanding borrowings
thereunder plus any additional borrowings of the Partnership, including the
Debentures, for a two year period. As of September 30, 1998, borrowings under
the New Credit Facility bore interest at an average rate of 7.39% (including the
effect of interest rate hedging agreements). The Partnership has entered into
fixed interest rate hedging agreements with an aggregate notional amount at
September 30, 1998 of $560 million, including contracts of $50 million assumed
from Falcon Video in connection with the TCI Transaction. Agreements in effect
at September 30, 1998 totaled $550 million, with the remaining $10 million to
become effective as certain of the existing contracts mature during the balance
of 1998. The agreements serve as a hedge against interest rate fluctuations
associated with the Partnership's variable rate debt. These agreements expire at
various times through July 2001. In addition to these agreements, the
Partnership has one interest rate swap contract with a notional amount of $25
million under which it pays variable LIBOR rates and receives fixed rate
payments, and one $25 million interest rate cap contract under which the
Partnership pays variable LIBOR rates, subject to a cap of 5.49%. In October
1998, Falcon LLC and the Owned Subsidiaries entered into additional hedging
contracts with a notional principal amount of $665 million (which total does not
include the $297.7 million contract discussed below). These contracts begin at
various future dates to coincide with termination dates of existing contracts,
and extend the hedging protection through various dates ending in 2006. The
average LIBOR-based rate of these additional contracts was 5.03%. The New Credit
Facility also contains various restrictions relating to, among other things,
mergers and acquisitions, a change in control and the incurrence of additional
indebtedness and also requires compliance with certain financial covenants. The
Partnership's management believes that it was in compliance with all such
requirements as of September 30, 1998.
-16-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Management believes that borrowings under the New Credit Facility together with
cash flow from operations will be adequate to meet the Partnership's liquidity
needs for the foreseeable future.
On April 3, 1998, as discussed in Note 4 to the condensed consolidated
financial statements, the Partnership and FFC consummated offerings of $375
million aggregate principal amount of the Senior Debentures and $435.2 million
aggregate principal amount at maturity of the Senior Discount Debentures. The
net proceeds of approximately $631 million from the sale of the Debentures were
used primarily to repay outstanding indebtedness under the then existing bank
credit agreement. Semiannual interest payments with respect to the Senior
Debentures will be approximately $15.7 million in the aggregate, commencing on
October 15, 1998. No interest on the Senior Discount Debentures will be payable
prior to April 15, 2003, unless the Partnership elects to pay cash interest.
After April 15, 2003, semiannual interest payments will be approximately $35.9
million in the aggregate. The Partnership anticipates that cash flow from
operations and, if necessary, borrowings under the New Credit Facility (or a
successor credit facility) will be adequate to meet its interest payment
obligations under the Debentures.
In September 1998, as discussed in Note 4 to the condensed consolidated
financial statements, the Partnership completed the Exchange Offer of Exchange
Debentures for the Debentures. In connection with consummation of the TCI
Transaction, pursuant to Section 5.01 of the Debentures Indenture, the
Partnership was substituted for FHGLP as an obligor under the Exchange
Debentures and the Debentures Indenture and thereupon FHGLP was released and
discharged from any further obligation with respect to the Exchange Debentures
and the Debentures Indenture.
On May 19, 1998, the Partnership repurchased approximately $247.8
million aggregate principal amount of the Notes for an aggregate purchase price
of $270.3 million pursuant to a fixed spread tender offer for all outstanding
Notes. The Notes tendered represented approximately 88% of the Notes
outstanding. The repurchase was funded with borrowings under the then existing
bank credit agreement.
The approximate $34.4 million principal amount of Notes not validly
tendered and repurchased in the tender offer were redeemed at a premium on
September 15, 1998 in accordance with the terms of the indenture governing the
Notes. The $38.2 million aggregate Redemption Price was funded with
borrowings under the New Credit Facility.
As a result of payment-in-kind interest payments under the Notes, the
aggregate principal of the Notes outstanding as of March 31, 1998 had
increased to $282.2 million. The Partnership, as permitted by the terms of
the indenture governing the Notes, elected to begin to pay interest payments
in cash beginning with the payment due March 15, 1998. In connection with the
decision to make interest payments on the Notes in cash and the anticipated
redemption of the Notes, the Partnership entered into various interest rate
swap agreements with three banks on February 10, 1998 in order to reduce the
interest cost. The agreements called for the Partnership to receive payments
at 11%; and to make payments at 7.625% for the period September 16, 1997
through September 15, 1998 on a notional principal amount of $282.2 million.
The contracts further called for the Partnership to pay at a fixed rate of
7.625% and receive interest at variable LIBOR-based rates for the period
September 16, 1998 through September 15, 2003 on a notional principal amount
of $297.7
-17-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
million. Based on the May 19, 1998 tender and the September 15, 1998
redemption, the Partnership terminated these agreements on October 2, 1998.
In consideration of the termination, the Partnership entered into a new
agreement with a notional principal amount of $297.7 million that requires it
to pay a fixed rate of 5.97% and receive interest at variable LIBOR-based
rates for the period of October 2, 1998 through October 2, 2006, although the
bank has the option to terminate the contract beginning October 2, 2000.
The Partnership is a separate, stand-alone holding company which employs
all of the management personnel for the Owned Systems. All of the Owned
Systems are owned by the Owned Subsidiaries. Accordingly, to fund its
operations and to pay its expenses, including interest expense, the
Partnership is financially dependent on the receipt of funds from its Owned
Subsidiaries, management and consulting fees from domestic cable ventures,
and on the reimbursement of specified expenses by the remaining Affiliated
Systems. Expected increases in the funding requirements of the Partnership
combined with limitations on its sources of cash may create liquidity issues
for the Partnership in the future. The New Credit Facility permits the Owned
Subsidiaries to remit to the Partnership no more than 4.25% of their net
cable revenues in any year. For the nine months ended September 30, 1998, the
Partnership's credit agreements permitted the Owned Subsidiaries to remit
approximately $8.5 million to the Partnership, and $8.3 million was actually
remitted. As a result of the 1998 acquisition of the Falcon Classic and
Falcon Video Systems, the Partnership will no longer receive management fees
and reimbursed expenses from Falcon Classic or receive management fees from
Falcon Video. Receivables from the Affiliated Systems for services and
reimbursements described above amounted to approximately $959,000 at
September 30, 1998.
The Partnership has historically pursued a strategy of seeking to
acquire attractive acquisition candidates, with an emphasis on the
acquisition of systems which can be integrated with its existing operations.
Over the past two years, the Partnership has emphasized the acquisition of
Affiliated Systems due to its familiarity with these assets and because, in
many cases, these assets were already operationally integrated with Owned
Systems located nearby. The Partnership is evaluating the acquisition of
certain of the Enstar Systems, although these transactions, if completed, are
expected to be small in size. The Partnership cannot predict whether it will
have access to adequate capital in the future to make further acquisitions of
cable systems. The Partnership frequently considers opportunities to sell
assets that it views as non-strategic.
In October 1998, the Partnership reinstated third party insurance
coverage against damage to its cable distribution plant and subscriber
connections and against business interruptions resulting from such damage.
Although this coverage is subject to a significant annual deductible, the policy
is intended to insure the Partnership against catastrophic losses, if any, in
future periods.
During the third quarter, the Partnership's management continued its
identification and evaluation of the Partnership's Year 2000 business risks and
its exposure to computer systems, to operating equipment which is date sensitive
and to the interface systems of its vendors and service providers. The
evaluation has focused on identification and assessment of systems and equipment
that may fail to distinguish between the year 1900 and the year 2000 and, as a
result, may cease to operate or may operate improperly when dates after December
31, 1999 are introduced.
-18-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Based on a study conducted in 1997, the Partnership's management
concluded that certain of the Partnership's information systems were not Year
2000 compliant and elected to replace such software and hardware with
applications and equipment certified by the vendors as Year 2000 compliant.
Replacement costs will be capitalized in accordance with generally accepted
accounting principles and amortized over the lives of the assets. Maintenance
costs will be expensed as incurred. The Partnership's management expects to
install substantially all of the new systems in the fourth quarter of 1998, with
the remaining systems to be installed in the first half of 1999. The Partnership
is utilizing internal and external resources to install the new systems. The
total anticipated cost, including replacement software and hardware, is expected
to be approximately $1.7 million and is being funded through operating cash
flow. As of September 30, 1998, the Partnership had spent approximately $1.0
million. The Partnership does not believe that any other significant information
technology ("IT") projects affecting the Partnership have been delayed due to
efforts to identify or address Year 2000 issues.
Additionally, the Partnership has inventoried its operating and revenue
generating equipment to identify items that need to be upgraded or replaced and
has surveyed cable equipment manufacturers to determine which of their models
require upgrade or replacement to become Year 2000 compliant. Identification and
evaluation are essentially completed and a plan is being developed to remediate
non-compliant equipment prior to January 1, 2000. The Partnership expects to
complete its planning process by the end of 1998. Upgrade or replacement,
testing and implementation will be performed in 1999. The cost of such
replacement or remediation is currently estimated to be $3.5 million, none of
which had been incurred as of September 30, 1998. The Partnership plans to
inventory, assess, replace and test equipment with embedded computer chips in a
separate segment of its project, presently scheduled for 1999.
The Partnership has continued to survey its significant third party
vendors and service suppliers to determine the extent to which the Partnership's
interface systems are vulnerable should those third parties fail to solve their
own Year 2000 problems on a timely basis. Among the most significant service
providers upon which the Partnership relies are programming suppliers, power and
telephone companies, various banking institutions and the Partnership's customer
billing service. A majority of these service suppliers either have not responded
to the Partnership's inquiries regarding their Year 2000 compliance programs or
have responded that they are unsure if they will become compliant on a timely
basis. Consequently, there can be no assurance that the systems of other
companies on which the Partnership must rely will be Year 2000 compliant on a
timely basis.
The Partnership expects to develop a contingency plan in 1999 to
address possible situations in which various systems of the Partnership, or of
third parties with which the Partnership does business, are not compliant prior
to January 1, 2000. Considerable effort will be directed toward distinguishing
between those contingencies with a greater probability of occurring from those
whose occurrence is considered remote. Moreover, such a plan will necessarily
focus on systems whose failure poses a material risk to the Partnership's
results of operations and financial condition.
-19-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Partnership's most significant Year 2000 risk is an interruption of
service to subscribers, resulting in a potentially material loss of revenues.
Other risks include impairment of the Partnership's ability to bill and/or
collect payment from its customers, which could negatively impact its liquidity
and cash flows. Such risks exist primarily due to technological operations
dependent upon third parties and to a much lesser extent to those under the
control of the Partnership. Failure to achieve Year 2000 readiness in either
area could have a material adverse impact on the Partnership. The Partnership is
unable to estimate the possible effect on its results of operations, liquidity
and financial condition should the Partnership or its significant service
suppliers fail to complete their readiness programs prior to the Year 2000.
Depending on the supplier, equipment malfunction or type of service provided, as
well as the location and duration of the problem, the effect could be material.
For example, if a cable programming supplier encounters an interruption of its
signal due to a Year 2000 satellite malfunction, the Partnership will be unable
to provide the signal to its cable subscribers, which could result in a loss of
revenues. Due to the number of individually owned and operated channels the
Partnership carries for its subscribers, and the packaging of those channels,
the Partnership is unable to estimate any reasonable dollar impact of such
interruption.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Cash provided by operating activities (including interest expense and
management fee income) decreased from $56.4 million to $44.4 million, or by
21.3%, for the nine months ended September 30, 1998 compared to the
corresponding period in 1997, a decrease of $12 million. The decrease resulted
primarily from a net decrease of $2.9 million in other operating items
(receivables, other assets, payables, accrued expenses and subscriber deposits
and prepayments) and to a $9.1 million reduction in non-cash interest expense
resulting from the fact that in 1997, unlike 1998, the Partnership recorded
$21.8 million of non-cash interest expense related to the Notes, partially
offset in 1998 by the recording of $12.7 million of non-cash interest expense
related to the Senior Discount Debentures.
Cash used in investing activities increased from $47.9 million to $155.9
million, or by 225.7%, for the nine months ended September 30, 1998 compared
to the corresponding period in 1997. The increase was primarily due to the
acquisition of the Falcon Classic Systems for $83.4 million, to an increase
in capital expenditures of $16.6 million, to an increase in intangible assets
of $6.5 million and to $1.5 million cash retained by the general partners.
Cash from financing activities changed from a $8.3 million use of cash
to $106.9 million of cash provided for the nine months ended September 30, 1998
compared to the corresponding period in 1997. The change was due primarily to
additional borrowings in 1998 related to the New Credit Facility, the
acquisition of the Falcon Classic Systems, the discharge of Falcon Video
indebtedness and to the increase in capital expenditures. (See Note 4 to the
condensed consolidated financial statements.)
-20-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
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.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-21-
<PAGE>
FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) None.
(b) Falcon Holding Group, L.P. filed a Form 8-K
on June 5, 1998, reporting under Item 5 that
it had issued certain press releases
regarding the tender offer to purchase its 11%
Senior Subordinated Notes due 2003. On September
15, 1998, Falcon Holding Group, L.P. and Falcon
Funding Corporation filed a report to announce that
they had issued press releases on September 14 and
September 15 to announce the consummation of their
registered exchange offer and commencement of the
redemption of the remaining outstanding 11% Notes,
respectively.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
FALCON COMMUNICATIONS, L.P.
By: Falcon Holding Group, L.P.
General Partner
By: Falcon Holding Group, Inc., its
General Partner
Date: November 13, 1998 By: /s/ Michael K. Menerey
-------------------------
Michael K. Menerey, Executive
Vice President, Secretary and
Chief Financial Officer
FALCON FUNDING CORPORATION
Date: November 13, 1998 By: /s/ Michael K. Menerey
-------------------------
Michael K. Menerey, Chief
Financial Officer and Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT SEPTEMBER 30, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000900346
<NAME> FALCON COMMUNICATIONS LP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,269
<SECURITIES> 0
<RECEIVABLES> 17,158
<ALLOWANCES> 524
<INVENTORY> 0
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<PP&E> 789,719
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<TOTAL-ASSETS> 1,454,982
<CURRENT-LIABILITIES> 111,319
<BONDS> 1,578,140
0
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<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 1,454,982
<SALES> 0
<TOTAL-REVENUES> 201,789
<CGS> 0
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