FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2094942
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(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
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(Address of Principal executive offices) (Zip Code)
(302) 427-8602
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _X_
Indicate the number of shares outstanding of each of the Registrant's
class of common stock, as of March 22, 1997: 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.
Item 1. BUSINESS.
General
Lenfest Communications, Inc. ("Lenfest" or the "Company") acquires,
develops and operates cable television systems principally through its
subsidiary, Suburban Cable TV Co. Inc. ("Suburban"). Management believes the
Company's wholly owned and operated cable television systems (the "Core Cable
Television Operations") provide service to one of the largest contiguous blocks
of customers served by a single cable operator in the United States. As of
December 31, 1996, the Company's Core Cable Television Operations served
approximately 932,000 basic customers and passed approximately 1,279,000 homes.
At December 31, 1996, the Company also held equity interests in other cable
television companies serving approximately 432,000 basic customers, of which
approximately 339,000 were in areas near or contiguous to the Core Cable
Television Operations, of which the Company's attributable portion is
approximately 179,000 basic customers, giving the Company a combined domestic
base of approximately 1,111,000 basic customers. In addition, on January 10,
1997, the Company acquired the assets of the Turnersville, NJ cable television
system which had approximately 36,900 basic customers and passed approximately
47,000 homes.
The Company's Core Cable Television Operations are located primarily in
the suburban areas surrounding Philadelphia (Eastern Pennsylvania, Southern New
Jersey and Northern Delaware) in predominantly middle and upper-middle income
areas that in recent years have had favorable household growth and income
characteristics. Management believes the "clustering" of its cable television
systems and the favorable demographics of its service area have contributed to
its high operating cash flow growth and margins. From January 1, 1992 through
December 31, 1996, the Company's Core Cable Television Operations have
experienced a compound annual growth rate in EBITDA of 16.3% (8.9% without
reference to acquisitions) and an average EBITDA margin of 50.4%.
H. F.(Gerry)Lenfest, President and Chief Executive Officer of the
Company, together with his children, and Tele-Communications, Inc. ("TCI"),
through an indirect wholly owned subsidiary, each beneficially owns 50% of the
Company's outstanding common stock. Mr. Lenfest is a cable industry pioneer who
founded Lenfest in 1974 and has grown the Company both internally and through
acquisitions. TCI is the largest cable television operator in the United States,
with owned and operated systems serving approximately 13.4 million customers.
Lenfest believes that its affiliation with TCI provides substantial benefits,
including the ability to purchase programming and equipment at rates
approximating those available to TCI. See "Business -- Relationship with TCI"
and "-- Programming and Equipment Supply."
Other Operations And Investments
In addition to its Core Cable Television Operations, at December 31,
1996, Lenfest held investments in other cable television and
communications-related companies. Lenfest holds a 50% interest in Garden State
Cablevision L.P., which serves approximately 204,000 basic customers in and
around Cherry Hill, New Jersey; a 30% interest in Susquehanna Cable Co., which
serves approximately 160,000 basic customers; a 45% interest in Raystay Co.,
which serves approximately 58,000 basic customers in Pennsylvania; and a 30%
interest in Clearview Partners, which serves approximately 9,600 basic customers
in Pennsylvania and Maryland. Lenfest also owns StarNet, Inc., a provider of
promotional services and equipment for the cable television industry; MicroNet,
Inc., a carrier of video, voice and data transmission services; Lenfest
Programming Services, Inc., the provider of a local cable news channel
(NewsChannel) in Eastern Pennsylvania and Southern New Jersey; and Lenfest
Advertising, Inc., a seller of advertising for insertion in the local time
periods each cable channel makes available to cable operators. In addition to
its domestic holdings, at December 31, 1996, Lenfest held a 41.5% economic
interest in Australis Media Limited, a pay-television provider in Australia, and
a 20.8% indirect interest in Videopole, a cable television operator in France
serving approximately 68,000 customers.
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Relationship with TCI
LMC Lenfest, Inc., an indirect wholly owned subsidiary of TCI, owns 50%
of the outstanding common stock of the Company. The Company's relationship with
TCI dates to 1982 when a subsidiary of TCI acquired a 15.1% interest in the
Company. That sale of shares by the Company, as well as the subsequent sale in
1986 of an additional 28.6% interest to a TCI subsidiary, was made to provide
the Company with funds for the acquisition of additional cable television
systems. In addition, in 1986 (in a secondary transaction), Mr. Lenfest sold an
8.3% interest from his holdings to an indirect wholly owned subsidiary of TCI,
one-half of which interest was subsequently repurchased by the Company and held
as treasury shares. In 1992, Mr. Lenfest and his family sold an additional 2.1%
interest in the Company to the TCI subsidiary. LMC Lenfest Inc. holds all of
TCI's interest in the Company.
Throughout the period that TCI has had an equity interest in the
Company, the Company has operated independently. Although John Malone, the
Chairman and (Chief Executive Officer of TCI), and Brendan Clouston, Executive
Vice President and Chief Financial Officer of TCI, were members of the Company's
Board of Directors during 1996, no other representative of TCI or its
subsidiaries participates in the management, operation or planning of the
Company. Mr. Clouston resigned from the Board on March 14, 1997, and TCI, which
has the right to nominate his replacement to the Board, has informed the Company
that it will nominate Leo Hindery, President of TCI. Mr. Lenfest and LMC
Lenfest, Inc., as successor in interest to the earlier TCI subsidiaries through
a series of TCI internal reorganizations, have an agreement that provides,
together with the amended and restated Certificate of Incorporation of the
Company, that Mr. Lenfest has the right to designate a majority of the Board of
Directors of the Company until the earlier of January 1, 2002 or his death.
During such period, vacancies in respect of the directors designated by Mr.
Lenfest shall be filled by designees of Mr. Lenfest or in the event of Mr.
Lenfest's death, of The Lenfest Foundation. Thereafter, the Lenfest Family and
LMC Lenfest, Inc. will have the right to appoint an equal number of members of
the Company's Board of Directors. This right will continue for so long as any
member of the Lenfest Family owns any stock in the Company.
Pursuant to other contractual arrangements with TCI and its affiliates,
the Company has the right to purchase cable programming at rates calculated as a
percentage in excess of the rates available to TCI. In addition, TCI has granted
the Company a right of first refusal to purchase any cable television system
which TCI or its subsidiaries has a right to acquire if such cable television
system is located within 25 miles of any existing Company-owned cable television
system. The Company also has the right to receive the same discounts on
equipment purchases as are received by TCI. See "Principal Stockholders."
Operating Strategy
Management believes that the cable television industry has significant
growth potential in both the business of providing television programming
services and the business of providing new services such as Internet access,
near video-on-demand and/or video on demand and interactive/transactional
services. Management believes that the Company's operating strategy will allow
the Company to take advantage of the industry's potential. The Company's
operating strategy for its Core Cable Television Operations includes the
following elements:
o Capturing the Benefits of Clustering: Management believes the
Company can derive significant economies of scale and
operating efficiencies from the operation of its cable
television systems in a single cluster. Operational advantages
and cost savings associated with clustering include
centralized management, standardized billing, efficient
marketing, consolidated and improved customer service,
technical and administrative functions, as well as the
reduction of headends. The Company began this process in the
first half of 1996 by combining all of its corporate functions
into one office. In the fourth quarter, the Company selected
Cincinnati Bell Information Systems (CBIS) as its new billing
system provider and expects to complete the conversion process
of transfering its five existing billing systems to the CBIS
system by the end of the third quarter 1997. Management also
believes that clustering will enable it to more effectively
utilize capital by
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more efficiently delivering cable and related services to a
greater number of households from a reduced number of
headends. Clustering also provides the opportunity to
consolidate customer service operations into a call center
environment, which will result in increased operating
efficiencies, as well as improved service standards. Operation
of its cable television systems in a single cluster also will
provide the Company with enhanced revenue opportunities,
including the ability to attract additional advertising, and
the potential to add business broadband services. Management
expects to complete the consolidation of its cable television
systems into a single operating cluster by the end of 1998.
o Targeting Regions with Favorable Demographics/Growth
Opportunities: Management believes that, in general, suburban
households have favorable demographics which relates to a
greater probability to subscribe to cable television services
and premium service packages and to take advantage of new
service offerings. Management attributes the Company's growth
and high customer penetration levels to its history of
acquiring and developing cable television systems in suburban
areas with favorable growth and income characteristics as well
as strong and consistent marketing. In order to build on the
favorable demographic characteristics of the areas contiguous
to the Company's cluster of cable television systems, the
Company will continue to opportunistically pursue acquisitions
of cable television systems near or contiguous to its Core
Cable Television Operations. This activity may include
attempts to acquire the balance of the ownership interests in
Raystay Co., Clearview Partners and Susquehanna Cable Co. and
its cable television operating subsidiaries.
o Emphasis on Customer Service: The Company has sought to
provide its cable television customers with quality customer
service and attractive programming choices at reasonable
rates. Among other customer service initiatives, the Company
has implemented same-day, evening and weekend installation and
repair options. Management believes that the improved
reliability and additional channel capacity expected to result
from the ongoing upgrade of the Company's cable television
systems will further increase customer satisfaction. The
state-of-the-art, twenty-four hour, seven day a week call
center which the Company plans to open during the second
quarter of 1997 in New Castle County, Delaware is expected to
provide excellent, specialized and timely customer service to
the Company's Core Cable Television Operations.
o Upgrade of Cable Television Systems: Management believes that
maintaining high technical standards is integral to increasing
programming choices, improving customer satisfaction and
developing new revenue streams. The Company has commenced an
upgrade of the network architecture of its cable television
systems by increasing bandwidth, deploying fiber optic cable
and reducing the number of headend reception facilities. The
Company has selected Scientific - Atlanta to supply the
transmission equipment for its state - of - the - art
broadband network. Successfully upgrading the architecture of
the Company's cable systems will result in expanded channel
capacity, two-way communication capability, enhanced network
quality and dependability, augmented addressability and the
ability to offer enhanced and new telecommunications services.
These new services will include additional channels (both
analog and digital), programming packages, pay-per-view
(including near video-on-demand and/or video on demand), high
speed data services and Internet access, digital advertisement
insertion and interactive/transactional services. In addition,
the successful upgrade should allow the Company to provide new
offerings, such as local and exclusive entertainment, news,
information and community-oriented programming services.
Management believes that these services will enable the
Company to differentiate itself on a competitive basis and
increase penetration and revenue per customer through more
effective targeted marketing, greater bundling of services and
further development of the Company's brand name.
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Overview Of Core Cable Television Operations
Development Of The Systems
The Company has grown since its founding in 1974 both through the
internal growth of its owned and operated cable television systems and through
acquisitions. Lenfest has acquired numerous cable television systems since 1983.
Through its selection of cable systems to acquire, the Company has successfully
developed a substantial cluster of contiguous cable operating systems, which
comprise the Company's Core Cable Television Operations. This single cluster is
located in areas surrounding Philadelphia, all of which are no more than a two
hour drive from Suburban's corporate office in Oaks, Pennsylvania, which is
approximately 20 miles northwest of Philadelphia.
The following table provides customer data for each of the years in the
five-year period ended December 31, 1996, for the Company's owned and operated
and affiliated cable television systems.
Year Ended December 31,
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1992 1993 1994 1995 1996
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Owned and Operated
Homes passed
Beginning of period 705,985 759,635 870,718 892,549 904,753
Internal growth 18,850 48,283 21,831 12,204 26,424
% Internal growth 2.67% 6.36% 2.51% 1.37% 2.11%
Acquired 34,800 62,800 --- --- 347,496
End of period 759,635 870,718 892,549 904,753 1,278,673
Basic customers
Beginning of period 440,045 477,130 550,703 577,377 596,366
Internal growth 13,085 31,573 26,674 18,989 29,153
% Internal growth 2.97% 6.62% 4.84% 3.29% 3.23%
Acquired 24,000 42,000 --- --- 306,066
End of period 477,130 550,703 577,377 596,366 931,585
Affiliated Systems
Homes passed
Beginning of period 487,114 491,003 505,521 518,425 538,082
Internal growth 3,889 14,518 12,904 19,657 25,053
% Internal growth 0.80% 2.96% 2.55% 3.79% 4.40%
Acquired --- --- --- --- 30,933
End of period 491,003 505,521 518,425 538,082 594,068
Attributable homes 112,858 163,258 185,457 229,390 248,720
passed at end of
period (a)
Basic customers
Beginning of period 327,502 336,388 353,935 366,041 384,480
Internal growth 8,886 17,547 12,106 18,439 25,686
% Internal growth 2.71% 5.22% 3.42% 5.04% 6.32%
Acquired --- --- --- --- 21,653
End of period 336,388 353,935 366,041 384,480 431,819
Attributable basic 74,998 113,294 130,247 162,338 179,118
customers at end
of period (a)
5
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(a) For each affiliated cable television system, the number of attributable
homes passed and attributable basic customers is determined by
multiplying the Company's percentage equity interest in such cable
television system by the actual homes passed and actual basic customers
of such system. As of December 31, 1996, the Company held a 50% equity
interest in Garden State Cablevision L.P., a 30% equity interest in
Susquehanna Cable Co., a 45% equity interest in Raystay Co. and a 30%
equity interest in Clearview Partners. See "--Unrestricted Cable
Television Systems."
Cable Television Systems Acquired in 1996
The TCI Exchange
On February 12, 1996, the Company completed an exchange (the "TCI
Exchange") in which it received TCI's northern Delaware cable television system
(the "Wilmington System") in exchange for the Company's cable television systems
in the East San Francisco Bay area, a 41.67% partnership interest in Bay Cable
Advertising (an advertising interconnect), and certain other non-contiguous
cable television properties having a net value of approximately $45.0 million.
As of February 12, 1996, the Wilmington System passed approximately 193,000
homes and served approximately 143,000 basic customers.
The Sammons Acquisition
On February 29, 1996, the Company acquired from Sammons Communications,
Inc. ("Sammons") its Bensalem and Harrisburg cable television systems in
Pennsylvania and its Vineland and Atlantic City/Pleasantville systems in New
Jersey (collectively, the "Sammons Systems") ("the Sammons Acquisition"). The
purchase price for the Sammons Systems was approximately $531.0 million. As of
February 29, 1996, the Sammons Systems passed approximately 364,000 homes and
served approximately 277,000 basic customers.
The Salem and Shore Acquisitions
On April 30, 1996, the Company acquired from an affiliate of Time
Warner, Tri-County Cable Television Company, the Salem cable television system
(the "Salem System") in New Jersey (the "Salem Acquisition"). The purchase price
for the Salem System was approximately $16.0 million. The Salem system had
approximately 7,700 customers and passed approximately 10,600 homes. On the same
date, the Company acquired from Shore Cable Company of New Jersey its Shore
cable television system (the "Shore System") in New Jersey (the "Shore
Acquisition"). The purchase price for the Shore System was approximately $11.0
million. The Shore system had approximately 5,000 customers on the date of
acquisition and served three municipalities already served by the Company's
Atlantic City/Pleasantville system.
The Clearview Acquisition
On September 30, 1996, the Company, through Lenfest Clearview, Inc.
("Clearview"), a newly formed subsidiary of Suburban, completed the acquisition
of a 30% partnership interest in Clearview Partners, a newly formed general
partnership (the "Partnership"). Suburban, through Clearview, contributed to the
Partnership $500,000 and Suburban's right to acquire the cable television assets
(the "Gettysburg Assets") located in and about Gettysburg, Pennsylvania from
Sammons Communications of Pennsylvania, Inc. and its right to exchange the
Gettysburg Assets for cable television assets located near Stewartstown,
Pennsylvania and owned by GS Communications, Inc. Suburban also received a
payment of $4.5 million from GS Communications, Inc. in connection with the
transactions. On October 11, 1996, Clearview CATV, Inc. ("CCI"), an unaffiliated
entity, contributed all of its assets and liabilities to the Partnership in
connection with its acquisition of the remaining 70% interest in the
Partnership. Partnership assets include cable television
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assets located in Maryland and Pennsylvania and the liabilities include bank
debt in the approximate amount of $8.5 million. As a result of the series of
transactions, Clearview holds a 30% general partnership interest in the
Partnership, and the Partnership has approximately 9,600 basic customers and
passes approximately 13,400 homes.
Other Acquisitions in 1996
The Cable AdNet Partners Acquisition
On February 12, 1996, Lenfest Advertising, Inc. purchased the
Philadelphia area assets of Cable AdNet Partners, a subsidiary of TCI, for
approximately $1.1 million. Cable AdNet Partners handled local ad insertion for
several cable operators, including Suburban, in the greater Philadelphia region.
The Metrobase Cable Advertising Acquisition
On September 30, 1996, the Company through Lenfest Advertising, Inc., a
wholly owned subsidiary, acquired the assets of Metrobase Cable Advertising from
a subsidiary of Harron Communications Corp. for approximately $4.5 million.
The StarNet, Inc./United Video Satellite Joint Venture
On September 11, 1996, the Company, through StarNet, entered into an
agreement with United Video Satellite Group, Inc. ("UVSG"), to form a joint
venture to combine the two companies' pay-per-view promotion services. StarNet
contributed its Barker service to the joint venture and received a 28%
partnership interest. The joint venture is named Sneak Prevue, L.L.C. and is
managed and controlled by UVSG.
Cable Television System Acquired After December 31, 1996
The Turnersville Acquisition
On January 10, 1997, the Company acquired from Cable TV Fund 14-A,
Ltd., an affiliate of Jones Intercable, Inc., its Turnersville cable television
system (the "Turnersville System") in New Jersey (the "Turnersville
Acquisition"). The purchase price for the Turnersville System was approximately
$84.5 million, subject to certain adjustments. At the closing, the Turnersville
System passed approximately 47,000 homes and served approximately 36,900 basic
customers.
The following table includes operating data for the Turnersville System
for each of the years in the three-year period ended December 31, 1996.
Year Ended December 31,
1994 1995 1996
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Homes passed 44,792 45,852 47,085
Basic customers 33,961 35,523 36,858
Basic penetration 75.8% 77.5% 78.3%
Premium units 46,404 46,952 46,253
The Turnersville System has approximately 765 miles of 450 MHz plant
and approximately 53 miles of fiber optic cable. The customers within the
Turnersville System receive 62 channels of programming.
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Technical Overview
Approximately 92% of the Company's cable television systems have a
minimum of 52 or greater channel capacity and approximately 20% of the Company's
cable television systems have a minimum of 78 channel capacity. In addition, the
Company offers analog addressable converters to its customers. Addressable
converters allow for remote authorization of premium services and pay-per-view
events and movies.
Upgrade Strategy And Capital Expenditures
Lenfest has begun the process of upgrading the architecture of its
cable television systems to a broadband hybrid fiber optic/coaxial cable
network. This upgrade is expected to increase channel capacity, reduce the
number of amplification devices subject to failure and allow for two-way
communications. A broadband hybrid fiber optic/coaxial cable network
architecture utilizes fiber optic cable to carry video and data signals from a
headend to nodes. Nodes are mini-headends which distribute the video and data
signals from the fiber optic cable to groups of 500-600 homes over coaxial
cable. The Company expects that the network architecture it will utilize to
carry video and data transmissions from the node to the customer's home will
have 750 MHz of bandwidth, which permits the transmission of 110 analog
uncompressed channels. Management plans to utilize 550 MHz of this capacity (or
78 channels) until sufficient consumer demand for increased channels and/or new
services develops the balance of that capacity (i.e. from 550 to 750 MHz) will
be allocated to delivery of digital services. Approximately 20% of the Company's
cable television systems have 78 channel capacity (550 MHz or greater),
including 6% that have been upgraded to 750 MHz of bandwidth. The Company's
current capital expenditure program contemplates spending approximately $300
million from 1996 through the end of the year 2000 on upgrade activities.
With the adoption of digital compression technology, channel capacity
could be further expanded by more than 300%. Management believes one of the
first uses of such expanded channel capacity will be for increased number of
programming packages including special interest tiers and multiplexed premium
services. Expanded channel capacity will also be used to offer video-on-demand,
Internet access and near video-on-demand services. Near video-on-demand utilizes
multiple channels in order to reduce the intervals between start times for
feature presentations.
Rates And Ancillary Revenue Sources
Lenfest's cable television systems typically offer five levels of
programming services: basic; cable programming service ("CPS"); new product
tier; premium services; and pay-per-view. As of December 31, 1996, the basic
service package consisted of local off-air broadcast channels, and public
service/access channels. The monthly rate charged for the basic service package
ranged from $8.33 to $11.57. The CPS package consisted of satellite-delivered
networks such as ESPN, MTV, CNN, The Discovery Channel and USA Network. The
average monthly rate for the CPS package ranged from $11.12 to $17.25.
In certain areas, Lenfest offers a new product tier of programming
services which includes channels such as The Cartoon Network, The Sci-Fi
Channel, The Travel Channel, Court TV, Encore and Turner Classic Movies. The
price for the group of new product tier channels ranged from an additional $2.50
to $4.95 over the price of the CPS package, depending on the number of channels
offered.
The Company also offers premium services, which include HBO, Cinemax,
The Movie Channel, Showtime, The Disney Channel and PRISM (a sports and movie
channel for the Philadelphia metropolitan area). As of December 31, 1996, the
monthly charge for each of these services, priced individually, ranged from
$8.95 to $12.95. Rates for premium services and pay-per-view services are
currently exempt from governmental regulation. See "Legislation and Regulation."
8
Lenfest's systems typically offer four channels of pay-per-view
services which include feature movies, special events and adult programming. As
of December 31, 1996, prices for movies ranged from $2.95 to $4.95. Prices for
adult features range from $3.95 to $5.95. Special event prices vary considerably
based upon the type of event. Pay-per-view revenues have increased in the last
three years as a result of expanded channel offerings and the growth in the
number of customers having addressable cable television converters.
In addition to customer fees, ancillary sources of revenue for cable
television system operators include the sale of advertising time on locally
originated and satellite-delivered programming, as well as home shopping sales
commissions. All of the Company's systems are involved in local advertising
sales and offer one or both of the leading shop-at-home services, QVC and Home
Shopping Network ("HSN"), as part of the basic programming package. Lenfest
receives commissions from both QVC and HSN based on orders placed by Lenfest
customers. Management believes that advertising income and home shopping
commissions have substantial growth possibilities.
Lenfest also receives revenue from the rental of converter boxes and
remote controls and from installation fees. All such revenues are regulated by
the 1992 Cable Act.
Programming And Equipment Supply
Through an agreement with Satellite Services, Inc. (a wholly owned
subsidiary of TCI), the Company is able to purchase almost all of its
programming services at rates closely approximating those paid by TCI, although
the Company retains the option to purchase programming from other parties.
Management believes that these rates are significantly lower than the Company
could obtain independently. Programming is the Company's largest single expense
item, accounting for 24.3% of total operating expense during 1996. The four
cable television operators in which the Company has an equity interest (Garden
State Cablevision L.P., Susquehanna Cable Co., Clearview Partners and Raystay
Co.) also obtain their programming pursuant to this agreement.
In addition, the Company has been placed on the "approved list" of
major equipment vendors to receive the same discounts on equipment purchases as
are received by TCI. There can be no assurance that the Company will continue to
be eligible to receive these equipment discounts in the future.
Franchises
As of December 31, 1996, the Company held 343 cable television
franchises. These franchises provide for the payment of fees to the issuing
authority, usually local governments. The Cable Communications Policy Act of
1984 (the "1984 Cable Act") prohibits franchising authorities from imposing
annual franchise fees in excess of 5% of the gross revenues attributable to
customers located in the franchise area and also permits the cable television
system operator to seek renegotiation and modification of franchise requirements
if warranted by changed circumstances. For the three years ended December 31,
1996, franchise fee payments made by the Company have averaged approximately
3.7% of gross cable television revenues.
The 1984 Cable Act provides for an orderly franchise renewal process,
and it establishes comprehensive renewal procedures which require that an
incumbent franchisee's renewal application be assessed on its own merit and not
as part of a comparative process with competing applications. A franchising
authority may not unreasonably withhold the renewal of a franchise. If a
franchise renewal is denied and the system is acquired by the franchise
authority or a third party, then the franchise authority
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or other purchaser must pay the operator the "fair market value" for the system
covered by the franchise. See "Legislation and Regulation."
The Company has never had a franchise revoked, and management believes
that its franchise relationships are satisfactory.
Unrestricted Cable Television Systems
The Company holds equity investments in four cable television system
companies: Garden State Cablevision L.P., Susquehanna Cable Co., Raystay Co. and
Clearview Partners. As of December 31, 1996, these companies operated cable
television systems serving approximately 432,000 basic customers, of which
approximately 339,000 are served by systems which are contiguous to the
Company's cluster of cable television systems. As a result of Lenfest's level of
affiliation with these companies, the companies participate in Lenfest's
programming purchasing relationship with Satellite Services, Inc. See " --
Programming and Equipment Supply."
Garden State Cablevision L.P.
In 1989, the Company, along with Comcast Corporation ("Comcast") and an
investment group, acquired the former New York Times cable television system
which now has approximately 204,000 basic customers in the Cherry Hill, New
Jersey area. Lenfest and Comcast subsequently purchased the investment group's
interest, and each now owns 50% of Garden State Cablevision L.P. ("Garden
State").
The following table provides customer data at year end for each of the
years in the three-year period ended December 31, 1996 for Garden State's cable
television systems.
Year Ended December 31,
1994 1995 1996
---- ---- ----
Homes passed 288,013 292,454 294,390
Basic customers 195,966 200,086 204,179
Basic penetration 68.0% 68.4% 69.4%
Premium units 151,606 154,245 154,916
Susquehanna Cable Co.
The Company, through an indirect, wholly owned subsidiary beneficially
owns a 30% equity interest in Susquehanna Cable Co.'s cable television operating
subsidiaries which now have approximately 160,000 basic customers (the "SCC
Subsidiaries"). The SCC Subsidiaries own and operate cable television systems in
York and Williamsport, Pennsylvania as well as smaller systems in Maine,
Mississippi, Illinois and Indiana.
The following table provides customer data at year end for each of the
years in the three-year period ended December 31, 1996 for the SCC Subsidiaries'
cable television systems.
Year Ended December 31,
1994 1995 1996
---- ---- ----
Homes passed 173,674 182,465 206,715
Basic customers 127,972 137,885 159,871
Basic penetration 73.7% 75.6% 77.3%
Premium units 72,740 71,135 71,928
Beginning May 28, 1998, each of Lenfest and Susquehanna Media Co. (the
70% owner of Susquehanna) may offer to purchase all of the shares of stock of
Susquehanna Cable Co. and the SCC Subsidiaries owned by the other. If the person
to whom an offer is made rejects the offer, such person is
10
then obligated to purchase all of the shares of stock of the person who made the
offer on the same terms and conditions as contained in the initial offer.
Lenfest has pledged its stock in Susquehanna Cable Co. and in the SCC
Subsidiaries as collateral for obligations incurred by Susquehanna Media Co.
Raystay Co.
Lenfest, through an indirect, wholly owned subsidiary, owns
approximately 45% of the stock of Raystay Co. ("Raystay"). Raystay owns and
operates cable television systems in Pennsylvania serving approximately 58,000
basic customers.
The following table provides customer data at year end for each of the
years in the three-year period ended December 31, 1996 for Raystay's cable
television systems.
Year Ended December 31,
1994 1995 1996
---- ---- ----
Homes passed 56,738 63,163 79,029
Basic customers 42,103 46,509 57,743
Basic penetration 74.2% 73.6% 73.1%
Premium units 17,847 17,755 17,565
Pursuant to a shareholder agreement, beginning September 30, 2002
either the Company or the Majority Shareholders of Raystay (as defined in the
agreement) may offer to purchase all of the shares of stock of the other. If the
offer to sell is rejected, the offeree is then obligated to purchase all of the
shares of stock of the offeror on the same terms and conditions. In addition, on
the earlier of May 1, 1999 or the date George G. Gardner ceases to actively
manage Raystay, Lenfest will have the right to designate the majority of the
board of directors of Raystay and to assume management control. Lenfest has
pledged its stock in Raystay as collateral for obligations incurred by Raystay.
Clearview Partners
As discussed in "--Other Acquisitions in 1996", the Company owns a 30%
interest in Clearview Partners which had no operating history prior to its
formation. For ninety days after October 1, 2004, Clearview has an option to
purchase CCI's partnership interest at fair market value. If the parties are
unable to agree on such a value, CCI must sell its interest or buy Clearview's
interest at the fair market value determined by Clearview.
Unrestricted Non-Cable Investments
StarNet, Inc.
StarNet Inc. offers program promotion for basic, premium and
pay-per-view cable television through its "NuStar" service.
NuStar delivers and inserts fully tagged promotional spots for
programming into 25 cable television networks. Each spot targets specific viewer
groups and includes time specific information, channel numbers and system logos.
Up to 65 different programs are promoted monthly through NuStar. The spots are
delivered by NuStar through its satellite transponder to proprietary equipment
in the cable headend. NuStar launched its service in 1989, and as of December
31, 1996 served cable television systems having 23 million customers. In
December 1996, StarNet converted its service to Digicipher II
11
delivery on a KU Band transponder and relaunched the NuStar service as
Customized NuStar and Classic NuStar. Customized NuStar provides individual
MSO's with their own satellite feed in order to insert promotional spots of
their own choosing.
In September 1996 StarNet formed a joint venture with Prevue Networks,
Inc. of Tulsa, OK, in which each entity contributed assets consisting of all of
their pay-per-view promotional services. For its contribution of The Barker(R)
assets, StarNet received a 28% equity in the new venture, called Sneak Prevue
LLC. Prevue contributed all of its Sneak Prevue assets and received 72% of the
equity. The joint venture is managed and operated by Prevue Networks. The joint
venture currently serves 33 million cable television customers using both The
Barker(R) and Sneak Prevue delivery systems. The joint venture intends
eventually to develop, market and sell a next generation pay-per-view
promotional service.
In October 1996, the Company decided to close the operations of StarNet
Development, Inc. ("SDI"), a subsidiary of StarNet, located in Salt Lake City,
UT, which manufactured and sold digital insertion and confirmation equipment to
cable television system operators. This equipment provided cable television
system operators with the ability to insert geographically targeted advertising
into cable television networks such as ESPN and CNN and to provide advertisers
with independent verification that the advertisement has been aired.
The Company decided that SDI could not compete profitably in this
business because the market was consolidating. Consequently, the Company has
moved the development of the next generation of ad insertion equipment to
StarNet's West Chester, Pennsylvania offices where it intends to integrate
components of this equipment for its own proprietary use. The Company will
support equipment currently in the field through an arrangement with former SDI
employees located in Salt Lake City.
MicroNet, Inc.
Founded in 1989, MicroNet is a carrier of video, voice and data
transmission services for a mix of markets and customers. These services are
transmitted through earth station, terrestrial microwave and digital fiber optic
facilities.
MicroNet's Cedar Hill, Texas earth station serves Texas, and its
Glenwood, New Jersey earth station serves the Northeast. The Cedar Hill facility
is directly interconnected to the Texas Video Network, a terrestrial system
serving seven major Texas cities and the Lower Rio Grande Valley. The Glenwood
earth station is integrated with MicroNet's Northeast terrestrial network
serving New York, Philadelphia, Baltimore and Washington, D.C.
MicroNet operates a network of fixed and temporary loops serving local
broadcasters, sports venues and other video traffic sources. These networks are
controlled by television operating centers. MicroNet's video customer base
includes all four major network broadcasters, numerous cable programmers, news
and sports program services and business video users. MicroNet's other
terrestrial systems include a cable television program distribution network
operating in New Jersey, Pennsylvania and Delaware.
MicroNet operates over 120 communication tower sites in the Northeast,
Texas and California for site rental to qualified users. Customers include
wireline and non-wireline cellular carriers, government agencies and other
common carriers.
In late 1996, the Company decided to offer for sale a portion of the
assets of MicroNet. The Company concluded that MicroNet's business did not match
strategically with its Core Cable Television Operations. The Company has
retained Communications Equity Associates to represent it in selling the
MicroNet assets. The Company does not anticipate closing on any such sale prior
to the end of the third quarter of 1997.
12
Lenfest Programming Services, Inc. (NewsChannel)
NewsChannel, part of Lenfest Programming Services, Inc., is a local
cable television news channel which began operations in 1994. It is designed to
function as an electronic newspaper, providing news tailored to the geographic
area served by individual cable television systems. NewsChannel receives news
from local newspapers before the newspapers arrive at the newsstands.
NewsChannel also has access to traditional local, regional and international
broadcast and print news services. The news is presented with computer generated
headlines, copy, video, graphics or photos. The displayed copy is read by
announcers and is supplemented by audio soundbites and video inserts.
NewsChannel runs in ten minute cycles and is updated continually. As of December
31, 1996, NewsChannel served approximately 649,000 customers in Pennsylvania and
New Jersey, 608,000 of whom were customers of the Core Cable Television
Operations.
In late 1996, a decision was made to combine the NewsChannel with
existing local origination channels and create new regional programming services
providing local news, information and entertainment. The convergence of the
critical mass of the Suburban customer cluster, connection of the Core Cable
Television Operations by fiber and control of advertising sales through Radius
(see below) presented the opportunity for the Company to efficiently create
regional programming to enhance the value provided to customers. The Company
anticipates that this new service will be rolled out in the fourth quarter of
1997.
Lenfest Advertising, Inc. (Radius Communications)
Lenfest Advertising, Inc. was formed in January 1996 to purchase the
Philadelphia area assets of Cable AdNet Partners, an indirect subsidiary of TCI.
Cable AdNet Partners sold and inserted cable advertising for several cable
operators, including Suburban, in the Greater Philadelphia market.
On September 30, 1996, Lenfest Advertising, Inc. purchased the assets
of Metrobase Cable Advertising, a subsidiary of Harron Communications Corp. for
approximately $4.5 million. Metrobase represented sixteen cable operators in six
states including the Suburban systems acquired from Sammons Communications in
February 1996. However, the majority of its business was in the Greater
Philadelphia region. In October 1996, the newly combined companies began doing
business under the name of Radius Communications ("Radius") representing cable
television systems having nearly 1.8 million customers, of which approximately
730,000 were customers of the Company.
In September 1996, the Company signed a Letter of Intent with Comcast
Corporation to enter into a partnership for the purpose of representing regional
and national cable advertising sales in the Greater Philadelphia market. Under
the arrangement, each partner would own a 50% interest, and Radius would be the
managing partner of the partnership for its first two years. Radius would
continue to provide local cable advertising sales and insertion for the Company
and 17 other cable television system operators. The Company believes that the
Radius/Comcast partnership agreement will be finalized in the second quarter of
1997.
Lenfest Australia, Inc.
In 1993, the government of Australia auctioned licenses for the right
to provide pay television services via DBS within Australia. The Company,
through its Lenfest Australia, Inc. subsidiary, agreed to
13
purchase an Australian company which successfully bid for and held the right to
obtain one of two private sector Australian pay television licenses, "License
B." Subsequently, Lenfest Australia, Inc. contributed its right to purchase such
company (and the right to acquire License B) to Australis Media Limited, an
Australian public company ("Australis") which provides programming via MMDS
licenses to substantially all of Australia's major population centers. In 1994
Lenfest Australia, Inc. paid, on behalf of Australis, A$116.8 million
(approximately U.S.$78.9 million) for License B. It also paid approximately
A$13.0 million (approximately U.S.$8.8 million) to the shareholders of the
Australian company which was the successful bidder in the auction in accordance
with the purchase agreement for such company.
Australis currently provides pay television programming services to
customers via DBS and MMDS in cooperation with the other Australian commercial
satellite licensee and, in 1993, entered into a 25-year programming distribution
agreement with Foxtel (a joint venture between Telestra and The News Corporation
Limited), for cable television distribution. The agreement with Foxtel provides
for minimum guaranteed monthly payments (denominated in US dollars) to Australis
and, in any month in which actual Foxtel subscribers exceed a specified number,
an additional fee based on such excess. In addition, Australis has entered into
long-term programming joint ventures and license agreements with major
international film studios and cable television programmers to obtain rights to
distribute a wide variety of movie, sports, general entertainment and other
programming to the Australian market.
As described in its Report on Form 10-Q for the period ended September
30, 1996 (the "September 10-Q") starting in January 1996, Australis experienced
a liquidity crisis which was resolved by the completion of a successful
refinancing of debt as well as the raising of new equity for Australis. The
Company lent Australis $19.7 million and guaranteed $75.0 million of a $125.0
million short term credit facility for Australis.
On October 31, 1996, Australis completed its refinancing through the
sale of $150 million in principal amount of its 15% Senior Secured Discount
Notes due 2002 (the "Australis Notes") and the sale of $100 million of shares
and convertible notes (the "Australis Stock"). In connection with the
refinancing, the Company purchased $40.0 million of the Australis Stock at a
price of A$0.545 per share or convertible note. In addition, the Company
purchased $40.0 million of the Australis Notes. Also as reported in the
September 10-Q, the Company was released from its guarantee, was repaid its
January loan, and was repaid funds which it and Publishing and Broadcasting
Limited had put up to purchase certain excess equipment from Australis in
August, 1996.
As part of its U.S. $75.0 million guarantee, the Company received
warrants to purchase stock or convertible notes of Australis at a price of
A$0.20. In order to attract sufficient equity investors into the Australis
refinancing plan, the Company agreed to transfer all of these warrants to other
parties who purchased portions of the Australis Stock. In addition, the Company
agreed to give two parties which purchased Australis Stock in the offering an
option for five years for each to purchase 50,000,000 convertible notes of the
173,000,000 convertible notes obtained by the Company in its original investment
in Australis. The option is exercisable at a price of A$0.20 per note with said
price to escalate at 8% per year commencing November 1, 1997.
Also as part of the refinancing plan, Australis and Lenfest Australia,
Inc. agreed to terminate the Technical Services Agreement, pursuant to which
Lenfest Australia, Inc. was to provide services to Australis in the period
1994-2005. Upon shareholder approval of this termination on December 11, 1996,
Australis issued 70,238,557 shares and/or convertible notes at a conversion
price of A$0.545 per share or note to Lenfest Australia, Inc. The shareholders
also approved the issuance of 500,000 convertible notes to Lenfest Australia as
a late payment penalty on its January, 1996 loan.
As a result of all transactions, at December 31, 1996, the Company had
invested an aggregate of $131.0 million and $40.0 million respectively, in the
equity and debt securities of Australis. At December 31, 1996, the equity
securities held by the Company had a market value of approximately $34.1
million and represented a 13.6% voting interest and a 41.5% economic interest
in Australis.
Lenfest International, Inc.
The Company and TCI each are partners in L-TCI Associates, a
partnership which held, as of December 31, 1996, a 29% interest in Videopole.
Videopole is a French cable television company serving rural areas of France. As
of December 31, 1996, Videopole held franchises in areas with nearly 424,000
homes, had built cable television systems passing approximately 263,000 homes,
and served approximately 68,000 customers. Videopole is controlled by Synergie
Developement et Services which is a wholly owned subsidiary of D' Electricite De
France, the French state-owned electric company.
Pursuant to the Partnership Agreement of L-TCI Associates (the "L-TCI
Partnership Agreement"), the Company made an initial investment of approximately
$7.2 million in 1993 related to its indirect investment in Videopole. Since that
initial investment, the Company has invested a further $ 15.7 million in
Videopole through the end of 1996. $10.7 million of this amount was obligated to
be invested by the Company under the original Videopole Agreement, and
approximately $3.6 million and $1.4 million, respectively, was invested by the
Company instead of by TCI in 1995 and 1996. The L-TCI Partnership Agreement
provides if TCI fails to make any of its required capital contributions after
1994 that the Company will make TCI's, as well as its own, capital
contributions. Since the Company has made payments instead of TCI, the Company's
percentage interest in L-TCI Associates has increased, thereby increasing the
Company's indirect percentage interest in Videopole to 20.8%, and decreasing
TCI's indirect interest to 8.2% as of the end of 1996.
14
On January 6,1997, the Company made a required additional capital
contribution for itself (approximately $2.6 million) and instead of TCI
(approximately $2.6 million) to Videopole. The Company also made a payment of
approximately $1.3 million to fund a commitment which another Videopole partner
was required to make, but did not. As a result of this investment in 1997, L-TCI
Associates' interest in Videopole increased to 30.46%; and the Company's
indirect interest in Videopole increased to 23.96% and TCI's indirect interest
decreased to 6.5%.
Competition
Multichannel Multipoint Distribution Service ("MMDS") systems, commonly
called wireless cable television systems, and Direct Broadcast Satellite ("DBS")
systems, which distribute programming to home satellite dishes, compete with
traditional cable television systems. Establishing a MMDS or DBS network is less
capital intensive than building a traditional cable television system and,
therefore, gives MMDS and DBS systems an advantage in areas of lower population
density. Providers of programming via these technologies have the potential to
compete directly with cable television systems in urban areas as well, and in
some areas of the country, DBS systems are in direct competition with cable
television systems.
In MMDS, the Company faces competition from ACS Enterprises, Inc.
("ACS"), acquired by CAI Wireless Systems, Inc. ("CAI") in 1995. ACS's maximum
potential service area is a radius of approximately 35 miles from ACS's tower in
Philadelphia which covers a significant portion of the Company's customer base.
However, management believes that a number of households in ACS's service area
cannot be reached because of terrain and elevation obstructions. In the
Company's Atlantic City/Pleasantville System, the Company faces competition from
Orion Vision, a local MMDS operator, which has a broadcast area of approximately
12 miles from its transmitting site in Corbin City, New Jersey.
MMDS operators currently have one package of service consisting of
approximately 33 channels with no off air broadcast channels. MMDS generally is
less expensive than cable due in large part to the lower number of channels it
offers. At this time, the Company does not view MMDS as a significant
competitive service, although it expects that this could change if advances in
digital wireless technology significantly expands MMDS channel capacity and
quality of service. Although the channel capacity of MMDS systems is limited, it
is expected that developments in compression technology will enable MMDS
operators to provide a sufficient number of channels that, while fewer than the
number of channels that are expected to be provided by cable television systems
using fiber-optic technology, may nevertheless be attractive to subscribers.
However, a digitally compressed MMDS service will require hardware similar to
that currently used by DBS providers and will have the same limitations as
compared with a cable television system currently faced by those providers set
forth above. Recent amendments to FCC regulations enable MMDS systems to compete
more effectively with cable television systems by making additional channels
available to the MMDS industry and by refining the procedures through which MMDS
licenses are granted.
Currently, there are several DBS providers offering service in the
Company's service area. The packages offered by the DBS providers generally are
more expensive than the Company's CPS tier, but some DBS providers currently can
provide a greater number of channels than the Company does on that tier, which
is the comparable offering of service. The Company believes that its services
presently have a competitive advantage over DBS because: (i) the cost of cable
installation is significantly lower than DBS' up-front equipment and
installation costs; (ii) within the Company's service areas, DBS providers
cannot offer any local television signals; (iii) without a significant
investment in additional equipment, only one channel can be seen on all
television sets in the same house at the same time; and (iv) with the Company's
upgraded network architecture, the Company will be able to offer two-way
interactive services and, with digital compression, will have more than three
times the bandwidth capacity of the satellite systems. Additionally, the Company
believes that a significant number of customers who purchase a satellite dish
keep their cable service at some level for usage on multiple sets and to watch
local channels. The Company believes that growth of DBS systems is almost
entirely within the non-cabled areas of its franchises.
Two DBS providers, EchoStar and MCI/News Corp., have announced their
intention to merge. If
15
this merger is consummated, the merged entity would have a very large channel
capacity and control two of the three orbital satellite positions which allow a
satellite to transmit signals covering the entire United States. The capacity
would enable the merged entity, through the use of encryption, to offer local
television signals in many major markets. The offering of local television
signals, if successful, would eliminate one of cable television's significant
advantages over DBS providers. There are a number of legal and regulatory
hurdles which the parties must overcome before this merger can be finalized.
To date, the Company believes that it has not lost a significant number
of customers, nor a significant amount of revenue, to DBS or MMDS operators
competing with the Company's systems. There can be no assurance, however, that
competition from these technologies will not have a negative impact on the
Company's business in the future.
The 1996 Act repealed the prohibition on Regional Bell Operating
Companies ("RBOCs") and other Local Exchange Carriers ("LECs") from providing
cable service directly to subscribers in their local telephone service areas.
Thus, LECs may now acquire, construct and operate cable systems both inside and
outside their service areas. The 1996 Act also authorizes LECs to provide video
programming through a variety of other means, including the operation of "open
video systems," without obtaining a local cable franchise.
The RBOCs and other local telephone companies are in the process of
entering the cable television business. The RBOCs have significant access to
capital and several have expressed their intention to enter the video-to-home
business as an adjunct to their existing voice and data transmission businesses.
In addition, the RBOCs and local telephone companies have in place facilities
which are capable of delivering cable television service.
Most of the Company's cable television assets are located in the Bell
Atlantic operating area. Bell Atlantic announced its intention to merge with
NYNEX in April 1996. It is not clear at this time how the pending Bell
Atlantic/NYNEX merger will impact competition. Bell Atlantic has an obligation
under its rate cap settlement with the Pennsylvania Public Utilities Commission
to build a fiber network within the Commonwealth of Pennsylvania. Portions of
this network will be within the Company's franchise areas. To the Company's
knowledge Bell Atlantic has not begun any of this build within such areas.
Cable television franchises are not exclusive. Under the 1992 Cable
Act, franchising authorities are prohibited from granting exclusive cable
television franchises and from unreasonably refusing to award additional
competitive franchises. Moreover, municipalities are permitted to operate cable
television systems in their communities without franchises. Consequently, more
than one cable television system may be built in the same area (known as an
"overbuild"), with potential loss of revenues to the operator of the original
cable television system. Management cannot predict the extent to which such
competition will materialize or, if such competition materializes, the extent of
its effect on Lenfest.
Constructing a cable television system is a capital intensive process
for which the Company believes there can be no assurance of realizing a return
on investment within an acceptable time period. The Company believes that, to be
successful, an overbuild would be required to serve a distinct portion of the
cable television market on a more cost efficient basis than the existing cable
operator, have facilities capable of transmitting cable television programming
in place or have significant access to capital.
Broadcast television is another competitor to cable television. In most
of the areas served by the Company's cable systems, a variety of terrestrial
broadcast television programming can be received off-air. Typically, there are
three to ten VHF/UHF broadcast channels that provide local, network and
syndicated programming free of charge.
The Company's competitors also include master antenna television
("MATV") and satellite master antenna television ("SMATV") systems. MATV and
SMATV systems are essentially small cable television systems that operate within
hotels, apartment complexes, condominium complexes and individual residences.
Due to the widespread availability of earth stations, such private cable systems
may offer both improved reception of local television stations and many of the
same satellite-delivered program services
16
that are presently offered by franchised cable systems. MATV and SMATV stations
currently labor under fewer regulatory burdens than franchised cable systems.
For example, MATV and SMATV stations need not serve low density or economically
depressed areas. By reducing cable regulation, the 1996 Act may have reduced
some of the advantages that had previously been enjoyed by MATV and SMATV
providers. However, since MATV and SMATV services are generally not "cable
systems" under the 1992 Cable Act, such services may be exempt from the
remaining laws and regulations that impact cable operators.
The 1996 Act also authorizes registered utility holding companies and
their subsidiaries to provide video programming services. In addition, cable
television operators face indirect competition from professional sports events,
the theater, moviehouses, home video entertainment, radio and newspapers. Other
new technologies may soon compete with the non-entertainment services that cable
systems offer or will soon be able to offer, as well as with cable television
services. Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. The Company cannot predict the effect that ongoing or future
developments may have on the cable television industry generally or the Company
specifically.
Employees
As of December 31, 1996, the Company had 1,478 full-time employees, of
which 161 employees were covered by collective bargaining agreements at two
locations.
As of December 31, 1996, the Company's Core Cable Television Operations
had 1,084 full-time employees, of which 161 employees were covered by collective
bargaining agreements at two locations.
With the completion of the Turnersville Acquisition, the Company has a
total of approximately 1,545 full-time employees, of which 161 are covered by
collective bargaining agreements at two locations. The Company has been
bargaining with the employees in its Harrisburg system since October 1996 on the
terms of a new contract. It expects to commence bargaining in the second quarter
of 1997 with the employees in its Atlantic City/Pleasantville system on the
terms of a new contract.
The Company considers its relations with its current employees to be
satisfactory.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies may in the future materially affect
the cable television industry. The following is a summary of significant federal
laws and regulations affecting the growth and operation of the cable television
industry and a description of certain state and local laws.
Federal Statutory Law
Existing Laws
The Cable Communications Policy Act of 1984 ("1984 Cable Act") became
effective on December 29, 1984. This federal statute, which amended the
Communications Act of 1934 (the "Communications Act"), creates uniform national
standards and guidelines for the regulation of cable television systems. On
October 5, 1992, Congress enacted the Cable Television Consumer Protection and
Competition Act of 1992 ("1992 Cable Act"). This legislation amended the 1984
Cable Act in many respects and has significantly changed the regulatory
environment in which the cable industry operates. The 1992 Cable Act allows for
a greater degree of regulation of the cable television industry with respect to,
among other things: (i) cable television system rates for both basic and certain
nonbasic services; (ii) programming access and exclusivity arrangements; (iii)
access to cable channels by unaffiliated programming services;
17
(iv) leased access terms and conditions; (v) horizontal and vertical ownership
of cable television systems; (vi) customer service requirements; (vii) franchise
renewals; (viii) television broadcast signal carriage and retransmission
consent; (ix) technical standards; (x) customer privacy; (xi) consumer
protection issues; (xii) cable equipment compatibility; (xiii) obscene or
indecent programming; and (xiv) requiring subscribers to subscribe to tiers of
service other than basic service as a condition of purchasing premium services.
Additionally, the 1992 Cable Act encourages competition with existing cable
television systems by: allowing municipalities to own and operate their own
cable television systems without having to obtain a franchise; preventing
franchising authorities from granting exclusive franchises or unreasonably
refusing to award additional franchises covering an existing cable television
system's service area; and prohibiting, with certain exceptions, the common
ownership of cable television systems and co-located MMDS or SMATV systems. The
1992 Cable Act also precludes cable operators affiliated with video programmers
from favoring such programmers in determining carriage on their cable systems or
unreasonably restricting the sale of their programming to other multichannel
video distributors.
The 1996 Act, which became law on February 8, 1996, significantly
alters the federal, state and local regulatory structure. As it pertains to
cable television, the 1996 Act, among other things, (i) deregulates rates for
nonbasic cable service in 1999; (ii) deregulates basic and nonbasic rates with
respect to cable operators that face video competition from LECs by expanding
the definition of "effective competition," the existence of which displaces rate
regulation; (iii) eliminates the restriction against the ownership and operation
of cable systems by telephone companies within their local exchange service
areas; and (iv) liberalizes certain of the FCC's cross-ownership restrictions.
The FCC will have to conduct a number of rulemaking proceedings in order to
implement many of the provisions of the 1996 Act.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction over
the cable television industry, has promulgated regulations covering a number of
subject matter areas. The FCC has the authority to enforce these regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations. A brief summary of the most
significant of these federal regulations as adopted to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation
for premium channels and optional nonbasic program tiers. The 1984 Cable Act
also deregulated basic cable rates for cable television systems determined by
the FCC to be subject to "effective competition." The 1992 Cable Act replaced
the FCC's old standard for determining "effective competition," under which most
cable television systems were exempt from local rate regulation, with a
statutory provision that subjected nearly all cable television systems to local
rate regulation of basic service. The 1996 Act expands the definition of
"effective competition" to cover situations where a local telephone company or
its affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except DBS. Regulation
of both basic and nonbasic tier cable rates ceases for any cable system subject
to "effective competition."
Additionally, the 1992 Cable Act authorized the FCC to adopt a formula,
for franchising authorities to enforce, to ensure that basic cable rates are
reasonable; allowed the FCC to review rates for nonbasic service tiers (other
than per-channel or per-program services) in response to complaints filed by
franchising authorities and/or cable customers; prohibited cable television
systems from requiring subscribers to purchase service tiers above basic service
in order to purchase premium services if the system is technically capable of
doing so; required the FCC to adopt regulations to establish, on the basis of
actual costs, the price for installation of cable service, remote controls,
converter boxes and additional outlets; and allows the FCC to impose
restrictions on the retiering and rearrangement of cable services under certain
limited circumstances.
18
The FCC has adopted rules designed to implement these rate regulation
provisions. The FCC's regulations contain standards for the regulation of basic
and nonbasic cable service rates (other than per-channel or per-program
services). The rate regulations adopt a benchmark price cap system for measuring
the reasonableness of existing basic and nonbasic service rates, and a formula
for evaluating future rate increases. 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 charges for equipment and
installation services must be recalculated annually and adjusted accordingly.
The 1996 Act eliminates regulation of rates for CPS packages for all
cable operators as of March 31, 1999. In the interim, regulation of rates for
CPS packages can only be triggered if a franchising authority complaint based on
more than one subscriber complaint is made with the FCC within 90 days after a
rate increase. These 1996 Act provisions should materially alter the
applicability of FCC rate regulations adopted under the 1992 Cable Act.
In addition, the 1996 Act relaxes the uniform rate requirements of the
1992 Cable Act, which required an operator of cable television systems to have a
uniform rate structure for the provision of cable services throughout the
geographic area in which the operator provides cable service. Specifically, the
new legislation clarifies that the uniform rate provision does not apply where
an operator of a cable television system faces "effective competition." In
addition, bulk discounts to multiple dwelling units are exempted from the
uniform rate requirements. However, complaints may be made to the FCC against
operators of cable television systems not subject to effective competition for
"predatory" pricing (including with respect to bulk discounts to multiple
dwelling units). The 1996 Act also permits operators of cable television systems
to aggregate, on a franchise, system, regional or company level, its equipment
costs in broad categories. The 1996 Act is expected to facilitate the
rationalization of equipment rates across jurisdictional boundaries. However,
these cost-aggregation rules do not apply to the limited equipment used by
subscribers who only receive basic service.
Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or nonbasic cable services and associated equipment, and refunds can
be required. In general, the current regulations require an aggregate reduction
of as much as 17 percent, adjusted forward for inflation, from the rates in
effect as of September 30, 1992. 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
programming costs. This can be done by an annual pass-through mechanism under
which cable operators can increase rates based on actual and anticipated cost
increases for the coming year. Cost-based adjustments to these capped rates also
can be made in the event a cable operator adds or deletes channels. There is
also a procedure under which cable operators can file abbreviated cost of
service showings for system rebuilds and upgrades, the result of which would be
a permitted increase in regulated rates to allow recovery of those costs.
Amendments in November, 1994 incorporated an alternative method for adjusting
the rates charged for a regulated nonbasic service tier when new services are
added. This method allowed cable operators to increase the monthly rate to each
customer by as much as $1.50 over a two year period to reflect the addition of
up to six new channels of service on regulated nonbasic service tiers (an
additional increase of $0.20 is permitted in the third year, 1997, if a seventh
channel is added). In addition, new product tiers consisting of services new to
the cable television system can be created free of rate regulation as long as
certain conditions are met such as not moving services from existing tiers to
the new tier.
In March 1997, the FCC provided operators of cable television systems
with the option of establishing uniform rates for similar service packages
offered in multiple franchise areas located in the same region. Under the FCC's
former rules, operators of cable television systems subject to rate regulation
are required to establish rates on a franchise-specific basis. The new rules
could lower operators' marketing costs and also allow operators to respond
better to competition from alternative providers.
19
Carriage Of Broadcast Television Signals
The 1992 Cable Act allows commercial television broadcast stations
which are "local" to a cable television system to elect every three years either
(i) to require the cable television system to carry the station, subject to
certain exceptions (known as the "must carry" requirement), or (ii) to deny the
cable television system the right to carry the station without the station's
express consent (known as "re-transmission consent"). The next election between
must-carry and retransmission consent will be October 1, 1999. Local
non-commercial television stations are also given mandatory carriage rights,
subject to certain exceptions, but are not given the option to negotiate
retransmission consent for the carriage of their signal. In addition, cable
television systems must obtain retransmission consent for the carriage of all
"distant" commercial broadcast stations, except for certain "superstations",
i.e., commercial satellite-delivered independent stations such as WTBS and WGN.
The legality of these "must-carry" provisions is currently under judicial
review. Invalidation of the "must-carry" provisions would free cable operators
(except for any contractual commitments) to replace the carriage of any or all
local broadcast stations with other programming. However, the outcome of the
pending judicial review cannot be predicted.
Deletion Of Certain Programming
Cable television systems that have 1,000 or more customers must, upon
the appropriate request of a local television station, delete the simultaneous
or nonsimultaneous network programming of a distant station when such
programming has also been contracted for by the local station on an exclusive
basis. FCC regulations also enable television stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable television system to delete or "black out" such programming from
other television stations which are carried by the cable television system.
Renewal Of Franchises
The 1984 Cable Act established renewal procedures and criteria designed
to protect incumbent franchisees against arbitrary denials of renewal. While
these formal procedures are not mandatory unless timely invoked by either the
cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Notwithstanding the renewal process,
franchising authorities and cable operators remain free to negotiate a renewal
outside the formal process. Nevertheless, renewal is by no means assured, as the
franchisee must meet certain statutory standards if the formal renewal
procedures are invoked. Even if a franchise is renewed, a franchising authority
may impose new and more onerous requirements such as upgrading facilities and
equipment, although the municipality must take into account the cost of meeting
such requirements.
The 1992 Cable Act makes several changes to the process under which a
cable operator seeks to enforce his renewal rights which could make it easier in
some cases for a franchising authority to deny renewal. Franchising authorities
may consider the "level" of programming service provided by a cable operator in
deciding whether to renew. For alleged franchise violations occurring after
December 29, 1984, franchising authorities are no longer precluded from denying
renewal based on failure to substantially comply with the material terms of the
franchise where the franchising authority has "effectively acquiesced" to such
past violations. Rather, the franchising authority is estopped if, after giving
the cable operator notice and opportunity to cure, it fails to respond to a
written notice from the cable television operator of its failure or inability to
cure. Courts may not reverse a denial of renewal based on procedural violations
found to be "harmless error."
20
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. The 1992 Cable Act required the FCC to establish a formula for
determining maximum reasonable rates. In February 1997, the FCC revised its
leased access rate formula so as to produce lower rates. The Company cannot
predict the effect of this action on its Core Cable Television Operations.
Ownership
The 1996 Act repealed the statutory ban against local exchange
telephone companies ("LECs") from providing video programming directly to
customers within their local exchange telephone service areas, except in rural
areas or by specific waiver of FCC rules. Consequently, the 1996 Act permits
telephone companies to compete directly with operators of cable television
systems. Under the 1996 Act and FCC rules recently adopted to implement the 1996
Act, LECs may provide video service as broadcasters, common carriers, or cable
operators or LECs and others may also provide video service through "open video
systems" ("OVS"), a regulatory regime that may give them more flexibility than
traditional cable systems. OVS operators (including LECs) may operate "open
video systems" without obtaining a local cable franchise, although they can be
required to make payments to local governmental bodies in lieu of cable
franchise fees. In general, OVS operators must make their systems available to
programming providers on rates, terms and conditions that are reasonable and
nondiscriminatory. Where carriage demand by programming providers exceeds the
channel capacity of an open video system, two-thirds of the channels must be
made available to programmers unaffiliated with the OVS operator.
The 1996 Act generally prohibits buyouts of cable television systems
(including any ownership interest of such systems exceeding 10%) by LECs within
an LEC's telephone service area, buyouts by operators of cable television
systems of LEC systems within a cable operator's franchise area, and joint
ventures between operators of cable television systems and LECs in the same
markets. There are some statutory exceptions, including a rural exemption that
permits buyouts in which the purchased system serves a non-urban area with fewer
than 35,000 inhabitants. Also, the FCC may grant waivers of the buyout
provisions in cases where (i) the operator of a cable television system or the
LEC would be subject to undue economic distress if such provisions were
enforced, (ii) the system or facilities would not be economically viable in the
absence of a buyout or a joint venture or (iii) the anticompetitive effects of
the proposed transaction are clearly outweighed by the transaction's effect in
light of community needs. The respective local franchising authority must
approve any such waiver.
The 1996 Act also authorizes registered utility holding companies and
their subsidiaries to provide video programming services, notwithstanding the
Public Utility Holding Company Act. In order to take advantage of the new
legislation, public utilities must establish separate subsidiaries through which
to operate any cable operations. Such utility companies must also apply to the
FCC for operating authority.
The 1996 Act eliminated the FCC rule prohibiting common ownership
between a cable system and a national broadcast television network. The 1996 Act
also eliminated the statutory ban covering certain common ownership interests,
operation or control between a television station and cable system within the
station's Grade B signal coverage area. However, the parallel FCC rule against
cable/television station cross-ownership remains in place, subject to review by
the FCC within two years. Finally, the 1992 Cable Act prohibits common
ownership, control or interest in cable television systems and MMDS facilities
or satellite master antenna television ("SMATV") systems having overlapping
service areas, except in limited circumstances. The 1996 Act exempts cable
systems facing "effective competition" from the MMDS and SMATV cross-ownership
restrictions.
Pursuant to the 1992 Cable Act, the FCC has adopted rules which, with
certain exceptions, preclude a cable television system from devoting more than
40% of its first 75 activated channels to national video programming services in
which the cable system owner has an attributable interest. The FCC also has set
a limit of 30% of total nationwide cable homes that can be served by any
multiple cable
21
system operator. The FCC has stayed the effectiveness of this ruling pending the
outcome of its appeal from the U.S. District Court decision holding the multiple
ownership limit provision of the 1992 Cable Act unconstitutional.
Equal Employment Opportunity
The 1984 Cable Act includes provisions to ensure that minorities and
women are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable television system operators with more than five
full-time employees. Pursuant to the requirements of the 1992 Cable Act, the FCC
has imposed more detailed annual Equal Employment Opportunity ("EEO") reporting
requirements on cable operators and has expanded those requirements to all
multichannel video service distributors. Failure to comply with the EEO
requirements can result in the imposition of fines and/or other administrative
sanctions, or may, in certain circumstances, be cited by a franchising authority
as a reason for denying a franchisee's renewal request.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request within 120 days after receipt of all information
required by FCC regulations and by the franchising authority. Approval is deemed
to be granted if the franchising authority fails to act within such period
unless an extension of time has been agreed to.
Technical Requirements
The FCC has imposed technical standards applicable to all channels on
which downstream video programming is carried, and has prohibited franchising
authorities from adopting standards which are in conflict with or more
restrictive than those established by the FCC. Local franchising authorities are
permitted to enforce the FCC's new technical standards. In order to prevent
harmful interference with aeronautical navigation and safety radio services, the
FCC also has adopted additional standards applicable to cable television systems
using frequencies in the 108-137 MHz and 225-400 MHz bands and established
limits on cable television system signal leakage. Periodic testing by cable
operators for compliance with these technical standards and signal leakage
limits is required.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable television systems
and consumer electronics equipment. These regulations, inter alia, generally
prohibit cable operators from scrambling their basic service tier and from
changing the infrared codes used in their existing customer premises equipment.
Under the 1996 Act, local franchising authorities may not prohibit, condition or
restrict a cable system's use of any type of subscriber equipment or
transmission technology.
FCC Implementation Of The 1996 Act
The FCC has recently initiated a proceeding to implement most of the
cable-related reform provisions of the 1996 Act. In this proceeding, the FCC has
adopted certain interim rules to govern cable operators while the agency
completes its implementation of the cable-related reform provisions of the 1996
Act. Among other things, the FCC is requiring on an interim basis that for an
LEC to constitute "effective competition" to cable operators, the LEC's
programming must include the signals of local broadcasters. Cable television
systems may file a petition with the FCC at any time for a determination as to
whether they are subject to "effective competition" and thus exempt from rate
regulation. Depending on the outcome of the FCC proceeding, several of the
Company's systems in the Philadelphia area may become deregulated.
22
The FCC has also adopted interim rules governing the filing of rate
complaints regarding nonbasic cable service by local franchising authorities.
Local franchising authorities may file rate complaints with the FCC when the
local franchising authorities receive more than one customer complaint
concerning a cable operator's rate increase within 90 days of the date such
increase becomes effective. If the local franchising authority receives more
than one such customer complaint and decides to file its own complaint with the
FCC, it must do so within 180 days of the date the rate increase becomes
effective. Before filing a complaint with the FCC, the local franchising
authority must first provide the operator of the cable system written notice of
its intent to do so and must give the operator a minimum of 30 days to file the
relevant FCC forms used to justify a rate increase with the local franchising
authority. The local franchising authority must then forward its complaint and
the operator's response to the FCC within the 180 day deadline. The FCC must
issue a final order within 90 days of the date it receives a local franchising
authority complaint.
Other Matters
FCC regulation also includes matters regarding a cable television
system's carriage of local sports programming; franchise fees; pole attachments;
home wiring; customer service; rules applicable to origination cablecasts; rules
governing political programming; sponsorship identification; lottery
information; and limitations on advertising contained in children's programming.
The 1996 Act imposes new requirements on operators of cable television
systems, including an obligation, upon request, to fully scramble or block at no
charge the audio and video portion of any channel not specifically subscribed to
by a household. The 1996 Act also directs the FCC to adopt regulations that
ensure, with certain exceptions, that video programming is fully accessible
through closed captioning. The FCC is presently engaged in a proceeding to
establish regulations to implement such closed captioning requirements.
Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried, and
the location of the cable television system with respect to over-the-air
television stations. Cable operators are liable for interest on underpaid and
unpaid royalty fees, but are not entitled to collect interest on refunds
received for overpayment of copyright fees.
The Copyright Office has commenced a proceeding aimed at examining its
policies governing the consolidated reporting of commonly owned and contiguous
cable television systems. The present policies governing the consolidated
reporting of certain cable television systems have often led to substantial
increases in the amount of copyright fees owed by the systems affected. These
situations have most frequently arisen in the context of cable television system
mergers and acquisitions. While it is not possible to predict the outcome of
this proceeding, any changes adopted by the Copyright Office in its current
policies may have the effect of reducing the copyright impact of certain
transactions involving cable company mergers and cable television system
acquisitions.
State And Local Regulation
Because a cable television system uses local streets and rights-of-way,
cable television systems are subject to state and local regulation, typically
imposed through the franchising process. State and/or local officials are
usually involved in franchise selection, system design and construction, safety,
service rates, consumer relations, billing practices and community related
programming and services.
23
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable if the franchise operator fails to comply
with material provisions. Although the 1984 Cable Act provides for certain
procedural protections, there can be no assurance that renewals will be granted
or that renewals will be made on similar terms and conditions. Franchises
usually call for the payment of fees (which are limited to 5% of the system's
gross subscriber revenues under the 1992 Cable Act) to the granting authority.
Upon receipt of a franchise, the cable television system owner usually is
subject to a broad range of obligations to the issuing authority directly
affecting the business of the system. Franchises generally contain provisions
governing charges for basic cable television services, fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
services provided. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction, and even from city to city within the same state,
historically ranging from reasonable to highly restrictive or burdensome.
The 1992 Cable Act prohibits exclusive franchises, and allows
franchising authorities to exercise greater control over the operation of
franchised cable television systems than the 1984 Cable Act did, especially in
the area of customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of cable
television systems. Moreover, franchising authorities are immunized from
monetary damage awards arising from regulation of cable television systems or
decisions made on franchise grants, renewals, transfers and amendments.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.
Item 2. DESCRIPTION OF PROPERTY.
The Company's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headends and distribution systems and customer drop equipment for each
of its cable television systems. The Company's cable distribution plant and
related equipment generally are attached to utility poles under pole rental
agreements with local public utilities and telephone companies, and in certain
locations are buried in underground ducts or trenches.
The Company owns or leases real property for signal receptions sites
and business offices in many of the communities served by its systems and for
its principal operating offices. See "Certain Transactions." On March 21, 1996,
Suburban entered into a lease for office space at 200 Cresson Boulevard, Oaks,
PA. The Company has moved administrative operations to this single location. The
office has approximately 57,000 square feet, which management believes is
adequate. Management believes that its properties are in good operating
condition and are suitable and adequate for the Company's business operations.
24
Item 3. LEGAL PROCEEDINGS.
On May 3, 1996, The News Corporation Limited ("News") filed in the
Supreme Court of New South Wales, Australia an action seeking unspecified
damages as a result of the alleged violation by the Company of an alleged oral
agreement to inform News prior to the Company taking any steps to effect a
recapitalization plan for Australis. On June 6, 1996, the Company filed suit in
federal court in Philadelphia seeking a declaration that no oral agreement was
made with News to notify News prior to making a separate refinancing proposal to
Australis, and that there is no agreement whatsoever with News that would delay
or prevent the Company's participation in providing refinancing to Australis. In
September 1996, the Company and News settled their respective suits against the
other by agreeing to dismiss all claims without payment of any damages.
On August 15, 1996, Harry F. Brooks, Executive Vice President of the
Company, was named in a 22 count indictment filed in the United States District
Court for the Eastern District of Pennsylvania charging him with making false
statements to a federal agency, together with copyright infringement. The
allegations against Mr. Brooks were the same as those contained in the civil
action filed against Suburban in December, 1993 alleging that Suburban had
misreported its subscriber rates to the Copyright Office and as a result,
underpaid copyright fees. The Company settled the civil action in 1994 and was
not named in the criminal action, nor was any other individual.
On December 10, 1996, Mr. Brooks pleaded guilty to a single misdemeanor
charging him with copyright infringement. All other charges were dismissed. On
March 7, 1997, he was placed on probation with conditions of work release and
home confinement and ordered to pay a $25,000 fine. While the Company has been
paying the legal expenses of Mr. Brooks, Mr. Brooks has agreed to repay such
expenses if it is later determined that the Company is not permitted to make
such payments under Delaware Corporate Law.
On January 20, 1995, Mr. Albert Hadid filed suit in the Federal Court
of Australia, New South Wales District Registry, against Australis (a company in
which the Company holds a 41.5% aggregate economic interest, see "-- Non-Cable
Investments"), the Company and several other entities and individuals including
H. F. Lenfest (the "Defendants"), involved in the acquisition of a company of
which Mr. Hadid was the controlling shareholder, the assets of which included
the right to acquire License B from the Australian government. Mr. Hadid alleged
that the Company and Mr. Lenfest breached fiduciary duties that they owed to him
and claimed damages of A$220 million. In August 1995, Mr. Hadid amended the suit
to include allegations that the Defendants defrauded him by making certain
representations to him in connection with the acquisition of his company and
claimed additional damages of A$485 million. Mr. Hadid seeks total monetary
damages in the amount of A$718 million (approximately U.S.$568 million as of
December 31, 1996). The Defendants have denied all claims made against them by
Mr. Hadid and stated their belief that Mr. Hadid's allegations are without
merit. They are defending this action vigorously.
On December 6, 1995, the Securities and Exchange Commission (the "SEC")
sued H. F. Lenfest and Marguerite Lenfest, in the United States District Court
for the Eastern District of Pennsylvania. The SEC alleges that, in October 1993,
Mr. Lenfest, while in possession of non-public information, recommended to one
of his sons that he purchase TCI stock and that Marguerite Lenfest traded in TCI
stock in October 1993 on the basis of information she misappropriated from her
husband. H. F. Lenfest and Marguerite Lenfest have categorically denied that
they engaged in any improper conduct and are defending this action vigorously.
The Company has agreed to pay the legal expenses of H. F. Lenfest and Marguerite
Lenfest related to this action. H. F. Lenfest and Marguerite Lenfest have agreed
to repay such expenses if it is subsequently determined that the Company is not
permitted to make such payments under Delaware corporate law.
25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.
Item 5. MARKET FOR REGISTRANT`S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock. As of March 22, 1997, there were five record holders of the Company's
common stock. No dividends have been paid on the Company's common stock in the
period from January 1, 1994 through December 31, 1996. In addition, the
borrowing agreements which were and are in effect between the Company and the
lenders party thereto during such periods prohibit the payment of any dividends.
Item 6. SELECTED FINANCIAL DATA
Summary Consolidated Financial And Operating Data (Dollars In Thousands Except
Per Customer Data)
The selected consolidated financial data as of and for each of the five
years in the period ended December 31, 1996 set forth below have been derived
from the audited Consolidated Financial Statements of the Company. These data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements for each of the three years in the period ended December 31, 1996
included elsewhere in this Form 10-K. The statement of operations data with
respect to the fiscal years ended December 31, 1992 and 1993 have been derived
from audited consolidated financial statements of the Company not included
herein.
Year Ended December 31,
----------------------------------------------------------------------
Statement of Operations Data 1992 1993 1994 1995 1996
------------- ------------- ------------ ----------- ---------------
Revenues $ 179,940 $ 213,240 236,195 266,249 $ 397,318
Programming expenses 43,388 51,783 59,352 65,423 82,804
Selling, general &
administrative 41,455 49,743 53,767 59,310 86,519
Technical and other 15,075 16,533 21,420 29,174 56,579
Depreciation and amortization 56,192 65,195 75,518 77,700 115,381
--------- --------- --------- -------- ---------
Operating income 23,830 29,986 26,138 34,642 56,035
Interest expense (32,563) (35,090) (47,749) (61,538) (107,916)
Other income (expense) (13,645) (9,797) (7,017) 4,306 (90,338)
--------- --------- --------- -------- ---------
Loss before income
taxes and extraordinary loss (22,378) (14,901) (28,628) (22,590) (142,219)
Income tax benefit 5,408 3,034 9,729 11,095 13,941
Extraordinary loss, net of
taxes --- --- --- (6,739) (2,484)
--------- --------- --------- -------- ---------
Net loss $ (16,970) $ (11,867) (18,899) (18,234) $ (130,762)
========= ========= ========= ======== =========
Balance Sheet Data
(end of period)
Total assets $ 424,733 $ 635,761 665,346 851,748 $ 1,231,017
Total debt 406,038 612,392 626,121 817,725 1,319,862
Stockholders' equity
(deficit) (44,162) (56,029) (49,609) (45,192) (233,790)
26
Core Cable Television Operations (Restricted Group)
Financial Ratios and Other
Data (a)
Revenues $ 166,081 $ 197,630 212,800 232,155 $ 354,561
EBITDA (b) (c) 83,449 100,476 105,711 115,261 182,905
EBITDA margin (d) 50.2% 50.8% 49.7% 49.6% 51.6%
Interest expense $ 32,749 $ 34,699 47,016 $ 59,966 $ 105,463
Capital expenditures (e) 43,463 41,658 42,162 40,168 51,703
Total debt 403,760 609,159 616,657 807,535 1,309,735
Ratio of total debt to EBITDA 4.84 x 6.06 x 5.83 x 7.01 x 7.16 x
Monthly revenue per average
basic customer $ 30.18 $ 32.05 31.44 32.97 $ 34.25
Annual EBITDA per average
basic customer 181.97 195.51 187.42 196.40 212.00
Annual capital expenditures
per average basic customer (e) 94.78 81.06 74.75 68.44 59.93
Summary Customer Data
(end of period) (a)
Homes passed 759,635 870,718 892,549 904,753 1,278,673
Basic customers 477,130 550,703 577,377 596,366 931,585
Basic Penetration 62.8% 63.2% 64.7% 65.9% 72.9%
Premium Units 393,689 420,630 426,092 426,345 579,660
- ------------------
(a) The Core Cable Television Operations (Restricted Group) consists of all
of the Company's wholly owned cable television subsidiaries. Financial
ratios and other information are presented for the Restricted Group to
enable investors to evaluate the results of operations of those
operating entities on which the Company relies to service all of its
debt obligations.
(b) EBITDA represents consolidated net income 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. EBITDA should not be considered by an investor as an
alternative to net income (loss), as an indicator of the operating
performance of the Company or as an alternative to cash flows as a
measure of liquidity. EBITDA is not a measure under generally accepted
accounting principles.
(c) CAH, Inc. became a part of the restricted group in 1996. CAH, Inc. has
not been included in the 1992-1995 presentation.
(d) EBITDA margin measures EBITDA as a percentage of revenues.
(e) Excludes the purchase price of acquisitions consummated during the
period.
27
CAPITALIZATION
The following table sets forth the consolidated capitalization and cash
and cash equivalents of the Company as of December 31, 1996.
Cash and Cash Equivalents $ 20,633
======================
Total Debt
Notes payable to banks $ 7,000
bank credit facility 230,000
11.84% Senior Notes 21,000
11.30% Senior Notes 60,000
9.93% Senior Notes 13,125
8 3/8% Senior Notes, net of discount 685,790
Obligations under capital leases 9,663
10 1/2% Senior Subordinated Notes, net of
discount 293,105
----------------------
Total debt $ 1,319,683
======================
Stockholders' equity (Deficit)
Common stock $ 2
Additional paid-in capital 50,747
Unrealized loss on marketable securities, net (9,866)
Accumulated deficit (274,673)
----------------------
Total stockholder's equity (deficit) (233,790)
----------------------
Total capitalization $ 1,085,893
======================
28
Item 7. 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 decision to
re-regulate certain aspects of the cable television industry, have affected
adversely the Company's ability to increase or restructure its rates for certain
services. These re-regulation activities are intended to reduce customer rates
for basic cable television service and limit future rate increases. See
"Legislation and Regulation."
The Company has generated increases in revenues and EBITDA for the year
ended December 31, 1996 and in each of the past three fiscal years, primarily
through acquisitions (except in 1994) and, to a lesser extent, through internal
customer growth, increases in monthly revenue per customer, growth in
advertising and home shopping, and pay-per-view revenues. As used herein,
"EBITDA" represents consolidated net income 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. 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. EBITDA is
not a measure under generally accepted accounting principles.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
CONSOLIDATED RESULTS
Revenues for the Company increased 49.2% to $397.3 million as
compared to 1995, primarily as a result of a 52.7% increase in revenues from the
Company's Core Cable Television Operations. The TCI Exchange, the Sammons
Acquisition, the Salem Acquisition and the Shore Acquisition (collectively, the
"Acquisitions") accounted for $103.9 million or 39.0% of the increase, while
10.2% was attributable to rate increases implemented throughout 1996 and
internal customer growth.
Operating expenses increased 47.4% to $341.3 million (85.9% of total
revenues) in 1996 as compared to 1995. The Acquisitions accounted for $89.0
million, or 38.5% of the increase while 8.9% resulted from costs associated with
internal customer growth. The increase was comprised of the following: (i)
service expense of 44.1% to $56.6 million (14.2% of total revenues), $10.1
million of which was attributable to the Acquisitions; (ii) cable programming
expense of 49.7% to $82.8 million (20.9% of total revenues), $22.9 million of
which was attributable to the Acquisitions; (iii) selling, general and
administrative of 45.9% to $86.5 million (21.8% of total revenues), $17.0
million of which was attributable to the Acquisitions; and (iv) depreciation and
amortization of 48.5% to $115.4 million (29.0% of total revenues), $39.0 million
of which was attributable to the Acquisitions.
Interest expense increased 75.4% to $107.9 million due to an increase
of indebtedness to $1,319.9 million from $817.7 million at the end of 1995. The
indebtedness was as follows: $700.0 million 8 3/8% Senior Notes Due 2005 issued
in November 1995 (the "8 3/8% Notes"), $300.0 million 10 1/2% Senior
Subordinated Notes Due 2006 issued in June 1996 (the "Subordinated Notes"), the
Private Placement Notes (hereinafter defined) and borrowings under the Company's
Bank Credit Facility (hereinafter defined).
Equity in net losses of unconsolidated affiliates increased by 67.3% to
$17.9 million. The Company's unconsolidated affiliates include several cable
television operators which incur high levels of depreciation, amortization and
interest expenses. The Company's equity in net losses of Garden State
Cablevision L.P. decreased by 40.6% to $5.1 million in 1996.
Loss before income taxes and extraordinary loss increased to $142.2
million from a loss of $22.6 million in 1995. The increase in this loss was
primarily attributable to the losses associated with the write down of the
Company's investment in Australis ($86.4 million) and the increase in interest
expense ($46.4 million).
EBITDA increased 55.4% to $174.6 million as compared to 1995. The
Acquisitions accounted for $54.5 million or 48.5% of the increase while $7.7
million, or 6.9%, was attributable to rate increases and internal subscriber
growth. EBITDA as a percentage of revenue increased to 43.9% from 42.2% as a
result of an increase in the Core Cable Television Operations ($62.0 million)
and a decrease in the Unrestricted Subsidiaries operations ($2.9 million).
Core Cable Television Operations
Revenues increased 52.7% to $354.6 million as compared to 1995. The
Acquisitions accounted for $103.9 million, or 44.7% of the increase, while the
balance was attributable to rate increases and internal customer growth. At
December 31, 1996, the Company had 931,585 basic customers as compared to
596,356 basic customers at December 31, 1995. The systems owned at December 31,
1995 added 29,163 basic customers for an internal growth rate of 3.2% in 1996.
The Acquisitions added 306,066 basic customers, including basic customers added
to such systems after the completion of the respective acquisition. All of the
Company's cable television systems had rate increases in 1996 commencing on one
of the following dates - April 1, July 1 or October 1 - depending on the system.
The increase averaged $2.03 per customer, per month commencing with the month a
particular system raised its rates. For the entire year, monthly revenue per
average basic customer grew $1.28, or 3.9%. During 1996, premium service
revenues grew by 42.1% to $75.8 million, $15.4 million of which was attributable
to the Acquisitions. Equipment rental revenue increased by 103.6% to $12.6
million due to an increase in the number of addressable converters deployed,
$5.9 million of which was attributable to the Acquisitions. Advertising and home
shopping revenues increased by 63.2% to $10.2 million due to an increase in the
advertising split the Company receives and an increase in customer buy rates,
$2.3 million of which was attributable to the Acquisitions. Pay-per-view
revenues increased 61.8% to $8.7 million, $3.3 million of which was attributable
to the Acquisitions.
Operating expenses increased 51.1% to $284.4 million (80.2% of Core Cable
Television Operations revenues) in 1996. The Acquisitions accounted for $89.0
million, or 47.3% of the increase, while 3.8% resulted from costs associated
with the internal customer growth. The increase was comprised of the following:
(i) service expense increase of 87.0% to $29.3 million (8.3% of Core Cable
Television Operations revenues) attributable to technical salaries and general
operating expenses, $10.1 million of which was attributable to the Acquisitions;
(ii) cable programming expense increase of 49.7% to $82.8 million (23.3% of Core
Cable Television Operations revenues) attributable to non-premium programming,
$22.9 million of which was attributable to the Acquisitions; (iii) selling,
general and administrative increase of 42.1% to $65.2 million (18.4% of Core
Cable Television Operations revenues) $17.0 million of which was attributable to
the Acquisitions; and (iv) depreciation and amortization increase of 50.1% to
$107.1 million (30.2% of Core Cable Television Operations revenues), $39.0
million of which was attributable to the Acquisitions.
EBITDA increased 58.7% to $182.9 million compared to 1995. 7.1% of this
increase was attributable to rate increases and internal customer growth. The
EBITDA margin increased to 51.6% from 49.6% in 1995. 1.6% of this difference was
attributable to cash distributions made to the Company by certain Unrestricted
Subsidiaries and affiliates where distributions made in prior years were
insignificant.
Unrestricted Subsidiaries
The largest of the Company's Unrestricted Subsidiaries in 1996 were
MicroNet, StarNet, and Radius. Revenues increased 25.4% to $42.8 million as
compared to 1995.
Operating expenses increased 31.1% to $56.9 million (133.0% of
Unrestricted Subsidiaries revenues) in 1996. This increase was comprised of the
following: (i) service expense and direct costs increase of 15.6% to $27.3
million (63.8% of Unrestricted Subsidiaries revenues); (ii) selling, general and
administrative increase of 78.7% to $21.3 million (49.8% of Unrestricted
Subsidiaries revenues); and (iii) depreciation and amortization increase of
24.4% to $8.3 million (19.3% of Unrestricted Subsidiaries revenues).
EBITDA was negative $8.3 million as compared to negative $2.9 million
in 1995, and the operating loss was $14.1 million as compared to $8.1 million in
1995. The increase in the loss is attributable to losses incurred by SDI as a
result of a decline in the sales of inserter equipment.
MicroNet revenues increased 22.3% to $15.9 million in 1996. The growth
rate was primarily due to increased activity in satellite transmission services
and increased tower rental revenue. Selling, general and administrative expenses
decreased by 4.7% to $3.7 million due to a reduction of legal and bad debt
expense. Depreciation and amortization increased 9.5% to $4.2 million as a
result of increased capital expenditures and the accelerated depreciation of
unused equipment. Operating income was $1.8 million as compared to $0.3 million
for 1995. MicroNet's loss before income taxes was $1.0 million, down from $1.5
million in 1995.
StarNet revenues decreased by 8.8% to $8.1 million as compared to 1995,
primarily due to a decrease in service revenue caused by the contribution of The
Barker(R) service to Sneak PreVue LLC in September, 1996. Direct costs decreased
17.5% to $6.2 million due primarily to a reduction in employees and contracted
engineering expenses. Operating loss was $5.8 million as compared to $3.4
million for 1995.
Radius ad sales revenues, its primary source of revenue, prior to
payment of affiliate fees, was $14.8 million. Production and programming
expenses totaled $1.7 million, and selling, general and administrative costs
were $5.2 million. Income from operations was $1.3 million. Radius, which began
operations in 1996 in connection with the purchase of certain advertising
assets, had no revenue in 1995.
Year ended December 31, 1995 compared with year ended December 31, 1994
Consolidated Results
Revenues for the Company increased 12.7% to $266.2 million as compared
to 1994, primarily as a result of a $19.4 million increase in revenues from the
Company's Core Cable Television Operations.
Operating expenses increased 10.3% to $231.6 million (87.0% of total
revenues) as compared to 1994. This increase was attributable to a (i) service
expense and direct costs - non-cable increase of 24.7% to $39.3 million (14.7%
of total revenues); (ii) cable programming expense increase of 12.3% to $55.3
million (20.8% of total revenues); (iii) selling, general and administrative
increase of 10.3% to $59.3 million (22.3% of total revenues); and (iv)
depreciation and amortization increase of 2.9% to $77.7 million (29.2% of total
revenues).
Interest expense increased 28.9% to $61.5 million as compared to 1994.
The increase was primarily the result of (i) additional indebtedness associated
with the Company's acquisition of an additional 10% interest in Garden State
Cablevision L.P.; (ii) the acquisition of the minority interest in South Jersey
Cablevision; (iii) borrowings to provide the initial investment in Australis;
and (iv) higher effective interest rates.
Equity in net losses of unconsolidated affiliates increased by 34.5% to
$10.7 million. The Company's unconsolidated affiliates include several cable
television operators which incur high levels of depreciation, amortization and
interest expenses. The Company's equity in net losses of Garden State
Cablevision L.P., in which the Company holds partnership interests totaling 50%,
increased by 13.3% to $8.5 million.
Other income increased to $15.0 million, up from $1.0 million in 1994.
This increase was attributable to the tendering of the Company's holdings of
QVC, Inc. stock in connection with the takeover of QVC by Comcast Corporation.
The Company recognized a gain of approximately $13.1 million on the sale of the
QVC stock.
Loss before income taxes and extraordinary loss decreased to $22.6
million from a loss of $28.6 million in 1994. The decrease in the loss was
primarily attributable to the increase in operating income.
EBITDA increased 10.5% to $112.3 million as compared to 1994. EBITDA as
a percentage of revenue decreased to 42.2% from 43.0%.
Core Cable Television Operations
Revenues increased 9.1% to $232.2 million as compared to 1994. The
increase is primarily attributable to: (i) 3.3% increase in the number of cable
television customers serviced by the Company; and (ii) average rate increases of
$1.95 per customer per month that became effective on February 15, 1995. Premium
service revenues grew by 11.5% to $53.3 million due to a premium rate increase
of $1.00 per month per premium channel for substantially all premium channels
that went into effect on June 1, 1995. Pay-per-view revenues increased 12.4% to
$5.4 million for the year as a result of increased customer buy rates.
Advertising and home shopping revenues increased 15.8% to $6.3 million due to an
increase in customer buy rates and the launching of a new home shopping channel.
Equipment rental revenue increased by 9.6% to $6.2 million due to an increase in
the number of addressable converters deployed.
Operating expenses increased 5.8% to $188.2 million (81.6% of Core
Cable Television revenues) as compared to 1994. This increase was attributable
to: (i) service expense increase of 11.1% to $15.7 million (6.8% of Core Cable
Television revenues); (ii) cable programming expense increase of 12.3% to $55.3
million (23.8% of Core Cable Television revenues); (iii) selling, general and
administrative increase of 5.0% to $45.9 million (20.4% of Core Cable Television
revenues); and (iv) depreciation and amortization increase of 0.7% to $71.3
million (30.6% of Core Cable Television revenues). The increase in service
expense was primarily attributable to increases in technical employee salary
expense and increased costs of service power and pole rental during 1995. The
largest increase in cable programming expense was attributable to non-premium
programming during 1995.
EBITDA increased 9.0% to $115.3 million compared to 1994. This increase
was primarily from rate increases and internal customer growth. The EBITDA
margin decreased to 49.6% from 49.7% in 1994.
Unrestricted Subsidiaries
The largest of the Company's Unrestricted Subsidiaries in 1995 were
MicroNet, StarNet, and SDI. Revenues increased 45.7% to $34.1 million as
compared to 1994.
Operating expenses increased 35.1% to $43.4 million (127.2% of
Unrestricted Subsidiaries revenues). The increase was attributable to: (i)
service expenses and direct costs increase of 35.7% to $23.6 million (69.2% of
Unrestricted Subsidiaries revenues); (ii) selling, general and administrative
expense increase of 33.4% to $13.4 million (39.3% of Unrestricted Subsidiaries
revenues); and (iii) depreciation and amortization increase of 36.6% to $6.4
million (18.6% of Unrestricted Subsidiaries revenues) as compared to 1994.
EBITDA was negative $2.9 million as compared to negative $4.0 million
and the operating loss was $9.3 million as compared to $8.7 million in 1994.
MicroNet revenues increased 30.0% to $13.0 million. The growth rate was
primarily due to increased activity in satellite transmission services and
increased tower rental revenue resulting from the acquisition of a partnership
with a tower rental business in the eastern shore areas of Delaware, Maryland
and Virginia. Selling, general and administrative expenses increased 15.4% to
$3.9 million due to additional staff. Depreciation and amortization increased
42.1% to $3.8 million as a result of increased capital expenditure and the
acquisition of the tower rental business. Operating income was $0.3 million as
compared to an operating loss of $0.3 million in 1994. Interest expense
increased by $0.6 million to $1.8 million due to the incurrence of $7.0 million
of bank debt used to finance the acquisition of the tower rental business.
MicroNet's loss before income taxes was $1.5 million, down from $1.6 million for
1994.
StarNet revenues decreased 5.7% to $10.5 million as compared to 1994
primarily due to decreased transponder sub-lease revenue. StarNet operating
expenses were $14.0 million, resulting in an operating loss of $3.4 million
compared to $0.9 million in 1994. Depreciation expense increased to $1.4 million
from $1.1 million in 1994.
Due to the transition from research and development to production, SDI
revenues increased to $9.5 million from $3.8 million in 1994. Gross profit on
sales increased to 26% from 12% in 1994. Cost of sales included a $1.5 million
write off of obsolete inventory in 1995. The operating loss was $3.0 million
compared to $3.7 million in 1994. Depreciation and amortization increased to
$0.9 million from $0.5 million in 1994.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued its Statements 125
and 127 on accounting for transfers and servicing of financial assets and
extinguishments of liabilities and Statement 126 which exempts certain
nonpublic entities from certain financial instrument disclosures. These
Statements will not apply to the Company.
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. At December 31, 1996, the
Company had aggregate total indebtedness of approximately $1,319.9 million,
which includes bank debt at the subsidiary level of approximately $7.0 million.
The Company's senior indebtedness of approximately $1,019.8 million consisted
of: (i) three debt obligations in the amount of approximately $60.0 million,
$21.0 million and $13.1 million (collectively, the "Private Placement Notes");
(ii) $686.0 million of 8 3/8% Notes; (iii) $230 million under a bank credit
facility dated as of June 27, 1996 (the "Bank Credit Facility"); and (iv)
obligations under capital leases of approximately $9.7 million. The Company
issued the Private Placement Notes from 1988 to 1991 in connection with the
refinancing of revolving bank debt. The Bank Credit Facility consists of a $150
million term loan facility and a $300 million revolving credit facility. At
December 31, 1996, the term loan was fully drawn.
At December 31, 1996, the only outstanding senior subordinated
indebtedness was the Company's Subordinated Notes. The Company issued the
Subordinated Notes on June 27, 1996 pursuant to a private offering to certain
institutional and other accredited investors. Simultaneously the Company entered
into the Bank Credit Facility. The net proceeds from the offering (approximately
$293.5 million), $150 million proceeds of the term loan under the Bank Credit
Facility and $1.0 million of cash on hand were used to prepay all amounts
outstanding under the Company's then - existing bank debt facility. On October
9, 1996, the Company completed an offer to exchange all notes issued in the
private offering for registered Subordinated Notes. The Subordinated Notes are
general unsecured obligations of the Company subordinate in right of payment to
all present and future senior indebtedness of the Company.
Effective October 28, 1996, the Company and its lenders under the Bank
Credit Facility amended certain of the terms of the Bank Credit Facility, in
part, to permit the Company: (i) to apply any distributions received as a
partner of Garden State Cablevision L.P. to reduce the outstanding amount of the
revolving credit facility, if any; (ii) to invest up to $80.0 million in
Australis; and (iii) to issue letters of credit for the benefit of Australis in
an aggregate amount of $33.5 million. In addition the revised terms contained
provisions limiting the Company's ability to make certain investments in excess
of $50 million in the aggregate and prohibiting the Company from having (i) a
Senior Debt Leverage Ratio for the quarter ended September 30, 1996 through
March 30, 1997 in excess of 5.75:1 declining thereafter; and (ii) a Total Debt
Leverage Ratio in excess of 7.50:1 at December 30, 1996, and declining to 6.00:1
commencing on December 31, 1998 and thereafter.
The Company's operations are conducted through its direct and indirect
subsidiaries. As a holding company, the Company has no independent operations
and, therefore, is dependent on the cash flow of its subsidiaries to meet its
own obligations, including the payment of interest and principal obligations on
the Subordinated Notes, the Private Placement Notes, the 8 3/8 % Notes and the
Bank Credit Facility when due. There are no restrictions relating to the payment
to the Company of dividends, advances or other payments by any of the Company's
subsidiaries except MicroNet.
Cash flow generated from continuing operations, excluding changes in
operating assets and liabilities that result from timing issues and considering
only adjustments for noncash charges, was approximately $67.1 million for the
year ended December 31, 1996 compared to approximately $43.9 million for the
year ended December 31, 1995. The Acquisitions accounted for $16.7 million of
the increased cash flow. In 1996, the Company was required to make interest
payments of approximately $104.3 million on outstanding debt obligations,
whereas in 1995, the Company was required under its then existing debt
obligations to make interest payments of approximately $55.8 million. This
increase was primarily attributable to increased debt incurred by the Company in
connection with the Acquisitions and the Australis investments in 1996.
On December 24, 1996, the Company received a partnership distribution
of approximately $41.9 million and accrued management fees of approximately $8.1
million in connection with the refinancing of the debt of Garden State
Cablevision L.P. on December 19, 1996.
On January 10, 1997, the Company completed the Turnersville Acquisition
for approximately $84.5 million. The Company funded the acquisition from
borrowings under the Bank Credit Facility ($75.0 million) and available cash
($9.5 million).
For the period 1996 through 2000, the Company's current capital
expenditure program for its Core Cable Television Operations contemplates
spending approximately $300.0 million on upgrade activities and approximately
$150.0 million for routine maintenance. For the year ended December 31, 1996,
the Company expended approximately $51.7 million for capital expenditures for
Core Cable Television Operations.
In 1997, the Company is obligated to make additional investments of
FF49.8 million for itself and instead of TCI (approximately $8.7 million,
subject to currency exchange rate fluctuations) related to its indirect
investment in Videopole. Since the Company made an investment of $6.6 million on
January 6, 1997, its remaining obligation for 1997 is approximately $2.1
million.
Future minimum lease payments under all capital leases and
noncancellable operating leases for each of the years 1997 through 2000 are $9.2
million (of which $890,000 is payable to a principal stockholder), $8.9 million
(of which $938,000 is payable to a principal stockholder), $7.3 million (of
which $988,000 is payable to a principal stockholder) and $5.8 million (of which
$1,040,000 is payable to a principal stockholder), respectively.
The Company has net operating loss carryforwards which it expects to
utilize notwithstanding recent and expected near term losses. The net operating
losses begin to expire in the year 2001 and will fully expire in 2009.
Management bases its expectation on its belief that depreciation and
amortization expense will level off and that interest expense will decline as
debt is repaid, resulting in higher levels of pretax income.
The Company is party to several interest rate swap agreements to
convert a portion of the Company's fixed rate debt to a LIBOR based rate,
thereby obtaining the benefits of long-term funds while paying a rate of
interest based on the cost of short-term funds. The Company does not otherwise
ordinarily enter into interest rate or currency hedge agreements.
In November 1994, Mr. Lenfest and TCI International, Inc. jointly and
severally guaranteed $67.0 million in program license obligations of the
distributor of Australis' movie programming. The terms of the guarantees provide
that the amount of the guarantees will be reduced on a dollar-for-dollar basis
with the provision of one or more letters of credit, which may not exceed $33.5
million. The Company is currently in discussions with Australis and the
beneficiaries under the guarantees with regard to providing such letters of
credit in the aggregate amount of $33.5 million with a term of five years. The
Company has arranged for the issuance of the letters of credit under the Bank
Credit Facility. The Company expects Australis to agree to reimburse the Company
for any draws made under the letters of credit as well as certain fees and
expenses incurred in connection therewith and to secure its obligations by
granting the Company a fourth security position in all of Australis' assets
after the Australian Government, the holders of the Australis Notes and the
holders of Australis' subordinated notes. At December 31, 1996, the amount
subject to the guarantee under the license agreements was approximately $60.1
million.
The Company had 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 $33.5 million, which amount will be further
reduced by the aggregate face amount of any letters of credit issued by the
Company with respect to the guarantees. Effective March 6, 1997, however, Mr.
Lenfest released the parent Company and its cable operating subsidiaries from
their indemnity obligation until the last to occur of September 30, 1997, and
the last day of any fiscal quarter during which the Company could incur the
indemnity obligation without violating the terms of the Bank Credit Facility.
Certain of the Company's Unrestricted Subsidiaries have agreed to indemnify Mr.
Lenfest for his obligations under the guarantee.
It is anticipated that during 1997, the Company will spend at least
$60.0 million for capital expenditures for its Core Cable Television Operations.
These capital expenditures will be for the upgrading of certain of its cable
television systems, maintenance and other capital projects associated with
implementing the Company's clustering strategy. The amount of such capital
expenditures for years subsequent to 1997 will depend on numerous factors, many
of which are beyond the Company's control. These factors include whether
competition in a particular market necessitates a cable television system
upgrade, whether a particular cable television system has sufficient capacity to
handle new product offerings, whether and to what extent the Company will be
able to recover its investment under FCC rate guidelines and whether the Company
acquires additional cable television systems in need of upgrading or rebuilding.
The Company, however, anticipates that capital expenditures for years subsequent
to 1997 will continue to be significant.
Suburban recently entered into a contract with Scientific-Atlanta, Inc.
pursuant to which Suburban agreed to purchase all of the distribution equipment,
fiber optic electronics, taps and passives needed to upgrade up to 18,000 miles
of its cable television plant. The prices in the contract are fixed for four
years. If Suburban purchases all the equipment currently contemplated, the
contract price is approximately $80.0 million before discounts. However, the
contract does not require Suburban to purchase any minimum amount of such
equipment during 1997 or any other year.
Management believes 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
throughout 1997. However, the Company's ability to borrow funds under the Bank
Credit Facility requires that the Company be in compliance with the Senior and
Total Debt Leverage Ratios or obtain the consent of the lenders thereunder to a
waiver or amendment of the applicable Senior or Total Debt Leverage Ratio.
Management believes that the Company will be in compliance with such Debt
Leverage Ratios.
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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The financial statements and supplementary data are included herein
beginning at page F-1.
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
During the period beginning January 1, 1994 and ended December 31,
1996, there have been no disagreements with any independent accountant engaged
as the principal accountant to audit the Company's financial statements or to
audit a significant subsidiary and on whom the principal accountant expressed
reliance in its report nor has any such person resigned, declined to stand for
the reelection or been dismissed.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors And Executive Officers
The directors and executive officers of the Company are as set forth
below:
Name Age Position
- ----- ---- ---------
H. F. Lenfest 66 President, CEO and Director
Marguerite B. Lenfest 63 Secretary/Treasurer and Director
Samuel W. Morris, Jr. 53 Vice President-General Counsel, Assistant
Secretary and Director
John C. Malone 56 Director
Harry F. Brooks 59 Executive Vice President, Assistant Secretary
Donald L. Heller 51 Vice President
Jeffrey DiFrancesco 33 Vice President
Maryann V. Bryla 31 Vice President
Robert W. Mohollen 34 Assistant Treasurer, Assistant Secretary
H. F. Lenfest is the founder, a director and President and Chief
Executive Officer of the Company, the sole director of each of the Company's
subsidiaries and the President of each of the subsidiaries other than Lenfest
Programming, TeleStar Marketing, Inc. ("TeleStar"), and MicroNet and its
subsidiaries. Mr. Lenfest's principal occupation since 1974 has been serving as
the President and CEO of the Company and its subsidiaries. He is married to
Marguerite B. Lenfest. Mr. Lenfest is currently a director of TelVue
Corporation, Box Worldwide, Inc. and Australis Media Ltd.
Marguerite B. Lenfest has served as a director and the
Secretary/Treasurer of the Company since 1974. She is the wife of H. F. Lenfest
and the sister of Harry F. Brooks.
Samuel W. Morris, Jr. has been Vice President-General Counsel and
Assistant Secretary of the Company since November 1993. Mr. Morris became a
director of the Company on April 4, 1996. Prior to assuming his current
position, he was a founding partner in the law firm of Hoyle, Morris & Kerr,
where he remains Of Counsel. Mr. Morris is also Vice President-General Counsel
and Secretary of each of the Company's subsidiaries. Mr. Morris also serves as
an alternate director of Australis Media Ltd. for both Messrs. Lenfest and
Heller.
John C. Malone has served as a director of the Company since January
1982. Dr. Malone has served as Chairman and Chief Executive Officer of TCI since
March 1997, Chief Executive Officer and President of TCI from January 1994 to
March 1997, Chief Executive Officer of TCI Communications, Inc. ("TCIC"), from
March 1992 to October 1994 and President of TCIC from 1973 to October 1994. He
currently is a director of TCI, TCIC, Tele-Communications International, Inc.,
TCI Satellite Entertainment, Inc., BET Holdings, Inc. and The Bank of New York.
Harry F. Brooks is Executive Vice President/Assistant Secretary of the
Company. He has been Executive Vice President since 1991 and a Vice President
since 1983. Mr. Brooks is also Vice President/Assistant Treasurer/Assistant
Secretary of each of the Company's subsidiaries other than TeleStar (where he is
Treasurer and Assistant Secretary), Lenfest Raystay Holdings, Inc. (where he is
Vice President and Assistant Secretary) and Lenfest Atlantic, Inc. He is the
brother of Marguerite B. Lenfest.
Donald L. Heller has been a Vice President of the Company since March
1993. Prior to assuming his current position, Mr. Heller was, from June 1984 to
January 1993, the Vice President and General Manager of Sportschannel Prism
Associates, a regional cable television service which provides movies and
professional sports. Mr. Heller is also Vice President of Lenfest International,
Inc. and Lenfest Australia, Inc. and President of Lenfest Programming. He is
currently a director of TelVue Corporation and of Australis Media Ltd.
Jeffrey J. DiFrancesco has been Vice President of Strategic Planning
and Business Development of the Company since January 1, 1996. Prior to assuming
his current position, he was Principal Consultant with Price Waterhouse's
Entertainment, Media and Communications Group. Prior to that he was a Managing
Director at Bell Atlantic Video Services Company and Tele-TV.
Maryann V. Bryla has been Vice President, Finance of the Company since
March 7, 1997. Prior to that, Ms. Bryla was Assistant Vice President of Finance
of the Company since November 1996 and Director of Investor Relations since June
1996. Prior to joining the Company, Ms. Bryla was a lending officer in
Telecommunication and Media Lending Division of PNC Bank, National Association.
Prior to that she was an Assistant Treasurer and Manager in the North America
Corporate Finance Syndications Division at Chase Manhattan Bank, NA. Ms. Bryla
is also Assistant Secretary of Lenfest Clearview, Inc.
Robert W. Mohollen has been Assistant Treasurer and Assistant Secretary
of the Company since August 1992. Prior to assuming his current position, he was
Controller since June 1989. Prior to that he was an accountant and auditor with
Pressman Ciocca Smith LLP, Certified Public Accountants, the Company's
accountants. Mr. Mohollen is also Treasurer and Assistant Secretary of each of
the Company's subsidiaries except TeleStar.
All directors serve until the next annual meeting of stockholders and
until their successors have been elected and have qualified. All executive
officers serve at the discretion of the Board of Directors. The directors of the
Company receive no compensation in their capacity as directors.
Other Principal Employees
Debra A. Krzywicki has been an Executive Vice President of Suburban
since January 1, 1996, and a Vice President of Suburban from 1989 to December
31, 1995. She is primarily responsible for marketing, programming, customer
service, training and public relations.
Robert Lawrence has been an Executive Vice President of Suburban
since January 1996, and a Regional Vice President and General Manager of
Suburban from March 1982 to December 31, 1995. He is responsible for
technical operations, engineering, franchise relations, information systems and
purchasing.
Item 11. EXECUTIVE COMPENSATION
The Company has no long-term compensation plans. The following table
sets forth certain information for the years ended December 31, 1994, 1995 and
1996 concerning cash and non-cash compensation earned by the CEO and the four
other most highly compensated executive officers of the Company whose combined
salary and bonus exceeded $100,000 during such periods.
Summary Compensation Table
Annual Compensation
Name and All Other
Principal Position Year Salary Bonus Compensation
------------------ ---- ------ ----- ------------
H. F. Lenfest 1996 $ 1,000,000 $ -- $ 270,135(a) (b)
President and CEO 1995 500,000 750,000 294,958(a) (b)
1994 500,000 -- 283,931(a) (b)
Samuel W. Morris, Jr. 1996 $ 250,000 $ 30,000 (c) $ 9,500(a)
Vice President and 1995 200,000 100,000 9,240(a)
General Counsel 1994 200,000 50,000 10,000(c)
Robert Lawrence 1996 $ 190,000 $ -- $ 9,500(a)
Executive Vice 1995 115,000 15,000 (d) 5,750(a)
President, Suburban 1994 108,000 -- 5,400(a)
Debra A. Krzywicki 1996 $ 170,000 $ -- $ 9,500(a)
Executive Vice 1995 105,000 -- 5,775(a)
President, Suburban 1994 90,000 -- 5,054(a)
Jeffrey J. DiFrancesco 1996 $ 147,400 $ 30,000 (e) $ 59,261(e)
Vice President
- ----------------
(a) Matching contributions under the Company's 401(k) Plan for H. F.
Lenfest amounted to $9,500, $9,240 and $5,830; for Samuel W. Morris,
Jr., $9,500 and $9,240 for the years ended December 31, 1996 and 1995,
respectively; for Robert Lawrence, $9,500, $5,750, and $5,400 for
the years ended December 31, 1996, 1995 and 1994, respectively; and for
Debra A.Krzywicki, $9,500, $5,775 and $5,054 for the years ended
December 31, 1996, 1995 and 1994.
(b) Pursuant to agreements between the Company and a foundation and trusts
created by H. F. Lenfest, the foundation and the trusts have purchased
split-dollar life insurance policies on H. F. Lenfest's life and on the
joint lives of Mr. Lenfest and his wife, Marguerite Lenfest, an officer
and director of the Company. Under these agreements, the Company pays
(i) the premium on each policy, minus a sum equal to the lesser of the
applicable one-year term premium cost computed under the Internal
Revenue Service Ruling 55-747 or the cost of comparable one-year term
life insurance in the amount of each policy or (ii) the entire premium.
The trusts and foundation are the beneficiaries of the insurance
policies. However, the Company has been granted a security interest in
the death benefits
of each policy equal to the sum of all premium payments made by the
Company. These arrangements are designed so that if the assumptions
made as to mortality experience, policy dividends and expenses are
realized, the Company, upon the deaths of Mr. and Mrs. Lenfest or the
surrender of the policies, will recover all of its insurance premium
payments. The premiums paid by the Company in 1996, 1995 and 1994
pursuant to these arrangements were $346,043, $325,471 and $328,449,
respectively. The amounts in this column include the present value of
such premium payments using an imputed interest rate, such present
value calculated based upon Mr. and Mrs. Lenfest's remaining life
expectancy, which totaled $260,635, $232,985 and $278,101 in 1996, 1995
and 1994, respectively. In addition, in 1995, Mr. Lenfest received
$52,733 of additional compensation, of which $50,213 consisted of the
payment by the Company of expenses incurred by Mr. Lenfest in
connection with personal investments.
(c) The bonus for 1996 was paid to Mr. Morris in January, 1997. The $10,000
additional compensation in 1994 was to reimburse Mr. Morris for medical
insurance premiums.
(d) The bonus for 1995 was paid to Mr. Lawrence in 1996.
(e) The bonus for Mr. DiFrancesco was for joining the Company, and the
other compensation was to reimburse him for moving and relocation
expenses.
Compensation Committee Interlocks And Insider Participation
The Company has no compensation committee. H. F. Lenfest has
participated in the past, and is expected to continue to participate, in the
deliberations of the Board of Directors concerning executive compensation.
Item 12. SECURITY AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1996, certain
information with respect to the Common Stock beneficially owned by each
director, all officers and directors of the Company as a group, and each person
known to the Company to own beneficially more than 5% of such Common Stock.
Unless otherwise noted, the individuals have sole voting and investment power.
Shares of Percent of
Name and Address Common Stock Common Stock
- ----------------- ------------ ------------
H. F. Lenfest, Director (a)(b)(c)(d) 79,448(c) 50.0%
Marguerite B. Lenfest, Director (a) --------- --------
John C. Malone, Director (e) 79,448(f) 50.0%
Brook J. Lenfest (a)(c)(d) 14,862(g) 9.4%
H. Chase Lenfest (a)(c)(d) 14,862(g) 9.4%
Diane A. Lenfest (a)(c) 14,862(g) 9.4%
LMC Lenfest, Inc. (c)(h) 79,448(c) 50.0%
(an indirect wholly owned subsidiary of TCI)
All officers and directors as a 158,896 100.0%
group (11 persons)
- -----------------
(a) Such person's address is c/o The Lenfest Group, 200 Cresson Boulevard,
Oaks, PA 19456.
(b) Includes 14,862 and 14,862 shares owned by Brook J. Lenfest and H.
Chase Lenfest which are held in trusts established by each of them, and
14,862 shares owned by Diane A. Lenfest, respectively, all of whom are
children of Mr. Lenfest. See Note (d) below.
(c) H. F. Lenfest and LMC Lenfest, Inc., as successor in interest to
Liberty Media Corporation, have an agreement that provides, together
with the amended and restated Certificate of Incorporation of the
Company, that Mr. Lenfest has the right to designate a majority of the
Board of Directors until the earlier of January 1, 2002 or until his
death. During such period, vacancies in respect of the directors
designated by Mr. Lenfest shall be filled by designees of Mr. Lenfest
or, in the event of Mr. Lenfest's death, of The Lenfest Foundation.
Thereafter, the Lenfest Family and LMC Lenfest, Inc. will have the
right to appoint an equal number of members of the Company's Board of
Directors. This right will continue for so long as any member of the
Lenfest Family owns any stock in the Company. Pursuant to a separate
agreement, each of H. F. Lenfest, Brook J. Lenfest, H. Chase Lenfest
and Diane A. Lenfest (the "Lenfest Stockholders") have granted to LMC
Lenfest, Inc. a right of first refusal with respect to their shares of
stock in the Company and LMC Lenfest, Inc. has granted a right of first
refusal to the Lenfest Stockholders with respect to its shares of stock
in the Company.
(d) Each of Mr. Lenfest, Brook J. Lenfest and H. Chase Lenfest hold their
34,862 shares, 14,862 shares and 14,862 shares, respectively, in trusts
established by each of them, each of which trusts is terminable at
will.
(e) Dr. Malone's address is c/o Terrace Tower II, 5619 DTC Parkway,
Englewood, CO 80111.
(f) Includes 79,448 shares owned by LMC Lenfest, Inc., of which Dr. Malone
is an affiliate. Dr. Malone disclaims beneficial ownership of these
shares.
(g) Each of Brook J. Lenfest, H. Chase Lenfest and Diane A. Lenfest has
given to H. F. Lenfest an irrevocable proxy granting him the power
(until March 30, 2000) to vote their shares for the election of
directors. H. F. Lenfest disclaims beneficial ownership of these
shares.
(h) LMC Lenfest, Inc.'s address is 8101 East Pacific Avenue, Suite 500,
Englewood, CO 80111.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a party to an agreement with Satellite Services, Inc.
("SSI"), an affiliate of TCI, the indirect parent of LMC Lenfest, Inc., a 50%
stockholder of the Company and an affiliate of Mr. Malone, pursuant to which SSI
provides certain cable programming to the Company at a rate fixed as a
percentage in excess of the rate available to TCI. Management believes that
these rates are significantly less than the rates that the Company could obtain
independently. For the year ended December 31, 1996, the Company paid SSI
approximately $57.3 million.
The Company, through its StarNet, Inc. and SDI subsidiaries, sells
cross channel tune-in promotional services for cable television to affiliates of
TCI. For the year ended December 31, 1996, the Company received $4.8 million for
such services.
The Company rents four office and warehouse spaces from H. F. Lenfest
and Marguerite Lenfest. For the year ended December 31, 1996, the Company paid
the Lenfests an aggregate of $845,000 under such leases. Rental payments are on
terms that are no less favorable than those the Company could obtain from
independent parties.
The Company reimbursed Mr. Lenfest approximately $10.2 million in 1996,
representing his costs incurred on behalf of the Company for the buyout of the
investment partnership of Garden State Cablevision L.P.
For the year ended December 31, 1996, the Company paid TelVue
Corporation, an affiliate of H. F. Lenfest, $325,000 for pay-per-view order
placement services.
In November 1994, Mr. Lenfest and TCI International, Inc. jointly and
severally guaranteed $67.0 million in program license obligations of the
distributor of Australis' movie programming. The terms of the guarantees provide
that the amount of the guarantees will be reduced on a dollar-for-dollar basis
with the provision of one or more letters of credit, which may not exceed $33.5
million. The Company is currently in discussions with Australis and the
beneficiaries under the guarantees with regard to providing such letters of
credit in the aggregate amount of $33.5 million with a term of five years. The
Company has arranged for the issuance of the letters of credit under the Bank
Credit Facility. The Company expects Australis to agree to reimburse the Company
for any draws made under the letters of credit as well as certain fees and
expenses incurred in connection therewith and to secure its obligations by
granting the Company a fourth security position in all of Australis' assets
after the Australian Government, the holders of the Australis Notes and the
holders of Australis' subordinated notes. At December 31, 1996, the amount
subject to the guarantee under the license agreements was approximately $60.1
million.
The Company had 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 $33.5 million, which amount will be further
reduced by the aggregate face amount of any letters of credit issued by the
Company with respect to the guarantees. Effective March 6, 1997, however, Mr.
Lenfest released the parent Company and its cable operating subsidiaries from
their indemnity obligation until the last to occur of September 30, 1997, and
the last day of any fiscal quarter during which the Company could incur the
indemnity obligation without violating the terms of the Bank Credit Facility.
Certain of the Company's Unrestricted Subsidiaries have agreed to indemnify Mr.
Lenfest for his obligations under the guarantee.
On February 29, 1996, Mr. Lenfest guaranteed the full payment and
performance of a credit facility which the Company's unrestricted subsidiary,
Lenfest Australia, had put in place to provide for its guarantee of $75.0
million of a $125.0 million Australis short term borrowing. This obligation was
terminated on October 31, 1996. For a fuller discussion of these transactions,
see the September, 1996 10-Q.
The Company has agreed to pay the legal expenses of H. F. Lenfest and
Marguerite Lenfest related to a pending SEC action against them. See "Business
- -- Legal Proceedings." H. F. Lenfest and Marguerite Lenfest have agreed to repay
such expenses if it is subsequently determined that the Company is not permitted
to make such payments under Delaware corporate law.
The Company has agreed to pay the legal expenses of Harry Brooks
related to the federal criminal action against him. See "Business -- Legal
Proceedings." Mr. Brooks has agreed to repay such expenses if it is subsequently
determined that the Company is not permitted to make such payments under
Delaware corporate law.
On February 12, 1996, the Company completed the exchange of its cable
television systems in the East San Francisco Bay Area, a 41.67% partnership
interest in Bay Cable Advertising, and the right to acquire certain other cable
television systems for TCI's Wilmington, Delaware area cable television system.
In connection with that transaction, the Company also purchased the Philadelphia
area assets of Cable AdNet Partners, a subsidiary of TCI, for approximately $1.1
million.
John C. Malone, a director of the Company, is a director of The Bank of
New York, which is the Trustee under the Indentures for the Company's 8 3/8 %
Notes and Subordinated Notes and a lender under the Bank Credit Facility.
For the year period January 1, 1996 to February 12, 1996, Cable AdNet
Partners, an affiliate of TCI and John C. Malone, paid Suburban approximately
$193,000 for Suburban's share of advertising revenue under a certain advertising
agreement.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following financial statements are filed as part of the report:
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Consolidated Balance Sheets, December 31, 1995 and 1996
Consolidated Statements of Operations, Years Ended December 31,
1994, 1995 and 1996
Consolidated Statements of Changes in Stockholders' Equity
(Deficit), Years Ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows, Years Ended December 31,
1994, 1995 and 1996
Notes to Consolidated Financial Statements
GARDEN STATE CABLEVISION L.P.
Report of Independent Public Accountants
Balance Sheets, December 31, 1995, and 1996
Statements of Operations, Years Ended December 31, 1994, 1995 and
1996
Statements of Partners' (Deficit), Years Ended December 31, 1994,
1995 and 1996
Statements of Cash Flows, Years Ended December 31, 1994, 1995 and
1996
Notes to Financial Statements
(a)(2) Financial Statement Schedules.
The following financial statement schedules are filed as a part of
the report:
(i) Report of Pressman Ciocca Smith LLP on Schedules
Schedule II -- Valuation and Qualifying Accounts
Lenfest Communications, Inc. and Subsidiaries
(ii) Report of Arthur Andersen LLP on Schedules
Schedule II -- Valuation and Qualifying Accounts
Garden State Cablevision L.P.
(a)(3) Exhibits.
The following Exhibits are furnished as part of this Registration
Statement:
Exhibit
Number Title or Description
- ------ --------------------
(a) Exhibits.
The following Exhibits are furnished as part of this Report:
*2.1 Amended and Restated Asset Exchange Agreement, dated September 8,
1995, between LenComm, Inc. and Lenfest West, Inc. and Heritage
Cablevision of Delaware, Inc.
*2.2 Asset Purchase Agreement, dated as of May 9, 1995, by and between
TCI Communications Inc. and Sammons Communications of New Jersey,
Inc., Oxford Valley Cablevision, Inc., Sammons Communications of
Pennsylvania, Inc., NTV Realty, Inc., Capital Telecommunications,
Inc. and AC Communications, Inc.
*2.3 Assignment and Assumption Agreement, dated as of June 1, 1995, among
TCI Communications, Inc., TKR Cable Company and Lenfest
Communications, Inc.
*2.4 Asset Purchase Agreement, dated as of September 7, 1995, by and
between Lenfest Atlantic, Inc. and Tri-County Cable Television
Company.
*2.5 Letter Agreement, dated July 13, 1995, between Suburban Cable TV
Co., Inc., and Service Electric Cable TV, Inc.
*2.6 Letter Agreement, dated August 11, 1995, between Suburban Cable TV
Co., Inc., and Service Electric Cablevision, Inc.
***2.7 Assignment and Assumption Agreement, dated as of February 16, 1996,
by and between Heritage Cablevision of Delaware, Inc. and Lenfest
New Castle County, a Delaware general partnership.
***2.8 Bill of Sale, Assignment and Assumption and Release, dated as of
February 16, 1996, by and among Lenfest New Castle County, Heritage
Cablevision of Delaware, Inc. and The World Company.
+2.9 Asset Purchase Agreement, dated March 28, 1996, between Cable TV
Fund 14-A, Ltd. and Lenfest Atlantic, Inc.
+++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.
+++4.4 Form of Certificated Note, dated June 27, 1996, between the Company
and Salomon Brothers Inc. (In accordance with Item 601 of Regulation
S-K similar Notes between the Company and Salomon Brothers Inc. have
not been filed because they are identical in all material respects
to the filed exhibit.)
+++4.5 Form of 10 1/2% Senior Subordinated Note, dated June 27, 1996, in
the principal sum of $296,700,000.
+++4.6 Registration Agreement, dated as of June 20, 1996, between the
Company and Salomon Brothers Inc., Toronto Dominion Securities (USA)
Inc., CIBC Wood Gundy Securities Corp. and NationsBanc Capital
Markets, Inc.
*10.1 Credit Agreement, dated as of June 24, 1994, as amended December
16, 1994 and January 10, 1995, among Lenfest Communications, Inc.,
The Toronto-Dominion Bank and PNC Bank, National Association as
Managing Agents, the Lenders and Toronto-Dominion (Texas), Inc.,
as Administrative Agent.
*10.2 Note Agreement, dated as of May 22, 1989, among Lenfest
Communications, Inc. and the Prudential Insurance Company of
America with respect to $50,000,000 10.69% Senior Notes due 1998.
*10.3 Note Agreement, dated as of September 14, 1988, among Lenfest
Communications, Inc. and certain Institutions described therein
with respect to $125,000,000 10.15% Senior Notes due 2000.
*10.4 Note Agreement, dated as of September 27, 1991, among Lenfest
Communications, Inc. and Certain Institutions described therein
with respect to $100,000,000 9.93% Senior Notes due 2001.
*10.5 Programming Supply Agreement, effective as of September 30, 1986,
between ease , dated as of May Marguerite Lenfest and Satellite
Services, Inc. and Lenfest Communications, Inc.
*10.6 Lease, dated as of May 1, 1990, by and between H.F. Lenfest and
Marguerite Lenfest and Suburban Cable TV Co. Inc.
*10.7 Lease, dated as of May 1, 1990, by and between H.F. Lenfest and
Marguerite Lenfest and Suburban Cable TV Co. Inc.
*10.8 Lease, dated as of May 24, 1990, by and between H.F. Lenfest and
Marguerite Lenfest and MicroNet, Inc.
*10.9 Lease, dated as of June 20, 1991, as amended January 1, 1995, by
and between H.F. Lenfest and Marguerite Lenfest and StarNet, Inc.
(as successor to NuStar).
*10.10 Supplemental Agreement, dated December 15, 1981, by and between
TCI Growth, Inc., H.F. Lenfest, Marguerite Lenfest and Lenfest
Communications, Inc. and Joinder Agreement executed by LMC
Lenfest, Inc.
*10.11 Amendment to Supplemental Agreement, dated May 4, 1984 between
Lenfest Communications, Inc. and TCI Growth, Inc.
*10.12 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, Telecommunications, Inc. and Liberty Media
Corporation.
*10.13 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 Lenfest
Communications, Inc.
*10.14 Letter Agreement, dated as of December 18, 1991, among Liberty
Media Corporation, Lenfest Communications, Inc., Marguerite B.
Lenfest, Diane A. Lenfest, H. Chase Lenfest, Brook J. Lenfest and
the Lenfest Foundation.
*10.15 Irrevocable Proxies of H. Chase Lenfest, Diane A. Lenfest and
Brook J. Lenfest, each dated March 30, 1990.
*10.16 Partnership Agreement of L-TCI Associates, dated April, 1993,
between Lenfest International, Inc. and UA-France, Inc.
*10.17 Stock Pledge Agreement, dated May 28, 1993, between Lenfest York,
Inc. and CoreStates Bank, N.A., as Collateral Agent.
*10.18 Pledge Agreement, dated July 29, 1994, between Lenfest Raystay
Holdings, Inc. and Farmers Trust Company as Collateral Agent.
*10.19 Agreement, dated September 30, 1986, between Lenfest
Communications, Inc. and Tele-Communications, Inc.
*10.20 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.
**10.21 Letter Agreement, dated November 8, 1995, between the Company and
The Prudential Insurance Company of America. (In accordance with
item 601 of Regulation S-K, agreements between the Company and
J.P. Morgan Investment Management Co. and Banker's Trust have not
been filed because they are identical in all material respects to
the filed exhibit.)
**10.22 Letter Agreement, dated November 8, 1995, between the Company and
The Prudential Insurance Company of America. (In accordance with
Item 601 of Regulation S-K, agreements between the Company and MBL
Life Assurance Corp., Full & Co., AUSA Life Insurance Company,
Inc. and Equitable Life Assurance Society have not been filed
because they are identical in all material respects to the filed
exhibit.)
**10.23 Letter Agreement, dated October 31, 1995, between the Company and
PPM America. (In accordance with item 601 of Regulation S-K,
agreements between the Company and Unum Life Insurance Company of
America and First Unum Life Insurance Company, New York Life
insurance Co., SAFECO Life Insurance Co., American Enterprise Life
Insurance Company, IDS Life Insurance Company of New York and
Teachers Insurance and Annuity Association of America have not
been filed because they are identical in all material respects to
the filed exhibit.)
**10.24 Letter Agreement, dated November 9, 1995, between the Company and
Unum Life Insurance Company of America and First Unum Life
Insurance Company.
**10.25 Credit Agreement, dated as of December 14, 1995, among Lenfest
Communications, Inc., The Toronto-Dominion Bank, PNC Bank,
National Association and NationsBank of Texas, N.A., as Arranging
Agents, the Lenders and Toronto-Dominion (Texas), Inc., as
Administrative Agent.
+10.26 First Amendment, dated as of February 29, 1996, to Credit
Agreement, dated as of December 14, 1995, by and among Lenfest
Communications, Inc., The Toronto-Dominion Bank, PNC Bank,
National Association and NationsBank of Texas, N.A., as Arranging
Agents, the Lenders and Toronto-Dominion (Texas), Inc., as
Administrative Agent.
+10.27 Agreement, dated as of February 29, 1996, in favor of the Company
by H.F. Lenfest.
+10.28 Credit Agreement, dated as of February 29, 1996, between Lenfest
Australia, Inc. and The Toronto-Dominion Bank and NationsBank of
Texas, N.A. and Toronto-Dominion (Texas), Inc., as Administrative
Agent.
+10.29 Sublease Agreement, dated March 21, 1996, between Suburban Cable
TV Co. Inc. and Surgical Laser Technologies, Inc.
+10.30 Letter Agreement, dated November 30, 1995, between the Company and
The Prudential Insurance Company of America.
+10.31 Letter Agreement, dated November 30, 1995, between the Company and
The Prudential Insurance Company of America. (In accordance with
Item 601 of Regulation S-K, agreements between the Company and MBL
Life Assurance Corp. and Full & Co. have not been filed because
they are identical in all material respects to the filed exhibit.)
++10.32 Form of Second Amendment, dated as of April 29, 1996, to Credit
Agreement, dated as of December 14, 1995, by and among Lenfest
Communications, Inc., The Toronto-Dominion Bank, PNC Bank,
National Association and NationsBank of Texas, N.A., as Arranging
Agents, the Lenders and Toronto-Dominion (Texas), Inc., as
Administrative Agent.
++10.33 Form of Letter Agreement, dated May 2, 1996, between the Company
and The Prudential Insurance Company of America.
++10.34 Form of Letter Agreement, dated May 2, 1996, between the Company
and The Prudential Insurance Company of America. (In accordance
with Item 601 of Regulation S-K, agreements between the Company
and ECM Fund, L.P. I and Equitable Life Assurance Society have not
been filed because they are identical in all material respects to
the filed exhibit.)
++10.35 Form of Senior Subordinated Credit Agreement, dated as of May 2,
1996, between Lenfest Communications, Inc. and The
Toronto-Dominion Bank.
+++10.36 Letter Agreement, dated June 11, 1996, and accepted June 20,
1996, between the Company and MBL Life Assurance Corporation. (In
accordance with Item 601 of Regulation S-K, an agreement between
the Company and The Prudential Insurance Company of America has
not been filed because it is identical in all material respects to
the filed exhibit.)
+++10.37 Letter Agreement, dated June 20, 1996, between the Company and The
Prudential Insurance Company of America.
+++10.38 Credit Agreement, dated June 27, 1996, between the Company, The
Toronto-Dominion Bank, PNC Bank, National Association and
NationsBank of Texas, as Arranging Agents, the Lenders and
Toronto-Dominion (Texas), Inc., as Administrative Agent.
+++10.39 First Amendment, dated August 29, 1996, to Credit Agreement, dated
as of February 29, 1996, by and among Lenfest Australia, Inc., The
Toronto-Dominion Bank, NationsBank of Texas, N.A. and Toronto
Dominion (Texas), Inc.
#10.40 Second Amendment, dated September 30, 1996, to Credit Agreement,
dated as of February 29, 1996, by and among Lenfest Australia,
Inc., The Toronto-Dominion Bank, NationsBank of Texas, N.A. and
Toronto Dominion (Texas), Inc.
#10.41 Form of First Amendment, dated as of October 28, 1996, to Credit
Agreement, dated as of June 27, 1996, by and among Lenfest
Communications, Inc., The Toronto-Dominion Bank, PNC Bank,
National Association and NationsBank of Texas, N.A., as Arranging
Agents, the Lenders and Toronto Dominion (Texas), Inc., as
Administrative Agent.
10.42 Letter, dated March 6, 1997, from H. F. Lenfest to the Company.
*21. Subsidiaries of the Company.
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 Report on Form 8-K,
dated February 26, 1996.
+ Incorporated by reference to the Company's Report on Form 10-K,
dated March 29, 1996, for the year ended December 31, 1995.
++ Incorporated by reference to the Company's Report on Form 10-Q,
for the quarter ended March 31, 1996.
+++ 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-Q,
dated November 14, 1996, for the quarter ended September 30, 1996.
(b) Reports on Form 8-K.
None.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS Page
----
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ............................................................ F-1
Consolidated Balance Sheets, December 31, 1995 and 1996 ....................................................... F-2
Consolidated Statements of Operations, Years Ended December 31, 1994, 1995 and 1996 ........................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit),
Years Ended December 31, 1994, 1995 and 1996 ............................................................. F-5
Consolidated Statements of Cash Flows, Years Ended December 31, 1994, 1995 and 1996 ........................... F-6
Notes to Consolidated Financial Statements .................................................................... F-8
GARDEN STATE CABLEVISION L.P.
Report of Independent Public Accountants ...................................................................... F-38
Balance Sheets, December 31, 1995 and 1996 .................................................................... F-39
Statements of Operations, Years Ended December 31, 1994, 1995 and 1996 ........................................ F-40
Statements of Partners' (Deficit), Years Ended December 31, 1994, 1995 and 1996 ............................... F-41
Statements of Cash Flows, Years Ended December 31, 1994, 1995 and 1996 ........................................ F-42
Notes to Financial Statements ................................................................................. F-43
FINANCIAL STATEMENT SCHEDULES
Report of Pressman Ciocca Smith LLP on Schedule
Schedule II - Valuation and Qualifying Accounts
Lenfest Communications, Inc. and Subsidiaries..................................................................F-50
Report of Arthur Andersen LLP on Schedule
Schedule II - Valuation and Qualifying Accounts
Garden State Cablevision L.P...................................................................................F-52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 1997 By: /s/ H.F. Lenfest
----------------
H.F. Lenfest
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ------ ------
/s/ H.F. Lenfest Chairman of the Board, Director and March 26, 1997
- ---------------- President
H.F. Lenfest (Principal Executive Officer)
/s/ Marguerite B. Lenfest Director March 26, 1997
- -------------------------
Marguerite B. Lenfest
/s/ John C. Malone Director March 26, 1997
- ------------------
John C. Malone
/s/ Samuel W. Morris, Jr. Director, Vice President March 26, 1997
- ------------------------- and General Counsel
Samuel W. Morris, Jr.
/s/ Harry F. Brooks Executive Vice President March 26, 1997
- ------------------------- (Principal Financial Officer)
Harry F. Brooks
/s/ Robert W. Mohollen Assistant Treasurer March 26, 1997
- ------------------------- (Principal Accounting Officer)
Robert W. Mohollen
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Lenfest
Communications, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Garden State Cablevision L.P., the
investment in which, as discussed in Note 7 to the financial statements, is
accounted for by the equity method of accounting. The financial statements
reflect equity in accumulated losses, net of related receivable, in excess of
the investments in Garden State Cablevision L.P. in the amounts of $15,451,000
and $72,454,000 at December 31, 1995 and 1996, respectively, and equity in its
net losses of $7,476,000, $8,527,000 and $5,068,000 for each of the years in the
three-year period ended December 31, 1996. The financial statements of Garden
State Cablevision L.P. were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for Garden State Cablevision L.P., is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits and
the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Lenfest Communications, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" in 1994.
PRESSMAN CIOCCA SMITH LLP
Hatboro, Pennsylvania
March 24, 1997
F-1
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
-----------------------------------
1995 1996
-------------- --------------
ASSETS
Cash and cash equivalents $ 164,943 $ 20,633
Marketable securities 169,581 79,830
Accounts receivable - trade and other, less allowance
for doubtful accounts of $1,104 in 1995 and $2,055 in 1996 12,890 22,801
Inventories 4,932 2,757
Prepaid expenses 3,124 2,824
Property and equipment, net of accumulated
depreciation 211,780 389,029
Investments in affiliates, accounted for under the equity
method, and related receivables 49,072 41,333
Other investments, at cost, and related receivables 10,410 10,410
Goodwill, net of amortization 52,874 78,524
Deferred franchise costs, net of amortization 133,525 494,568
Other intangible assets, net of amortization 20,519 26,076
Deferred Federal tax asset (net) 14,707 55,620
Other assets 3,391 6,612
-------------- --------------
$ 851,748 $ 1,231,017
============== ==============
See accompanying notes. (continued)
F-2
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, (continued)
(Dollars in thousands)
December 31,
-----------------------------------
1995 1996
-------------- --------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Notes payable $ 812,441 $ 1,310,200
Obligations under capital leases - related party 5,284 5,186
Obligations under capital leases - unrelated parties - 4,477
Accounts payable and accrued expenses - unrelated parties 33,926 40,377
Accounts payable - affiliate 7,205 12,855
Unearned revenues and customer prepayments 3,402 4,485
Deposits on converters 5,853 4,663
Deferred state tax liability (net) 9,940 9,165
Investment in Garden State Cablevision L.P. 15,451 72,454
-------------- --------------
TOTAL LIABILITIES 893,502 1,463,862
MINORITY INTEREST in equity of consolidated
subsidiaries 3,438 945
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
Unrealized gain (loss) on marketable securities, net of deferred
tax liabilities of $25,830 in 1995 and $317 in 1996 47,970 (9,866)
Accumulated deficit (143,911) (274,673)
-------------- --------------
(45,192) (233,790)
-------------- --------------
$ 851,748 $ 1,231,017
============== ==============
See accompanying notes.
F-3
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------
1994 1995 1996
------------- ------------ -------------
REVENUES $ 236,195 $ 266,249 $ 397,318
OPERATING EXPENSES
Service 18,344 20,659 35,438
Programming - from affiliate 33,782 37,685 57,344
Programming - other cable 15,485 17,637 25,460
Selling and marketing 8,263 9,328 15,066
General and administrative 45,504 49,982 71,453
Direct costs - non-cable 13,161 18,616 21,141
Depreciation 50,001 51,624 68,985
Amortization 25,517 26,076 46,396
------------- ------------ -------------
210,057 231,607 341,283
------------- ------------ -------------
OPERATING INCOME 26,138 34,642 56,035
OTHER INCOME (EXPENSE)
Interest expense (47,749) (61,538) (107,916)
Equity in net (losses) of unconsolidated affiliates (7,940) (10,682) (17,870)
Recognized (loss) on decline in market value of securities -
Australis Media Limited - - (86,400)
Other income (expense) 923 14,988 13,932
------------- ------------ -------------
(54,766) (57,232) (198,254)
------------- ------------ -------------
(LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS (28,628) (22,590) (142,219)
INCOME TAX BENEFIT (EXPENSE)
Current (40) - (897)
Deferred 9,769 11,095 14,838
------------- ------------ -------------
9,729 11,095 13,941
------------- ------------ -------------
(LOSS) BEFORE
EXTRAORDINARY LOSS (18,899) (11,495) (128,278)
EXTRAORDINARY (LOSS)
Early extinguishment of debt, net of deferred taxes of
$3,629 in 1995 and $1,337 in 1996 - (6,739) (2,484)
------------- ------------ -------------
NET (LOSS) $ (18,899) $ (18,234) $ (130,762)
============= ============ =============
See accompanying notes.
F-4
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------
1994 1995 1996
------------ ------------ -------------
COMMON STOCK
BALANCE AT BEGINNING
AND END OF YEAR $ 2 $ 2 $ 2
============ ============ =============
ADDITIONAL PAID-IN CAPITAL
BALANCE AT BEGINNING
AND END OF YEAR $ 50,747 $ 50,747 $ 50,747
============ ============ =============
UNREALIZED GAIN (LOSS) ON MARKETABLE
SECURITIES
Balance at beginning of year $ - $ 25,319 $ 47,970
Adjustment for the cumulative effect of applying the new method
of accounting for certain investments in debt and equity
securities, net of deferred taxes of $4,300 in 1994 8,440 - -
Net unrealized gain (loss) on marketable securities, net of
deferred tax liabilities 16,879 22,651 (57,836)
------------ ------------ -------------
BALANCE AT END OF YEAR $ 25,319 $ 47,970 $ (9,866)
============ ============ =============
ACCUMULATED DEFICIT
Balance at beginning of year $ (106,778) $ (125,677) $ (143,911)
Net (loss) (18,899) (18,234) (130,762)
------------ ------------ -------------
BALANCE AT END OF YEAR $ (125,677) $ (143,911) $ (274,673)
============ ============ =============
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) $ (49,609) $ (45,192) $ (233,790)
============ ============ =============
See accompanying notes.
F-5
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------
1994 1995 1996
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (18,899) $ (18,234) $ (130,762)
Adjustments to reconcile net (loss) to net cash provided
by operating activities
Depreciation and amortization 75,518 77,700 115,381
Extraordinary loss - 10,368 3,821
Accretion of debt discount - 328 1,081
Net (gains) losses on sales of marketable securities 209 (13,517) (342)
Recognized loss on decline in market value of securities -
Australis Media Limited - - 86,400
(Gain) on disposition of partnership interest - - (7,210)
Deferred income tax (benefit) (9,769) (14,724) (16,175)
Write off of assets upon rebuild of cable systems 2,245 282 846
(Gain) on sale of property and equipment (371) (143) (326)
Equity in net losses of unconsolidated affiliates 7,940 10,682 17,870
Loss on other investments - 75 -
Amortization of discount on Australis notes - - (1,026)
Interest paid from loan proceeds 1,792 - -
Deferred interest on capital leases 19 - -
Minority interests (581) (1,347) (2,492)
Changes in operating assets and liabilities, net of effects from acquisitions:
Cash - restricted escrow (3,273) 3,273 -
Accounts receivable (3,595) 2,205 (8,180)
Inventories (2,657) 2,260 2,175
Prepaid expenses 478 540 260
Other assets (564) (85) (3,298)
Accounts payable and accrued expenses:
Affiliate 4,176 (433) 5,650
Unrelated parties (773) 12,201 6,627
Unearned revenues and customer prepayments 1,930 (137) 827
Deposits on converters 294 62 (29)
------------ ------------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 54,119 71,356 71,098
------------ ------------- ------------
See accompanying notes. (continued)
F-6
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of cable systems $ - $ - $ (604,032)
Acquisition of the minority interest of South Jersey
Cablevision Associates - (8,838) -
Non cable acquisitions - (198) (5,600)
Purchases of property and equipment (48,525) (47,735) (60,656)
Purchases of marketable securities (9,023) (2,678) (582)
Purchases of other investments (55) (71) -
Proceeds from transfer of cable system - - 4,500
Proceeds from sales of property and equipment 607 253 381
Proceeds from sales of marketable securities 6,974 16,575 1,952
Loans to Australis Media - - (41,139)
Proceeds from Australis Media note receivable - 19,240 41,139
Investments in unconsolidated affiliates (5,071) (19,492) (4,183)
Distributions from unconsolidated affiliates 2,825 1,826 45,932
(Increase) in other intangible assets - investing (490) (539) (4,596)
Loans and advances to unconsolidated affiliates (1,979) (726) (470)
Loans and advances from unconsolidated affiliates 837 1,110 8,390
------------- -------------- - -------------
NET CASH (USED BY)
INVESTING ACTIVITIES (53,900) (41,273) (618,964)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in debt 275,950 741,363 942,023
Early extinguishment of debt - (91,118) (448,821)
Other debt reduction:
Notes (274,350) (515,528) (80,345)
Bonds (67) - -
Obligations under capital leases (90) (49) (256)
(Increase) in other intangible assets - financing (76) (4,110) (9,045)
-------------- -------------- -------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,367 130,558 403,556
-------------- -------------- --------------
NET INCREASE
(DECREASE) IN CASH 1,586 160,641 (144,310)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,716 4,302 164,943
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 4,302 $ 164,943 $ 20,633
============== ============== ==============
See accompanying notes.
F-7
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1995 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Lenfest Communications, Inc.
and subsidiaries ("the Company") is presented to assist in understanding its
financial statements. These accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation of
the consolidated financial statements.
Business Activities and Concentrations of Credit Risk
The Company, through its cable subsidiaries, owns and operates clusters of cable
television systems located in the suburbs of Philadelphia, Pennsylvania, from
Harrisburg, Pennsylvania through Wilmington, Delaware and south through Atlantic
City, New Jersey. In addition, the Company, through its non-cable subsidiaries,
sells advertising for cable television systems, provides satellite delivered
cross channel tune-in promotional services for cable television and microwave
transmission of video, voice and data. The Company's ability to collect the
amounts due from customers is affected by economic fluctuations in these
geographic areas and in the cable television industry generally.
The Company maintains cash balances at several financial institutions located
primarily in the Philadelphia Area. Accounts at each institution are insured by
either the Bank Insurance Fund or another institutional insurance fund up to
$100,000 and $500,000, respectively. The Company maintains cash balances in
excess of the insured amounts.
Basis of Consolidation and Change in Reporting Entity
The consolidated financial statements include the accounts of Lenfest
Communications, Inc. and those of all wholly owned subsidiaries. In addition,
effective 1995, the accounts of L-TCI Associates, a partnership that is owned
approximately seventy-two percent (72%) by the Company, are also included.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
During 1996, the Company acquired an additional 50% interest in Atlantic
Communication Enterprises, which increased its holdings to 100%. 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 net loss for 1994, 1995 or
1996. Since the amounts are not material and have no effect on net loss, the
prior period financial statements have not been restated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable debt securities
with original maturities of three months or less.
F-8
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. Inventories consist of equipment assembled and sold by some of the
Company's non-cable wholly owned subsidiaries.
Property and Equipment
Property and equipment are stated at cost. For the newly acquired systems or
companies, the purchase price has been allocated to net assets on the basis of
fair market values as determined by an independent appraiser. Depreciation is
provided using the accelerated and straight-line methods of depreciation for
financial reporting purposes at rates based on estimated useful lives. For
income tax purposes, recovery of capital costs for property and equipment is
made using accelerated methods over statutory recovery periods.
Expenditures for renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Property and Equipment Under Capital Leases
Property and equipment capitalized under capital leases are amortized on the
straight-line method over the term of the leases or the estimated useful lives
of the assets. Amortization of leased assets is included in depreciation expense
in the statements of operations.
Capitalization of Costs
All costs properly attributable to capital items, including that portion of
employees' compensation allocable to installation, engineering, design,
construction and various other capital projects are capitalized. Installation
income has been fully recognized.
Deferred Franchise Costs, Goodwill and Other Intangible Assets
Deferred franchise costs, goodwill and other intangible assets acquired in
connection with the purchases of cable systems and other companies have been
valued at acquisition cost on the basis of the allocation of the purchase price
on a fair market value basis to net assets as determined by an independent
appraiser. Additions to these assets are stated at cost. Other intangible assets
consist of debt acquisition costs, organization costs and covenants not to
compete. Goodwill represents the cost of acquired cable systems and companies in
excess of amounts allocated to specific assets based on their fair market
values. Deferred franchise costs are amortized on the straight-line method over
the legal franchise lives, generally 10 to 20 years. Other intangible assets are
being amortized on the straight-line method over their legal or estimated useful
lives, generally ranging from 5 to 10 years. Goodwill is amortized on the
straight-line method over 20 to 40 years. In accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company
assesses, on an on-going basis, the recoverability of intangible assets based on
estimates of future undiscounted cash flows for the applicable business acquired
compared to net book value. If the future undiscounted cash flow estimate is
less than net book value, net book value is then reduced to the undiscounted
cash flow estimate. The Company also evaluates the amortization periods of
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives. As of December 31, 1996, management believes that no
revisions to the remaining useful lives or writedowns of deferred charges are
required.
F-9
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Investments
Investments in which the ownership interest is less than 20% are generally
carried at cost. Investments in marketable equity securities are carried at fair
market value and any unrealized appreciation is presented as a separate
component of stockholders' equity (deficit), net of deferred taxes. For those
investments in affiliates in which the Company's voting interest is 20% to 50%,
the equity method of accounting is used. Under this method, the original
investment, recorded at cost, is adjusted to recognize the Company's share of
the net earnings or losses of the affiliates as they occur rather than as
dividends or other distributions are received, limited to the extent of the
Company's investment in, advances to and guarantees for the investee. The
Company's share of net earnings or losses of affiliates includes the
amortization of purchase adjustments.
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the current
exchange rate as of the end of the year. Statement of operations items are
translated at average currency exchange rates. The resulting translation
adjustment is included with unrealized gain (loss) on marketable securities, a
separate component of stockholders' equity (deficit), net of deferred taxes.
Income Taxes
The Company files a consolidated Federal tax return. Investment and other tax
credits are recognized under the flow-through method of accounting.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
Interest Rate Protection Agreements
The amount of interest to be paid or received is accrued as interest rates
change and is recognized over the life of the agreements as an adjustment to
interest expense.
Compensated Absences
Employees of the Company are entitled to carry over up to five days of earned,
unused vacation to the following year. The Company also pays employees for
earned, unused vacation days upon termination of employment. The Company does
not accrue this liability because it does not believe this liability to be
material.
Restatement and Reclassifications
Certain amounts have been reclassified for comparability with the 1996
presentation.
F-10
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Revenue Recognition
The Company bills its customers in advance; however, revenue is recognized as
cable television services are provided. Receivables are generally collected
within 30 days. Credit risk is managed by disconnecting services to customers
who are delinquent. Other revenues are recognized as services are provided or
equipment is delivered. Revenues obtained from the connection of customers of
the cable television system are less than related direct selling costs;
therefore, such revenues are recognized as received.
NOTE 2 - COMMON STOCK OWNERSHIP AND CONTROL
The 158,896 shares of common stock outstanding at December 31, 1995 and 1996,
are 50% owned by members of the Lenfest Family and affiliated entities and 50%
by LMC Lenfest, Inc., an indirect wholly owned subsidiary of
Tele-Communications, Inc. ("TCI"). All Lenfest Family members have granted
irrevocable proxies to H.F. Lenfest. These proxies expire March 30, 2000.
Pursuant to an agreement among H.F. Lenfest, the Lenfest Family and LMC Lenfest,
Inc. dated December 18, 1991, and the amended and restated Articles of
Incorporation of the Company, Mr. Lenfest has the right to continue as chief
executive officer of the Company until January 1, 2002, and has the right to
designate a majority of the Board of Directors of the Company until the earlier
of January 1, 2002, or Mr. Lenfest's death. During such period, vacancies in
respect of the directors designated by Mr. Lenfest shall be filled by designees
of Mr. Lenfest or, in the event of Mr. Lenfest's death, of The Lenfest
Foundation. Thereafter, the Lenfest Family and LMC Lenfest, Inc. will have the
right to appoint an equal number of members of the Company's Board of Directors.
This right will continue for so long as any member of the Lenfest Family owns
any stock in the Company.
NOTE 3 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------
1994 1995 1996
------------ ------------ ------------
(Dollars in thousands)
Cash paid during the year for:
Interest $ 44,613 $ 55,845 $ 104,330
============ ============ =============
Income taxes $ 121 $ 160 $ -
============ ============ =============
Supplemental Schedules Relating to Acquisitions
Year Ended December 31,
---------------------------------------------------
1994 1995 1996
------------ ------------ -------------
(Dollars in thousands)
Property and equipment $ - $ 4,932 $ 170,085
Deferred franchise costs - 2,124 398,260
Goodwill and other intangible assets - 6,158 32,543
Equity interests in affiliates - - 2,877
Other asset - - 5,867
Minority interest in partnership equity - 3,129 -
Customer prepayments and deposits - (307 ) -
------------ ------------ -------------
- 16,036 609,632
Amount financed - 7,000 -
------------ ------------ -------------
NET CASH PAID $ - $ 9,036 $ 609,632
============ ============ =============
F-11
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 3 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOW - (continued)
Noncash Investing and Financing Transactions
On December 23, 1996, the Company received 18,000,000 shares of voting stock of
Australis Media Limited ("Australis") and 52,238,547 non-voting debentures of
Australis in connection with the termination of a technical services agreement
with Australis and also received 500,000 shares of voting stock for late
repayment of a loan to the Company by Australis. Also on December 23, 1996, the
Company converted 5,000,000 non-voting debentures of Australis into 5,000,000
shares of voting stock.
On October 31, 1996, the Company financed $80,000,000 used to acquire additional
debt and equity securities of Australis (See Note 11).
On September 30, 1996, the Company contributed the right to receive assets of a
cable television system for a partnership interest (See Note 4). Also, in
September 1996, the Company contributed the assets that comprise the business
known as "the Barker" to a newly formed joint venture (See Note 4).
On May 10, 1996, the Company entered into an agreement to guarantee up to
$75,000,000 of a new $125,000,000 Australis bank facility as part of
recapitalization plans pursued by Australis. On May 2, 1996, the Company entered
into a stand-by $75,000,000 senior subordinated credit facility in order to
provide any required funding under this guaranty. As of October 31, 1996, the
guaranty and stand-by facility were terminated.
In February 1996, the Company exchanged the assets of its cable television
systems in the East San Francisco Bay area with a book value of $33,194,000, its
41.67% partnership interest in Bay Cable Advertising with a book value of
$3,545,000 and a fair market value of $10,755,000, and the right to receive
assets of a cable television system located in Fort Collins, CO, which right was
acquired for $54,385,000, less settlement adjustments of $8,799,000 for the
assets of a cable television system serving Wilmington, Delaware and the
surrounding area. The assets of the Wilmington system have been recorded at the
net book value of the cable television system assets exchanged and the market
value of the partnership interest, less the settlement adjustment. A gain of
$7,210,000, which represents the excess of the market value of the partnership
interest over its book value, has been included in the statement of operations.
In 1996, the Company incurred additional capital lease obligations of
$4,635,000.
In 1995, the Company financed a $19,240,000 loan to Australis Media Limited and
$20,000,000 of its additional investment in Garden State Cablevision L.P.
The Company's 1994 investment in Raystay Co. was financed by a promissory note
to Raystay Co. in the amount of $3,000,000 and promissory notes to several
selling shareholders totaling $3,238,000.
In 1994, the Company financed the payment of $90,972,000 of maturing debt,
$1,792,000 of interest and $4,236,000 of loan costs.
In 1994, the Company converted $2,200,000 of convertible promissory notes and
$154,000 of accrued interest into 1,833,555 shares of Video Jukebox Network,
Inc., now known as Box Worldwide, Inc.
During 1994 and 1995, the Company disposed of $2,037,000 and $4,231,000,
respectively, of fully depreciated plant in connection with the rebuild of
certain of its systems. The Company retired $250,000 of fully depreciated
equipment in 1994.
The Company reclassified $777,000 and $10,000 of equipment under capital lease
as property and equipment in 1994 and 1995, respectively, at the conclusion of
the lease obligations.
F-12
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - NEW BUSINESS AND ACQUISITIONS
Cable Systems
On September 30, 1996, the Company through its newly formed subsidiary, Lenfest
Clearview, Inc. ("Clearview") completed the acquisition of a 30% general
partnership interest in a newly formed general partnership, Clearview Partners
(the "Partnership"). The Company contributed $500,000 and its right to receive
the assets of the Gettysburg, PA cable television system (see acquisition from
Sammons Communications, Inc. discussed below) and its right to exchange the
Gettysburg system for the assets of the Stewartstown, PA cable television system
owned by GS Communications, Inc. The Company received a payment of $4.5 million
from GS Communications, Inc. in connection with these transactions. No gain or
loss was recorded on the exchange. Clearview CATV, Inc., an unaffiliated
company, contributed the assets and certain liabilities of its cable television
system located in Maryland and Pennsylvania to the Partnership for a 70% general
partnership interest. The Partnership's systems pass approximately 13,400 homes
and serve approximately 9,650 basic customers. The Company reports its
proportionate share of partnership net income (loss) on the equity method. The
Company's cash contribution was made from available funds.
On April 30, 1996, the Company acquired from Tri-County Cable Television
Company, an affiliate of Time Warner, its Salem, N.J. cable television system
for approximately $16,000,000. The system passes approximately 10,600 homes and
serves approximately 7,700 basic customers. On the same date, the Company
acquired from Shore Cable Company of New Jersey its Ventnor, NJ cable television
system for approximately $11,000,000. The system passes approximately 6,100
homes and serves approximately 5,000 basic customers. For financial reporting
purposes, the Company accounts for the acquisition of these assets under the
purchase method. These acquisitions were funded in part by the existing bank
credit facility at that date.
On February 29, 1996, the Company acquired four cable television systems and
equity interests in three affiliates from Sammons Communications, Inc. for
approximately $531,000,000. The systems, which are located in Bensalem and
Harrisburg, PA and in Vineland and Atlantic City/Pleasantville, N.J., pass
approximately 358,000 homes and service approximately 282,000 basic customers.
The equity interests consist of a 50% partnership interest in Hyperion
Telecommunications of Harrisburg, a 50% partnership interest in Atlantic
Communication Enterprises and a 25% partnership interest in Cable Adcom. For
financial reporting purposes, the Company accounts for the acquisition of these
assets under the purchase method. The acquisition was funded in part by
$420,000,000 borrowed under the Company's bank credit facility existing at that
date, and the remaining proceeds from a public offering of debt securities in
November 1995. The Company paid for a fifth system, located in Gettysburg, PA,
but did not take title to it. The Company managed the Gettysburg system from
February 29, 1996, until, the system was transferred from Sammons
Communications, Inc. to GS Communications, Inc. on September 30, 1996.
In February 1996, the Company exchanged the assets of its cable television
systems in the East San Francisco Bay area with a book value of $33,194,000, its
41.67% partnership interest in Bay Cable Advertising with a book value of
$3,545,000 and a fair market value of $10,755,000, and the right to receive
assets of a cable television system located in Fort Collins, CO, which right was
acquired for $54,385,000, less settlement adjustments of $8,799,000 for the
assets of the Wilmington, Delaware and surrounding area cable television system.
The assets of the Wilmington system have been recorded at the net book value of
the cable television system assets exchanged and the market value of the
partnership interest, less the settlement adjustment. A gain of $7,210,000,
which represents the excess of the market value of the partnership interest over
its book value has been included in the statement of operations. The acquisition
of these cable systems were financed with proceeds from the Company's public
offering of debt in November 1995.
F-13
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - NEW BUSINESS AND ACQUISITIONS - (continued)
On June 29, 1995, the Company, through its subsidiary, Lenfest Raystay Holdings,
Inc., exercised an option to acquire an additional 5,275 shares of Class B
common stock of Raystay Co. for $3,073,000 increasing the Company's ownership to
45%. The Company initially acquired 31.99% of the outstanding stock of Raystay
Co. for $6,238,000 on July 29, 1994. The Company uses the equity method to
account for this investment.
On June 23, 1995, the Company through its newly formed subsidiary, Lenfest South
Jersey Investments, Inc. purchased the remaining 40% minority general
partnership interest in South Jersey Cablevision Associates ("South Jersey") for
$8,838,000. The Company, through its subsidiary, Lenfest Atlantic, Inc. owned a
sixty percent (60%) general partnership interest in South Jersey, and has
managed the South Jersey's operations since its inception on April 2, 1993.
Lenfest Atlantic's original investment was $6,000,000. South Jersey owns and
operates contiguous cable systems serving approximately 21,000 customers in
southern New Jersey. As of June 30, 1996, Lenfest South Jersey Investments, Inc.
was merged into Lenfest Atlantic, Inc., which became the 100% owner of South
Jersey, thereby terminating the partnership.
On January 10, 1995, the Company, through its subsidiary, Lenfest Jersey, Inc.,
acquired a 10.005% general partnership interest in Garden State Cablevision,
L.P. for $29,250,000, increasing its ownership to a total of 50% of the
partnership.
(See Note 7).
The accompanying consolidated financial statements include the results of
operations for these acquisitions since the dates of the acquisitions.
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1994:
1994 1995 1996
------------ ------------ -------------
(Dollars in thousands)
Revenues $ 343,836 $ 378,733 $ 416,897
------------ ------------ -------------
Loss before extraordinary loss $ (53,558) $ (42,249) $ (139,371)
------------ ------------ -------------
Net loss $ (53,558) $ (48,988) $ (141,855)
------------ ------------ -------------
Other
In September 1996, the Company signed a Letter of Intent with Comcast
Corporation to enter into a partnership for the purpose of representing regional
and national cable advertising sales in the Greater Philadelphia market. Under
the arrangement, each partner would own a 50% interest, and Radius would be the
managing partner of the partnership for its first two years. Radius would
continue to provide local cable advertising sales and insertion for the Company
and 17 other cable television system operators. The Company believes that the
Radius/Comcast partnership agreement will be finalized in the second quarter of
1997.
F-14
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - NEW BUSINESS AND ACQUISITIONS - (continued)
On September 30, 1996, the Company, through its subsidiary, Lenfest Advertising,
Inc. d/b/a Radius Communications ("Radius"), acquired the assets of Metrobase
Cable Advertising from a subsidiary of Harron Communications Corp. for
approximately $4,500,000. For financial reporting purposes, the Company accounts
for the acquisition of these assets under the purchase method. This acquisition
was funded from available funds.
On September 11, 1996, StarNet, Inc. ("StarNet"), a wholly owned subsidiary of
the Company, entered into a joint venture with Prevue Networks, Inc. ("Prevue"),
a wholly owned subsidiary of United Video Satellite Group, Inc. (UVSG) to
combine the two companies' pay-per-view promotion services. StarNet contributed
its Barker service to the joint venture and received a 28% partnership interest.
The new joint venture, Sneak Prevue, L.L.C., is based in Tulsa, Oklahoma and is
managed and controlled by UVSG. The Company reports its proportionate share of
net income (loss) on the equity method.
In February 1996, Radius purchased the Philadelphia area assets of Cable AdNet
Partners, a subsidiary of TCI for approximately $1,100,000.
On January 4, 1995, the Company acquired all of the general and limited
partnership interests of OPM Real Estate, L.P., a company that provided
microwave transmission services throughout Delaware, Maryland and Virginia, for
$7,500,000 before deductions for customer prepayments and deposits. The Company
acquired these interests through MicroNet Diversified Investments, Inc. and
MicroNet Delmarva, Inc., newly formed, wholly owned subsidiaries of MicroNet,
Inc., a wholly owned subsidiary of the Company. Immediately upon acquisition,
the name of the limited partnership was changed to MicroNet Delmarva Associates,
L.P. ("Associates"). As an indirect, wholly owned subsidiary of the Company,
Associates is included in the consolidated financial statements of the Company.
This acquisition was financed in part by a new credit facility issued by PNC
Bank to MicroNet, Inc.
The Company, through its wholly owned subsidiary, Lenfest International, Inc.,
is a partner in L-TCI Association (L-TCI). UA-France, Inc. ("UAF"), an indirect
wholly owned subsidiary of TCI, is the only other partner. L-TCI was formed to
acquire 29% of the issued and outstanding shares of stock in Videopole, a French
cable television holding and management company that franchises, builds and
operates cable television systems in medium to smaller communities in France.
The Company invested $4,860,000 to fund its pro-rata share of the L-TCI
acquisition in 1993 and made an additional investment of $1,627,000 in 1994.
L-TCI is obligated to make additional capital contributions pursuant to its
stock subscription agreement. In 1995 and 1996, UAF did not fund its pro-rata
share of the capital contributions. Pursuant to the L-TCI partnership agreement,
the Company is contingently liable for the UAF share of L-TCI's commitment and
invested an aggregate of $9,929,000 to fund the L-TCI contributions. The 1995
and 1996 investments increased the Company's ownership percentage of L-TCI to
approximately 72%. L-TCI's commitment amounts to 49.8 million French francs in
1997, which as of the date of these statements, amounted to $8,750,000. The
Company used the equity method to account for its investment in L-TCI in 1994.
Effective 1995, the accounts of L-TCI are included in the Company's consolidated
financial statements.
F-15
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - NEW BUSINESS AND ACQUISITIONS - (continued)
The Company, through its subsidiary, StarNet Interactive Entertainment, Inc., is
a fifty percent (50%) partner in StarNet/CEA II Partners ("Partners"). Partners
was formed for the sole purpose of jointly holding a substantial equity interest
in Box Worldwide ("Box"), a publicly traded Florida corporation that was
formerly known as Video Jukebox Network, Inc. In 1994, Partners acquired an
additional 1,957,033 shares of Box stock for $1,949,000. At December 31, 1996,
Partners owned a total of 9,013,845 shares of Box common stock which represents
direct ownership by Partners of approximately 37.6% of Box's outstanding shares
of common stock. CEA Investors Partnership II, Ltd. ("Investors"), owns the
remaining fifty percent (50%) of Partners and also controls irrevocable proxies
in its favor on an additional 3,308,810 shares. Investors has agreed that it
will vote the proxy shares in the same manner as Partners, thereby giving
Partners and Investors voting control over approximately 51.3% of Box voting
stock.
In connection with the above stock acquisitions, StarNet entered into
consulting, management and service agreements. Under the management agreement,
which expired December 31, 1994, StarNet was compensated in the amount of
$250,000 plus cost incurred by StarNet in developing technology relating to a
system for digital satellite distribution, headend storage and playback of
discrete video segments. Under the service agreement, StarNet provided analog
uplink service and satellite capacity to Box on Satcom C-4 for the delivery of
Box's programming service known as "The Box" for a fee of $200,000 per month.
Upon conversion of The Box from analog to digital transmission, which occurred
in February 1995, the monthly charge was reduced to $110,000 per month, and
further reduced to $73,500 in April 1995. The service agreement was terminated
in April 1996. As permitted by the service agreement, Box elected to defer the
first eleven months of payments by the issuance of convertible promissory notes
totaling $2,200,000, such notes bearing interest at prime plus one percent (1%).
On December 12, 1994, StarNet converted the convertible promissory notes and
$154,000 of accrued interest into 1,833,555 shares of Box.
The Company's direct and indirect investment in Box via Partners and StarNet
amount to approximately 45.2% of the outstanding stock of Box. The Company
utilizes the equity method to account for its investments in Box.
NOTE 5 - INVENTORIES
The schedule of inventories at December 31, 1995 and 1996 are as follows:
1995 1996
------------ ------------
(Dollars in thousands)
Raw materials $ 3,428 $ 2,285
Finished goods and work-in process 1,504 472
------------ ------------
$ 4,932 $ 2,757
============ ============
At December 31, 1995 and 1996, inventories have been written down to estimated
net realizable value and the accompanying consolidated statements of operations
for 1995 and 1996 include corresponding charges of $1,346,000 and $1,047,000,
respectively, which have been included with direct costs - non-cable.
F-16
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 6 - PROPERTY AND EQUIPMENT
The schedule of property and equipment at December 31, 1995 and 1996 is as
follows:
Estimated
Useful Lives
1995 1996 in Years
-------------- -------------- -----------------
(Dollars in thousands)
Land $ 4,660 $ 5,752 -
Building and improvements 13,574 15,147 10-39
Cable distribution systems 458,520 601,073 5-12
Microwave equipment 30,717 34,413 7
Satellite communications and other
equipment 9,806 12,487 7
Office equipment, furniture
and fixtures 16,457 21,580 4-7
Assets under capital leases 5,132 9,767 5-15
-------------- --------------
538,866 700,219
Accumulated depreciation 327,086 311,190
-------------- --------------
$ 211,780 $ 389,029
============== ==============
NOTE 7 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P.
The Company, through several subsidiaries, owns non-controlling partnership
interests in several general partnerships and corporations. Any subsidiary of
the Company that is a general partner is, as such, liable, as a matter of
partnership law, for all debts of such partnership. Investments and advances in
affiliates accounted for under the equity method amounted to $49,072,000 and
$41,333,000 at December 31, 1995 and 1996, respectively. Net losses recognized
under the equity method for the years ended December 31, 1994, 1995 and 1996
were $7,940,000, $10,682,000 and $17,870,000, respectively. 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 loan 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 in Garden State
Cablevision L.P. (Garden State), a cable company now serving approximately
204,000 customers in southern New Jersey. Under a consulting agreement, the
Company advises Garden State on various operational and financial matters for a
consulting fee that was equal to 1.5% of Garden State's gross revenues. On
January 10, 1995, in connection with the increase in ownership described in Note
4, the consulting fee was changed to 3% of gross revenues. Due to restrictions
contained in Garden State's debt agreements, the payment of a portion of these
fees had been deferred. In December 1996, the Company received a $50 million
distribution from Garden State. The distribution received included $8.1 million
of prior accrued management fees that had been deferred. Garden State also
obtains its cable television programming from Satellite Services, Inc. through
the Company. The programming services are at a rate which is not more than
Garden State could obtain independently. For the years ended December 31, 1994,
1995 and 1996, the total programming obtained through the Company was
approximately $11,150,000, $11,985,000 and $13,659,000, respectively.
F-17
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 7 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P.- (continued)
The Company accounts for its investment in Garden State under the equity method.
Effective January 10, 1995, the Company is allocated a total of 50% of Garden
State's losses. Previously, the Company was allocated 49.5% of losses. In
addition, the Company is required to make up its partner capital deficits upon
the 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 receivable, in excess of
the investments in Garden State in the amount of $15,451,000 and $72,454,000 at
December 31, 1995 and 1996, respectively.
Summarized audited financial information of Garden State, accounted for under
the equity method, at December 31, 1995 and 1996, is as follows:
1995 1996
--------------- ---------------
(Dollars in thousands)
Financial Position
Cash and cash equivalents $ 3,259 $ 4,858
Accounts receivable, net 2,640 2,683
Prepaid expenses 1,104 1,033
Property and equipment, net 72,485 75,920
Other deferred assets, net 113,711 85,204
-------------- --------------
TOTAL ASSETS $ 193,199 $ 169,698
============== ==============
Debt $ 245,000 $ 333,000
Liabilities to the Company 7,801 3,246
Accounts payable and accrued expenses 18,188 13,674
Customer prepayments and deposits 971 947
Other liabilities 964 1,098
Partners' deficit (79,725) (182,267)
-------------- --------------
TOTAL LIABILITIES AND DEFICIT $ 193,199 $ 169,698
============== ==============
1994 1995 1996
-------------- -------------- --------------
(Dollars in thousands)
Results of Operations
Revenues $ 91,288 $ 91,771 $ 100,756
Operating expenses (39,068) (40,595) (43,608)
Depreciation and amortization (47,293) (46,976) (48,524)
-------------- -------------- --------------
OPERATING INCOME 4,927 4,200 8,624
Interest expense (19,132) (19,166) (16,405)
Other expense (3,700) (5,590) (6,045)
-------------- -------------- --------------
NET LOSS $ (17,905) $ (20,556) $ (13,826)
============== ============== ==============
F-18
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 7 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
1994 1995 1996
-------------- -------------- --------------
(Dollars in thousands)
Cash Flows
Cash flows from operating activities $ 30,043 $ 30,452 $ 26,132
Cash flows from investing activities (15,369) (14,794) (22,759)
Cash flows from financing activities (15,279) (17,009) (1,774)
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (605) (1,351) 1,599
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 5,215 4,610 3,259
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 4,610 $ 3,259 $ 4,858
============== ============== ==============
Summarized financial information of affiliates other than Garden State,
accounted for under the equity method, at December 31, 1995 and 1996, is as
follows:
1995 1996
--------------- ---------------
(Dollars in thousands)
Financial Position
Cash and cash equivalents $ 10,206 $ 5,972
Accounts receivable, net 15,458 11,071
Prepaid expenses 1,425 13,071
Property and equipment, net 67,061 172,864
Due from related party (not the Company) 15 533
Deferred tax asset 2,122 8,730
Other assets, net 14,898 44,806
-------------- --------------
TOTAL ASSETS $ 111,185 $ 257,047
============== ==============
Liabilities to the Company $ 2,514 $ 2,375
Accounts payable and accrued expenses 17,339 47,202
Debt 31,193 135,086
Deferred tax liability 9,716 11,943
Payable to related party (not the Company) 66,194 67,136
Other liabilities 3,606 9,195
Deficit (19,377) (15,890)
-------------- --------------
TOTAL LIABILITIES
AND DEFICIT $ 111,185 $ 257,047
============== ==============
F-19
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 7 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
1994 1995 1996
--------------- --------------- ---------------
(Dollars in thousands)
Results of Operations
Revenues $ 99,256 $ 124,171 $ 125,534
Operating expenses (68,382) (84,615) (96,909)
Depreciation and amortization (12,122) (15,876) (25,755)
-------------- -------------- --------------
OPERATING INCOME 18,752 23,680 2,870
Interest expense (7,748) (8,988) (16,964)
Other income (expense) (2,064) (2,548) 1,054
-------------- -------------- --------------
NET INCOME $ 8,940 $ 12,144 $ (13,040)
============== ============== ==============
Cash Flows
Cash flows from operating activities $ 16,384 $ 18,146 $ 6,070
Cash flows from investing activities (14,213) (24,598) (57,436)
Cash flows from financing activities (1,448) 4,289 46,450
-------------- -------------- --------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 723 $ (2,163) $ (4,916)
============== ============== ==============
The following table reflects the carrying value of the Company's investments,
other than Garden State, accounted for under the equity method, including
related receivables, as of December 31, 1995 and 1996:
1995 1996
--------------- ---------------
(Dollars in thousands)
Financial Position
Susquehanna Cable Co. Subsidiaries ("SCC Subs")(Note 8) $ 11,889 $ 10,880
Box Worldwide ("Box") (Note 4) 6,832 4,161
Raystay Co. ("Raystay") (Note 4) 8,556 6,981
Videopole (Note 4) 13,663 9,015
Bay Cable Advertising ("BCA") 4,058 -
MetroNet Communications and GlobeNet ("MetroNet") 2,149 1,674
Hyperion Telecommunications of Harrisburg ("Hyperion") - 1,043
Sneak Prevue, L.L.C. ("Sneak Prevue") (Note 4) - 3,091
Clearview Partners ("Clearview") (Note 4) - 1,825
Cable Adcom ("Adcom") 786 1,481
Others 1,139 1,182
-------------- --------------
$ 49,072 $ 41,333
============== ==============
F-20
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 7 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
CAH, Inc., a subsidiary of the Company, owned a 41.67% general partnership
interest in Bay Area Interconnect d/b/a Bay Cable Advertising ("BCA"), a cable
advertising interconnect serving the San Francisco, California, Area of Dominant
Influence ("ADI") (See Note 4). Lenfest York, Inc., a subsidiary of the Company,
owns a 30% equity interest in five subsidiaries of Susquehanna Cable Co. ("SCC
Subs"). Suburban Cable TV Co. Inc., a wholly owned subsidiary of the Company,
owns a 50% general partnership interest in Cable Adcom. Cable Adcom is a cable
advertising interconnect that serves the Harrisburg, Pennsylvania, ADI. The
Company's indirect, wholly owned subsidiary, LenNet, Inc., owns a 50% general
partnership interest in MetroNet Communications, a company that provides
microwave transmissions of voice and data between two points of presence for its
customers located throughout the United States and a 50% general partnership
interest in GlobeNet, a company that provides international call back telephone
service for its customers located in foreign countries. The Company's wholly
owned subsidiary, Lenfest Telephony, Inc., owns a 50% partnership interest in
Hyperion Telecommunications of Harrisburg. StarNet, Inc., a subsidiary of the
Company, owns a 28% equity interest in Sneak Prevue, L.L.C. Lenfest Clearview,
Inc., a subsidiary of the Company, owns a 30% general partnership interest in
Clearview Partners.
The following table reflects the Company's share of earnings or losses of Garden
State and each of the aforementioned affiliates:
1994 1995 1996
--------------- --------------- ---------------
(Dollars in thousands)
Results of Operations
Garden State $ (7,476) $ (8,527) $ (5,068)
SCC Subs (1,150) (1,263) (1,010)
Box (654) 132 (2,671)
Raystay 132 (886) (1,575)
Videopole (1,518) (2,644) (7,408)
BCA 2,143 1,711 50
MetroNet 213 190 (92)
Hyperion - - (734)
Sneak Prevue - - (326)
Clearview - - (100)
Adcom 400 530 1,070
Other (30) 75 (6)
-------------- -------------- -------------
$ (7,940) $ (10,682) $ (17,870)
============== ============== ==============
F-21
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - OTHER INVESTMENTS
Other investments, accounted for under the cost method, are summarized as
follows:
1995 1996
--------------- ---------------
(Dollars in thousands)
Susquehanna Cable Co., Inc. (a) $ 10,359 $ 10,359
Other 51 51
-------------- --------------
$ 10,410 $ 10,410
============== ==============
(a) The Company has 14.9% ownership of the voting stock of Susquehanna
Cable Co. Inc. and accounts for this investment under the cost method.
Susquehanna is an indirect subsidiary of Susquehanna Pfaltzgraff Co.
and is the parent company of five cable operating subsidiaries, of
which the Company has a direct ownership interest of the voting stock
of 17.75%. The Company's investment in these subsidiaries are
accounted for under the equity method because the Company's direct and
indirect ownership interests in these subsidiaries approximate thirty
percent (30%).
NOTE 9 - GOODWILL
The excess of the purchase price paid over the acquired net assets has been
allocated to goodwill. Accumulated amortization at December 31, 1995 and 1996,
was $22,390,000 and $26,232,000, respectively.
NOTE 10 - DEFERRED FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS
A schedule of deferred franchise costs and other intangible assets and
accumulated amortization at December 31, 1995 and 1996, is as follows:
Accumulated
Amount Amortization Net
------------- ----------------- --------------
(Dollars in thousands)
December 31, 1995
Deferred franchise costs $ 260,321 $ 126,796 $ 133,525
============== ============== ==============
Debt acquisition costs $ 8,104 $ 2,368 $ 5,736
Covenants not to compete 12,646 4,409 8,237
Other deferred assets 9,970 3,424 6,546
-------------- -------------- --------------
$ 30,720 $ 10,201 $ 20,519
============== ============== ==============
December 31, 1996
Deferred franchise costs $ 639,131 $ 144,563 $ 494,568
============== ============== ==============
Debt acquisition costs $ 12,793 $ 3,229 $ 9,564
Covenants not to compete 12,500 5,867 6,633
Other deferred assets 13,403 3,524 9,879
-------------- -------------- --------------
$ 38,696 $ 12,620 $ 26,076
============== ============== ==============
F-22
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 11 - MARKETABLE SECURITIES
In 1994, the Company changed its method of accounting for marketable securities
to conform to the requirements of Financial Accounting Standards Board Statement
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The adoption of SFAS 115 changed the Company's method of accounting
for certain investments from the lower of cost or market to fair market value.
Under this method, certain investments in debt and equity securities are carried
at their fair market value. Any unrealized appreciation or depreciation is
presented as a separate component of stockholders' equity (deficit), net of
deferred taxes. The new method of accounting decreased stockholders' deficit as
of January 1, 1994, by $8,440,000. Prior to 1994, the Company valued its
marketable securities on the lower of cost or market method.
The Company's investment in the securities of Australis Media Limited consists
of 77,982,000 shares of voting stock, 269,427,000 non-voting convertible
debentures and a $71,339,000 senior subordinated discount note due May 15, 2003.
The debentures are classified as equity securities by Australis and the
debentures are unsecured non-voting securities that have interest entitlements
equivalent in both timing and amount to the dividend entitlements attaching to
common stock and will be subordinated to all creditors other than common stock
shareholders upon any liquidation or winding up. The convertible debentures will
not be redeemable for cash but will be convertible into ordinary shares on a
one-for-one basis providing that certain conditions are met. The debentures are
convertible once they have been transferred from the initial subscriber.
The aggregate cost and market values of the securities at December 31, 1995 and
1996 are as follows:
Gross
Aggregate Unrealized Fair
Cost Gain (Loss) Value
-------------- ----------------- --------------
(Dollars in thousands)
December 31, 1995
Australis Media Limited convertible debentures $ 85,534 $ 68,817 $ 154,351
Australis Media Limited common stock 5,438 3,967 9,405
Other marketable equity securities 4,809 1,016 5,825
-------------- -------------- --------------
$ 95,781 $ 73,800 $ 169,581
============== ============== ==============
December 31, 1996
Australis Media Limited convertible debentures $ 10,885 $ (2,505) $ 8,380
Australis Media Limited common stock 33,687 (7,952) 25,735
Australis Media Limited discount notes 41,026 - 41,026
Other marketable equity securities 3,781 908 4,689
-------------- -------------- --------------
$ 89,379 $ (9,549) $ 79,830
============== ============== ==============
In December 1993, the Company acquired 11,000,000 shares of the voting stock and
173,000,000 non-voting debentures of Australis Media Limited ("Australis") for
$90,972,000. As of August 12, 1996, the Australis securities held by the Company
had a market value of approximately $24.0 million. Due to uncertainty regarding
the long-term financing of Australis, the Company determined that the decline in
market value was other than temporary and, accordingly, the Company recognized a
loss of $66.9 million, as of June 30, 1996, resulting from a write-down of the
Australis investment from cost in the accompanying consolidated statement of
operations. The write-down established a new cost basis in the Australis
investment.
F-23
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 11 - MARKETABLE SECURITIES - (continued)
On October 31, 1996, the Company purchased senior subordinated discount notes of
Australis Media Limited, with a face value of $71,339,000, and 71,339 warrants
for $40 million. The discount notes will mature on May 15, 2003, and cash
interest will not accrue on notes prior to May 15, 2000. Commencing November 15,
2000, cash interest on the notes will be payable on May 15, and November 15 each
year at a rate of 14% per annum. Each warrant entitles the Company to purchase
57.721 ordinary shares at A$.20 per share. In connection with the long-term
financing, the Company purchased 43,482,000 shares of voting stock and
49,188,779 non-voting debentures for $40 million. At the time of the
transaction, these securities had a fair value of $13,568,000, and the Company
recognized a loss of $26.4 million in the accompanying statement of operations.
On December 23, 1996, the Company received 18,000,000 shares of voting stock and
52,238,547 non-voting debentures of Australis in connection with the termination
of a technical services agreement with Australis and also received 500,000
shares of voting stock for late repayment of a loan to the Company by Australis.
The securities were recorded at the fair value when received, which was $7.0
million and the income recognized has been offset against the recognized losses
on the decline in market value. On December 23, 1996, the Company converted
5,000,000 non-voting debentures of Australis into 5,000,000 shares of voting
stock.
All of the Company's securities are considered to be available for sale. Net
realized gains (losses) from the sale of marketable securities, in the amount of
$(209,000), $13,517,000 and $342,000 are included in other income (expense) in
1994, 1995 and 1996, respectively. The 1995 net realized gains includes a net
gain of approximately $13,100,0000 from the sale of its QVC, Inc. stock
holdings. The specific identification method is used to determine the cost of
each security at the time of sale.
NOTE 12 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 1995 and 1996:
1995 1996
--------------- ---------------
(Dollars in thousands)
8 3/8% senior notes due November 1, 2005 (a) $ 684,691 $ 685,970
10 1/2% senior subordinated notes due June 15, 2006 (b) - 293,105
Bank credit facility (c) - 230,000
11.30% senior promissory notes due September 1, 2000 (d) 75,000 60,000
11.84% senior promissory notes due May 15, 1998 (e) 31,500 21,000
9.93% senior promissory notes due September 30, 2001 (f) 14,250 13,125
Notes payable to bank due September 30, 2001 (g) 7,000 7,000
-------------- --------------
Notes payable $ 812,441 $ 1,310,200
============== ==============
(a) These notes, which are stated net of an unamortized discount of
$14,030,000 at December 31, 1996, were issued through a public offering in
November 1995. The notes require semi-annual interest payments. The notes
are not redeemable at the option of the Company prior to maturity. Upon a
Change of Control Triggering Event, holders of the notes may require the
Company to purchase all or a portion of the notes at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest. The net proceeds were used to provide funds for the early
extinguishment of debt, to pay off notes payable to banks, and to provide
funding for the exchange of assets with TCI (Note 4) and to provide
partial funding for the cable television systems acquired from Sammons
Communications, Inc. (Note 4).
F-24
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - NOTES PAYABLE - (continued)
(b) These notes, which are stated net of an unamortized discount of $6,895,000
at December 31, 1996, were issued through a private placement in June 1996
and were later registered for a public offering in September 1996. The
notes require semi-annual interest payments. The notes are general
unsecured obligations of the Company subordinate in right of payment to
all present and future senior indebtedness of the Company. The net
proceeds were used, together with $150 million from initial borrowings
under the term loan portion of the new bank credit facility described in
(c) to prepay all amounts outstanding under the Company's old bank credit
facility. The Company incurred extraordinary charges from the write-off
of the unamortized loan costs associated with the old bank credit
facility. These charges increased net loss by $2,484,000, net of income
tax benefit of $1,337,000.
(c) On June 27, 1996, the Company entered into a bank credit facility
consisting of a $150 million term loan and a $300 million revolving
credit facility. Principal payments under the term loan facility and
commitment reductions under the revolving loan facility will commence on
March 31, 1999, with quarterly reductions thereafter until the
termination of the facility on September 30, 2003. Loans outstanding
under the facility bear interest, at the Company's option, at either (i)
the Base Rate plus an applicable margin ranging from 0% to 1 3/8% or (ii)
LIBOR plus an applicable margin ranging from 3/4% to 2 3/8%, in each case
based upon certain levels of leverage ratios. The effective interest
rate at December 31, 1996 was 7.75%.
(d) These notes are payable to a group consisting of several insurance
companies. The notes are payable in annual installments, with the final
payment due September 1, 2000. In connection with the offering described
in (a), the Company and the holders have agreed to amend the terms
thereof, which included increasing the interest rate from 10.15% to
11.30% per annum. Interest is payable quarterly.
(e) These notes are payable to an insurance company and to its assignees. The
notes are payable in annual installments, with the final payment due May
15, 1998. In connection with the offering described in (a), the Company
and the holders have agreed to amend the terms thereof, which included
increasing the interest rate from 10.69% to 11.84% per annum. Interest is
payable quarterly.
(f) This consists of a note payable to an insurance company. The note is
payable in annual installments, with the final payment due September 30,
2001. Interest is at the fixed rate of 9.93% per annum, payable
semi-annually. Additional notes payable to a group consisting of several
insurance companies were redeemed in connection with the offering
described in (a). The Company incurred extraordinary charges associated
with the early extinguishment of these notes. These charges increased the
net loss by $6,739,000, net of income tax benefit of $3,629,000 in 1995.
The above debt agreements place certain financial restrictions on the
Company and its restricted subsidiaries which, among others, require
meeting certain ratios relating to interest coverage and debt coverage.
F-25
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - NOTES PAYABLE - (continued)
(g) These notes are payable by the Company's subsidiary, MicroNet, Inc., to
PNC Bank, pursuant to a credit agreement dated January 3, 1995, and
amended as of October 16, 1996. The agreement provides for a revolving
loan not to exceed $9,500,000 through October 1, 1998, at which time the
outstanding balance converted to a term loan payable in quarterly
installments with the initial payment due October 1, 1998, and maturing on
September 30, 2001. The loan is secured by the real and personal property
of MicroNet. The loan bears interest at MicroNet's option at either the
bank's base prime rate plus 1/2% - 3/4% ("Prime Based Rate") or LIBOR plus
1 1/2% - 1 3/4% ("LIBOR Based Rate"). Interest is payable monthly with
respect to a portion of the loan bearing interest at the Prime Based Rate,
and on the last date of each LIBOR maturity period with respect to
portions of the loan bearing interest at the LIBOR Based Rate, not to
exceed three months. The loan requires mandatory principal prepayments
when certain cash flow targets have been met. The effective interest rate
at December 31, 1996, was 7.156%
Maturities of notes payable, excluding the unamortized discount of $20,925,000
are as follows:
(Dollars in thousands)
Year Ending December 31,
------------------------
1997 $ 27,000
1998 27,800
1999 45,725
2000 46,875
2001 39,975
Thereafter 1,143,750
---------------
$ 1,331,125
===============
The Company has entered into interest rate cap agreements to reduce the impact
of changes in interest rates on its floating rate long-term debt. At December
31, 1996, the Company had outstanding an interest rate cap agreement with a
commercial bank, having a notional principal amount of $25,000,000. This
agreement effectively changes the Company's interest rate exposure on
$25,000,000 of its floating rate debt to a maximum LIBOR rate of eight percent
(8%) plus an applicable level of borrowing margin. The interest rate cap
agreement terminated on February 28, 1997. The Company had two additional
interest rate cap agreements with commercial banks, having notional principal
amounts of $50,000,000 and $25,000,000, that terminated on July 18, 1996 and
November 8, 1996, respectively.
The Company has also entered into interest rate swap agreements. At December 31,
1996, the Company had outstanding two interest rate swap agreements with a
commercial bank, having notional principal amounts of $100,000,000 each. These
agreements effectively change the Company's interest rate on $200,000,000 of its
fixed rate debt to a floating rate based on LIBOR. These interest rates swap
agreements terminate on June 15, 2006. In January 1997, the Company entered into
two interest rate swap agreements with commercial banks, having notional
principal amounts of $50,000,000 each. These agreements terminate on November 1,
2005 and June 15, 2006, respectively.
The Company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate cap agreement. However, the Company does not
anticipate nonperformance by the counterparty.
F-26
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 13 - LEASES
Subsidiaries of the Company have entered into four leases for office and
warehouse space from H.F. Lenfest, a principal stockholder of the Company, and
his wife. The leases are classified as capital leases. At December 31, 1996,
three of the leases provide for an aggregate minimum monthly payment of $49,000.
On each anniversary date of these three leases, the monthly payment will
increase by a minimum of 6%. At December 31, 1996, the minimum monthly payment
of the fourth lease is $24,000. On each anniversary date of the fourth lease,
the minimum monthly payment will increase by $957. For the year ended December
31, 1994, interest expense in the amount of $19,000 in excess of the minimum
monthly payments has been accrued and added to obligations under capital leases.
The Company has entered into various capital lease agreements. The agreements
are for the financing of equipment. The economic substance of the leases is that
the Company is financing the acquisition of the assets through the leases and,
accordingly, they are recorded in the Company's assets and liabilities.
Future minimum lease payments under all capital leases and non-cancelable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1996:
Capital Capital
Leases - Leases -
Principal Unrelated Operating
Stockholder Parties Leases
----------------- ---------------- ---------------
(Dollars in thousands)
Year Ending December 31,
1997 $ 890 $ 1,495 $ 6,802
1998 938 1,292 6,655
1999 988 1,267 5,006
2000 1,040 614 4,178
2001 1,095 364 3,002
Thereafter 4,582 - 732
-------------- -------------- --------------
TOTAL MINIMUM LEASE PAYMENTS 9,533 5,032 $ 26,375
==============
LESS AMOUNT REPRESENTING
INTEREST 4,347 555
-------------- --------------
PRESENT VALUE OF MINIMUM
LEASE PAYMENTS $ 5,186 $ 4,477
============== ==============
Property and equipment under capitalized leases at December 31, 1995 and 1996, are summarized as follows:
1995 1996
--------------- ---------------
(Dollars in thousands)
Buildings - related party $ 5,132 $ 5,132
Equipment - 4,635
-------------- --------------
5,132 9,767
Accumulated depreciation 1,849 2,406
-------------- --------------
$ 3,283 $ 7,361
============== ==============
F-27
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 13 - LEASES - (continued)
Rental expense for all operating leases, principally office and warehouse
facilities, pole rent and satellite transponders, amounted to $7,691,000,
$7,986,000 and $9,613,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. In addition, the Company made total payments to a principal
stockholder for buildings under capitalized leases of $759,000, $801,000 and
$845,000 in 1994, 1995 and 1996, respectively.
In addition to fixed rentals, certain leases require payment of maintenance and
real estate taxes and contain escalation provisions based on future adjustments
in price indices. It is expected that, in the normal course of business,
expiring leases will be renewed or replaced by leases on other properties; thus,
it is anticipated that future minimum operating lease commitments will not be
less than the amount shown for 1997.
On September 20, 1991, the Company entered into a six-year satellite service
agreement with GE American Communications, Inc. requiring monthly payments of
$162,500 to lease a transponder on the Satcom C-4 communications satellite. The
lease payments commenced on March 31, 1993. The Company has an option to renew
the satellite service agreement for a term of six (6) years at $170,000 per
month.
On April 8, 1996, the Company entered into a five year agreement with GE
American Communications, Inc. requiring monthly payments of $190,000 to lease a
transponder on the GE-1 communications satellite.
NOTE 14 - RESEARCH AND DEVELOPMENT
The Company, through its subsidiaries CAM Systems, Inc., StarNet Development,
Inc. and StarNet, Inc., incurred research and development costs of $2,095,000,
$1,037,000 and $2,427,000 for the years ended December 31, 1994,1995 and 1996,
respectively, in connection with the development of new equipment and computer
software. These costs have been included with direct costs - non-cable on the
accompanying consolidated statements of operations.
NOTE 15 - EMPLOYEE HEALTH BENEFIT PLAN
On February 1, 1984, the Company established the Lenfest Group Employee Health
Benefit Plan (a trust), which provides health insurance for the employees of
most of its subsidiaries and affiliates. This trust is organized under Internal
Revenue Code Section 501(c)(9) - Voluntary Employees Beneficiary Association
(VEBA). Benefits are prefunded by contributions from each participating
subsidiary. Insurance expense is recognized as benefits are incurred. The
Company does not provide post retirement benefits to its employees. Therefore,
Statement of Financial Accounting Standards No. 106, Employers' Accounting for
Post Retirement Benefits Other than Pensions, does not have an impact on the
Company's financial statements.
NOTE 16 - 401(k) PLAN
The Company provides a 401(k) profit sharing plan. The Company matches the
entire amount contributed by a participating, eligible employee up to five
percent (5%) of salary. For the years ended December 31, 1994, 1995 and 1996,
the Company matched contributions of $725,000, $877,000 and $1,054,000,
respectively.
F-28
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 17 - 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 reorganization. Deferred income tax expense is measured by the change in
the net deferred income tax asset or liability during the year.
The provisions for income tax benefit (expense) consists of the following
components:
1994 1995 1996
--------------- --------------- ---------------
(Dollars in thousands)
Current
Federal $ - $ - $ (211)
State (40) - (686)
-------------- -------------- --------------
(40) - (897)
Deferred
Federal 4,553 1,327 3,581
State (217) 3,088 775
Benefit of operating loss carryforward 5,700 6,583 10,352
(Increase) decrease in valuation allowance (267) 97 130
-------------- -------------- --------------
9,769 11,095 14,838
-------------- -------------- --------------
$ 9,729 $ 11,095 $ 13,941
============== ============== ==============
The categories of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
Federal State
------------------------------- ------------------------------
1995 1996 1995 1996
------------- -------------- ------------- -------------
(Dollars in thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $ 335 $ 651 $ 95 $ 192
Deferred start-up costs 308 187 - -
Net operating loss carryforward 69,086 79,440 - -
Investments in affiliates, principally
due to differences in taxable income - 2,704 - -
Investments and other tax credits 1,849 1,719 249 249
------------ ------------ ------------- ------------
Gross Deferred Tax Asset 71,578 84,701 344 441
F-29
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 17 - CORPORATE INCOME TAXES - (continued)
Federal State
------------------------------- ------------------------------
1995 1996 1995 1996
------------- -------------- ------------- -------------
(Dollars in thousands)
Deferred Tax Liabilities:
Property and equipment, principally
due to differences in depreciation (12,724) (14,412) (4,002) (4,351)
Investments in affiliates, principally
due to differences in taxable income (2,317) - (1,432) (881)
Property and equipment and intangible
assets arising from purchase
accounting adjustments (15,452) (13,934) (4,850) (4,374)
Unrealized gain on marketable
securities (25,830) (317) - -
------------ ------------ ------------- ------------
Gross Deferred Tax Liability (56,323) (28,663) (10,284) (9,606)
------------ ------------ ------------- ------------
Net deferred tax asset (liability)
before valuation allowance 15,255 56,038 (9,940) (9,165)
Valuation allowance (548) (418) - -
------------ ------------ ------------- ------------
Net Deferred Tax Asset (Liability) $ 14,707 $ 55,620 $ (9,940) $ (9,165)
============ ============ ============= ============
The difference between the net income tax benefit (expense) and the amounts
expected by applying the U.S. Federal income tax rate of 35% to loss before
income taxes is as follows:
1994 1995 1996
--------------- --------------- ---------------
(Dollars in thousands)
Federal income tax benefit at statutory rates $ 10,020 $ 7,907 $ 49,777
Nondeductible amortization of goodwill and
other intangibles (949) (949) (949)
Nondeductible loss on marketable securities - - (30,240)
Net operating losses applied towards
prior years audit adjustments - - (6,306)
Provision for state income taxes, net of
Federal income tax benefit (167) 2,007 58
Other 825 2,130 1,601
-------------- -------------- --------------
$ 9,729 $ 11,095 $ 13,941
============== ============== ==============
F-30
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 17 - CORPORATE INCOME TAXES - (continued)
The Company has a net operating loss carryforward of approximately $227,000,000
on a tax reporting basis. The carryforward will begin to expire in 2001, if not
utilized. The Company has available an alternative minimum tax credit of
$430,000 for indefinite carryover to subsequent years. The Company also has
available unused general business tax credits, after reduction required under
the Tax Reform Act of 1986, of approximately $1,289,000 for carryover to
subsequent years. The general business tax credits expire as follows:
Year Ending December 31,
-------------------------
1997 $ 166,000
1998 252,000
1999 361,000
2000 485,000
2001 5,000
2002-2006 20,000
----------------
$ 1,289,000
================
NOTE 18 - OTHER INCOME (EXPENSE)
The schedules of other income (expense) for the years ended December 31, 1994,
1995 and 1996 are as follows:
Year Ended December 31,
-----------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
(Dollars in thousands)
(Loss) on disposal of assets upon rebuild of
cable systems $ (2,245) $ (282) $ (846)
Gain on sales of property and equipment 371 143 326
Gain (loss) on sales of marketable securities (209) 13,517 342
Gain on disposition of partnership interest (See Note 3) - - 7,210
Interest and dividend income 1,244 2,086 4,751
Minority interest in net loss of South Jersey Cablevision 581 212 -
Minority interest in net loss of L-TCI Associates - 1,135 2,492
Litigation settlements (250) (1,900) -
Ad Valorem tax reassessment 1,656 - -
Miscellaneous income (expense) (225) 77 (343)
-------------- -------------- --------------
$ 923 $ 14,988 $ 13,932
============== ============== ==============
In December 1995, the Company's subsidiary, LenComm, Inc. d/b/a Bay Cablevision,
paid a contractor $1,550,000 under a binding arbitration award in connection
with a breach of contract action.
F-31
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 18 - OTHER INCOME (EXPENSE) - (continued)
In October 1995, the Company's subsidiary, Lenfest West, Inc. d/b/a Cable
Oakland, under an order by the Superior Court of the State of California, County
of Alameda, paid $350,000 into a settlement fund in settlement of a class action
which alleged that the charges imposed by Cable Oakland for delinquent payments
from subscribers were illegally high. Approximately $207,000 of the settlement
was distributed to local non-profit and municipal entities. The remaining
balance was used to defray plaintiffs' attorney fees and other costs.
The Company, through its subsidiary, LenComm, Inc. was reassessed for prior
years' ad valorem taxes, namely, California Business Personal Property and
Possessory Interest taxes. The Company contested the reassessment and, in 1994,
received a reduction in the amount of $1,656,000.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
H.F. Lenfest, on behalf of the Company, and TCI have jointly and severally
guaranteed an aggregate of $67 million obligation of Australis 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 and
with the provision of one or more letters of credit, which letters of credit may
not exceed $33.5 million. The Company is currently in discussions with Australis
and the beneficiaries under the guarantees with regard to providing letters of
credit in the aggregate amount of $33.5 million. If the Company provides such
letters of credit, the Company would be directly obligated for $33.5 million and
may remain indirectly obligated for the balance of the program license payment
obligations. Under the terms of its bank credit facility, however, Mr. Lenfest's
claims for indemnification are limited to $33.5 million, which amount will be
further reduced by the aggregate face amount of any letters of credit issued by
the Company with respect to the guarantees. Effective March 6, 1997, Mr. Lenfest
released the parent Company and its cable operating subsidiaries from their
indemnity obligation until the last to occur of September 30, 1997, and the last
day of any fiscal quarter during which the Company could incur the indemnity
obligation without violating the terms of its bank credit facility. Certain of
the Company's non-cable subsidiaries have agreed to indemnify Mr. Lenfest for
his obligations under the guarantee. In addition, in February 1996, Mr. Lenfest
provided his personal guaranty of an approximately $18.7 million loan to Lenfest
Australia, Inc. by two commercial banks. The guaranty was terminated and the
$18.7 million loan was repaid in October 1996 with the funds received from
Australis.
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 Mr. Lenfest,
involved in the acquisition of a company owned by the Plaintiff, the assets of
which included the right to acquire Satellite License B from the Australian
government. The Plaintiff alleges 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. $568 million as of
December 31, 1996). The Plaintiff also alleges 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. They are
defending this action vigorously.
F-32
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 19 - COMMITMENTS AND CONTINGENCIES - (continued)
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 or the results of operations of the
Company.
The Company is obligated to purchase additional shares of Videopole stock at a
total of 49.8 million French francs (approximately $8,750,000) in 1997. The
Company's future commitment in dollars is subject to changes in the exchange
rate.
The Company's operating cable television subsidiaries hold various franchises
and, in connection therewith, are obligated to pay franchise fees based on
certain gross revenues. For the years ended December 31, 1994 and 1995,
franchise fees in the amount of $8,453,000 and $9,166,000, respectively were
paid. For the year ended December 31, 1996, franchise fees in the amount of
$10,824,000 will be paid.
NOTE 20 - RELATED PARTY TRANSACTIONS
The Company has entered into an agreement whereby Satellite Services, Inc., an
affiliate of TCI, provides certain cable television programming to the Company
and its unconsolidated cable television affiliates. This agreement provides the
Company and its unconsolidated cable television affiliates with programming
services at a rate which is not more than the Company could obtain
independently. For the years ended December 31, 1994, 1995 and 1996, the Company
recorded programming expenses of $33,782,000, $37,685,000 and $57,344,000,
respectively, under this agreement.
The Company, through its subsidiaries, StarNet and SDI, generates revenue from
cross channel tune-in promotional services for cable television and equipment
sales to affiliates of TCI. For the years ended December 31, 1994, 1995 and
1996, the Company has generated revenues of $1,525,000, $3,900,000 and
$4,789,000, respectively, from affiliates of TCI.
Cable AdNet Partners, an affiliate of TCI, paid Suburban approximately
$1,500,000 and $2,637,000 for the years ended December 31, 1994 and 1995,
respectively, for Suburban's share of advertising revenue under certain
advertising agreements. In 1996, Radius purchased the Philadelphia area assets
of Cable AdNet for approximately $1,100,000. (See Note 4).
The Company paid TelVue Corporation, an affiliate of Mr. Lenfest, $174,000,
$190,000 and $325,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, for pay-per-view order placement services.
During 1996, the Company loaned a total of $41,139,000 to Australis. All loans
were repaid with interest.
In January 1995, H.F. Lenfest advanced $10,000,000 to the Company in connection
with the investment by the Company's subsidiary, Lenfest Jersey, Inc., in Garden
State Cablevision, L.P. The advance was repaid on April 20, 1995.
In January 1995, the Company advanced $19,240,000 to Australis. The funds were
used to prepay license fees to U.S. movie studios in connection with and under
certain contracts to supply movies to Australis. The loan bore interest at a
rate equal to the rate charged to the Company its related borrowing under its
bank credit facility dated June 24, 1994. The loan was repaid on April 20, 1995.
F-33
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 20 - RELATED PARTY TRANSACTIONS - (continued)
In 1994, the Company sold the assets of one of its subsidiaries, Stockdale
Productions, Inc., to TCI for $225,000.
Subsidiaries of the Company have entered into various leasing arrangements with
a principal stockholder for office and warehouse facilities. (See Note 13).
NOTE 21 - SEGMENT INFORMATION
The Company operates primarily in the cable television industry. Certain
subsidiaries of the Company operate in other industries which provide microwave
transmission and promotional, cable advertising traffic and billing services.
Cable Other Total
--------------- --------------- ---------------
(Dollars in thousands)
Year Ended December 31, 1994
Revenues $ 212,800 $ 23,395 $ 236,195
============== ============== ==============
Operating income (loss) $ 34,843 $ (8,705) $ 26,138
============== ============== ==============
Depreciation and amortization $ 70,867 $ 4,651 $ 75,518
============== ============== ==============
Capital expenditures, including
acquisitions $ 42,162 $ 6,363 $ 48,525
============== ============== ==============
Identifiable assets $ 440,640 $ 224,706 $ 665,346
============== ============== ==============
Year Ended December 31, 1995
Revenues $ 232,155 $ 34,094 $ 266,249
============== ============== ==============
Operating income (loss) $ 44,199 $ (9,557) $ 34,642
============== ============== ==============
Depreciation and amortization $ 71,054 $ 6,646 $ 77,700
============== ============== ==============
Capital expenditures, including
acquisitions $ 47,658 $ 16,420 $ 64,078
============== ============== ==============
Identifiable assets $ 576,855 $ 274,893 $ 851,748
============== ============== ==============
F-34
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 21 - SEGMENT INFORMATION - (continued)
Cable Other Total
--------------- --------------- ---------------
(Dollars in thousands)
Year Ended December 31, 1996
Revenues $ 354,561 $ 42,757 $ 397,318
============== ============== ==============
Operating income (loss) $ 70,135 $ (14,100) $ 56,035
============== ============== ==============
Depreciation and amortization $ 107,115 $ 8,266 $ 115,381
============== ============== ==============
Capital expenditures, including
acquisitions $ 655,735 $ 14,553 $ 670,288
============== ============== ==============
Identifiable assets $ 1,026,116 $ 204,901 $ 1,231,017
============== ============== ==============
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
presented in accordance with the provisions of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which
it is practicable to estimate that value:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Deposits
on Converters
The carrying amount approximates fair market value because of the short maturity
of those instruments
Marketable Securities
The fair market values of securities are estimated based on quoted market prices
for those investments.
Other Investments
The Company's investment in Susquehanna Cable Co., Inc. is carried at cost. (See
Note 8). There are no quoted market prices for Susquehanna, which is a holding
company that has majority ownership in cable operating subsidiaries in which the
Company also has ownership interests. The Company uses the equity method to
account for its ownership in the subsidiaries. (See Note 7). Because of its
relationship with subsidiaries, the Company does not believe that it is
practicable to estimate fair market value for its investment in Susquehanna.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on current rates at which the
Company could borrow funds with similar remaining maturities.
F-35
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS - (continued)
Interest Rate Swap and Cap Agreements
The fair values of the interest rate swap and cap agreements are estimated based
on mark-to market values.
The estimated fair values of the Company's financial instruments as of December
31, 1996 are as follows:
Carrying Fair
Amount Value
----------------- -----------------
(Dollars in thousands)
Balance Sheet Financial Instruments
Cash and cash equivalents $ 20,633 $ 20,633
Marketable securities 79,830 79,830
Long-term debt (1,310,200) (1,324,125)
Deposits on converters (4,663) (4,663)
Off Balance Sheet Financial Instruments
Interest rate swaps $ - $ 3,147
Interest rate cap - -
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
NOTE 23 - 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 subscribers 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. In addition, new product
tiers consisting of services new to the cable system can be created free of rate
regulation as long as certain conditions are met such as not moving services
from existing tiers to the new tier. 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.
F-36
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 23 - 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 the 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.
NOTE 24 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of December
31:
1995 1996
--------------- ---------------
(Dollars in thousands)
Accounts payable - unrelated parties $ 10,403 $ 9,586
Accounts payable - affiliate 7,205 12,855
Accrued copyright fees 685 1,460
Accrued franchise fees 5,301 7,011
Accrued interest 11,371 14,002
Accrued payroll and fringe benefits 934 1,746
Accrued sales taxes 273 546
Accrued other 4,959 6,026
-------------- --------------
$ 41,131 $ 53,232
============== ==============
NOTE 25 - SUBSEQUENT EVENTS
On January 10, 1997, the Company acquired a cable television system from Cable
TV Fund 14-A, Ltd., an affiliate of Jones Intercable, Inc. for approximately
$84,500,000, subject to certain adjustments. The system, which is located in
Turnersville, New Jersey, passes approximately 47,000 homes and serves
approximately 36,900 basic customers. For financial reporting purposes, the
Company will account for the acquisition of these assets under the purchase
method.
On January 6, 1997, the Company invested an additional 34.2 million French
Francs (approximately $6,600,000) in Videopole.
In January 1997, the Company entered into two interest rate swap agreements with
commercial banks, having notional principal amounts of $50,000,000 each. These
agreements terminate on November 1, 2005 and June 15, 2006, respectively.
Effective March 6, 1997, Mr. Lenfest released the parent Company and its cable
operating subsidiaries from their indemnity obligation of Australis. (See Note
19).
F-37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Garden State Cablevision L.P.:
We have audited the accompanying balance sheets of Garden State Cablevision L.P.
(a Delaware Limited Partnership) as of December 31, 1995 and 1996, and the
related statements of operations, partners' deficit and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Garden State Cablevision L.P.
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
January 31, 1997
F-38
GARDEN STATE CABLEVISION L.P.
-----------------------------
BALANCE SHEETS
--------------
(Amounts in thousands)
December 31,
-----------------------------
ASSETS 1995 1996
------ ---- ----
CURRENT ASSETS
Cash and cash equivalents $ 3,259 $ 4,858
Accounts receivable, less allowance for doubtful
accounts of $609 and $682 2,640 2,683
Other current assets 1,104 916
---------- ---------
Total current assets 7,003 8,457
PREPAID INTEREST -- 117
PROPERTY, PLANT AND EQUIPMENT, net 72,485 75,920
DEFERRED CHARGES, net 113,711 85,204
---------- ---------
$ 193,199 $ 169,698
========== =========
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,303 $ 16,162
Accrued interest 603 500
Subscribers' advance payments and deposits 971 947
---------- ---------
Total current liabilities 12,877 17,609
LONG-TERM DEBT 245,000 333,000
DEFERRED MANAGEMENT AND CONSULTING FEES 14,083 258
OTHER LIABILITIES 964 1,098
PARTNERS' DEFICIT (79,725) (182,267)
---------- ---------
$ 193,199 $ 169,698
========== =========
The accompanying notes are an integral part of these statements.
F-39
GARDEN STATE CABLEVISION L.P.
STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
------------------------------------
1994 1995 1996
---- ---- ----
SERVICE INCOME $ 91,288 $ 91,771 $100,756
COSTS AND EXPENSES
Operating 27,369 28,818 31,633
Selling, general and administrative 11,699 11,777 11,975
Depreciation and amortization 47,293 46,976 48,524
-------- -------- --------
OPERATING INCOME 4,927 4,200 8,624
OTHER EXPENSES
Management, consulting and other fees 3,700 5,590 6,045
Interest expense, net of interest income
of $227, $247, and $296 19,132 19,166 16,405
-------- -------- --------
NET LOSS $(17,905) $(20,556) $(13,826)
======== ======== ========
The accompanying notes are an integral part of these statements.
F-40
GARDEN STATE CABLEVISION L.P.
-----------------------------
STATEMENTS OF PARTNERS' DEFICIT
-------------------------------
(Amounts in thousands)
General Limited
Partners Partners Total
-------- -------- -----
BALANCE, JANUARY 1, 1994 $ 23,340 $ (64,604) $ (41,264)
Net loss (179) (17,726) (17,905)
-------- --------- ---------
BALANCE, DECEMBER 31, 1994 23,161 (82,330) (59,169)
Net loss (206) (20,350) (20,556)
-------- --------- ---------
BALANCE, DECEMBER 31, 1995 22,955 (102,680) (79,725)
Distributions to partners (17,757) (70,959) (88,716)
Net loss (138) (13,688) (13,826)
-------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ 5,060 $(187,327) $(182,267)
======== ========= =========
The accompanying notes are an integral part of these statements.
F-41
GARDEN STATE CABLEVISION L.P.
-----------------------------
STATEMENTS OF CASH FLOWS
------------------------
(Amounts in thousands)
Year Ended December 31,
-------------------------------
1994 1995 1996
---- ---- ----
OPERATING ACTIVITIES
Net loss $ (17,905) $(20,556) $(13,826)
Noncash items included in net loss
Depreciation and amortization 47,293 46,976 48,524
Amortization of prepaid interest 49 295 261
Deferred management and consulting fees 926 2,742 258
Losses on disposal of property, plant and equipment 183 323 118
Increase in other liabilities 123 62 134
Decrease (increase) in accounts receivable and other
current assets (678) (707) 14
Increase in current liabilities 52 1,317 4,732
Payment of deferred management and consulting fees -- -- (14,083)
--------- -------- --------
Net cash provided by operating activities 30,043 30,452 26,132
--------- -------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment (15,298) (14,652) (22,715)
Additions to deferred charges (71) (142) (44)
--------- -------- --------
Net cash used in investing activities (15,369) (14,794) (22,759)
--------- -------- --------
FINANCING ACTIVITIES
Repayments of debt, net (285,402) (17,000) (12,000)
Proceeds from borrowing 275,000 -- 100,000
Distributions to partners -- -- (88,716)
Debt acquisition costs (4,286) (9) (796)
Prepaid interest (591) -- (262)
---------- -------- --------
Net cash used in financing activities (15,279) (17,009) (1,774)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (605) (1,351) 1,599
CASH AND CASH EQUIVALENTS, beginning of year 5,215 4,610 3,259
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 4,610 $ 3,259 $ 4,858
========= ======== ========
The accompanying notes are an integral part of these statements.
F-42
GARDEN STATE CABLEVISION L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND PARTNERS' INTERESTS
------------------------------------
Formation and Business
- ----------------------
Garden State Cablevision L.P. (the "Partnership"), a Delaware limited
partnership, was formed in 1989, to acquire, own, operate and maintain a cable
television system (the "System") servicing Camden, Burlington, Gloucester, Ocean
and Salem counties in New Jersey, which was acquired by the Partnership in 1989.
Through January 10, 1995, the General Partner was Garden State Cablevision, Inc.
("GSC"). In January 1995, the General Partner's interest was purchased by
Comcast Garden State, Inc., a wholly owned subsidiary of Comcast Corporation
("Comcast"), and Lenfest Jersey, Inc., an affiliate of Lenfest Communications,
Inc. ("Lenfest"). The Limited Partners are AWACS Garden State, Inc., an indirect
wholly owned subsidiary of Comcast, and Lenfest Jersey, Inc.
Partners' Capital
- -----------------
Additional capital contributions may be requested from the partners in
proportion to each partner's percentage interest, if the General Partners
determine that the Partnership requires additional capital beyond the
Partnership's borrowing capacity.
Distribution Ratios
- -------------------
Net losses are allocated 1% to the General Partners and 99% to the Limited
Partners.
Partnership Agreement
- ---------------------
Each Limited Partner may at any time, without the approval of any other partner,
transfer all of its Partnership interests to any of its affiliates, subject to
the maintenance of certain criteria. Remaining partners have the right of first
refusal to purchase the interests of a partner seeking to transfer ownership to
a third party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Changes in Accounting Principles
- --------------------------------
The Partnership adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1994. The adoption of this statement did not
have a material effect on the Partnership's financial position or results of
operations.
F-43
-2-
Management's Use of Estimates
- -----------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
- ----------------
Cash equivalents consist of bank commercial paper that is readily convertible to
cash and is recorded at cost plus accrued interest which approximates its market
value.
Prepaid Interest
- ----------------
The Partnership uses interest rate cap agreements to manage its exposure to
fluctuations in interest rates. Premiums associated with these instruments are
amortized to interest expense over their term.
The Partnership does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments. The credit risks
associated with the Partnership's derivative financial instruments are
controlled through the evaluation and monitoring of the creditworthiness of the
counterparties. Although the Partnership may be exposed to losses in the event
of nonperformance by the counterparties, the Partnership does not expect such
losses, if any, to be significant.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives, as follows:
Distribution plant 3 to 12 years
Converters 3 to 4 1/4 years
Subscriber drop installations 8 years
Building 20 years
Other operating facilities 6 to 12 years
Other equipment 3 to 6 years
Improvements that extend asset lives are capitalized; other repair and
maintenance charges are expensed as incurred. The cost and related accumulated
depreciation applicable to assets sold or retired are removed from the accounts
and the gain or loss on disposition is recognized in net loss.
F-44
-3-
Deferred Charges
- ----------------
Deferred charges consist principally of subscriber contracts, franchise
operating rights and fees, debt acquisition costs, organization costs and the
cost of the acquired business in excess of amounts allocated to specific assets
based on their fair values, and are being amortized on a straight-line basis
over their legal or estimated useful lives to a maximum of 40 years (see Note
6).
Valuation of Long-Lived Assets
- ------------------------------
The Partnership continually evaluates whether events or circumstances have
occurred that indicate that the remaining useful lives of its long lived assets
including property, plant and equipment and deferred charges should be revised
or that the remaining balance of such assets may not be recoverable using
objective methodologies. Such methodologies include evaluations based on the
cash flows generated by the underlying assets or other determinants of fair
value.
Income Taxes
- ------------
Income taxes have not been recorded in the accompanying financial statements
because they accrue directly to the partners.
Post Retirement Benefits Other Than Pensions
- --------------------------------------------
The Partnership accrues the estimated cost of retiree benefits earned during the
years the employee provides services. The Partnership continues to fund benefit
costs principally as incurred, with the retiree paying a portion of the costs.
The Partnership's liability for postretirement benefits is included in other
liabilities.
Fair Value of Financial Instruments
- -----------------------------------
The Partnership believes that the carrying value of all financial instruments,
including the aggregate carrying value of long-term debt, is a reasonable
estimate of fair value at December 31, 1995 and 1996. The fair value of
long-term debt was estimated using interest rates that would be currently
available to the Partnership for debt issuances of similar terms and remaining
maturities.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
----------------------------------
The Partnership paid interest of $28.8 million, $19.8 million and $17.1 million
in 1994, 1995 and 1996, respectively.
F-45
-4-
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid expenses and other current assets consist of the following (amounts in
thousands):
December 31,
-------------------
1995 1996
---- ----
Prepaid expenses $ 607 $351
Nontrade receivables 497 565
------ ----
$1,104 $916
====== ====
5. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment consist of the following (amounts in thousands):
December 31,
---------------------
1995 1996
---- ----
Distribution plant $ 90,956 $ 109,039
Converters 33,185 33,402
Subscriber drop installations 19,787 19,786
Land and building 5,433 5,437
Other operating facilities 6,133 6,827
Other equipment 9,491 10,969
-------- ---------
164,985 185,460
Less accumulated depreciation (92,500) (109,540)
-------- ---------
$ 72,485 $ 75,920
======== =========
6. DEFERRED CHARGES
----------------
Deferred charges consist of the following (amounts in thousands):
December 31,
-----------------------
1995 1996
---- ----
Subscriber contracts $ 163,251 $ 148,712
Franchise operating rights and fees 136,186 136,230
Goodwill 9,379 9,379
Debt acquisition costs 4,295 5,092
Organization costs and other 95 95
--------- ---------
313,206 299,508
Less accumulated amortization (199,495) (214,304)
--------- ---------
$ 113,711 $ 85,204
========= =========
F-46
-5-
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
Accounts Payable and Accrued Expenses consist of the following (amounts in
thousands):
December 31,
---------------------
1995 1996
---- ----
Accounts payable $ 650 $ 6,578
Subscriber refund liability (Note 10) 1,925 73
Franchise fees 1,543 1,508
Accrued wages and benefits 771 762
Management fees 796 750
Programming costs 2,787 3,272
Deferred revenues 981 946
Other 1,850 2,273
------- -------
$11,303 $16,162
======= =======
8. LONG-TERM DEBT
--------------
On December 23, 1996, the Partnership amended its $300 million Credit Agreement
(the "1994 Credit Agreement") with various banks to a $360 million facility (the
"Amended Credit Agreement"). At that time, the Partnership borrowed additional
funds under the Amended Credit Agreement for the purpose of making cash
distributions, and the payment of deferred management and consulting fees, to
its partners. Under the terms of the Amended Credit Agreement, scheduled
principal reductions are to commence on March 31, 1999 and extend through June
30, 2005.
Interest rate options under the Amended Credit Agreement are periodically fixed
for defined terms based on one or more of the following rates, as agreed by the
Partnership and the banks:
Base rate (higher of federal funds rate plus 1/2% or prime) plus up to
1/2%. Eurodollar Rate (Eurodollar Rate divided by a percentage equal to 1
minus the reserve requirement in effect) plus 1/2% to 1.625%.
The level of the preceding applicable margin is based upon the leverage ratio,
as defined. The Partnership also pays a commitment fee of 1/4% to 3/8% on the
unused principal which is based upon the leverage ratio, as defined. The loan is
secured by the ownership interests of the General Partners and the Limited
Partners in the assets of the Partnership. As of December 31, 1996, all
borrowings under the Amended Credit Agreement were subject to the Eurodollar
Rate option resulting in an interest rate of 7.10%.
F-47
-6-
The Amended Credit Agreement continues to require 50% of the aggregate principal
amount of the loan outstanding to be hedged against interest rate risk for at
least two years. The Partnership currently maintains interest rate protection on
$120 million of the loan which takes effect when the Base rate or Eurodollar
interest rate, on the outstanding borrowings exceeds 7%. Additional coverage to
the required 50% of outstanding commitments is to required be made within 90
days of the Amended Credit Agreement's effective date. The total cost of the
agreements was capitalized and is being amortized over the two year terms of the
agreements.
The Amended Credit Agreement is subject to certain restrictive covenants, with
which the Partnership was in compliance as of December 31, 1996.
Based upon the outstanding borrowings at December 31, 1996, maturities for the
four years after 1997 are as follows (amounts in thousands):
1998 $ --
1999 9,000
2000 36,000
2001 45,000
9. MANAGEMENT AND CONSULTING FEES
------------------------------
In connection with the Amended and Restated Agreement of Limited Partnership and
Amended Consulting Agreement executed in January 1995, Comcast and Lenfest are
each compensated for their services as consultants at a fee equal to 3% of
service income. Services include providing the Partnership advice and
consultation based on their industry experience, knowledge and trained
personnel. Payment of such fees is subordinated to the prior payment of and
provision for operating expenses and capital requirements and pursuant to
certain financial conditions as defined in the Amended Credit Agreement.
Prior to January 1995, in accordance with the terms of the original Partnership
Agreement, the former General Partner was entitled to receive a management fee
equal to 1% of the System's service income. This fee was payable provided the
Partnership was in compliance with terms of the loan agreement. The Limited
Partners each received an amount equal to 1.25% of the System's service income
as a payment for the use of their original capital contributions. The
Partnership had also entered into a consulting agreement with Comcast and
Lenfest (the "Consultants"), whereby they were each entitled to a fee equal to
1/4% of the System's service income. In accordance with the loan agreement, the
payments to the Limited Partners and Consultants could not have been made unless
certain financial conditions, as defined in the agreements, were met. In 1994,
1995 and 1996, the Partnership paid $2,304,000, $2,728,000 and $19,914,000 to
the Partners under the Amended Consulting Agreement and the original Partnership
Agreement. The payments made in 1996 include the payment of previously deferred
management and consulting fees.
F-48
-7-
10. 1992 CABLE ACT
--------------
On April 1, 1993, the Federal Communications Commission ("FCC") adopted
regulations under the Cable Television Consumer Protection and Competition Act
of 1992 (the "1992 Cable Act") governing the rates charged to subscribers for
basic service and cable programming service, other than programming offered on a
per-channel or per-program basis. The FCC's rate regulations became effective on
September 1, 1993.
In June 1996, the FCC adopted an order approving a negotiated settlement of rate
complaints pending against the Partnership for cable programming service tiers
("CPSTs") which provided approximately $1.6 million in refunds, plus interest,
being given in the form of bill credits, to approximately 198,000 of the
Partnership's cable subscribers. Approximately $1,904,000 of bill credits for
such refunds, including interest, have been issued through December 31, 1996,
with the balance of $73,000 to be issued in 1997. This FCC order resolved the
Partnership's cost-of-service cases for CPSTs covering the period September 1993
through December 1, 1995. As part of the negotiated settlement, the Partnership
agreed to forego certain inflation and external cost adjustments for systems
covered by its cost-of-service filing for CPSTs.
11. RELATED PARTY TRANSACTIONS
--------------------------
The Partnership has entered into an agreement whereby Lenfest, a Limited
Partner, provides certain cable television programming to the Partnership at
rates that are not more than the Partnership could obtain independently. For the
years ended December 31, 1994, 1995 and 1996, the Partnership charged to expense
approximately $14.9 million, $16.4 million, and $18.2 million, respectively,
under this agreement.
During 1996, the Partnership made $88.7 million of cash distributions to its
partners.
A subsidiary of Comcast provides the Partnership with the use of certain
computerized financial systems at a rate that may be more favorable than those
available from unrelated parties. The Partnership expensed $24,000 in 1994, 1995
and 1996 for such services.
In addition, the Partnership has acquired certain vendor services through
cooperative arrangements with affiliates of the Limited Partners. These services
include such items as legal services, insurance and association dues. The
amounts paid for these services are not more than the rates the Partnership
could obtain independently. Payments to affiliates of Lenfest Jersey, Inc.
totaled $94,999, $88,000 and $66,000 in 1994, 1995 and 1996, respectively.
Payments to affiliates of AWACS Garden State, Inc. were $357,000, $234,000 and
$627,000 in 1994, 1995 and 1996, respectively.
F-49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries
We have audited in accordance with generally accepted auditing standards, the
consolidated balance sheets of Lenfest Communications, Inc. and subsidiaries as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the years in the three-year period ended December 31, 1996, and have issued our
report thereon dated March 24, 1997, which is included in the December 31, 1996,
annual report on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement Schedule II. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statement taken as a whole, present
fairly, in all material respects, the information set forth therein.
PRESSMAN CIOCCA SMITH LLP
Hatboro, Pennsylvania
March 24, 1997
F-50
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1994, 1995 and 1996
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
--------------- --------------- --------------- ---------------
(Dollars in thousands)
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET
ACCOUNTS:
Allowance for doubtful accounts
Year ended December 31, 1994 $ 861 $ 3,173 $ 3,206 $ 828
============== ============== ============== ==============
Year ended December 31, 1995 $ 828 $ 3,842 $ 3,566 $ 1,104
============== ============== ============== ==============
Year ended December 31, 1996 $ 1,104 $ 4,671 $ 3,720 $ 2,055
============== ============== ============== ==============
F-51
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Garden State Cablevision L.P.:
We have audited in accordance with generally accepted auditing standards, the
financial statements for Garden State Cablevision L.P. and have issued our
report thereon dated January 31, 1997, which is included in this Form 10-K. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
January 31, 1997
F-52
GARDEN STATE CABLEVISION L.P.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1994, 1995 and 1996
(Dollars in thousands)
Additions
Balance, Charged to
Beginning of Costs and Balance,
Year Expenses Deductions End of Year
------------ ----------- ---------- -----------
For the year ended December 31, 1994:
Allowance for doubtful accounts $ 668 $ 701 $ 727 $ 642
=========== ========= ========== =========
For the year ended December 31, 1995:
Allowance for doubtful accounts $ 642 $ 658 $ 691 $ 609
=========== ========= ========== =========
For the year ended December 31, 1996:
Allowance for doubtful accounts $ 609 $ 733 $ 660 $ 682
=========== ========= ========== =========
F-53
EXHIBIT INDEX
Exhibit
Number Title or Description
- ------- ------------------------
10.42 Letter, dated March 6, 1997, from H. F. Lenfest to the Company
27. Financial Data Schedule