-----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, URfqQDGhvpR20Vp5YUpRfpxmb5T+6vXbsc2i/6e2RSIz+q9ZQ164uN9/xzrMuyPJ QzBcF3yuK+xBNyhI69WRpA== 0001047469-98-029920.txt : 19980810 0001047469-98-029920.hdr.sgml : 19980810 ACCESSION NUMBER: 0001047469-98-029920 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980807 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON HOLDING GROUP LP CENTRAL INDEX KEY: 0000900346 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 954408577 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 033-60776 FILM NUMBER: 98679884 BUSINESS ADDRESS: STREET 1: 10900 WILSHIRE BLVD STREET 2: 15TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3108249990 10-Q/A 1 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________________ FORM 10-Q/A (MARK ONE) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 ________________________ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _______________ Commission File Number 33-60776 -------- Falcon Holding Group, L.P. - ------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 95-4408577 - --------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 10900 Wilshire Boulevard - 15th Floor Los Angeles, California 90024 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 824-9990 ------------------ - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- The Exhibit Index is located at Page E-1. PART I - FINANCIAL INFORMATION FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31, 1997* 1998 ------------ ----------- (Unaudited) (Dollars in Thousands) ASSETS: Cash and cash equivalents $ 13,917 $ 11,162 Receivables: Trade, less allowance of $825,000 and $781,000 for possible losses 13,174 12,291 Affiliates 11,254 11,309 Other assets 14,576 15,647 Other investments 1,776 1,555 Property, plant and equipment, less accumulated depreciation and amortization of $272,551,000 and $275,806,000 324,559 358,074 Franchise cost, less accumulated amortization of $203,700,000 and $211,870,000 222,281 218,844 Goodwill, less accumulated amortization of $18,531,000 and $20,010,000 66,879 71,487 Customer lists and other intangible costs, less accumulated amortization of $25,517,000 and $28,578,000 59,808 88,360 Deferred loan costs, less accumulated amortization of $7,144,000 and $7,681,000 12,134 11,597 ---------- --------- $ 740,358 $ 800,326 ---------- --------- ---------- --------- LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable $ 911,221 $1,001,054 Accounts payable 9,169 6,476 Accrued expenses 52,789 44,812 Customer deposits and prepayments 1,452 1,652 Deferred income taxes 7,553 7,026 Minority interest 354 346 Equity in losses of affiliated partnerships in excess of investment 3,202 3,251 ---------- --------- TOTAL LIABILITIES 985,740 1,064,617 ---------- --------- COMMITMENTS AND CONTINGENCIES REDEEMABLE PARTNERS' EQUITY 171,373 171,373 ---------- --------- PARTNERS' DEFICIT: General partner (13,200) (13,389) Limited partners (403,555) (422,275) ---------- --------- TOTAL PARTNERS' DEFICIT (416,755) (435,664) ---------- --------- $ 740,358 $ 800,326 ---------- --------- ---------- ---------
*As presented in the audited financial statements. See accompanying notes to condensed consolidated financial statements. -2- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- -----------------------------------------------
UNAUDITED ----------------------- THREE MONTHS ENDED MARCH 31, ----------------------- 1997 1998 ----------- ---------- (Dollars in Thousands) REVENUES $ 63,984 $ 64,557 --------- --------- EXPENSES: Service costs 18,295 19,565 General and administrative expenses 11,179 11,678 Depreciation and amortization 29,793 31,079 --------- --------- Total expenses 59,267 62,322 --------- --------- Operating income 4,717 2,235 OTHER INCOME (EXPENSE): Interest expense, net (20,384) (20,487) Equity in net loss of investee partnerships (71) (248) Other expense, net (163) (774) Income tax benefit 566 365 --------- --------- NET LOSS $ (15,335) $ (18,909) --------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements. -3- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- -----------------------------------------------
UNAUDITED ----------------------- THREE MONTHS ENDED MARCH 31, ----------------------- 1997 1998 ----------- ---------- (Dollars in Thousands) Net cash provided by operating activities $ 15,322 $ 2,729 --------- --------- Cash flows from investing activities: Acquisition of cable television systems - (76,789) Capital expenditures (10,624) (18,021) Increase in intangible assets (326) (550) Other 9 42 --------- --------- Net cash used in investing activities (10,941) (95,318) --------- --------- Cash flows from financing activities: Borrowings from notes payable 8,000 96,472 Repayment of debt (15,179) (6,638) Other 24 - --------- --------- Net cash provided by (used in) financing activities (7,155) 89,834 ---------- --------- Net decrease in cash and cash equivalents (2,774) (2,755) Cash and cash equivalents at beginning of period 13,633 13,917 --------- --------- Cash and cash equivalents at end of period $ 10,859 $ 11,162 --------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements. -4- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------- -------------------------------------------- NOTE 1 - BASIS OF PRESENTATION Falcon Holding Group, L.P., a Delaware limited partnership (the "Partnership" or "FHGLP"), owns and operates cable television systems serving small to medium-sized communities and the suburbs of certain cities in 23 states (the "Owned Systems"). The Partnership also controls, holds varying equity interests in and manages certain other cable television systems for a fee (the "Affiliated Systems" and, together with the Owned Systems, the "Systems"). The Affiliated Systems operate 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"). The condensed consolidated financial statements include the consolidated accounts of FHGLP, its subsidiary cable television operating partnerships and corporations (the "Owned Subsidiaries") and those operating partnerships' general partners which are owned by FHGLP. The condensed consolidated financial statements also include the accounts of Enstar Communications Corporation ("ECC"), a wholly-owned subsidiary of one of the operating partnerships, which is the general partner of the 15 limited partnerships operating under the name "Enstar" (the "Enstar Partnerships"), which are Affiliated Systems. The ECC ownership interests in the Enstar Partnerships range from 0.5% to 1.0%. NOTE 2 - INTERIM FINANCIAL STATEMENTS The interim financial statements for the three months ended March 31, 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 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 months ended March 31, 1998 are not necessarily indicative of results for the entire year. NOTE 3 - MINORITY INTEREST Included in the operations of Falcon Telecable, one of the Owned Subsidiaries, are the results of operations of Lake Las Vegas Cablevision, L.P., a Delaware limited partnership, which is a joint venture owned 66 2/3% by Falcon Telecable. The minority interest reflects the 33 1/3% of the venture that Falcon Telecable does not own. -5- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------- -------------------------------------------- NOTE 4 - ACQUISITION In March 1998 the Partnership paid to Falcon Classic Cable Income Properties, L.P. ("Falcon Classic") $76.8 million (including $1.1 million of interest as required by an agreement settling certain litigation arising from the acquisition by the Partnership of the assets of Falcon Classic) in order to purchase substantially all of the assets of Falcon Classic, other than the cable television system serving the City of Somerset, Kentucky. The Partnership also paid approximately $1.2 million to the settlement fund established in connection with the settlement of the above-referenced litigation, $500,000 of which was reimbursed by insurance on May 1, 1998. The acquisition of the City of Somerset assets will be completed as soon as regulatory approvals can be obtained, of which there can be no assurance. Falcon Classic had revenue of approximately $32.1 million for the year ended December 31, 1997, including approximately $1.5 million from the City of Somerset. NOTE 5 - SUBSEQUENT EVENTS On April 3, 1998 the Partnership and its wholly-owned subsidiary Falcon Funding Corporation ("FFC" and, collectively with the Partnership, the "Issuers") consummated the issuance of $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 are obligated to consummate an offer to exchange, pursuant to an effective registration statement under the Securities Act, the Debentures for debentures with terms identical to the corresponding Debentures, or to cause resales of the Debentures to be registered under the Securities Act pursuant to a shelf registration statement. The Senior Debentures were issued at a price of 99.732% of their principal amount, for total gross proceeds to the Issuers of approximately $374.0 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 to the Issuers 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 to the Issuers of approximately $631 million. The Partnership used substantially all the net proceeds from the sale of the Debentures to repay outstanding bank indebtedness. On April 20, 1998, the Partnership made a tender offer for all of its 11% Senior Subordinated Notes due 2003 (the "11% Notes"). If such tender offer does not result in the purchase of all of the 11% Notes, the Partnership will redeem any remaining outstanding 11% Notes prior to October 15, 1998. -6- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") required the Federal Communications Commission ("FCC") to, among other things, implement extensive regulation of the rates charged by cable television systems for basic and programming service tiers, installation, and customer premises equipment leasing. Compliance with those rate regulations has had a negative impact on the Partnership's revenues and cash flow. The Telecommunications Act of 1996 (the "1996 Telecom Act") substantially changed the competitive and regulatory environment for cable television and telecommunications service providers. Among other changes, the 1996 Telecom Act provides that the regulation of cable programming service tier ("CPST") rates will be terminated altogether on March 31, 1999. Because cable service rate increases have continued to outpace inflation under the FCC's existing regulations, the Partnership expects Congress and the FCC to explore additional methods of regulating cable service rate increases, including deferral or repeal of the March 31, 1999 termination of CPST rate regulation. There can be no assurance as to what, if any, further action may be taken by the FCC, Congress or any other regulatory authority or court, or the effect thereof on the Partnership's business. Accordingly, the Partnership's historical financial results as described below are not necessarily indicative of future performance. This Report includes certain forward looking statements regarding, among other things, future results of operations, regulatory requirements, pending business combination and 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 the Partnership's Annual Report on Form 10-K for the year ended December 31, 1997 and the other periodic reports filed by 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. -7- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES RESULTS OF OPERATIONS The Partnership's revenues increased from $64 million to $64.6 million, or by 0.9%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. Of the $573,000 net increase in revenues, $1.3 million was due to the acquisition in March 1998 of the Falcon Classic assets discussed in Note 4 to the condensed consolidated financial statements. This increase was partially offset by decreases of $424,000 in management fees and $289,000 in cable service revenues. The $289,000 decrease in cable service revenues was caused principally by decreases of $1.5 million due to reductions in the number of regulated subscriptions for cable service and $975,000 due to reductions in the number of premium subscriptions for cable service. These decreases were partially offset by increases of $1.5 million related to increases in regulated service rates implemented during 1997 and 1998 and by $741,000 related to increases in unregulated service rates implemented during 1997. As of March 31, 1998, the Owned Systems had approximately 607,000 basic subscribers and 183,000 premium service units. Management and consulting fees earned by the Partnership decreased from $1.5 million to $1.1 million for the three months ended March 31, 1998 compared to the corresponding period in 1997 primarily due to a $349,000 reduction in the amounts received from Falcon Classic. $73,000 of this reduction was due to the March, 1998 sale of the Falcon Classic assets to the Partnership; the balance was due 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 $18.3 million to $19.6 million, or by 6.9%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. Service costs represent costs directly attributable to providing cable services to customers. The $1.3 million increase was primarily caused by an increase in programming fees paid to program suppliers (including primary satellite fees), $411,000 of which was due to the acquisition of the Falcon Classic assets. General and administrative expenses increased from $11.2 million to $11.7 million, or by 4.5%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The $499,000 increase for the three months ended March 31, 1998 compared to the corresponding period in 1997 related primarily to increases in marketing expense and to $262,000 related to the acquisition of the Falcon Classic assets. Depreciation and amortization expense increased from $29.8 million to $31.1 million, or by 4.3%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The $1.3 million increase in depreciation and amortization expense was primarily due to the acquisition of the Falcon Classic assets. Operating income decreased from $4.7 million to $2.2 million, or by 52.6%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The $2.5 million decrease was principally due to increases in operating expenses in excess of increases in revenues and to an increase in depreciation and amortization expense as discussed above. Interest expense, net, including the effects of interest rate hedging agreements, increased from $20.4 million to $20.5 million, or by 0.5%, for the three months ended March 31, 1998 compared to the -8- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES RESULTS OF OPERATIONS (CONTINUED) corresponding period in 1997. The increase was primarily due to higher average debt balances outstanding. The increase was partially offset by the effect of slightly lower average interest rates (8.8% during the three months ended March 31, 1998 compared to 9.1% during the corresponding period in 1997). Due to the Partnership electing to pay interest expense on the 11% Notes in cash on March 15, 1998, there was no payment-in-kind interest expense (in which interest payment requirements are met by an increase in the principal amount of the notes) associated with the 11% Notes for the three months ended March 31, 1998 compared to $7 million of payment-in-kind interest expense for the corresponding period in 1997. Interest rate hedging agreements resulted in additional interest expense of $53,000 during the three months ended March 31, 1998 compared to additional interest expense of $250,000 during the corresponding period in 1997. Other expense, net increased from $163,000 for the three months ended March 31, 1997 to $774,000 for the corresponding period in 1998, primarily due to a $690,000 casualty loss recorded during 1998 as a result of property damage caused by a storm. Due to the factors described above, the Partnership's net loss increased from $15.3 million to $18.9 million, or by 23.3%, for the three months ended March 31, 1998 compared to the corresponding period 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 primary debt instruments of FHGLP 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 53.9% to 51.6% for the three months ended March 31, 1998 compared to the corresponding period in 1997. The decrease was primarily caused by increases in programming costs and marketing expenses in excess of revenue increases, as described above, and to the acquisition of assets from Falcon Classic (which had an EBITDA as a percentage of revenues of 47.7%), EBITDA decreased from $34.5 million to $33.3 million as a result of such factors, or by 3.5%. 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 the Owned Systems. The Partnership spent $76.3 million during 1997 on capital expenditures. In addition to the purchase of substantially all of the Falcon Classic assets (except for the cable system serving the City of Somerset, Kentucky) in March 1998 for $76.8 million and the anticipated subsequent purchase of Classic's City of Somerset, Kentucky cable system for approximately $6.4 million, management's current plan calls for the expenditure of approximately $101 million in capital expenditures in 1998, including approximately $68.2 million to rebuild and upgrade certain of the Owned Systems. The Partnership plans to finance capital -9- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) expenditures with cash flow from operations and borrowings under its existing and future bank credit facilities, subject to its ability to remain in compliance with certain covenants related to its outstanding indebtedness. The Partnership's proposed spending plans (including its plans for 1998) 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 Amended and Restated Credit Agreement provides for maximum available borrowings of $774 million at December 31, 1997, reducing to $185 million at December 31, 2004. As of March 31, 1998, the amount outstanding under the Amended and Restated Credit Agreement was $695.6 million (including $76.8 million related to the acquisition of the Falcon Classic Systems) and, subject to complying with covenants, the Partnership had available to it additional borrowings thereunder of approximately $40.1 million. The Amended and Restated Credit Agreement 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. As of March 31, 1998, borrowings under the Amended and Restated Credit Agreement bore interest at an average rate of 7.9% (including the effect of interest rate hedging agreements). The Partnership has entered into fixed interest rate hedging agreements with an aggregate notional amount at March 31, 1998 of $565 million. Agreements in effect at March 31, 1998 totaled $540 million, with the remaining $25 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%. The Amended and Restated Credit Agreement 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 March 31, 1998. Management believes that borrowings under its credit facilities together with cash flows from operations will be adequate to meet the Partnership's liquidity needs for the foreseeable future. On March 29, 1993, the Partnership issued $175 million aggregate principal amount of its 11% Notes in connection with the Partnership's formation. As a result of payment-in-kind interest payments under the 11% Notes, the aggregate principal of the 11% Notes outstanding as of March 31, 1998 had increased to $282.2 million. Future interest payments are permitted to be paid in kind until the year 2000, when cash payment is required. However the Partnership, as permitted by the terms of the Indenture, elected to begin to pay interest payments in cash beginning with the payment due March 15, 1998. This election required an amendment to the Amended and Restated Credit Agreement, which had prohibited cash interest payments on the 11% Notes until September 30, 2000. The 11% Notes also contain various restrictions relating to, among other things, mergers and acquisitions, a change in control and the incurrence of additional indebtedness. The incurrence of additional indebtedness test limits the ratio of the total debt of the Partnership to Operating Cash Flow (as defined in the indenture) to 7.5 to 1 if such indebtedness is incurred through December 31, 1999 and to 6.5 to 1 thereafter. -10- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) On April 3, 1998, as discussed in Note 5 to the condensed consolidated financial statements, the Partnership 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 the Debentures of approximately $631 million were used to repay certain outstanding indebtedness under the Amended and Restated 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 Issuers elect 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 existing and future bank credit facilities will be adequate to meet its interest payment obligations under the Debentures. On April 20, 1998, the Partnership made a tender offer for all of the 11% Notes, which is expected to require approximately $303 million if 100% of the 11% Notes are tendered, and which will be funded by bank borrowing. The Partnership is also negotiating a new bank credit agreement which would replace the Amended and Restated Credit Agreement in the second quarter of 1998, and provide funds for the closing of its pending transaction with an affiliate of Tele-Communications, Inc. (the "TCI Transaction") (see discussion in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1997). In connection with the decision to make interest payments on the 11% Notes in cash and the anticipated redemption of the 11% 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 call 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 call 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 million. The Partnership (i.e., FHGLP) is a separate, stand-alone holding company which employs all of the management personnel for the Systems. All of the Owned Systems are owned by subsidiaries of the Partnership. 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 certain of the 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 Amended and Restated Credit Agreement permits the Owned Subsidiaries to remit to FHGLP no more than 4.25% of their net cable revenues in any year. For the three months ended March 31, 1998, the Amended and Restated Credit Agreement permitted the Owned Subsidiaries to remit approximately $2.8 million to FHGLP, and $2.6 million was actually remitted. As a result of the 1998 acquisition of the Falcon Classic assets, the Partnership will no longer receive management fees and reimbursed expenses from Falcon Classic. Receivables from the Affiliated Systems for services and reimbursements described above amounted to approximately $11.3 million at March 31, 1998, which amount includes $7.5 million of notes receivable from the Enstar Partnerships. -11- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) 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 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. The existing FHGLP partnership agreement contains provisions that may require FHGLP to purchase substantially all of the limited partnership interests in FHGLP held by its Group I, Group II and Group III limited partners (constituting approximately 60% of the common equity of FHGLP), at the holders' option. Certain of these interests are mandatorily redeemable at certain dates. Limited partnership interests held by the Group IV limited partner become redeemable at a later date, subject to certain shared liquidity rights. In contemplation of the TCI Transaction, by agreement of the Group I, Group II, Group III and Group IV partners, the dates on which the partners may exercise certain put rights and the dates by which FHGLP is required to redeem certain partnership interests were tolled in accordance with the document governing the TCI Transaction (the "Contribution Agreement"). The new dates are determined by adding to the original date the number of days in the period beginning on December 1, 1997 and ending ninety days after the earlier of December 31, 1998 or the date that the Contribution Agreement is terminated in accordance with its terms. As a result, assuming that the Contribution Agreement is not terminated prior to December 31, 1998, FHGLP may be required to purchase the partnership interests held by the Group I, Group II and Group III partners during the period of January 2000 to October 2000, with the Class C partnership interests held by the Group IV partner becoming mandatorily redeemable in July 2005. If the Contribution Agreement is terminated prior to December 31, 1998, FHGLP may be required to redeem certain partnership interests earlier than the dates set forth above. Subject to certain customary exceptions, the Contribution Agreement may not be terminated without the consent of FHGLP prior to December 31, 1998. The purchase price for such partnership interests (other than Class C partnership interests, which had a liquidation value of $51.4 million at March 31, 1998) will generally be determined through a third party appraisal mechanism, as specified in the existing FHGLP partnership agreement, at the time such interests are redeemed, or through negotiation. The estimated purchase price of such non-preferred partnership interests at March 31, 1998 was approximately $120 million, based on preliminary estimates by management which are subject to change. The purchase price is to be paid in cash or, under certain circumstances, may be paid through the issuance of debt or equity securities. The redemption value of the Class C partnership interests will generally be their liquidation value as determined in accordance with a formula set forth in the existing FHGLP partnership agreement. Certain of the Partnership's debt agreements (including the Amended and Restated Credit Agreement and the 11% Notes) restrict the Partnership's ability to (i) make distributions to fund the purchase of these partnership interests pursuant to the provisions described above, (ii) incur indebtedness or issue debt securities in connection with such purchase or (iii) sell a substantial amount of its assets. The obligations of FHGLP to redeem any significant amount of its limited partnership interests would result in a material liquidity demand on FHGLP, and there can be no assurance that FHGLP would be able to raise such funds on terms acceptable to FHGLP, or at all. FHGLP has not identified a source for funding any material redemption obligation at this time. Upon completion of the TCI Transaction, the existing liquidity rights will be terminated and be -12- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) replaced by certain new liquidity rights provided to the non-management limited partners in the new FHGLP partnership agreement and the New Falcon Partnership Agreement. The "Year 2000" issue refers to certain contingencies that could result from computer programs being written using two digits rather than four to define the year. Many existing computer systems, including certain of the Partnership's computer systems, process transactions based on two digits for the year of the transaction (for example, "98" for 1998). These computer systems may not operate effectively when the last two digits become "00," as will occur on January 1, 2000. The Partnership's management has commenced an assessment 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. Based on a preliminary study, the Partnership's management has concluded that certain of the Partnership's information systems were not Year 2000 compliant and has elected to replace such software and hardware with Year 2000 compliant applications and equipment, although the decision to replace major portions of such software and hardware had previously been made without regard to the Year 2000 issue. 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 1998, with the remaining systems to be installed in the first half of 1999. The total anticipated cost, including replacement software and hardware, is expected to be approximately $1.5 million. In addition to evaluating internal systems, the Partnership's management has also initiated communications with 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. There can be no assurance that the systems of other companies on which the Partnership's systems rely will be timely converted and that the failure to do so would not have an adverse impact on the Partnership's systems. The Partnership's management continues to closely monitor Year 2000 developments with vendors and service suppliers. THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Cash provided by operating activities (including interest expense and management fee income) decreased from $15.3 million to $2.7 million, or by 82.2%, for the three months ended March 31, 1998 compared to the corresponding period in 1997, a decrease of $12.6 million. The decrease resulted primarily from a net decrease of $5.6 million in other operating items (receivables, other assets, payables, accrued expenses and subscriber deposits and prepayments) and from the fact that in 1997, unlike 1998, the Partnership incurred $7 million of payment-in-kind interest expense related to the 11% Notes. Cash used in investing activities increased from $10.9 million to $95.3 million, or by 771.2%, for the three months ended March 31, 1998 compared to the corresponding period in 1997. The increase was primarily due to the 1998 acquisition of Falcon Classic assets for $76.8 million and to an increase in capital expenditures of $7.4 million. -13- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Cash from financing activities changed from a $7.2 million use of cash to $89.8 million of cash provided for the three months ended March 31, 1998 compared to the corresponding period in 1997. The change was due primarily to additional borrowings of debt in 1998 related to the acquisition of the Falcon Classic assets and to the increase in capital expenditures. 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. -14- FALCON HOLDING GROUP, L.P. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEMS 1-5. Not applicable. ITEM 6. Exhibits and Reports on Form 8-K (a) EXHIBIT 10.61 First Amendment to Contribution and Purchase Agreement dated as of March 23, 1998 by and among Falcon Holding Group, L.P., Falcon Communications, L.P., and TCI Falcon Holdings, LLC. EXHIBIT 10.62 Second Amendment to Contribution and Purchase Agreement dated as of April 2, 1998, between Falcon Holding Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC. EXHIBIT 10.63 Waiver Letter, dated as of March 27, 1998, among Falcon Holding Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC relating to the Amended and Restated Agreement of Limited Partnership of Falcon Communications, L.P., dated as of December 30, 1997. (b) No Reports on Form 8-K were filed for the quarter for which this Report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FALCON HOLDING GROUP, L.P. a Delaware limited partnership ------------------------------ (Registrant) By: Falcon Holding Group General Partner Date: August __, 1998 By: /s/ Michael K. Menerey ----------------------------- Michael K. Menerey, Executive Vice President, Secretary and Chief Financial Officer EXHIBIT INDEX Exhibit Number Description 10.61* First Amendment to Contribution and Purchase Agreement dated as of March 23, 1998 by and among Falcon Holding Group, L.P., Falcon Communications, L.P., and TCI Falcon Holdings, LLC. 10.62* Second Amendment to Contribution and Purchase Agreement dated as of April 2, 1998, between Falcon Holding Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC. 10.63* Waiver Letter, dated as of March 27, 1998, among Falcon Holding Group, L.P., Falcon Communications, L.P. and TCI Falcon Holdings, LLC relating to the Amended and Restated Agreement of Limited Partnership of Falcon Communications, L.P., dated as of December 30, 1997. - ------------ * Previously filed E-1 -----END PRIVACY-ENHANCED MESSAGE-----