-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GK0PglaWyYGs1UXpdZe29oMG6NHmPcaWY5+A4sfJHGhlrNVlOPXagHSEpCq2Iepp IbUokQ9D7jfgRK2Yuyyyjg== 0000912057-99-004698.txt : 19991115 0000912057-99-004698.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-004698 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON COMMUNICATIONS LP CENTRAL INDEX KEY: 0000900346 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 954654565 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-60776 FILM NUMBER: 99746689 BUSINESS ADDRESS: STREET 1: 10900 WILSHIRE BLVD STREET 2: 15TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3108249990 FORMER COMPANY: FORMER CONFORMED NAME: FALCON HOLDING GROUP LP DATE OF NAME CHANGE: 19940601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON FUNDING CORP CENTRAL INDEX KEY: 0001060530 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 954681480 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-55755-01 FILM NUMBER: 99746690 BUSINESS ADDRESS: STREET 1: 10900 WILSHIRE BLVD STREET 2: 15TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3108249990 MAIL ADDRESS: STREET 1: 10900 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90024 10-Q 1 10-Q 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, 1999 ------------------------------------------ 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 333-55755-01 ---------------------------------------------- FALCON COMMUNICATIONS, 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 Incorporation or Organization) Numbers) 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) - -------------------------------------------------------------------------------- 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 X No --- --- Number of shares of common stock of Falcon Funding Corporation outstanding as of November 9, 1999: 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. PART I - FINANCIAL INFORMATION FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ======================================================
December 31, September 30, 1998* 1999 ----------------- ----------------- (Unaudited) (Dollars in Thousands) ASSETS: Cash and cash equivalents $ 14,284 $ 4,196 Receivables: Trade, less allowance of $670,000 and $600,000 for possible losses 15,760 16,236 Affiliates 2,322 2,414 Other assets 16,779 30,422 Property, plant and equipment, less accumulated depreciation and amortization of $320,209,000 and $366,232,000 505,894 549,476 Franchise cost, less accumulated amortization of $226,526,000 and $263,777,000 397,727 372,322 Goodwill, less accumulated amortization of $25,646,000 and $30,513,000 135,308 131,051 Customer lists and other intangible costs, less accumulated amortization of $59,422,000 and $117,721,000 333,017 280,238 Deferred loan costs, less accumulated amortization of $2,014,000 and $2,886,000 24,331 22,874 ----------------- ----------------- $ 1,445,422 $ 1,409,229 ================= ================= LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable $ 1,611,353 $ 1,681,454 Accounts payable 10,341 3,382 Accrued expenses 83,077 139,626 Customer deposits and prepayments 2,257 2,714 Deferred income taxes 8,664 1,681 Minority interest 403 546 ----------------- ----------------- TOTAL LIABILITIES 1,716,095 1,829,403 ----------------- ----------------- REDEEMABLE PARTNERS' EQUITY 133,023 424,280 ----------------- ----------------- PARTNERS' EQUITY (DEFICIT): General partner (408,369) (847,641) Limited partners 4,673 3,187 ----------------- ----------------- TOTAL PARTNERS' DEFICIT (403,696) (844,454) ----------------- ----------------- $ 1,445,422 $ 1,409,229 ================= =================
*As presented in the audited financial statements. See accompanying notes to condensed consolidated financial statements. -2- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ===============================================
Unaudited ------------------------------------- Three months ended September 30, ------------------------------------- 1998 1999 ---------------- ----------------- (Dollars in Thousands) REVENUES $ 68,457 $ 108,023 ---------------- ----------------- OPERATING COSTS AND EXPENSES: Programming costs 13,364 25,020 Service costs 7,716 11,773 General and administrative expenses 20,226 18,474 Depreciation and amortization 34,278 58,498 ---------------- ----------------- Total operating costs and expenses 75,584 113,765 ---------------- ----------------- Operating loss (7,127) (5,742) OTHER INCOME (EXPENSE): Interest expense, net (25,045) (34,079) Equity in net income (loss) of investee partnerships 67 (204) Other expense, net (338) (1,681) Income tax benefit (expense) (4,679) 563 ---------------- ----------------- Net loss before extraordinary items (37,122) (41,143) Extraordinary items (2,230) - ---------------- ----------------- NET LOSS $ (39,352) $ (41,143) ================ =================
See accompanying notes to condensed consolidated financial statements. -3- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS =======================================================
Unaudited ------------------------------------- Nine months ended September 30, ------------------------------------- 1998 1999 ---------------- ----------------- (Dollars in Thousands) REVENUES $ 201,789 $ 320,228 ---------------- ----------------- OPERATING COSTS AND EXPENSES: Programming costs 39,297 72,253 Service costs 21,840 37,318 General and administrative expenses 44,742 58,253 Equity-based deferred compensation - 44,600 Depreciation and amortization 98,284 168,546 ---------------- ----------------- Total operating costs and expenses 204,163 380,970 ---------------- ----------------- Operating loss (2,374) (60,742) OTHER INCOME (EXPENSE): Interest expense, net (69,744) (98,931) Equity in net loss of investee partnerships (199) (41) Other income (expense), net (1,162) 8,126 Income tax benefit (expense) (2,848) 3,022 ---------------- ----------------- Net loss before extraordinary items (76,327) (148,566) Extraordinary items (30,642) - ---------------- ----------------- NET LOSS $ (106,969) $ (148,566) ================ =================
See accompanying notes to condensed consolidated financial statements. -4- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ======================================================
Unaudited ------------------------------------- Nine months ended September 30, ------------------------------------- 1998 1999 ---------------- ----------------- (Dollars in Thousands) Net cash provided by operating activities $ 44,361 $ 71,585 ---------------- ----------------- Cash flows from investing activities: Acquisition of cable television systems (83,391) (26,320) Capital expenditures (63,357) (102,626) Increase in intangible assets (7,692) (3,333) Cash retained by FHGLP (1,546) - Proceeds from sale of system - 3,178 Other 37 (2,048) ---------------- ----------------- Net cash used in investing activities (155,949) (131,149) ---------------- ----------------- Cash flows from financing activities: Borrowings from notes payable 2,357,607 93,500 Repayment of debt (2,225,120) (44,121) Deferred loan costs (25,630) (70) Other 83 167 ---------------- ----------------- Net cash provided by financing activities 106,940 49,476 ---------------- ----------------- Net decrease in cash and cash equivalents (4,648) (10,088) Cash and cash equivalents at beginning of period 13,917 14,284 ---------------- ----------------- Cash and cash equivalents at end of period $ 9,269 $ 4,196 ================ =================
See accompanying notes to condensed consolidated financial statements. -5- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES 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 23 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"), 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"). In March 1999, AT&T and Tele-Communications, Inc. completed a merger under which Tele-Communications, Inc. became a unit of AT&T called AT&T Broadband & Internet Services, which is now the owner of TCI Falcon Holdings, LLC as a result of the merger. As a result, AT&T Broadband and Internet Services 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 has been accounted for as a recapitalization of FHGLP into the Partnership and the concurrent acquisition by the Partnership of the TCI systems. On May 26, 1999, the Partnership and Charter Communications ("Charter") announced a definitive agreement in which Charter will acquire the Partnership in a cash and stock transaction valued at approximately $3.6 billion. Closing of the pending sale is anticipated to take place in the fourth quarter of 1999. NOTE 2 - INTERIM FINANCIAL STATEMENTS The interim financial statements for the three and nine months ended September 30, 1999 and 1998 are unaudited. These condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Partnership's latest Annual Report on Form 10-K. In the opinion of management, such statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of such periods. The results of operations for the three and nine months ended September 30, 1999 are not indicative of results for the entire year. NOTE 3 - REDEEMABLE PARTNERS' EQUITY Redeemable partners' equity has been adjusted as of September 30, 1999 based on the estimated redemption value to be recognized from the pending sale to Charter, which is subject to final determination of working capital and debt balances. NOTE 4 - EQUITY-BASED DEFERRED COMPENSATION In connection with the pending sale of the Partnership to Charter discussed in Note 1, the Partnership recorded a non-cash charge of $42 million during the three months ended June 30, 1999 -6- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ========================================================== NOTE 4 - EQUITY-BASED DEFERRED COMPENSATION (CONTINUED) related to both the 1993 Incentive Performance Plan ($17.2 million) and the 1999 Employee Restricted Unit Plan ($24.8 million). The estimated amounts were determined based on the value of the underlying ownership units, as established by the pending sale of the Partnership to Charter, and on estimated closing working capital and debt balances of the Partnership. Additional compensation related to the 1993 Incentive Performance Plan of $2.6 million was recorded in the three months ended March 31, 1999 based on management's estimate of the increase in value of the underlying ownership interests since December 31, 1998. Payments under the plans are subject to closing of the sale to Charter, will be determined based on the final working capital and debt balances of the Partnership and will be paid from net sale proceeds. The total recorded deferred compensation expense of $44.6 million under these plans is included in accrued expenses. In addition to the amounts expected to be paid pursuant to the plans, management currently expects to pay from net sale proceeds additional bonuses to certain employees in the aggregate amount of approximately $22 million contingent upon the closing of the sale to Charter. Such amounts will be reflected in the condensed consolidated financial statements when the closing of the sale to Charter has occurred. NOTE 5 - ACQUISITIONS In March 1998, the Partnership acquired substantially all of the assets of Falcon Classic Cable Income Properties, L.P. 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. The following unaudited condensed consolidated pro forma statement of operations presents the consolidated results of operations of the Partnership as if the acquisitions had occurred at January 1, 1998 and is 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.
Three Nine Months Ended Months Ended September 30, September 30, 1998 1998 --------------------- --------------------- (Dollars in Thousands) Revenues $ 107,418 $ 321,058 Expenses (113,826) (335,064) --------------------- --------------------- Operating loss (6,408) (14,006) Interest and other expenses (35,306) (98,127) --------------------- --------------------- Loss before extraordinary items $ (41,714) $ (112,133) ===================== =====================
In January 1999, the Partnership acquired the assets of certain cable systems serving approximately 591 customers in Oregon for $800,700. On March 15, 1999, the Partnership acquired the assets of certain cable systems serving approximately 7,928 customers in Utah for $6.8 million. On March 22, 1999, the Partnership acquired the assets of the Franklin, Virginia system in exchange for the assets of its Scottsburg, Indiana systems and $8 million in cash and recognized a gain of $8.5 -7- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ========================================================== NOTE 5 - ACQUISITIONS (CONTINUED) million. The Franklin system serves approximately 9,042 customers and the Scottsburg systems served approximately 4,507 customers. The effects of this transaction on results of operations are not material. On July 30, 1999, the Partnership acquired the assets of certain cable systems serving approximately 6,500 customers in Oregon for $9.5 million. NOTE 6 - SALE OF SYSTEMS On March 1, 1999, the Partnership contributed $2.4 million cash and certain systems located in Oregon with a net book value of $5.6 million to a joint venture with Bend Cable Communications, Inc., which manages the joint venture. The Partnership owns 17% of the joint venture. These systems had been acquired from Falcon Classic in March 1998, and served approximately 3,471 subscribers at March 1, 1999. On March 26, 1999, the Partnership sold certain systems serving approximately 2,550 subscribers in Kansas for $3.2 million and recognized a gain of $2.5 million. -8- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Cable Television Consumer Protection and Competition Act of 1992 required the 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 our revenues and cash flow. The Telecommunications Act of 1996 substantially changed the competitive and regulatory environment for cable television and telecommunications service providers. Among other changes, the Telecommunications Act of 1996 ended regulation of cable programming service tier rates on March 31, 1999. The FCC, Congress or other regulatory authorities could take actions in the future that could negatively impact the Partnership's business. Accordingly, the historical financial results described below are not necessarily indicative of future performance. REVENUE. Substantially all of our revenue is earned from subscriber fees for cable television programming services, the sale of advertising, commissions for products sold through home shopping networks, fees for ancillary services (such as the rental of set top and remote control devices), and installations. OPERATING COSTS AND EXPENSES. Operating costs and expenses consist of programming expenses, service costs, general and administrative expenses and depreciation and amortization expense. Programming expenses have historically increased at rates in excess of inflation due to system acquisitions, as well as increases in the number, quality and costs of programming services offered. Service costs primarily include expenses related to wages and employee benefits of technical personnel, franchise fees, copyright fees, property taxes, electricity, systems supplies and vehicles. General and administrative expenses include wages and employee benefits of customer service, accounting and administrative personnel, marketing and advertising costs and expenses related to billing, payment processing, office administration, insurance and corporate overhead. Depreciation and amortization expense relates to depreciation of tangible assets and the amortization of intangible costs. 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 us. 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 us. In addition to the information provided herein, reference is made to our annual report on Form 10-K for the year ended December 31, 1998 and the other periodic reports and registration statements filed by Falcon Holding Group, L.P. and Falcon Communications, L.P. with the Securities and Exchange Commission from time to time for additional information regarding such matters and the effect thereof on our business. -9- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES RESULTS OF OPERATIONS The following table sets forth the historical statement of operations data and the components of net earnings and EBITDA expressed as a percentage of revenue for the periods indicated.
Unaudited ----------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------- --------------------------------- 1998 1999 1998 1999 --------------- --------------- -------------- --------------- Statement of Operations Data: Revenue 100.0% 100.0% 100.0% 100.0% --------------- --------------- -------------- --------------- Operating costs and expenses: Programming costs 19.5% 23.2% 19.5% 22.6% Service costs 11.3% 10.9% 10.8% 11.7% General and administrative expenses 29.5% 17.1% 22.2% 18.2% Depreciation and amortization 50.1% 54.2% 48.7% 52.6% Equity-based deferred compensation - - - 13.9% --------------- --------------- -------------- --------------- Total operating costs and expenses 110.4% 105.4% 101.2% 119.0% --------------- --------------- -------------- --------------- Operating loss (10.4%) (5.4%) (1.2%) (19.0%) Interest expense, net (36.6%) (31.5%) (34.6%) (30.9%) Other income (expense) (7.2%) (1.2%) (2.1%) 3.5% --------------- --------------- -------------- --------------- Net loss before extraordinary items (54.2%) (38.1%) (37.9%) (46.4%) Extraordinary items (3.3%) - (15.2%) - --------------- --------------- -------------- --------------- Net Loss (57.5%) (38.1%) (53.1%) (46.4%) =============== =============== ============== =============== EBITDA 39.7% 48.8% 47.5% 33.7%
Our revenues increased from $68.4 million to $108 million, or by 57.9%, and from $201.8 million to $320.2 million, or by 58.7%, for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998. Of the $39.6 million net increase in revenues for the three months ended September 30, 1999 as compared to the corresponding period in 1998, $31 million was due to the acquisition in September 1998 of the TCI systems, $8.9 million was due to the acquisition in September 1998 of the Falcon Video systems and $1.2 million related to increases in regulated service rates implemented during 1998 and 1999. These increases were partially offset by decreases of $1.7 million related to reductions in the number of regulated and premium subscriptions for cable service and a $527,000 reduction in management fees. Of the $118.4 million net increase in revenues for the nine months ended September 30, 1999 compared to the corresponding period in 1998, $91.5 million was due to the acquisition of the TCI systems, $25.6 million was due to the acquisition of the Falcon Video systems, $4.6 million was due to the acquisition in March and July 1998 of the Falcon Classic systems and $1.7 million was due to increases in regulated service rates implemented during 1998 and 1999. These increases were partially offset by decreases of $3.8 million related to reductions in the number of regulated and premium subscriptions for cable service and a $1.8 million reduction in management fees. As of September 30, 1999, we had approximately 1,009,000 basic subscribers and 267,000 premium service units. -10- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES RESULTS OF OPERATIONS (CONTINUED) Management and consulting fees decreased from $937,000 to $411,000 and from $3 million to $1.2 million for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998 primarily due to our acquisition of cable systems we had previously managed. Of the total reduction for the three and nine months ended September 30, 1999 as compared to the corresponding periods in 1998, $425,000 and $1.2 million related to the acquisition of the Falcon Video systems, $100,000 and $342,000 was due to a reduction in the amounts received from Enstar Communications Corporation, the general partner of partnerships owning approximately 93,000 subscribers that we manage, and $191,000 for the nine month period only related to the acquisition of the Falcon Classic systems. Programming costs increased from $13.4 million to $25 million, or by 86.6%, and from $39.3 million to $72.3 million, or by 84%, for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998. Of the $11.6 million and $33 million increase in programming fees paid to programming suppliers (including primary satellite fees) for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998, $9 million and $26.4 million related to the acquisition of the TCI systems, $2 million and $5.5 million related to the acquisition of the Falcon Video systems and $936,000 for the nine month period only related to the acquisition of the Falcon Classic systems. Service costs increased from $7.7 million to $11.8 million, or by 53.2%, and from $21.8 million to $37.3 million, or by 71.1%, for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998. Service costs represent costs other than programming costs that are directly attributable to providing cable services to customers. Of the $4.1 million and $15.5 million increase in service costs for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998, $4.5 million and $12.3 million related to the acquisition of the TCI systems, $920,000 and $2.9 million related to the acquisition of Falcon Video systems and $709,000 for the nine months period only related to the acquisition of the Falcon Classic systems. These increases were partially offset by decreases in a number of categories, primarily franchise and copyright fees. General and administrative expenses decreased from $20.2 million to $18.5 million, or by 8.4%, for the three months ended September 30, 1999 and increased from $44.8 million to $58.3 million, or by 30.1%, for the nine months ended September 30, 1999 compared to the corresponding periods in 1998. The $1.7 million decrease for the three months ended September 30, 1999 compared to the corresponding period in 1998 was principally caused by the absence in 1999 of $7.7 million of compensation expense related to the TCI transaction recorded during the third quarter 1998, partially offset by increases related to the acquisition of the TCI systems and Falcon Video systems ($4.9 million and $1.0 million, respectively) and to an $893,000 increase in worker's compensation insurance expense in 1999. Of the $13.5 million increase for the nine months ended September 30, 1999, $19.4 million related to the acquisitions of the TCI systems, Falcon Video systems and Falcon Classic systems ($15.4 million, $3.4 million and $607,000, respectively) and $1.3 million related to an increase in worker's compensation insurance expense. These increases were partially offset by the absence in 1999 of the $7.7 million of compensation expense recorded during 1998. As discussed in Note 4 to the financial statements, we recorded a non-cash charge of $44.6 million during the nine months ended September 30, 1999 related to both the 1993 Incentive -11- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES RESULTS OF OPERATIONS (CONTINUED) Performance Plan ($19.8 million) and the 1999 Employee Restricted Unit Plan ($24.8 million). Payments under the plans are subject to closing of our pending sale to Charter, will be determined based on the final working capital and debt balances of the Partnership, and will be paid from net sales proceeds. Depreciation and amortization expense increased from $34.3 million to $58.5 million, or by 70.6%, and from $98.3 million to $168.5 million, or by 71.4%, for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998. Of the $24.2 million and $70.2 million increase in depreciation and amortization expense for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998, $18.8 million and $54 million related to the acquisition of the TCI systems, $8.3 million and $18 million related to the acquisition of the Falcon Video systems and $2.9 million for the nine month period only related to the acquisition of the Falcon Classic systems. These increases were partially offset by accelerated depreciation related to asset retirements. Operating loss decreased from $7.1 million to $5.7 million and increased from $2.4 million to $60.8 million, for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998. The $1.4 million decrease for the three months ended September 30, 1999 was principally due to the compensation expense related to the TCI Transaction discussed above. The $58.4 million increase for the nine months ended September 30, 1999 was primarily due to the equity-based deferred compensation expense discussed above and to the depreciation and amortization expense associated with the acquisition of the TCI, Falcon Video and Falcon Classic systems (which had a combined operating loss of $9.6 million and $21.5 million for the three and nine month periods in 1999). Interest expense, net, including the effects of interest rate hedging agreements, increased from $25 million to $34.1 million, or by 36.4%, and from $69.7 million to $98.9 million, or by 41.9%, for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998. The increases were primarily due to higher average debt balances outstanding, partially offset by the effect of lower average interest rates (7.8% and 7.6% during the three and nine months ended September 30, 1999 compared to 9.3% and 9.2% during the corresponding periods in 1998). Non-cash interest expense associated with our senior discount debentures amounted to $7 million and $20.7 million for the three and nine months ended September 30, 1999. Interest rate hedging agreements resulted in additional interest expense of $924,000 and $4.1 million during the three and nine months ended September 30, 1999 compared to additional interest expense of $104,000 and $319,000 during the corresponding periods in 1998. Other expense, net, increased from $338,000 to $1.7 million for the three months ended September 30, 1999 and changed from $1.2 million of expense to $8.1 million of income for the nine months ended September 30, 1999 compared to the corresponding periods in 1998. We recorded $1.4 million of expenses during the third quarter of 1999 related to our pending sale to Charter. The change for the nine months ended September 30, 1999 as compared to the corresponding period in 1998 was primarily related to the recognition of $11 million gain from the exchange of cable systems located in Indiana ($8.5 million) and Kansas ($2.5 million) during the first quarter of 1999, partially offset by a $2.2 million of expenses related to pending sale to Charter. -12- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES RESULTS OF OPERATIONS (CONTINUED) Due to the factors described above, our net loss increased from $39.4 million to $41.2 million, or by 4.6%, and from $106.9 million to $148.5 million, or by 38.9% for the three and nine months ended September 30, 1999 compared to the corresponding periods in 1998. Based on our experience in the cable television industry, we believe that operating income before depreciation and amortization, commonly referred to as "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 our primary debt instruments use EBITDA-derived calculations as a measure of financial performance. EBITDA is not a measurement determined under generally accepted accounting principles and does not represent cash generated from operating activities in accordance with these accounting principles. EBITDA should not be considered by the reader as an alternative to net income as an indicator of our financial performance or as an alternative to cash flows as a measure of liquidity. In addition, our definition of EBITDA may not be identical to similarly titled measures used by other companies. EBITDA increased from $27.1 million to $52.7 million, or by 94.5% and from $95.9 million to $107.8 million, or by 12.4%. EBITDA as a percentage of revenues increased from 39.7% to 48.8% for the three months ended September 30, 1999 and decreased from 47.5% to 33.7% for the nine months ended September 30, 1999 compared to the corresponding periods in 1998. The decrease for the nine months was primarily caused by the deferred compensation costs described above and by the impact of the systems acquired from TCI (which had an EBITDA margin of 40.5% and 40.8% for the three and nine month 1999 periods). Absent the impact of the equity-based deferred compensation adjustments, EBITDA for the nine months ended September 30, 1999 would have been $152.4 million and EBITDA as a percentage of revenues would have been 47.6%. LIQUIDITY AND CAPITAL RESOURCES Historically, our primary need for capital has been to acquire cable systems, to finance plant extensions, rebuilds and upgrades and to add addressable set top devices to certain of our cable systems. We spent $96.4 million during 1998 on capital expenditures. Our 1999 plan called for capital expenditures of approximately $190 million, consisting of approximately $111 million to rebuild and upgrade certain cable systems and $79 million for line extensions and other new equipment. Due to various factors, we do not currently anticipate spending that much, and for the nine months ended September 30, 1999 we spent $56.7 million to rebuild and upgrade certain cable systems and $47.8 million for line extensions and other new equipment. We plan to finance capital expenditures with cash flow from operations and borrowings under our bank credit facility, subject to our ability to remain in compliance with certain covenants of the bank credit facility and the indenture for our outstanding debentures. The restriction on incurring indebtedness contained in our partnership agreement was waived pending the completion of our pending sale to Charter. Our proposed spending plans are frequently reviewed and revised with respect to changes in technology, acceptable leverage parameters (including those specified in our debt agreements), franchise requirements, competitive circumstances and other factors. The bank 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. As of September 30, 1999, the amount outstanding under the bank credit facility was $975.75 million and, -13- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) subject to complying with covenants, we had available additional committed borrowing capacity (excluding the supplemental credit facility) of approximately $166.6 million. The bank credit facility requires that interest be tied to the ratio of consolidated total debt to consolidated annualized cash flow, and further requires that we maintain hedging arrangements with respect to at least 50% of the outstanding borrowings thereunder plus any of our additional borrowings, including the debentures, for a two-year period. As of September 30, 1999 borrowings under the bank credit facility bore interest at an average rate of 7.2% (including the effect of interest rate hedging agreements). We have entered into fixed interest rate hedging agreements with an aggregate notional amount at September 30, 1999 of $1.4 billion. Agreements in effect at September 30, 1999 totaled $820 million, with the remaining $535 million to become effective as certain of the existing contracts mature during 1999 through October of 2004. The agreements serve as a hedge against interest rate fluctuations associated with our variable rate debt. These agreements expire at various times through October 2006. Our earnings are affected by changes in short-term interest rates applied to the portion of our debt that is not protected by hedging agreements. Because most of our debt is protected by hedging agreements, a 1% change in average interest rates would have an immaterial impact on our reported interest expense for the nine months ended September 30, 1999. The bank 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. We believe that we were in compliance with all such requirements as of September 30, 1999. We believe that borrowings under the credit facility together with cash flow from operations will be adequate to meet our liquidity needs for the foreseeable future. We have outstanding $375 million aggregate principal amount of senior debentures and $435.2 million aggregate principal amount at maturity of senior discount debentures. Semiannual interest payments with respect to the senior debentures are approximately $15.7 million. Interest on the senior discount debentures accrete semiannually until April 15, 2003, unless we elect to pay cash interest. After April 15, 2003, semiannual cash interest payments will be approximately $35.9 million in the aggregate. We anticipate that cash flow from operations and, if necessary, borrowings under the bank credit facility (or a successor credit facility) will continue to be adequate to meet our interest payment obligations under the debentures. Falcon Communications is a separate, stand-alone holding company which employs all of the management personnel for its cable television systems. All of the Falcon systems are owned by the subsidiaries of Falcon Communications. Accordingly, to fund our operations and to pay our expenses, including interest expense, we are financially dependent on the receipt of funds from our subsidiaries, management fees from domestic cable ventures, and the reimbursement of specified expenses by Enstar Communications Corporation. Expected increases in funding requirements combined with limitations on our sources of cash could create liquidity issues in the future. The bank credit facility permits our subsidiaries to remit to us no more than 4.5% of their net cable revenues in any year. For the nine months ended September 30, 1999, our credit agreements permitted our subsidiaries to remit approximately $14.2 million to us, and $14.2 million was actually remitted. As a result of the 1998 acquisition of the Falcon Video and Falcon Classic systems, we no longer receive management fees -14- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) and reimbursed expenses from Falcon Classic or management fees from Falcon Video. Receivables from Enstar Communications Corporation for services and reimbursements described above amounted to approximately $2.4 million at September 30, 1999. We intend to pay approximately $67 million to employees at closing upon completion of our acquisition by Charter as discussed in Note 4 to the financial statements, and all of these payments will be funded with sale proceeds. We have historically pursued a strategy of seeking to acquire attractive acquisition candidates, with an emphasis on the acquisition of systems which can be integrated with our existing operations. Over the past few years, we have emphasized the acquisition of our affiliated systems due to our familiarity with these assets and because, in many cases, these assets were already operationally integrated with our systems located nearby. In October 1998, we 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 us against catastrophic losses, if any, in future periods. CASH FLOWS Cash provided by operating activities (including interest expense and management fee income) increased from $44.4 million to $71.6 million, or by 61.3% for the nine months ended September 30, 1999 compared to the corresponding period in 1998, an increase of $27.2 million. The increase resulted primarily from a net increase of $19.2 million in other operating items (receivables, other assets, payables, accrued expenses and subscriber deposits and prepayments) and to an increase of $8 million in non-cash interest expense recorded in 1999 related to the senior discount debentures. Cash used in investing activities decreased from $155.9 million to $131.1 million, or by 15.9%, for the nine months ended September 30, 1999 compared to the corresponding period in 1998. The $24.8 million decrease was primarily due to the 1998 acquisition of the Falcon Classic assets for $83.4 million, to a decrease in intangible assets of $4.4 million, to $3.2 million of cash proceeds received during the third quarter of 1999 in connection with the sale of Kansas systems and to $1.5 million cash retained by our general partners during 1998. These decreases were partially offset by increases of $39.3 million in capital expenditures, $26.3 million related to the 1999 acquisition of certain cable systems located in Virginia, Utah and Oregon and a $2.4 million investment in a joint venture with Bend Cable Communications, Inc. Cash from financing activities decreased from $106.9 million to $49.5 million, or by 53.7%, for the nine months ended September 30, 1999 compared to the corresponding period in 1998. The decrease was primarily related to a reduction in net borrowings of approximately $83.1 million from the 1998 nine month period related to the bank credit facility, partially offset by the expenditure of $25.6 million in 1998 on deferred loan costs. -15- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES YEAR 2000 During the third quarter of 1999, we continued identification, evaluation and remediation of our Year 2000 business risks associated with operations directly under our control and those risks that are dependent on third parties related to our exposure to computer systems, to operating equipment which is date sensitive and to the interface systems of our vendors and service providers. The evaluation has focused on identification, assessment and remediation 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. Most of our exposure to Year 2000 issues is dependent in large part on third parties. Failure to identify and remediate a critical Year 2000 issue could result in an interruption of services to customers or in the interruption of critical business functions, either of which could result in a material adverse impact on our financial results. We have concluded that certain of our internal 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 are capitalized in accordance with generally accepted accounting principles and amortized over the lives of the assets. Maintenance costs are expensed as incurred. We installed the new systems in the first quarter of 1999. We are continuing to utilize internal and external resources to extend the functionality of the new systems. The total anticipated cost, including replacement software and hardware, is expected to be approximately $2.7 million and is being funded through operating cash flow. As of September 30, 1999, we had spent approximately $2.65 million. We do not believe that any other significant information technology projects affecting us have been delayed due to efforts to identify or address Year 2000 issues. Additionally, we continue to inventory internal operating and revenue generating equipment to identify items that need to be upgraded or replaced and survey cable equipment manufacturers to determine which of their models require upgrade or replacement to become Year 2000 compliant. Identification and evaluation, while ongoing, are substantially completed and a plan has been developed to remediate or replace non-compliant equipment. All potentially non-compliant items have been identified. Approximately 8.5% of non-compliant items are in the remediation planning phase and 91.5% are in the implementation stage. We have conducted limited testing of our systems, software and equipment in the third quarter of 1999 and place significant reliance on test results provided by AT&T Broadband & Internet Services. The cost of such replacement or remediation is currently estimated to be $1.7 million, of which $1.6 million had been incurred as of September 30, 1999. We have also substantially completed the assessment and replacement or remediation of the majority of our internal equipment containing embedded computer chips. We continue to survey our significant third party vendors and service suppliers to determine the extent to which our interface systems are vulnerable should those third parties fail to solve their own Year 2000 problems on a timely basis. We are heavily dependent on third parties and these parties are themselves heavily dependent on technology. For example, in a situation impacting the entire cable industry, much of our headend equipment that controls cable set-top devices was not Year 2000 compliant. The manufacturers have been working with cable industry groups to develop solutions that we are installing in our head-end equipment. We currently believe that these solutions were substantially implemented as of the end of the third quarter of 1999. In addition, if a television broadcaster or cable programmer encounters Year 2000 problems that impede its ability to -16- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES YEAR 2000 (CONTINUED) deliver its programming, we will be unable to provide that programming to our cable customers, which would result in a loss of revenues, although we would attempt to provide our customers with alternative program services. Virtually all of our most critical equipment vendors have responded to the surveys regarding the Year 2000 compliance of their products and indicated that they are already compliant or have indicated their intent to be compliant. Additional compliance information has been obtained for specific products from vendor Web sites, interviews, on-site visits, system interface testing and industry group participation. Among the most significant third party service providers upon which we rely are programming suppliers, power and telephone companies, various banking institutions and our customer billing service. We have satisfied ourselves that the third parties on which we are heavily reliant are Year 2000 compliant and have developed and published satisfactory contingency plans, or that alternative means of meeting our business requirements are available. However, we can predict neither the likelihood of successful compliance nor the direct or indirect costs to us of non-compliance by those third parties or of securing such services from alternate compliant third parties. We believe that we have established an effective program to resolve all significant Year 2000 issues in our control in a timely manner. Although we have substantially completed all phases of our program, we are dependent on third parties whose progress is not within our control. Disruptions experienced by third parties with which we do business as well as by the economy generally could also materially and adversely affect us. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. We have focused our efforts on identification and remediation of Year 2000 exposures and have developed specific contingency plans in the event we do not successfully complete our remaining remediation as anticipated or experience unforeseen problems. Considerable effort has been directed toward distinguishing between those contingencies with a greater probability of occurring from those whose occurrence is considered remote, and on those systems whose failure poses a material risk to our results of operations and financial condition. We are also examining our business interruption strategies to evaluate whether they would satisfactorily meet the demands of failures arising from Year 2000 related problems. INFLATION Certain of our expenses, such as those for wages and benefits, equipment repair and replacement, and billing and marketing generally increase with inflation. However, we do not believe that our financial results have been, or will be, adversely affected by inflation in a material way, provided that we are able to increase our service rates periodically, of which there can be no assurance. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK See Item 2., "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." -17- FALCON COMMUNICATIONS, L.P. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEMS 1-5. Not applicable. ITEM 6. Exhibits and Reports on Form 8-K (a) EXHIBIT 10.39 - Second Amendment to Purchase and Contribution Agreement, dated as of October 27, 1999, Charter Communications, Inc., Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN, Inc. EXHIBIT 27 - Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter for which this report is filed. 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 11, 1999 By: /s/ Michael K. Menerey ------------------------------------ Michael K. Menerey, Executive Vice President, Secretary and Chief Financial Officer FALCON FUNDING CORPORATION Date: November 11, 1999 By: /s/ Michael K. Menerey ------------------------------------ Michael K. Menerey, Chief Financial Officer and Secretary EX-10.39 2 EXHIBIT 10.39 Exhibit 10.39 SECOND AMENDMENT TO PURCHASE AND CONTRIBUTION AGREEMENT THIS SECOND AMENDMENT TO PURCHASE AND CONTRIBUTION AGREEMENT ("Second Amendment") is made and entered into as of October 27, 1999 by and among Charter Investment, Inc., a Delaware corporation formerly known as Charter Communications, Inc. ("CII"), Charter Communications Holding Company, LLC, a Delaware limited liability company ("Charter LLC"), Falcon Communications, L.P., a California limited partnership ("Falcon"), Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"), TCI Falcon Holdings, LLC, a Delaware limited liability company ("TCI"), Falcon Cable Trust, a California trust ("FC Trust"), Falcon Holding Group, Inc., a California corporation ("FHGI"), and DHN Inc., a California corporation ("DHN") (FHGLP, TCI, FC Trust, FHGI and DHN are sometimes referred to herein as "Sellers"). PRELIMINARY STATEMENT A. CII, Falcon, and Sellers entered into the Purchase and Contribution Agreement on May 26, 1999 (the "Purchase and Contribution Agreement"), which was amended and modified by a First Amendment to Purchase and Contribution Agreement dated as of June 22, 1999 ("First Amendment"). B. The parties hereto desire to modify the Purchase and Contribution Agreement in certain respects as described herein. Section 11.9 of the Purchase and Contribution Agreement provides that the Purchase and Contribution Agreement may be amended; provided that any such amendment will be binding on the parties prior to Closing only if set forth in a writing executed by them. C. Section 8.1(a)(1) of the Purchase and Contribution Agreement provides that the Closing shall take place on the date specified therein or on such earlier or later date as FHGLP and CII shall mutually agree. FHGLP, CII and Charter LLC desire to designate a certain date for the Closing in certain events as specified herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Except as otherwise provided in this Second Amendment, all capitalized terms used herein and not otherwise defined herein shall have the same meanings assigned to them in the Purchase and Contribution Agreement, as amended and modified by the First Amendment. 2. For purposes of this Second Amendment, "Charter IPO" means the initial public offering of shares of Class A Common Stock of Charter Communications, Inc. that is described in the Preliminary Prospectus dated October 18, 1999. 3. In the event FHGLP would be authorized to specify a date for the Closing that is on or before November 11, 1999 in accordance with Section 8.1(a)(1) of the Purchase and Contribution Agreement and FHGLP has heretofore specified, or after the date hereof specifies, such a date for the Closing, then, notwithstanding any such specification, FHGLP agrees to postpone the date for the Closing to the earlier of (A) the date on which the Charter IPO is consummated (in which event the Closing will occur concurrently with the consummation of the Charter IPO) and (B) November 19, 1999; and FHGLP, CII and Charter LLC agree to consummate the Closing on such earlier date in such event. If the date for the Closing is determined pursuant to the preceding sentence, such date shall be deemed determined in accordance with Section 8.1(a)(1) of the Purchase and Contribution Agreement for all purposes of the Purchase and Contribution Agreement (including, but not limited to, Section 9). Accordingly, consummation of the Closing remains subject to satisfaction or, to the extent permitted by law, waiver, of the closing conditions described in Section 7 and subject to Sections 8.1(a)(2), 8.1(a)(3) and 8.1(a)(4) of the Purchase and Contribution Agreement, and the proviso at the end of Section 8.1(a)(1) shall still apply. In the event FHGLP would not be authorized to specify a date for the Closing that is on or before November 11, 1999 in accordance with Section 8.1(a)(1) of the Purchase and Contribution Agreement or FHGLP does not specify such a date for the Closing, the date for the Closing shall be determined in accordance with the provisions of the Purchase and Contribution Agreement without regard to this Second Amendment. 4. The parties hereby agree that the Purchase and Contribution Agreement, as amended and modified by the First Amendment, is hereby deemed further amended in all respects necessary to give effect to the consents, agreements and waivers contained in this Second Amendment, whether or not a particular Section or provision of the Purchase and Contribution Agreement has been referred to in this Second Amendment. Except as amended hereby, the Purchase and Contribution Agreement, as amended and modified by the First Amendment, shall remain unchanged and in full force and effect, and this Second Amendment shall be governed by and subject to the terms of the Purchase and Contribution Agreement, as amended and modified by the First Amendment and this Second Amendment. From and after the date of this Second Amendment, each reference in the Purchase and Contribution Agreement to "this Agreement," "hereof," "hereunder" or words of like import, and all references to the Purchase and Contribution Agreement in any and all agreements, instruments, documents, notes, certificates and other writings of every kind and nature (other than in this Second Amendment or as otherwise expressly provided) shall be deemed to mean the Purchase and Contribution Agreement, as amended and modified by the First Amendment and as further amended and modified by this Second Amendment, whether or not such First Amendment or Second Amendment is expressly referenced. This Second Amendment may be signed in one or more counterparts, each of which shall constitute an original but which when taken together shall constitute one instrument. EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AT SEPTEMBER 30, 1999, AND THE STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001060530 FALCON FUNDING CORPORATION 1,000 9-MOS DEC-31-1999 SEP-30-1999 4,196 0 19,250 600 0 0 915,708 366,232 1,409,229 145,722 1,681,454 0 0 0 0 1,409,229 0 320,228 0 377,963 (8,085) 3,007 98,931 (151,588) (3,022) (148,566) 0 0 0 (148,566) 0 0
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