FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND 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 AND EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 33-96804
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LENFEST COMMUNICATIONS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2094942
-------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1105 North Market St., Suite 1300,
P. O. Box 8985,
Wilmington, Delaware 19899
--------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(302) 427-8602
--------------
(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of November 5, 1999: 158,896 shares of common
stock, $0.01 par value per share. All shares of the registrant's common stock
are privately held, and there is no market price or bid and asked price for said
common stock.
LENFEST COMMUNICATIONS, INC.
Index
Part I. Financial Information Page
----
Item 1. Financial Statements
Report on Review by Independent Certified Public Accountants 3
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and as of December 31, 1998 4
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three months and nine months ended September 30, 1999 (unaudited) and
June 30, 1998 (unaudited) 6
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 (unaudited) and September 30, 1998 (unaudited) 7
Notes to Condensed Consolidated Financial Statements (unaudited) 9
Statement by Management Concerning Review of Interim Financial
Information by Independent Certified Public Accountants 18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 26
-2-
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of
Lenfest Communications, Inc. and subsidiaries as of September 30, 1999, and the
related consolidated statements of operations and comprehensive income (loss)
for the three months and nine months ended September 30, 1999 and 1998, and the
consolidated statements of cash flows for the nine months ended September 30,
1999 and 1998, included in the accompanying Securities and Exchange Commission
Form 10-Q for the period ended September 30, 1999. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the condensed consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficit) and cash flows for the year then ended (not
presented herein). In our report dated March 5, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1998, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
October 27, 1999
-3-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September December
30, 1999 31, 1998
---------- ----------
(Unaudited) (*)
ASSETS
Cash and cash equivalents $ 13,739 $ 9,802
Marketable securities 53,274 18,854
Accounts receivable, trade and other, less allowance for
doubtful accounts of $3,828 in 1999 and $3,603 in 1998 26,545 25,292
Prepaid expenses 5,519 3,949
Property and equipment, net of accumulated depreciation
of $503,321 in 1999 and $436,273 in 1998 527,029 431,455
Investments, principally in affiliates, and related receivables 36,102 47,645
Goodwill, net of amortization of $35,035 in 1999 and
$32,364 in 1998 95,491 68,637
Deferred franchise costs, net of amortization of $259,590 in
1999 and $227,797 in 1998 499,447 465,420
Other intangible assets, net of amortization of $16,305 in 1999
and $14,611 in 1998 23,473 19,399
Deferred Federal tax asset, net 2,347 80,371
Net assets of discontinued operations 121,691 -
Other assets 4,564 5,113
---------- ----------
$1,409,221 $1,175,937
========== ==========
(*) Condensed from audited financial statements.
See independent certified public accountants' review report and accompanying
notes.
-4-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, (continued)
(Dollars in thousands)
September December
30, 1999 31, 1998
---------- ----------
(Unaudited) (*)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable and obligations under capital leases $1,436,377 $1,296,553
Accounts payable and accrued expenses - unrelated parties 95,659 73,051
Accounts payable - affiliate 26,775 22,968
Customer prepayments and deposits 7,091 6,851
Deferred gain on terminated interest swaps 6,067 6,518
Deferred state tax liability, net 9,406 9,406
Investment in Garden State Cablevision, L.P. 68,886 73,414
---------- ----------
TOTAL LIABILITIES 1,650,261 1,488,761
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 158,896 shares authorized,
issued and outstanding 2 2
Additional paid-in capital 50,747 50,747
Accumulated deficit (312,788) (359,149)
Accumulated other comprehensive income (loss) arising
from unrealized net gains (losses) on marketable securities,
net of deferred taxes of $11,307 in 1999 and $55 in 1998 20,999 (4,424)
---------- ----------
(241,040) (312,824)
---------- ----------
$1,409,221 $1,175,937
========== ==========
(*) Condensed from audited financial statements.
See independent certified public accountants' review report and accompanying
notes.
-5-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES $136,986 $119,018 $404,454 $347,009
OPERATING EXPENSES
Service 10,881 11,502 37,590 34,413
Programming - from affiliate 21,303 17,652 60,796 52,360
Programming - other cable 9,344 8,963 31,211 24,520
Selling, general and administrative 33,664 24,701 89,565 74,153
Direct costs - non-cable 5,800 4,983 16,341 13,504
Depreciation 24,490 21,265 72,598 63,714
Amortization 12,818 11,300 38,008 37,332
-------- -------- -------- --------
118,300 100,366 346,109 299,996
-------- -------- -------- --------
OPERATING INCOME 18,686 18,652 58,345 47,013
OTHER INCOME (EXPENSE)
Interest expense (31,020) (29,895) (93,079) (90,706)
Equity in net income of unconsolidated
affiliates 51 1,726 5,408 1,686
Gain on disposition of partnership interest - - - 11,489
Other income and expense (net) (161) 895 (545) 2,593
-------- -------- -------- --------
(31,030) (27,274) (88,216) (74,938)
-------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (12,444) (8,622) (29,871) (27,925)
INCOME TAX BENEFIT (EXPENSE) (NET) - (675) - 2,780
-------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS (12,444) (9,297) (29,871) (25,145)
DISCONTINUED OPERATIONS 76,232 - 76,232 -
-------- -------- -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS 63,788 (9,297) 46,361 (25,145)
EXTRAORDINARY LOSS - (4,299) - (7,360)
-------- -------- -------- --------
NET INCOME (LOSS) 63,788 (13,596) 46,361 (32,505)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
the period (7,395) (13,760) 25,720 (13,486)
Less: reclassification adjustment for (gains)
included in net income (loss) (74) - (297) (2,382)
-------- -------- -------- --------
(7,469) (13,760) 25,423 (15,868)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 56,319 $(27,356) $ 71,784 $(48,373)
======== ======== ======== ========
See independent certified public accountants' review report and accompanying
notes.
-6-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
-------------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 46,361 $(32,505)
Discontinued operations (70,687) -
Extraordinary loss - 7,360
-------- --------
Loss from continuing operations (24,326) (25,145)
Adjustments to reconcile net loss from continuing operations
to net cash provided by operating activities
Depreciation and amortization 110,606 101,046
Accretion of debt discount 1,582 1,404
Accretion of deferred gain on terminated interest swaps (451) (405)
Net (gains) on sales of marketable securities (223) (3,664)
(Gain) on disposition of partnership interest - (11,489)
Deferred income tax (benefit) - (4,455)
Net losses on sale/disposal of property and equipment 856 2,078
Loss on write-off of intangible assets 148 -
Equity in net income of unconsolidated affiliates (5,408) (1,686)
Minority interest in equity of consolidated subsidiary 311 -
Changes in operating assets and liabilities
Accounts receivable (1,253) 1,127
Prepaid expenses (1,570) (583)
Other assets 549 (636)
Accounts payable and accrued expenses:
Unrelated parties 22,608 31,002
Affiliate 3,807 (4,229)
Customer prepayments and deposits 240 (831)
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 107,476 83,534
-------- --------
See independent certified public accountants' review report and accompanying
notes.
-7-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
-------------------------------
1999 1998
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of cable systems $ (46,181) $ -
Purchases of property and equipment (124,452) (74,110)
Purchases of marketable securities (263) (1,323)
Proceeds from sales of property and equipment 257 177
Proceeds from sales of marketable securities 671 7,878
Discontinued operations (5,901) 2,660
Investments in unconsolidated affiliates (4,824) (282)
Distributions from unconsolidated affiliates - 675
(Increase) in other intangible assets - investing (4,933) (369)
Loans and advances to unconsolidated affiliates (2,823) (2,172)
Loans and advances from unconsolidated affiliates 4,113 3,006
--------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES (184,336) (63,860)
CASH FLOWS FROM FINANCING ACTIVITIES
Increases in debt 135,000 296,386
Early extinguishment of debt - (67,375)
Extinguishment of acquired debt (53,179) -
Other debt reduction:
Notes (82) (241,470)
Obligations under capital leases (942) (4,606)
(Increase) in other intangible assets - financing - (1,193)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 80,797 (18,258)
--------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 3,937 1,416
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 9,802 15,623
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 13,739 $ 17,039
========= ==========
See independent certified public accountants' review report and accompanying
notes.
-8-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Condensed Financial Information and Results of Operations
In the opinion of the management of Lenfest Communications, Inc. and
subsidiaries (the "Company"), the accompanying condensed unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and with the regulations of the Securities and Exchange
Commission and contain all adjustments (consisting of only normal recurring
adjustments) necessary to make the condensed consolidated financial statements
not misleading and to present fairly the consolidated financial condition as of
September 30, 1999, the consolidated results of operations for the three and
nine months ended September 30, 1999 and 1998, and consolidated cash flows for
the nine months ended September 30, 1999 and 1998.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K dated March 30, 1999. The results of operations for the periods ended
September 30, 1999 and 1998, are not necessarily indicative of operating results
for the full year.
Basis of Consolidation, Change in Reporting Entity and Reclassification
The consolidated financial statements include the accounts of Lenfest
Communications, Inc. and those of all wholly owned and majority owned
subsidiaries. Effective January 20, 1999, the Company, through its subsidiary,
Lenfest International, Inc., acquired the remaining 71% of the outstanding
common stock of Videopole (See Note 6). The Company sold its Videopole
investment on August 4, 1999 (See Note 3). Videopole's financial position,
results of operations and cash flows have not been consolidated in the
accompanying consolidated financial statements.
During 1999, the Company, through its subsidiary, Lenfest Raystay Holdings,
Inc., acquired the remaining 54.9% of the common stock of Raystay Co.
("Raystay"), which the Company did not already own, thereby making Raystay a
wholly owned subsidiary of the Company (See Note 6). Accordingly, the Company
changed its method of accounting for this investment from the equity method to
consolidation as required by generally accepted accounting principles. This
change in consolidation policy had no effect on the net loss for 1998. Since the
amounts are not material and have no effect on net loss, the prior period
financial statements were not restated to reflect the change in consolidation
policy.
Certain amounts in the prior year have been reclassified to conform with the
1999 presentation.
NOTE 2 - MERGER WITH AT&T CORP.
On May 4, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AT&T Corp. and its subsidiary, AT&T LCI, Inc. The
Merger Agreement provides that the Company will merge with and into AT&T LCI
Inc. ("Surviving Corporation"). The Surviving Corporation will be a wholly owned
subsidiary of AT&T Corp. and will succeed to all of the rights and obligations
of the Company.
NOTE 3 - DISCONTINUED OPERATIONS
Effective August 4, 1999, the Company sold the stock of Videopole for realized
net proceeds of $121.0 million. The sale resulted in a gain of $108.7 million,
net of a $7.0 million purchase of the minority interest, less applicable income
taxes of $38.0 million. The proceeds consisted of $65 million cash and 955,376
shares of United Pan-European Communications, N.V., a company that is 60% owned
by United Global Com, Inc. (formerly United Intl. Holdings, Inc.).
-9-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 3 - DISCONTINUED OPERATIONS, (continued)
Pursuant to provisions contained in the AT&T Merger Agreement, which provides
for a specific use of these assets, the net proceeds from the sale of Videopole
have been segregated from the general assets of the Company and have been
separately classified in the accompanying consolidated balance sheet under the
caption "Net assets of discontinued operations" and consist of the following at
September 30, 1999:
(Dollars in thousands)
Cash $ 64,113
Marketable securities 57,578
--------
$121,691
========
Income related to the sale of Videopole is shown separately in the accompanying
consolidated statements of operations and comprehensive income (loss) under the
caption "DISCONTINUED OPERATIONS" and consist of the following:
(Dollars in thousands)
Net gain on disposal of subsidiary $108,687
Investment income 5,545
Income tax expense (38,000)
--------
$ 76,232
========
NOTE 4 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
----------------------------
1999 1998
------- -------
(Dollars in thousands)
Cash paid during the period for
Interest $73,898 $67,217
======= =======
Income taxes $ 205 $ 120
======= =======
Noncash Investing and Financing Activities
On August 4, 1999, the Company received stock, with a value of $56.1 million, as
partial proceeds for the sale of Videopole (See Note 3).
On July 30, 1999, the Company assumed debt of $53.2 million in connection with
the acquisition of Raystay (See Note 6).
On June 29, 1999, the Company purchased the office building located in Oaks, PA,
that has served as the Company's corporate headquarters, and assumed debt of
$3.9 million.
On February 12, 1998, the Company exchanged a partnership interest for a warrant
to acquire Class A common stock of Hyperion Telecommunications, Inc. (See Note
5).
-10-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 5 - GAIN ON DISPOSITION OF PARTNERSHIP INTEREST
On February 12, 1998, the Company's wholly owned subsidiary, Lenfest Telephony,
Inc., exchanged its 50% general partnership interest in Hyperion
Telecommunications of Harrisburg ("HTH") for a warrant to acquire 731,624 shares
(the effective number of shares after a stock split) or approximately 2% of
Class A common stock of Hyperion Telecommunications, Inc. ("Hyperion"), the
other 50% general partner in HTH. The value of the warrant was estimated to be
$11.7 million, based on the initial public offering of the Class A common stock
of Hyperion in May 1998. The Company believes that this value approximated fair
market value of the warrant on February 12, 1998. A gain of $11.5 million, which
represents the excess of the market value of the partnership interest over its
book value, has been included in the accompanying consolidated statement of
operations and comprehensive income (loss). The warrant was exercised in May
1998.
NOTE 6 - NEW BUSINESS AND ACQUISITIONS
Effective July 30, 1999, the Company, through its subsidiary, Lenfest Raystay
Holdings, Inc., acquired the remaining 54.9% of the outstanding common stock of
Raystay, which the Company did not already own. In the transaction, the Company
paid $46.2 million, and assumed all of Raystay's existing indebtedness. The
Company immediately repaid the acquired Raystay debt of $53.2 million. The
acquisition and debt repayment were funded in part by borrowings under the bank
credit facility. The accompanying consolidated statements of operations and
comprehensive income (loss) include the revenues and expenses of Raystay since
January 1, 1999. The sellers' preacquisition share of income is included in
other income and expense (net).
The accompanying consolidated financial statements include the results of
operations for this acquisition since January 1, 1999. The following summarized
pro forma information assumes the acquisition occurred on January 1, 1998:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in Thousands)
Revenues $136,986 $124,990 $404,454 $364,245
-------- -------- -------- --------
Loss from continuing operations $(14,625) $(12,429) $(38,315) $(34,540)
-------- -------- -------- --------
Net income (loss) $ 61,607 $(16,728) $ 37,917 $(41,900)
-------- -------- -------- --------
On January 20, 1999, the Company through its subsidiary, Lenfest International,
Inc. ("International") purchased 71% of the outstanding common stock of
Videopole, a French cable television holding and management company that
franchises, builds and operates cable television systems in medium to small
communities in France. International also had an 80% partnership interest in
L-TCI Associates, a partnership that owned the remaining 29% of common stock of
Videopole. As a result of the purchase, the Company's direct and indirect
interest in Videopole was 94.2%, prior to the sale of Videopole on August 4,
1999 (See Note 3). As a result of the sale, L-TCI Associates was dissolved and
the Company distributed $7.0 million to UA-France, Inc., the other partner.
-11-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 7 - MARKETABLE SECURITIES
The aggregate cost basis and market values of marketable securities at September
30, 1999 and December 31, 1998 are as follows:
September December
30, 1999 31, 1998
--------- --------
(Dollars in thousands)
Aggregate cost basis $23,039 $23,223
Unrealized gain (loss) 30,235 (4,369)
------- -------
Fair value $53,274 $18,854
======= =======
All of the Company's securities are considered to be available for sale. Net
realized gains from the sale of marketable securities, in the amount of $0.2
million and $3.7 million are included in the accompanying consolidated
statements of operations for 1999 and 1998, respectively. The specific
identification method is used to determine the cost of each security at the time
of sale.
NOTE 8 - INVESTMENTS, PRINCIPALLY IN AFFILIATES
The Company, through several subsidiaries, owns non-controlling interests in
several general partnerships and corporations. Under the equity method, the
initial investments are recorded at cost. Subsequently, the carrying amount of
the investments are adjusted to reflect the Company's share of net income or
loss of the affiliates as they occur. Losses in excess of amounts recorded as
investments on the Company's books have been offset against loans and advances
to these unconsolidated affiliates to the extent they exist.
The Company, through its subsidiary, Lenfest Jersey, Inc., owns a 10.005%
general partnership interest and a 39.995% limited partnership interest in
Garden State Cablevision L.P. ("Garden State"), a cable company serving
approximately 214,000 customers in southern New Jersey at September 30, 1999.
The Company accounts for its investment in Garden State under the equity method.
The Company is allocated a total of 50% of Garden State's losses. In addition,
the Company is required to make up its partner capital deficits upon termination
or liquidation of the Garden State partnership. Because of the requirement to
make up capital deficits, the accompanying financial statements reflect equity
in accumulated losses, net of related receivables, in excess of investments, net
of distributions, in Garden State in the amount of $68.9 million and $73.4
million at September 30, 1999 and December 31, 1998, respectively.
Summarized statements of operations of Garden State, accounted for under the
equity method for the nine months ended September 30, 1999 and 1998, are as
follows:
1999 1998
--------- ---------
(Dollars in thousands)
Results of Operations
Revenues $ 90,779 $ 84,853
Operating expenses (35,509) (34,437)
Management and consulting fees (5,445) (5,091)
Depreciation and amortization (21,903) (22,515)
-------- --------
OPERATING INCOME 27,922 22,810
Other income (net) 147 -
Interest expense (14,481) (16,725)
-------- --------
NET INCOME $ 13,588 $ 6,085
======== ========
-12-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 9 - LONG-TERM DEBT
Notes payable and obligations under capital leases consisted of the following at
September 30, 1999 and December 31, 1998:
September December
30, 1999 31, 1998
---------- ----------
(Dollars in thousands)
8-3/8% senior notes due November 1, 2005 $ 689,270 $ 688,284
10-1/2% senior subordinated notes due September 15, 2006 294,656 294,259
7-5/8% senior notes due February 15, 2008 148,473 148,377
8-1/4% senior subordinated notes due February 15, 2008 148,324 148,221
Bank credit facility 150,000 15,000
Mortgages payable 3,841 -
Obligations under capital leases 1,813 2,412
---------- ----------
$1,436,377 $1,296,553
========== ==========
On June 29, 1999, the Company, through a subsidiary, purchased the office
building in Oaks, PA, which has served as the Company's corporate headquarters,
and assumed two mortgages with a combined balance of $3.9 million. The first
mortgage had a balance due of $2.8 million and bears interest at 10.5%. Monthly
payments of $33,945 of principal and interest are based on a 20 year
amortization, with a final payment due in October 2011. The second mortgage had
a balance due of $1.1 million and bears interest at 3.0%. Monthly payments of
$13,812 of principal and interest are based on a 15 year amortization, with a
final payment due in December 2006.
On March 9, 1999, the Company entered into an interest rate swap agreement with
a large commercial bank. The agreement has a notional principal amount of $150
million. The agreement effectively changes the Company's interest rate on $150
million of its fixed rate debt to a floating rate based on LIBOR. The interest
rate swap agreement terminates on February 15, 2008. The Company is exposed to
credit loss in the event of nonperformance by the other party to the interest
rate swap agreement. However, the Company does not anticipate nonperformance by
the counterparty.
NOTE 10 - CORPORATE INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
in accordance with Financial Accounting Standards Board Statement (SFAS) No.
109, "Accounting for Income Taxes". SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the financial statement or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Differences between financial reporting
and tax bases arise most frequently from differences in timing of income and
expense recognition. Deferred income tax expense is measured by the change in
the net deferred income tax asset or liability during the period.
The net income tax benefit differs from amounts expected by applying the U.S.
Federal income tax rate of 35% to loss before income taxes primarily from
nondeductible amortization on goodwill and certain other intangibles and
provision for state income taxes.
-13-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Mr. Lenfest, for the benefit of the Company, and TCI have jointly and severally
guaranteed an aggregate of $67 million of Australis Media Limited ("Australis")
obligations incurred in connection with the purchase of program licenses in
April 1995. The terms of the guarantees provide that the amount of the
guarantees will be reduced on a dollar-for-dollar basis with payments made by
Australis under the licenses. The Company has agreed to indemnify Mr. Lenfest
against loss from such guaranty to the fullest extent permitted under the
Company's debt obligations. Under the terms of its bank credit facility,
however, Mr. Lenfest's claims for indemnification are limited to the lesser of
the actual claim or $33.5 million. At September 30, 1999, the aggregate amount
subject to guarantee of the obligations under the license agreements was
approximately $12.0 million.
On January 20, 1995, an individual (the "Plaintiff") filed suit in the Federal
Court of Australia, New South Wales District Registry against the Company and
several other entities and individuals (the "Defendants"), including Australis
and Mr. Lenfest, involved in the acquisition of a company of which the Plaintiff
was the controlling shareholder, the assets of which included the right to
acquire Satellite License B from the Australian government. The Plaintiff
alleged that the Defendants defrauded him by making certain representations to
him in connection with the acquisition of his company and claims total damages
of A$718 million (approximately U.S. $468 million as of September 30, 1999). The
Plaintiff also alleged that Australis and Mr. Lenfest owed to him a fiduciary
duty and that both parties breached this duty. The Defendants have denied all
claims made against them by the Plaintiff and stated their belief that the
Plaintiff's allegations are without merit. The trial in this action ended on
September 30, 1998. The Company expects a decision by the end of 1999. Neither
the Company nor its counsel can predict the outcome of the trial.
The Company has also been named as a defendant in various legal proceedings
arising in the ordinary course of business. In the opinion of management, the
ultimate amount of liability with respect to the above actions will not
materially affect the financial position, the results of operations or the cash
flows of the Company.
NOTE 12 - SEGMENT INFORMATION
The Company operates primarily in the cable television industry in the United
States. This segment develops and operates cable television systems and holds
investments in other cable television operating companies in the United States.
Other segments provide cable advertising, promotional, traffic and billing,
telemarketing, paging, internet and digital video services. These segments do
not meet the quantitative guidelines for reportable segments.
The segments' accounting policies are the same as those described in the summary
of significant accounting policies. Management of the Company evaluates
performance based on operating income before depreciation and amortization.
Operating income before depreciation and amortization is commonly referred to in
the cable television industry as "operating cash flow". Operating cash flow is a
measure of a company's ability to generate cash to service its obligations,
including debt service obligations, and to finance capital and other
expenditures. Operating cash flow does not purport to represent net income or
net cash provided by operating activities, as those terms are defined under
generally accepted accounting principles, and should not be considered as an
alternative to such measurements as an indicator of the Company's performance.
-14-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 12 - SEGMENT INFORMATION, (continued)
Information concerning continuing operations by reportable segment for each of
the nine month periods ended September 30, was as follows:
1999 1998
-------- --------
(Dollars in thousands)
Revenues
Core cable television $365,339 $318,064
All others 48,037 34,716
Intersegment revenues (8,922) (5,771)
-------- --------
$404,454 $347,009
======== ========
Operating income (loss) before depreciation and amortization
Core cable television $169,394 $153,718
All others (443) (5,659)
-------- --------
$168,951 $148,059
======== ========
Information concerning continuing operations by reportable segment as of
September 30, 1999 and December 31, 1998 and for each of the nine month periods
ended September 30, was as follows:
1999 1998
---------- ----------
(Dollars in thousands)
Depreciation and amortization
Core cable television $ 105,061 $ 97,774
All others 5,545 3,272
---------- ----------
$ 110,606 $ 101,046
========== ==========
Operating income (loss)
Core cable television $ 64,333 $ 55,944
All others (5,988) (8,931)
---------- ----------
$ 58,345 $ 47,013
========== ==========
Interest expense
Core cable television $ 92,998 $ 90,706
All others 81 -
---------- ----------
$ 93,079 $ 90,706
========== ==========
Equity in net income (losses) of unconsolidated affiliates
Core cable television $ 8,797 $ 1,347
All others (3,389) 339
---------- ----------
$ 5,408 $ 1,686
========== ==========
Identifiable assets
Core cable television $1,153,917 $1,098,508
All others 143,488 82,226
Intersegment receivables (9,875) (4,797)
---------- ----------
$1,287,530 $1,175,937
========== ==========
-15-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 12 - SEGMENT INFORMATION, (continued)
1999 1998
---------- ----------
(Dollars in thousands)
Long-term debt
Core cable television $1,432,536 $1,296,553
All others 3,841 -
---------- ----------
$1,436,377 $1,296,553
========== ==========
Expenditures for long-lived assets
Core cable television $ 157,021 $ 68,806
All others 18,545 6,866
---------- ----------
$ 175,566 $ 75,672
========== ==========
Operating income (loss) $ 58,345 $ 47,013
Interest expense (93,079) (90,706)
Equity in net income (losses) of unconsolidated affiliates 5,408 1,686
Other income and expense (net) (545) 14,082
---------- ----------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ (29,871) $ (27,925)
========== ==========
NOTE 13 - REGULATORY MATTERS
The Federal Communications Commission ("FCC") has adopted regulations under The
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") governing rates charged to customers for basic and tier service and
for equipment and installation charges (the "Regulated Services"). The 1992
Cable Act placed the Company's basic service equipment and installation rates
under the jurisdiction of local franchising authorities and its tier service
rates under the jurisdiction of the FCC. The rate regulations do not apply to
services offered on an individual service basis, such as per-channel or
pay-per-view services. The rate regulations adopt a benchmark price cap system
for measuring the reasonableness of existing basic and tier service rates.
Alternatively, cable operators have the opportunity to make cost-of-service
showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be made
in the event a cable operator adds or deletes channels. There is also a
streamlined cost-of-service methodology available to justify a rate increase on
basic and regulated nonbasic tiers for "significant" system rebuilds or
upgrades.
Effective March 31, 1999, fee regulation of rates for tier service expired. Rate
regulation continues for basic service rates, charges for cable-related
equipment (e.g. converter boxes and remote control devices) and installation
services.
-16-
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 13 - REGULATORY MATTERS, (continued)
The Company believes that it has complied in all material respects with the
provision of the 1992 Cable Act, including its rate setting provisions. However,
the Company's rates for regulated services are subject to review by the FCC, if
a complaint has been filed, or the appropriate franchise authority, if such
authority has been certified. If, as a result of the review process, a cable
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received. Any refunds of the excess portion of tier service rates would be
retroactive to the date of complaint. Any refunds of the excess portion of all
other Regulated Service rates would be retroactive to one year prior to the
Refund Order issued by the applicable franchise authority. The amount of
refunds, if any, which could be payable by the Company in the event that systems
rates are successfully challenged by franchising authorities is not considered
to be material.
-17-
LENFEST COMMUNICATIONS AND SUBSIDIARIES
STATEMENT BY MANAGEMENT CONCERNING REVIEW OF
INTERIM FINANCIAL INFORMATION BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1999 and 1998 condensed consolidated financial statements
included in this filing on Form 10-Q have been reviewed by Pressman Ciocca Smith
LLP, Independent Certified Public Accountants, in accordance with established
professional standards and procedures for such a review.
The review report of Pressman Ciocca Smith LLP is included in Part I, Item 1.
-18-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Substantially all of the Company's revenues are earned from customer
fees for cable television programming services, the sale of advertising,
commissions for products sold through home shopping networks and ancillary
services (such as rental of converters and remote control devices and
installations). Federal law and regulations, including the regulation of certain
aspects of the cable television industry, have affected adversely the Company's
ability to increase or restructure its rates for certain services. These
regulations are intended to limit future rate increases.
The Company has generated increases in revenues and Adjusted EBITDA for
the three-month and nine-month periods ended September 30, 1999 primarily
through its acquisition of Raystay Co. (the "Raystay Acquisition"), (please
refer to Note 1 of the financial statements for more information), internal
customer growth, increases in monthly revenue per customer, and growth in
advertising revenues. As used herein, "Adjusted EBITDA" represents consolidated
net income from continuing operations plus the provision for income taxes,
interest expense, depreciation, amortization, any other non-cash items reducing
consolidated net income and cash actually distributed by an unconsolidated
affiliate, minus all non-cash items increasing consolidated net income. EBITDA
is presented because it is a widely accepted financial indicator of a company's
ability to incur and service debt. Adjusted EBITDA represents EBITDA (earnings
before interest expense, income taxes, depreciation and amortization) adjusted
to include cash distributions received from unconsolidated and unrestricted
affiliates. Adjusted EBITDA corresponds to the definition of "EBITDA" contained
in the Company's publicly held debt securities and is presented for the
convenience of the holders of the Company's public debt securities. Adjusted
EBITDA should not be considered as an alternative to net income, as an indicator
of the operating performance of the Company or as an alternative to cash flows
as a measure of liquidity. Neither EBITDA nor Adjusted EBITDA is a measure under
generally accepted accounting principles.
Beginning with the quarter ended December 31, 1998, the Company has
included the consolidated financial results of Lenfest Advertising, Inc. (dba
Radius Communications) ("Radius"), with the results of its cable television
operations (collectively, the "Core Cable Television Operations"). The financial
results for the Company's Core Cable Television Operations have been restated to
include the results of Radius since its inception in 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
CONSOLIDATED RESULTS
Because the Company's Core Cable Television Operations represent the
significant majority of the Company's assets and results of operations, except
where noted, the change from the prior period is a result of the Core Cable
Television Operations. The Core Cable Television Operations for all comparison
periods ended September 30, 1999, were also affected by the acquisition of
Raystay Co. on July 30, 1999. See "Core Cable Television Operations" discussion
for more information.
Revenues for the Company increased 15.1% to $137.0 million for the
three-month period ended September 30, 1999 as compared to the corresponding
1998 period.
-19-
Service and Programming Expenses increased 9.8% to $47.3 million for
the three-month period ended September 30, 1999 compared to the corresponding
1998 period. These expenses are related to technical salaries, general
operating, and network programming costs.
Selling, General, and Administrative Expense increased 36.3% to $33.7
million for the three-month period ended September 30, 1999 compared to the
corresponding 1998 period. These expenses are associated with office salaries,
facility, and marketing costs.
Depreciation and Amortization Expense increased 14.6% to $37.3 million
for the three-month period ended September 30, 1999 compared to the
corresponding 1998 period.
Adjusted EBITDA increased 10.3% to $57.4 million for the three-month
period ended September 30, 1999 compared to the corresponding period in the
prior year. The increase was primarily due to the Core Cable Television
Operations. The Adjusted EBITDA margin decreased to 41.9% in 1999 compared to
43.8% for 1998.
Interest Expense increased 3.8% to $31.0 million for the three-month
period ended September 30, 1999 compared to the corresponding 1998 period. This
increase was due to higher outstanding balances under the Company's Bank Credit
Facility primarily resulting from the funding of the Raystay Acquisition.
Loss from continuing operations before income tax increased 44.3% to
$12.4 million.
Core Cable Television Operations
Revenues increased 12.9% to $130.6 million for the three-month period
ended September 30, 1999 compared to the corresponding 1998 period. This
increase was primarily due to the Raystay Acquisition, which represented 41.4%
or $6.2 million of the increase in total revenue, increased revenue associated
with the basic and CPS tiers and customer equipment and installation,
("regulated services") and increased revenue from the Company's advertising
subsidiary, Radius. The regulated services revenue increased 26.0% or $22.6
million compared to the corresponding 1998 period. This increase was primarily
attributable to the Raystay Acquisition, which represented 23.2% or $5.2 million
of the total increase in regulated revenue, internal customer growth of
approximately 1.6%, and rate increases occurring predominately in the second
quarter 1999 and fourth quarter of 1998. The Core Cable Television Operations'
experienced customer growth of 7.6% for the three-month period ended September
30, 1999 compared to the corresponding 1998 period. This increase was primarily
as a result of the Raystay Acquisition, which added approximately 61,900
customers. Non-regulated service revenue increased 12.4% or $1.9 million for the
three-month period ended September 30, 1999 compared to the corresponding 1998
period. This increase was primarily as a result of the Raystay Acquisition,
which represented 24.8% or $0.5 million of the total increase in non-regulated
revenues, and internal customer growth. Revenues for Radius increased 29.9%, or
$2.7 million, to $11.8 million, representing 9.9% of the increase in revenue for
the Core Cable Television Operations for the three-month period ended September
30, 1999 compared to the corresponding 1998 period. This increase was primarily
attributable to increased advertising sales.
Service and Programming Expenses increased 8.0% to $45.8 million for
the three-month period ended September 30, 1999 compared to the corresponding
1998 period. These expenses are related to technical salaries, general operating
costs, and programming costs. The increase was primarily related to higher
programming costs associated with the Raystay Acquisition, which represented
72.0% or $2.4 million of the total increase. Service and programming expenses
for Radius increased 22.1%, or $1.2 million, to $6.9 million, representing 14.4%
of the increase in expenses of the Core Cable Television Operations for the
three-month period ended September 30, 1999, compared to the corresponding 1998
period.
Selling, General and Administrative Expense increased 31.3% to $27.1
million for the three-month period ended September 30, 1999 compared to the
corresponding 1998 period. These expenses are associated with office salaries,
facility, and marketing costs. This increase was primarily due to increased
-20-
selling expenses associated with the Raystay Acquisition, which represented
10.3% or $0.7 million of the total increase. Selling, general and administrative
expenses for Radius increased 10.7%, or $0.4 million, to $3.7 million
representing 4.7% of the increase in the expenses of the Core Cable Television
Operations for the three-month period ended September 30, 1999 compared to the
corresponding 1998 period.
Depreciation and Amortization Expense increased 12.5% to $36.0 million
for the three-month period ended September 30, 1999 compared to the
corresponding 1998 period. The increase was primarily a result of the Raystay
Acquisition. The depreciation and amortization expenses for Radius increased
41.5%, or $0.3 million, to $1.1 million for the three-month period ended
September 30, 1999 compared to the corresponding 1998 period.
Adjusted EBITDA increased 10.5% to $59.2 million for the three-month
period ended September 30, 1999 compared to the corresponding 1998 period. This
increase was due to higher regulated service revenue resulting primarily from
the Raystay Acquisition, which represented 54.6% or $3.1 million of the total
increase in Adjusted EBITDA. The Adjusted EBITDA margin decreased to 45.3% for
the three-month period ended September 30, 1999 compared to 46.3% for the
corresponding 1998 period. This decrease was primarily caused by an increase in
programming, selling, general and administrative expenses.
RESULTS OF OPERATIONS
NINE-MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE-MONTHS ENDED SEPTEMBER
30, 1998
CONSOLIDATED RESULTS
Because the Company's Core Cable Television Operations represent the
significant majority of the Company's assets and results of operations, except
where noted, the change from the prior period is a result of the Core Cable
Television Operations.
Revenues for the Company increased 16.6% to $404.5 million for the
nine-month period ended September 30, 1999 as compared to the corresponding 1998
period.
Service and Programming Expenses increased 16.9% to $145.9 million for
the nine-month period ended September 30, 1999 compared to the corresponding
1998 period. These expenses are related to technical salaries, general
operating, and network programming costs.
Selling, General, and Administrative Expense increased 20.8% to $89.6
million for the nine-month period ended September 30, 1999 compared to the
corresponding 1998 period. These expenses are associated with office salaries,
facility, and marketing costs.
Depreciation and Amortization Expense increased 9.5% to $110.6 million
for the nine-month period ended September 30, 1999 compared to the corresponding
1998 period.
Adjusted EBITDA increased 14.0% to $172.2 million for the nine-month
period ended September 30, 1999 compared to the corresponding period in the
prior year. The increase was primarily due to the Core Cable Television
Operations. The Adjusted EBITDA margin decreased to 42.6% for the nine-month
period ended September 30, 1999 compared to 43.5% for the corresponding 1998
period.
Interest Expense increased 2.6% to $93.1 million for the nine-month
period ended September 30, 1999 compared to the corresponding 1998 period. The
increase was due to higher outstanding balances under the Company's Bank Credit
Facility primarily resulting from the funding of the Raystay Acquisition.
Loss before income tax increased 7.0% to $29.9 million.
-21-
Core Cable Television Operations
Revenues increased 16.5% to $393.3 million for the nine-month period
ended September 30, 1999 compared to the corresponding 1998 period. This
increase was primarily due to the Raystay Acquisition, which represented 33.3%
or $18.5 million of the increase in total revenue, increased revenue associated
with regulated services and increased revenue from Radius. The regulated
services revenue increased 15.4% or $39.0 million compared to the corresponding
1998 period. This increase was primarily attributable to the Raystay
Acquisition, which represented 40.4% or $15.7 million of the total increase in
regulated revenue, internal customer growth of approximately 1.6%, and rate
increases occurring predominately in the second quarter of 1999 and fourth
quarter of 1998. Non-regulated service revenue increased 6.5% or $3.0 million
for the nine-month period ended September 30, 1999 compared to the corresponding
1998 period. This increase was primarily as a result of the Raystay Acquisition,
which represented 48.2% or $1.4 million of the total increase in non-regulated
revenues, and internal customer growth. Revenues for Radius increased 47.5%, or
$11.4 million, to $35.4 million, representing 20.5% of the increase in revenue
for the Core Cable Television Operations for the nine-months ended September 30,
1999 compared to the corresponding 1998 period. This increase was primarily
attributable to increased advertising sales.
Service and Programming Expenses increased 17.7% to $142.0 million for
the nine-month period ended September 30, 1999 compared to the corresponding
1998 period. These expenses are related to technical salaries, general operating
costs, and programming costs. The increase was primarily related to higher
programming costs resulting from the Raystay Acquisition, which represented
34.1% or $7.3 million of the total increase, and higher programming expenses for
Radius. Service and programming expenses for Radius increased 44.8%, or $6.1
million, to $19.8 million, representing 28.8% of the increase in expenses of the
Core Cable Television Operations for the nine-month period ended September 30,
1999 compared to the corresponding 1998 period.
Selling, General and Administrative Expense increased 28.5% to $78.0
million for the nine-month period ended September 30, 1999 compared to the
corresponding 1998 period. These expenses are associated with office salaries,
facility, and marketing costs. This increase was primarily due to the Raystay
Acquisition, which represented 11.5% or $2.0 million of the total increase, and
increased selling and administrative expenses for Radius. Selling, general and
administrative expenses for Radius increased 52.5%, or $4.0 million, to $11.7
million representing 23.2% of the increase in the expenses of the Core Cable
Television Operations for the nine-month period ended September 30, 1999
compared to the corresponding 1998 period. This increase for Radius was
primarily due to increased selling expenses.
Depreciation and Amortization Expense increased 8.6% to $108.2 million
for the nine-month period ended September 30, 1999 compared to the corresponding
1998 period. The increase was primarily a result of the Raystay Acquisition. The
depreciation and amortization expenses for Radius increased 69.9%, or $1.3
million, to $3.1 million representing 15.0% of the increase for the nine-month
period ended September 30, 1999 compared to the corresponding 1998 period.
Adjusted EBITDA increased 10.8% to $176.5 million for the nine-month
period ended September 30, 1999 compared to the corresponding 1998 period. The
increase was primarily due to increased regulated service revenue resulting from
the Raystay Acquisition, which represented 53.6% or $9.2 million of the total
increase in Adjusted EBITDA . The Adjusted EBITDA margin decreased to 44.9% for
the nine-months ended September 30, 1999 compared to 47.2% for the corresponding
1998 period. This decrease was primarily caused by an increase in programming
and selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's businesses require cash for operations, debt service,
capital expenditures and acquisitions. To date, cash requirements have been
funded by cash flow from operations and borrowings.
Financing Activities. At September 30, 1999, the Company had aggregate
-22-
total indebtedness of approximately $1,436.4 million. The Company's senior
indebtedness of $993.4 million consisted of: (i) $837.7 million of 7-5/8% and
8-3/8% Senior Notes; (ii) obligations under its August 4, 1999 Bank Credit
Facility ("Bank Credit Facility") of $150.0 million; (iii) $3.9 million of
mortgages payable obligations (see below), and (iv) obligations under capital
leases of approximately $1.8 million. At September 30, 1999, the Company had
approximately $443.0 million of 8-1/4% and 10-1/2% Senior Subordinated Notes
outstanding. The Senior Subordinated Notes are general unsecured obligations of
the Company subordinate in right of payment to all present and future senior
indebtedness of the Company.
Loans outstanding under the Bank Credit Facility bear interest at
floating rates. The Bank Credit Facility contains customary covenants, including
restrictive covenants, which impose certain limitations on the Company and its
wholly owned cable operating subsidiaries and Radius, including, among other
things, incurring additional indebtedness, the payment of dividends, the
repurchase of stock, the making of certain payments and purchases, the making of
acquisitions and investments, the creation of certain liens, disposing or
acquiring assets, sale-leaseback transactions, and transactions with affiliates.
The Bank Credit Facility also includes financial covenants requiring the Company
to maintain certain financial ratios at specified levels. The Bank Credit
Facility also contains customary default provisions, including nonpayment of
principal, interest, fees and other amounts when due, violation of covenants,
failure of representations and warranties to be true and correct in all material
respects when made, cross defaults and cross acceleration to other debt
obligations, bankruptcy events, unsatisfied judgments in excess of specified
amounts and change of control.
On June 29, 1999, the Company, through a subsidiary, purchased the
office building in Oaks, PA, that has served as the Company's corporate
headquarters, and assumed two mortgages with a combined balance of approximately
$3.9 million. Please refer to footnote number 9 of the Company's financial
statements, included in this Form 10-Q, for more information.
Operations. Cash flow generated from continuing operations, excluding
changes in operating assets and liabilities that result from timing issues and
considering only adjustments for non-cash charges, was approximately $83.1
million for the nine-month period ended September 30, 1999 compared to
approximately $57.7 million for the nine-month period ended September 30, 1998.
During the nine-month period ended September 30, 1999 the Company was required
to make interest payments of approximately $73.9 million on outstanding debt
obligations, whereas in the same period in the prior year, the Company was
required under its then existing debt obligations to make interest payments of
$67.2 million.
Future minimum lease payments under all capital leases and
non-cancelable operating leases for each of the years 1999 through 2002 are $5.6
million, $4.4 million, $2.9 million and $1.4 million, respectively.
In November 1994, H.F. Lenfest and TCI International, Inc. jointly and
severally guaranteed $67.0 million in program license obligations to the
distributors of movie programming for Australis. As of September 30, 1999, the
Company believes the amount subject to the guarantee under the license
agreements was approximately $12.0 million. The Company has agreed to indemnify
Mr. Lenfest against loss from such guaranty to the fullest extent permitted
under the Company's debt obligations. Under the terms of the Bank Credit
Facility, however, Mr. Lenfest's claims for indemnification are limited to the
lesser of the actual claim or $33.5 million. The Company does not believe that
Mr. Lenfest's guarantee will be called, and, as of the date hereof, there has
been no demand for payment under the guarantee of the program license
obligations.
Capital Expenditures. For the nine-month period ending September 30,
1999, the Company made approximately $124.5 million of capital expenditures.
During 1999, the Company expects to make approximately $180 million of capital
expenditures, of which approximately $160 million is expected to be spent for
the upgrading of certain of its cable television systems, including wide
deployment of fiber optics, maintenance, including plant extensions,
installations, and other fixed assets as well as other capital projects
associated with implementing the Company's clustering strategy. The amount of
such capital expenditures for years subsequent to 1999 will depend on numerous
factors, many of which are beyond the Company's control, including responding to
-23-
competition and increasing capacity to handle new product offerings in affected
cable television systems. The Company anticipates that capital expenditures for
years subsequent to 1999 will continue to be significant.
Resources. Management believes, based on its current business plans,
that the Company has sufficient funds available from operating cash flow and
from borrowing capacity under the Bank Credit Facility to fund its operations,
capital expenditure plans and debt service. To the extent the Company seeks
additional acquisitions, it may need to obtain additional financing. However,
the Company's ability to borrow funds under the Bank Credit Facility requires
that the Company be in compliance with certain financial ratios at specified
levels or obtain the consent of the lenders thereunder to a waiver or amendment
of the applicable financial ratios. As of September 30, 1999, Management
believes that the Company was in compliance with such financial ratios.
On January 20, 1999, the Company through its subsidiary, Lenfest
International, Inc. ("International") purchased 71% of the outstanding common
stock of Videopole, a French cable television holding and management company
that franchises, builds and operates cable television systems in medium to small
communities in France. International also has an 80% partnership interest in
L-TCI Associates, a partnership that owns the remaining 29% of common stock of
Videopole. As a result of the purchase, the Company's direct and indirect
interest in Videopole was 94.2%.
Effective August 4, 1999, the Company sold the stock of Videopole for
net proceeds of $121.0 million, subject to certain adjustments. The proceeds
consist of $65.0 million in cash and 955,376 shares of United Pan-European
Communications, N.V., a company that is 60% owned by UnitedGlobalCom, Inc. The
sale resulted in a gain of $70.1 million, net of a $7.0 million distribution to
the minority interest and applicable income taxes of $38.0 million. As a result
of this sale, L-TCI Associates, a partnership between the Company and UA-France
Inc., which held a 29.0% interest in Videopole, was dissolved, and the Company
distributed $7.0 million to UA-France Inc.
Effective July 30, 1999, the Company acquired the 54.9% of the
outstanding capital stock of Raystay Co. ("Raystay") which the Company did not
already own. In the transaction, the Company paid approximately $104.0 million
which amount included the repayment of all of Raystay's existing indebtedness.
The acquisition was funded by borrowings under the Bank Credit Facility.
On May 4, 1999, the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with AT&T Corp. and its subsidiary, AT&T LCI Inc.
The Merger Agreement provides that the Company will merge with and into AT&T LCI
Inc. ("Surviving Corporation"). The Surviving Corporation will be a wholly-owned
subsidiary of AT&T Corp. and will succeed to all of the rights and obligations
of the Company. The completion of the merger is subject to the receipt of
necessary governmental approvals, the consent of the Company's lenders under its
Bank Credit Facility and the receipt by AT&T and the Company of opinions
concerning the tax treatment of the merger. The transaction is expected to close
before the end of 1999 and must close before March 31, 2000 (which date may be
extended to June 30, 2000 under certain conditions). If the merger is terminated
by the Company under specified conditions, the Company may require AT&T to
contribute all cable television systems it owns which are located within 35
miles of the Company's cable television systems, subject to certain conditions.
Year 2000 Readiness Disclosure
The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As a
result, on or near the change of the century, date-sensitive systems may
recognize the Year 2000 as 1900, or not at all, which may cause systems to fail
or process financial and operational information incorrectly.
The Company has developed plans to address its Year 2000 issues. The
plans are designed to encompass all businesses of the Company including both
internal and external interfaces to vendors. The plans address three broad
areas: (1) internal information technology systems - including financial and
operational application systems, computer hardware and systems software and
communication systems; (2) non-information technology systems - such as building
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systems, headend devices and other devices with embedded computer chips; and (3)
third party compliance - which addresses Year 2000 compliance efforts of key
vendors and suppliers. The project plans consist of the following phases:
1) Organizational awareness - general awareness of the Year 2000 issues, which
has been completed, and ongoing communication of Year 2000 project status.
2) Inventory of current applications - which has been completed.
3) Risk assessment of inventoried systems, with identification of
mission-critical systems.
4) Replacement/remediation of systems.
5) Year 2000 testing and conversion of systems.
6) Contingency planning.
Program management offices, staffed with business unit personnel have
been established to address Year 2000 issues. These offices report to an
Executive Steering Committee, which is responsible for the Company's Year 2000
program. This Committee was formed in the spring of 1998 to review and monitor
the Company's Year 2000 program. It is made up of members of Senior Management
responsible for various areas of the Company's business. The Committee meets
regularly to review corporate-wide Year 2000 issues and progress.
Third party compliance. The Company has identified, and initiated
communications with, key third party suppliers and customers to determine
potential exposure to these third parties' failure to remediate their own Year
2000 issues. The Company expects to complete its third party reviews by November
30, 1999 and will develop contingency plans to address potential third party
Year 2000 failures. However, an extended outage by utilities (electric, water,
telephone, etc.), key third-party suppliers or financial institutions, could
have material adverse impacts on the Company's operations and financial
condition.
Contingency Plans
Company resources to date have been focused primarily on Year 2000
remediation. The Company maintains contingency plans for computer failures,
power outages, natural disasters, etc. Year 2000 contingency plans for
mission-critical systems, in the areas discussed above, will be developed and
integrated with the existing contingency plans where appropriate by November 30,
1999.
Costs
The Company currently estimates spending approximately $5.0 million,
including internal costs, to complete its Year 2000 compliance program,
including approximately $1.5 million that has been expended through September
30, 1999. Year 2000 costs related to systems or equipment replacement are
capitalized in accordance with the Company's accounting policies. Year 2000
remediation costs are expensed as incurred.
The Company's ability to achieve Year 2000 compliance, the level of
costs associated therewith and the resultant impact on operations and financial
condition could be adversely impacted by, among other things, the availability
and cost of applicable resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
program.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has recently issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133 is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. The Company has
not yet adopted SFAS No. 133. The adoption of SFAS No. 133 is not expected to
have a significant impact on the Company's financial statement disclosures.
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The American Institute of Certified Public Accountants ("AICPA")
recently issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
defines which costs of computer software developed or obtained for internal use
are capital and which costs are expenses. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. Effective January 1, 1999, the Company
adopted SOP 98-1. The adoption of SOP 98-1 did not have a significant impact on
the Company's consolidated financial statements and related footnotes.
The AICPA recently issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that entities
expense start-up costs and organization costs as they are incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. Effective January
1, 1999, the Company adopted SOP 98-5. The adoption of SOP 98-5 did not have a
significant impact on the Company's consolidated financial statements and the
related footnotes.
Inflation
The net impact of inflation on operations has not been material in the
last three years due to the relatively low rates of inflation during this
period. If the rate of inflation increases the Company may increase customer
rates to keep pace with the increase in inflation, although there may be timing
delays.
Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits.
Exhibit
Number Title or Description
- ------ --------------------
The following Exhibits are furnished as part of this Report:
Exhibit
Number Title or Description
------ --------------------
++++2.1 Stock Purchase Agreement, dated as of January 25, 1999, by and
between each of the stockholders of Raystay Co. and Lenfest
Raystay Holdings, Inc.
++++2.2 Agreement and Plan of Merger, dated as of May 4, 1999 among AT&T
Corp., AT&T LCI Inc., Lenfest Communications, Inc. and H. F.
Lenfest, H. Chase Lenfest, Diane Lenfest Myer and Brook J.
Lenfest.
***3.1 Restated Certificate of Incorporation of the Company.
***3.2 Amended and Restated Bylaws of the Company.
*4.1 Form of $700,000,000 8 3/8% Senior Note due 2005.
**4.2 Indenture between the Company and The Bank of New York, dated as
of November 1, 1995.
***4.3 Indenture, dated as of June 15, 1996, between the Company and The
Bank of New York.
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***4.4 Form of 10 1/2% Senior Subordinated Note, dated June 27, 1996, in
the principal sum of $296,700,000.
++4.5 Indenture, dated as of February 5, 1998, between the Company and
The Bank of New York relating to the $150,000,000 7 5/8% Senior
Notes due 2008.
++4.6 Form of $150,000,000 7 5/8% Senior Notes due 2008. (In accordance
with Item 601 of Regulation S-K similar notes between the same
parties, which reference CUSIP No. 526055 AF 5 and CUSIP No.
U52547 AA 1 have not been filed because they are identical in all
material respects to the filed exhibit.)
++4.7 Indenture, dated as of February 5, 1998, between the Company and
The Bank of New York relating to the $150,000,000 8 1/4% Senior
Subordinated Notes due 2008.
++4.8 Form of $150,000,000 8 1/4% Senior Subordinated Notes due 2008.
(In accordance with Item 601 of Regulation S-K similar notes
between the same parties which reference CUSIP No. U52547 AB 9 and
CUSIP No. 526055 AH 1 have not been filed because they are
identical in all material respects to the filed exhibit.)
*!10.1 Programming Supply Agreement, effective as of September 30, 1986,
between Satellite Services, Inc. and the Company.
*10.2 Supplemental Agreement, dated December 15, 1981, by and between
TCI Growth, Inc., H.F. Lenfest, Marguerite Lenfest and the Company
and Joinder Agreement executed by LMC Lenfest, Inc.
*10.3 Amendment to Supplemental Agreement, dated May 4, 1984 between the
Company and TCI Growth, Inc.
*10.4 Agreement, dated July 1, 1990, between H.F. Lenfest, Marguerite B.
Lenfest, Diane A. Lenfest, H. Chase Lenfest, Brook J. Lenfest and
the Lenfest Foundation, Tele-Communications, Inc. and Liberty
Media Corporation.
*10.5 Agreement and Consent, dated as of November 1, 1990, by and among
TCI Development Corporation, TCI Holdings, Inc., TCI Liberty,
Inc., Liberty Cable, Inc., H.F. Lenfest, Marguerite B. Lenfest, H.
Chase Lenfest, Brook J. Lenfest, Diane A. Lenfest and the Company.
*10.6 Letter Agreement, dated as of December 18, 1991, among Liberty
Media Corporation, the Company, Marguerite B. Lenfest, Diane A.
Lenfest, H. Chase Lenfest, Brook J. Lenfest and the Lenfest
Foundation.
*10.7 Irrevocable Proxies of H. Chase Lenfest, Diane A. Lenfest and
Brook J. Lenfest, each dated March 30, 1990.
*10.8 Partnership Agreement of L-TCI Associates, dated April 1993,
between Lenfest International, Inc. and UA-France, Inc.
*10.9 Pledge Agreement, dated July 29, 1994, between Lenfest Raystay
Holdings, Inc. and Farmers Trust Company as Collateral Agent.
*!10.10 Agreement, dated September 30, 1986, between the Company and
Tele-Communications, Inc.
*10.11 Agreement for the Sale of Advertising on Cable Television
Stations, dated as of November 25, 1991 between Suburban Cable TV
Co. Inc. and Cable AdNet Partners.
+10.12 Agreement, dated as of February 29, 1996, in favor of the Company
by H.F. Lenfest.
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+10.13 Sublease Agreement, dated March 21, 1996, between Suburban Cable
TV Co. Inc. and Surgical Laser Technologies, Inc.
****10.14 Letter, dated March 6, 1997, from H. F. Lenfest to the Company.
+10.15 Agreements, dated as of June 5, 1997, between H. F. Lenfest and
Lenfest Jersey, Inc., Lenfest York, Inc., Lenfest Raystay, Inc.
and Lenfest MCN, Inc. (formerly, MicroNet, Inc.).
++10.16 Letter, dated March 26, 1998 (effective September 30, 1997), from
H. F. Lenfest to the Company.
++++10.17 Amended and Restated Loan Agreement, dated as August 4, 1998,
among Lenfest Communications, Inc., a certain Lead Arranger,
certain Arranging Agents, a certain Documentation Agent, a certain
Syndication Agent, the Lenders, and a certain Administrative
Agent.
++++10.18 Stock Pledge Agreement, dated May 12, 1999, between Lenfest York,
Inc. and First Union National Bank, N.A., as Agent.
27. Financial Data Schedule.
- -----------------
* Incorporated by reference to the Company's Registration Statement
on Form S-1, No. 33-96804, declared effective by the Securities and
Exchange Commission on November 8, 1995.
** Incorporated by reference to the Company's Report on Form 10-Q,
dated December 22, 1995, for the quarter ended September 30, 1995.
*** Incorporated by reference to the Company's Registration Statement
on Form S-4, No. 333-09631, dated August 6, 1996.
**** Incorporated by reference to the Company's Report on Form 10-K,
dated March 22, 1997, for the year ended December 31, 1996.
+ Incorporated by reference to the Company's Report on Form 10-Q,
dated August 14, 1997, for the quarter ended June 30, 1997.
++ Incorporated by reference to the Company's Report on Form 10-K,
dated March 27, 1998, as subsequently amended, for the year ended
December 31, 1997.
+++ Incorporated by reference to the Company's Registration Statement
on Form S-4, as amended, No. 333-51589, dated May 1, 1998.
++++ Incorporated by reference to the Company's Report on Form 10Q,
dated May 14, 1999, for the quarter ended March 31, 1999.
! Confidential portions have been omitted pursuant to Rule 406 and
filed separately with the Commission.
(b) Reports on Form 8-K.
Report filed as of May 10, 1999.
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SIGNATURE
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.
LENFEST COMMUNICATIONS, INC.
DATE: November 5, 1999 By: /s/ Maryann V. Bryla
--------------------
Maryann V. Bryla
Senior Vice President - Chief Financial
Officer and Treasurer (Authorized Officer
and Principal Financial Officer)