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, 1997
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
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 27, 1998: 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") is principally
engaged in the development and operation of cable television systems primarily
through its subsidiaries which operate under the name of Suburban Cable
("Suburban Cable"). Other subsidiaries hold the Company's investments in other
cable television system operating companies, media entities and companies
providing services to cable television system operating companies.
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, 1997, the Company's Core Cable
Television Operations served approximately 991,800 basic customers and passed
approximately 1,388,900 homes. At December 31, 1997, the Company also held
equity interests in other cable television entities serving approximately
441,300 basic customers, of which approximately 380,000 were in areas near or
contiguous to the Core Cable Television Operations. The Company's attributable
portion in such other cable television entities is approximately 183,000 basic
customers, giving the Company a combined domestic base of approximately
1,174,800 basic customers.
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, 1993 through
December 31, 1997, the Company's Core Cable Television Operations have
experienced an average EBITDA margin of 50.3%.
H. F. (Gerry) Lenfest, President and Chief Executive Officer of the
Company, together with his children, and Tele-Communications, Inc. ("TCI"),
through LMC Lenfest, Inc., 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 the Company in 1974 and has grown the
Company both internally and through acquisitions. The Company 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."
Mr. Lenfest and LMC Lenfest, Inc. 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 are to be filled by designees of Mr. Lenfest or in the event of Mr.
Lenfest's death, of The Lenfest Foundation. Thereafter, the Lenfest Family
("H.F. (Gerry) Lenfest, Marguerite Lenfest, their issue, and The Lenfest
Foundation") 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.
Operating Strategy
Management believes that the Company has significant growth potential in
the continued business of providing analog television programming services, as
well as in the business of providing new services such as Internet access,
digital video and audio programming services, video-on-demand, paging and other
data services. As a base for achieving that growth, the Company has implemented
the following:
o Field Operations: The Company's operations are clustered in
one extended market area, with Field Operations management
divided into four regions of approximate equal size (i.e.,
250,000 customers each). Management of these regions provides
individualized focus on the day-to-day requirements of the
operations, including plant maintenance,
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installations of new customers and service and repair
functions. Across all four regions the Company standardized
scheduling of installations and repairs, the hours of
operation and all related work procedures. The customer,
therefore, sees a consistent and superior level of service,
regardless of the region.
o Customer Management (i.e., Billing) System: In 1997 the
Company effected the conversion to one common Customer
Management System platform (CBIS - Cincinnati Bell Information
Systems) from the previous five separate systems. That
standardized platform now allows fulfillment of work order
scheduling, sales, service and repair and billing inquiries
from any location for the entire cluster. This
state-of-the-art Customer Management System will also be the
platform for support of new products, such as paging and
Internet.
o Customer Service: In May, 1997, the Company opened a Customer
Satisfaction Center ("Call Center") in New Castle County,
Delaware. At that time, the Call Center served as the source
for inbound telephone customer service for one system of
100,000 customers. As planned, the Company proceeded to
migrate the inbound telephone customer service for additional
systems to that Call Center through the balance of the year.
By year end 1997, approximately 55% of the Company's customer
base was supported out of that location. By the end of 1998,
the Company expects the entire customer base to be supported
from that location. The Company intends to use the Call Center
to provide billing, sales and service for cable television and
new products. Among other customer service initiatives, the
Company has implemented same day, evening and weekend
installation and repair appointment options.
o Marketing and Advertising Sales: The concentration of a
significant sized customer base in one cluster affords the
Company enhanced benefits in both marketing and the sale of
advertising. The Company utilizes the local market media
(television, radio and print) to reach a wide audience in an
efficient manner given the match of the Company's coverage
area to the local media market. As the size of the Company's
cluster has grown, there has been no appreciable increase in
costs required to purchase those mass media.
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. Through its acquisitions, 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 the corporate offices of Suburban Cable TV Co. Inc. ("Suburban") 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, 1997, for the Company's owned and operated
and affiliated cable television systems.
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Year Ended December 31,
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1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Owned and Operated
Homes passed
Beginning of period 759,635 870,718 892,549 904,753 1,278,673
Internal growth 48,283 21,831 12,204 26,424 63,129
% Internal growth 5.87% 2.51% 1.37% 2.11% 4.76%
Acquired 62,800 --- --- 347,496 47,085
End of period 870,718 892,549 904,753 1,278,673 1,388,887
Basic customers
Beginning of period 477,130 550,703 577,377 596,366 927,249
Internal growth 31,573 26,674 18,989 24,817 27,609
% Internal growth 6.08% 4.84% 3.29% 2.75% 2.86%
Acquired 42,000 --- --- 306,066 36,900
End of period 550,703 577,377 596,366 927,249(b) 991,758
Affiliated Systems
Homes passed
Beginning of period 491,003 505,521 518,425 538,082 594,068
Internal growth 14,518 12,904 19,657 25,053 13,331
% Internal growth 2.96% 2.55% 3.79% 4.40% 2.24%
Acquired --- --- --- 30,933 ---
End of period 505,521 518,425 538,082 594,068 607,399
Attributable homes passed at
end of period (a) 163,258 185,457 229,390 248,720 254,294
Basic customers
Beginning of period 336,388 353,935 366,041 384,480 431,819
Internal growth 17,547 12,106 18,439 25,686 9,458
% Internal growth 5.22% 3.42% 5.04% 6.32% 2.19%
Acquired --- --- --- 21,653 ---
End of period 353,935 366,041 384,480 431,819 441,277
Attributable basic customers 113,294 130,247 162,338 179,118 182,886
at end of period (a)
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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, 1997, the Company held a 50% equity interest in Garden State
Cablevision L.P., a 30% equity interest in the cable television subsidiaries of Susquehanna
Cable Co., a 45% equity interest in Raystay Co. and a 30% equity interest in Clearview Partners.
See "-- Unrestricted Cable Television Systems." The Company receives no direct customer revenue
from attributable basic customers.
(b) Ending customers for 1996 were restated as a result of the conversion to a
single billing system in 1997 and the resulting conversion to a unified
criteria for calculating customers.
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Technical Overview and Upgrade Strategy
The Company utilizes a combination of coaxial and fiber optic cables to
distribute a wide range of programming and other broadband services to its
customers. As of December 31, 1997, approximately 95% of the Company's cable
television systems had the capacity to carry a minimum of 52 analog channels,
and approximately 28% had the capacity to carry a minimum of 78 analog channels.
The Company has commenced an upgrade of its cable television systems to
increase the channel capacity, improve the system reliability and provide the
capability for carrying enhanced, interactive two-way services such as
video-on-demand and Internet access. The Company recently has revised its plant
upgrade strategy to begin accelerating the wide deployment of fiber optic cable
throughout all of its cable television systems to create segmented service areas
with between 500 and 2,000 homes in each area,
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followed by the activation of two-way return amplifiers in each of the segmented
nodes. This strategy (using the already installed coaxial network
infrastructure) will allow the Company to accelerate delivery of two-way
interactive services. The planned fiber deployment will improve the reliability
of the network by reducing the number of amplification devices. The Company will
continue to target selected areas for upgrade to 750MHz (110 analog channel
capacity), based on local demographics, program carriage requirements and
existing franchise commitments.
The Company's upgrade strategy also includes the introduction of second
generation digital set-top devices, and it has entered into a supplier agreement
for delivery commencing in 1998. These digital set-top devices will have the
capability to receive a minimum of 12 digitally compressed channels of
programming transmitted across one analog channel on the cable network. This 12
to 1 compression ratio will provide the capability to significantly increase the
number of programming services across the existing network by replacing one
current analog service (such as pay-per-view programming) with 12 new channels
of programming. Using digital compression, the Company will be able to increase
capacity to 100 channels, or more, depending on the number of analog channels
utilized on the existing cable network.
Rates And Ancillary Revenue Sources
Lenfest's cable television systems typically offer four levels of
programming services: basic; cable programming service ("CPS"); premium
services; and pay-per-view. As of December 31, 1997, 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
$8.69 to $14.95. The CPS package consisted of satellite-delivered networks such
as ESPN, MTV, CNN, The Discovery Channel and USA Network. The monthly rate for
the CPS package ranged from $11.42 to $19.46. Rates for basic and CPS services
and customer equipment and installation are currently subject to governmental
regulation. See "Legislation and Regulation."
The Company also offers premium services, which include HBO, Cinemax, The
Movie Channel, Showtime, The Disney Channel and STARZ. As of December 31, 1997,
the monthly charge for each of these services, priced individually, ranged from
$8.95 to $11.95. Rates for premium services and pay-per-view services are
currently exempt from governmental regulation. See "Legislation and Regulation."
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, 1997, prices for movies and adult programming ranged from $1.95 to
$6.95. 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.
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. See "Legislation and Regulation."
Programming And Equipment Supply
Through an agreement with Satellite Services, Inc. (a wholly owned
subsidiary of TCI), the Company is able to purchase a majority 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
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independently. Programming is the Company's largest single expense item,
accounting for 24.2% of total operating expense during 1997. 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 a significant amount of 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, 1997, the Company held 350 cable television franchises.
These franchises are all non-exclusive and 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, 1997, franchise fee payments made by the Company have
averaged approximately 3.4% 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 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 good.
Unrestricted Cable Television Systems
In addition to its Core Cable Television Operations, at December 31, 1997,
Lenfest held investments in four cable television system entities. Lenfest holds
a 50% equity interest in Garden State Cablevision L.P. ("Garden State"); a 30%
equity interest in the cable subsidiaries of Susquehanna Cable Co. ("SCC"); a
45% equity interest in Raystay Co. ("Raystay"); and a 30% equity interest in
Clearview Partners ("Clearview"). As of December 31, 1997, these entities
operated cable television systems serving approximately 441,300 basic customers,
of which approximately 380,000 are served by systems which are near or
contiguous to the Company's cluster of cable television systems. As a result of
Lenfest's investment in these companies, the companies participate in Lenfest's
programming purchasing relationship with Satellite Services, Inc. See " --
Programming and Equipment Supply."
Garden State serves the Cherry Hill, New Jersey area. The following table
provides customer data at year end for each of the years in the three-year
period ended December 31, 1997 for Garden State's cable television system.
Year Ended December 31,
---------------------------------------------
1995 1996 1997
------- ------- -------
Homes passed ............................... 292,454 294,390 297,783
Basic customers ............................ 200,086 204,179 208,204
Basic penetration .......................... 68.4% 69.4% 69.9%
SCC has 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, 1997 for SCC's cable television systems.
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Year Ended December 31,
---------------------------------------------
1995 1996 1997
------- ------- -------
Homes passed ............................... 182,465 206,715 211,778
Basic customers ............................ 137,885 159,871 164,186
Basic penetration .......................... 75.6% 77.3% 77.5%
Beginning May 28, 1998, each of Lenfest and Susquehanna Media Co. (the
owner of the balance of the equity interest in SCC and its cable subsidiaries)
may offer to purchase all of the shares of stock of SCC and its cable
subsidiaries owned by the other. If the recipient of the offer rejects the
offer, the recipient is then obligated to purchase all of the shares of stock of
the person who made the offer on the same terms and conditions as were contained
in the initial offer. Lenfest has pledged its stock in SCC and in the SCC cable
subsidiaries as collateral for obligations incurred by Susquehanna Media Co.
Raystay owns and operates cable television systems in Pennsylvania. The
following table provides customer data at year end for each of the years in the
three-year period ended December 31, 1997 for Raystay's cable television
systems.
Year Ended December 31,
--------------------------------------------
1995 1996 1997
------ ------ ------
Homes passed ............................... 63,163 79,029 83,451
Basic customers ............................ 46,509 57,743 59,085
Basic penetration .......................... 73.6% 73.1% 70.8%
Beginning July 30, 1998, upon a change of control which results in the
Company controlling Raystay, the stockholders of Raystay have the right to cause
the Company to purchase their shares, subject to certain conditions. In
addition, effective September 30, 2002 either the Company or the other
stockholders of Raystay may offer to purchase all of the other's shares of
stock. If the recipient of the offer rejects the offer, the recipient is then
obligated to purchase all the shares of stock of the other party(ies) on the
same terms and conditions as were contained in the initial offer.
Clearview owns and operates cable television systems in Pennsylvania and
Maryland. As of December 31, 1997, Clearview had approximately 9,800 basic
customers and passed approximately 14,400 homes.
Unrestricted Non-Cable Investments
Lenfest Advertising, Inc. (d/b/a Radius Communications)
Lenfest Advertising, Inc. purchased the Philadelphia area assets of Cable
AdNet Partners, an indirect subsidiary of TCI in February, 1996. In October
1996, after Lenfest Advertising acquired Metrobase Cable Advertising from Harron
Communications for $4.5 million, it began doing business under the name of
Radius Communications ("Radius").
Effective January 1, 1997, Radius, through its subsidiary, Lenfest
Philadelphia Interconnect, Inc., entered into a partnership with Comcast
Philadelphia Interconnect Partner for the purpose of representing regional and
national cable advertising sales in the Greater Philadelphia market. Under the
agreement, the percentage interests of the partners is determined on the basis
of the number of customers of the partners in the designated market area at the
beginning of the year. For 1997, the Company's partnership interest was 72%. The
partners have equal representation on the Executive Committee, and the Company
will be the managing partner of the partnership for its first two years. At
December 31, 1997, Radius provided local cable advertising sales and insertion
for the Company and sixteen other cable television system operators with
approximately 1.8 million customers, of which approximately 750,000 were
customers of the Company.
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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 cable
system headends. NuStar launched its service in 1989, and as of December 31,
1997 served cable television systems having 23 million customers. In December
1996, StarNet converted its service to Digicipher II delivery on a KU Band
transponder and relaunched the NuStar service as Customized NuStar and Classic
NuStar. Customized NuStar provides individual MSOs 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. ("Prevue") 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. The joint venture
currently serves 33 million cable television customers using both The Barker(R)
and Sneak Prevue delivery systems.
Local Programming
In late 1996, a decision was made to combine the Company's NewsChannel
operations with Suburban Cable's existing local origination channels. In
October, 1997, however, the Company ceased airing the NewsChannel. The Company
currently is evaluating the creation of a new regional programming channel to
provide local news, information and entertainment.
MicroNet, Inc.
As of October 31, 1997, MicroNet, Inc. and MicroNet Delmarva Associates,
LP (collectively, "MicroNet"), each a wholly-owned subsidiary of the Company,
sold substantially all of their assets related to their video, voice and data
transmission businesses, and Suburban, Lenfest Atlantic, Inc. and Lenfest New
Castle County sold certain of their towers. The purchase price was approximately
$70.3 million, subject to adjustments. The Company repaid all of the bank debt
($7.0 million) owed by MicroNet and used approximately $45 million to repay
amounts owed under the Bank Credit Facility (as defined below). The Company used
the balance for working capital purposes.
Effective with the three-month period ended June 30, 1997, MicroNet is
accounted for as discontinued operations. The revenues and expenses of MicroNet
are not included with the consolidated revenues and expenses of the Company, but
are reflected as income (loss) from discontinued operations. The prior period
financial statements included herein have been restated to reflect the
continuing operations of the Company.
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Lenfest International, Inc.
The Company and TCI each are partners in L-TCI Associates, a partnership
which held, as of December 31, 1997, a 29.0% interest in Videopole, a French
cable television company serving rural areas of France and suburbs of Paris. As
of December 31, 1997, Videopole held franchises in areas with nearly 547,000
homes, had built cable television systems passing approximately 317,000 homes,
and served approximately 113,000 customers. Videopole is controlled by Synergie
Developpement et Services which is a wholly owned subsidiary of D' Electricite
De France, the French state-owned electric company.
As of December 31, 1997, the Company's indirect interest in Videopole was
23.2% and TCI's indirect interest was 5.8%.
Lenfest Australia, Inc.
At December 31, 1997, the Company owned securities representing a 13.6%
voting interest and a 41.5% economic interest in Australis Media Limited
("Australis"), a publicly held Australian pay television company. The Company
had acquired its interest in Australis through a series of investments totaling
$131.0 million. In the fourth quarter of 1997, the Company wrote off the
remaining balance of its investment in Australis, approximately $12.0 million.
In December 1997, Australis announced that it was suffering a liquidity
crisis, and shortly thereafter, its stock was de-listed on the Australian Stock
Exchange.
Competition
Cable systems compete to varying degrees with a number of other
communications and entertainment media for customers. These media include, but
are not limited to movie theaters and movie store rentals, Internet service,
sporting events, and the direct reception of broadcast signals by the viewer's
own antenna.
Other services compete directly with cable television by offering similar
video services. Currently, the most significant competition faced by the Company
is in providing service to commercial or multiple dwelling units (MDUs).
Competitors focus on MDUs because they can access a number of customers with one
contract thereby producing economies of scale.
Cable communications systems operate pursuant to franchises granted on a
non-exclusive basis. The 1992 Cable Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits franchising
authorities to operate cable systems. Well-financed businesses from outside the
cable industry (such as public utilities that own certain of the poles to which
cable is attached) may become competitors for franchises or providers of
competing services. See "Legislation and Regulation."
Private satellite master antenna television (SMATV), direct broadcast
systems (DBS), and Multi-channel Multipoint Distribution systems (MMDS) are the
three types of companies that offer direct competitive services. The possibility
of additional hardwire competition from companies like Bell Atlantic, RCN,
Connectiv, or PECO exists, but due to the level of effort required to build and
develop a hardwired video distribution service, the Company estimates any
significant threat from these entities to be several years away.
Cable operators face additional competition from SMATV systems that serve
condominiums, apartment and office complexes and private residential
developments. SMATV systems offer both reception of local television stations
and many of the same satellite-delivered programming services offered by
franchised cable communications systems. SMATV operators often enter into
exclusive agreements with building owners or homeowners' associations. These
services currently cannot offer non-broadcast local programming.
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Cable communications systems also compete with wireless program
distribution services such as MMDS which use low-power microwave frequencies to
transmit video programming over-the-air to subscribers. There are two MMDS
operators which are authorized to provide or are providing broadcast and
satellite programming to subscribers in areas served by the Company's cable
systems, CAI Wireless and Orionvision. Neither uses digital technology and each
offers fewer channels, albeit at a lower price, than are currently available
through Suburban Cable. The customer is required to have an antenna installed on
his house and needs a converter box to translate the signals. CAI Wireless
currently has about 9,500 customers in Suburban Cable's service areas, all
within a 35 mile radius of CAI's tower in Philadelphia. Orionvision currently
has 5,000 customers within a 30 mile radius of its tower in Corbin City, New
Jersey. About 60% of Orionvision's customer base falls within Suburban Cable's
New Jersey franchise areas. Additionally, the FCC has adopted regulations
allocating frequencies in the 28-Ghz band for a new multichannel wireless video
service called Local Multipoint Distribution Service ("LMDS") that is similar to
MMDS. The FCC initiated spectrum auctions for LMDS licenses in February 1998.
Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable systems. These technologies include, among others, DBS
service whereby signals are transmitted by satellite to receiving facilities
located on customer premises. Programming is currently available to individual
households, condominiums, apartment and office complexes through conventional,
medium and high-power satellites. DBS providers can offer more than 100 channels
to their subscribers. Several major companies are offering or are currently
developing nationwide DBS services, including DirecTV, EchoStar Communications
Corporation and ASkyB and Primestar (an affiliate of TCI). DBS systems use video
compression technology to increase the channel capacity of their systems to
provide movies, broadcast stations and other program services comparable to
those of cable systems. Digital satellite service ("DSS") offered by DBS systems
currently has certain advantages over cable systems with respect to programming
capacity and digital quality, as well as certain current disadvantages that
include high up-front customer equipment and installation costs and a lack of
local programming and service. The FCC and Congress are presently considering
proposals to enhance the ability of DBS providers to gain access to additional
programming and to authorize DBS carriers to transmit local signals to local
markets.
DBS offers sports and movie packages to its customers that Suburban Cable
cannot currently offer due to technical and regulatory constraints. Higher DBS
penetrations are achieved in the rural areas where fewer customers can get
connected to cable at a reasonable cost.
DirecTV/USSB is now making concerted efforts to provide service to a
number of Suburban Cable's commercial/bulk accounts. Additionally, Bell Atlantic
has recently signed an agreement with DirecTV to sell DirecTV/USSB services to
residential customers as well as commercial/MDU accounts, in certain of its
operating areas. Bell Atlantic has not yet announced where it will sell
DirecTV/USSB services.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable communications industry or on the
operations of the Company.
Employees
As of December 31, 1997, the Company had 1,646 full-time employees, of
which 175 employees were covered by collective bargaining agreements at three
locations.
As of December 31, 1997, the Company's Core Cable Television Operations
had 1,093 full-time employees, of which 175 employees were covered by collective
bargaining agreements at three locations.
The Company considers its relations with its current employees to be good.
10
Legislation and Regulation
The cable television industry is regulated by the FCC, some states 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 discussion summarizes certain federal, state
and local laws and regulations affecting cable television.
Federal Laws. The 1984 Cable Act, the 1992 Cable Act and the 1996
Telecommunications Act are the principal federal statutes governing the cable
industry. These statutes regulate the cable industry, among other things, with
respect to: (i) cable system rates for both basic and certain non-basic
services; (ii) programming access and exclusivity arrangements; (iii) access to
cable channels by unaffiliated programming services; (iv) leased access terms
and conditions; (v) horizontal and vertical ownership of cable systems; (vi)
consumer protection and customer service requirements; (vii) franchise renewals;
(viii) television broadcast signal mandatory carriage and retransmission
consent; (ix) technical standards; and (x) privacy of customer information.
Federal Regulations. The FCC, the principal federal regulatory agency with
jurisdiction over cable television, has promulgated regulations implementing the
federal statutes.
Rate Regulation. Nearly all cable television systems are subject to local
rate regulation of basic service pursuant to a formula established by the FCC
and enforced by local franchising authorities. Additionally, the FCC reviews
rates for non-basic service tiers (other than per-channel or per-program
services) in response to complaints filed by franchising authorities; prohibits
cable television systems from requiring subscribers to purchase service tiers
above basic service in order to purchase premium service if the system is
technically capable of doing so; and has adopted regulations to establish, on
the basis of actual costs, the price for installation of cable service and
rental of cable equipment.
Regulation of non-basic tier rates is scheduled to terminate on March 31,
1999. Regulation of both basic and non-basic tier cable rates also ceases for
any cable system subject to "effective competition." The 1996 Telecommunications
Act expanded the definition of "effective competition" to include 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.
The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and non-basic 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 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 costs. Cost-based adjustments to these capped
rates can also be made in the event a cable operator adds or deletes channels or
significantly upgrades its system. 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, e.g., services may not be moved from existing
tiers to the new product tier. The rules also require that charges for
cable-related equipment (e.g., converter boxes and remote control devices) and
installation be unbundled from the provision of cable service and based upon
actual costs plus a reasonable profit.
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 non-basic cable services and associated equipment, and refunds can
be required.
Carriage of Broadcast Television Signals. Commercial television broadcast
stations which are "local" to a cable system must elect every three years either
to require the cable system to carry the station, subject to certain exceptions,
or to negotiate for "retransmission consent" to carry the station. Broadcast
stations typically seek monetary compensation or the carriage of additional
programming in return for granting retransmission consent. The next three-year
election between mandatory carriage and retransmission consent for local
commercial television stations will occur on October 1, 1999. Local
non-commercial television stations are also given mandatory carriage rights,
subject to certain exceptions. Unlike commercial stations, noncommercial
stations are not given the option to require negotiation of retransmission
consent. In addition, cable systems must obtain retransmission consent for the
carriage of
11
all "distant" commercial broadcast stations, except for certain "superstations,"
i.e., commercial satellite-delivered independent stations such as WGN.
Deletion of Certain Programming. Cable television systems that serve 1,000
or more customers must delete the simultaneous or non-simultaneous network
programming of a distant station upon the appropriate request of a local
television station holding local exclusive rights to such programming. FCC
regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system.
Public and Leased Access Channels. The 1984 Cable Act permits local
franchising authorities to require 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 requires leased access
rates to be set according to a formula determined by the FCC.
Ownership. The 1996 Telecommunications Act repealed the 1984 Cable Act's
restrictions on local exchange telephone companies ("LECs") from providing video
programming directly to customers within their local exchange telephone service
areas. With certain limited exceptions, a LEC may not acquire more than a 10%
equity interest in an existing cable system operating within the LEC's service
area. The 1996 Telecommunications Act also authorized LECs and others to operate
"open video systems" without obtaining a local cable franchise, although LECs
operating such systems can be required to make payments to local governmental
bodies in lieu of cable franchise fees.
The 1996 Telecommunications Act eliminated the FCC rule prohibiting common
ownership between a cable system and a national broadcast television network,
and 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 SMATV systems having
overlapping service areas, except in limited circumstances. The 1996
Telecommunications 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 system operator.
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. The 1992 Cable Act
makes several changes to the renewal process which could make it easier in some
cases for a franchising authority to deny renewal. In the renewal process, a
franchising authority may seek to impose new and more onerous requirements, such
as upgraded facilities, increased channel capacity or enhanced services,
although the municipality must take into account the cost of meeting such
requirements.
Other FCC Regulations. Additional FCC regulations relate to a cable
system's carriage of local sports programming; privacy of customer information;
equipment compatibility; franchise transfers; franchise fees; closed captioning;
equal employment opportunity; pole attachments; application of the rules
governing political broadcasts; customer service; technical standards; home
wiring and limitations on advertising contained in non-broadcast children's
programming. The 1996 Telecommunications Act changes the formula for pole
attachment fees which could result in substantial increases in payments by cable
operators to utilities for pole attachment rights when services other than cable
services are delivered by cable systems.
12
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 system with respect to over-the-air
television stations.
State and Local Regulation. Because a cable television uses local streets
and rights-of-way, cable television systems are subject to local regulation,
typically imposed through the franchising process, and certain states have also
adopted cable television legislation and regulations. Cable franchises are
nonexclusive, granted for fixed terms and usually terminable if the cable
operator fails to comply with material provisions. Franchises usually call for
the payment of fees (which are limited under the 1984 Cable Act to 5% of the
system's gross revenues from cable service) to the granting authority. The terms
and conditions of cable 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 operate their own multichannel video distribution system without
having to obtain a franchise. 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.
The foregoing does not 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 or the Company 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. In 1997, the Company, through one of its non-cable subsidiaries,
purchased land adjacent to its Oaks, PA office location where it expects to
build a master head-end facility. Management believes that its properties are in
good operating condition and are suitable and adequate for the Company's
business operations.
Item 3. LEGAL PROCEEDINGS.
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
13
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.$467 million as of December 31, 1997). 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.
The trial in this action began on February 2, 1998 and is expected to last
until sometime in the third quarter of 1998. As of the date hereof, Mr. Hadid
and other witnesses testifying on his behalf have not completed their testimony
and cross examination. The Defendants have not presented any part of their case.
While the Company continues to deny all of Mr. Hadid's claims, it cannot predict
the outcome of the trial.
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, 1997.
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 27, 1998, 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, 1995 through December 31, 1997. 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, 1997 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, 1997
included elsewhere in this Form 10-K. The statement of operations data with
respect to the fiscal years ended December 31, 1993 and 1994 have been derived
from audited consolidated financial statements of the Company not included
herein.
14
- - ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands)
Statement of Operations Data* 1993 1994 1995 1996 1997
------------- ------------- ------------- --------------- ---------------
Revenues $ 205,326 $ 226,185 $ 254,225 $ 381,810 $ 447,390
Programming expenses 44,033 49,267 55,322 82,804 93,088
Selling, general & administrative 46,527 50,269 55,262 82,688 105,470
Technical and other 20,167 27,269 34,529 50,449 56,109
Depreciation and amortization 62,089 72,813 74,272 111,277 129,939
-------- --------- -------- ----------- -----------
Operating income 32,510 26,567 34,840 54,592 62,784
Interest expense (35,090) (47,749) (60,909) (107,201) (120,788)
Other income and expense (net) (10,232) (7,072) 4,245 (90,361) (50,070)
-------- --------- -------- ----------- -----------
Loss from continuing operations
before income taxes (12,812) (28,254) (21,824) (142,970) (108,074)
Income tax benefit 2,018 10,174 10,724 14,329 38,740
-------- --------- -------- ----------- -----------
Loss from continuing operations (10,794) (18,080) (11,100) (128,641) (69,334)
Discontinued operations, net of taxes (1,073) (819) (395) 363 33,738
Extraordinary loss, net of taxes --- --- (6,739) (2,484) ---
-------- --------- -------- ----------- -----------
Net loss $ (11,867) $ (18,899) $ (18,234) $ (130,762) $ (35,596)
======== ========= ======== =========== ===========
Balance Sheet Data*
(end of period)
Total assets $ 634,938 $ 664,555 $ 843,110 $ 1,221,788 $ 1,219,720
Total debt 612,392 626,121 810,725 1,312,863 1,295,306
Stockholders' equity (deficit) (56,029) (49,609) (45,192) (233,790) (254,264)
Core Cable Television Operations (Restricted Group)
Financial Ratios and Other
Data (a)
Revenues $ 197,630 $ 212,800 $ 232,155 $ 354,561 $ 413,792
EBITDA (b) (c) 100,476 105,711 115,261 182,905 205,861
EBITDA margin (d) 50.8% 49.7% 49.6% 51.6% 49.7%
Interest expense $ 34,699 $ 47,016 $ 59,966 $ 105,463 $ 120,549
Capital expenditures (e) 41,658 42,162 40,168 51,703 87,510
Total debt 609,159 616,657 807,535 1,309,735 1,293,579
Ratio of total debt to EBITDA 6.06x 5.83x 7.01x 7.16x 6.28x
Monthly revenue per average
basic customer $ 32.05 $ 31.44 $ 32.97 $ 34.25 $ 35.18
Annual EBITDA per average
basic customer 195.51 187.42 196.40 212.00 210.04
Annual capital expenditures per
average basic customer (e) 81.06 74.75 68.44 59.93 89.28
Summary Customer Data
(end of period) (a)
Homes passed 870,718 892,549 904,753 1,278,673 1,388,887
Basic customers 550,703 577,377 596,366 927,249 991,758
Basic Penetration 63.2% 64.7% 65.9% 72.5% 71.4%
15
- - ----------------------
* Prior year data is restated to reflect continuing operations.
(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
facilitate the evaluation of 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 from continuing operations plus the provision for income taxes,
interest expense, depreciation, amortization, any other non-cash items reducing consolidated net income and
cash actually distributed by an unconsolidated affiliate, minus all non-cash items increasing consolidated
net income. EBITDA is presented because it is a widely accepted financial indicator of a company's ability
to incur and service debt. 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 1993-1995
presentation.
(d) EBITDA margin measures EBITDA as a percentage of revenues.
(e) Excludes the purchase price of acquisitions consummated during the period.
- - -------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION
The following table sets forth the consolidated capitalization and cash
and cash equivalents of the Company as of December 31, 1997.
(Dollars in thousands)
Cash and Cash Equivalents $ 15,623
==================
Total Debt
Bank credit facility $ 240,000
11.84% Senior Notes 10,500
11.30% Senior Notes 45,000
9.93% Senior Notes 11,625
8-3/8% Senior Notes, net of discount 687,082
Obligations under capital leases 7,318
10-1/2% Senior Subordinated Notes, net of discount 293,781
------------------
Total debt 1,295,306
------------------
Stockholders' equity (Deficit)
Common stock 2
Additional paid-in capital 50,747
Unrealized gain on marketable securities, net 5,256
Accumulated deficit (310,269)
------------------
Total stockholders' equity (deficit) (254,264)
------------------
Total capitalization $ 1,041,042
==================
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 regulation of certain aspects of the cable
television industry, have affected adversely the Company's ability to increase
or restructure its rates for certain services. These regulations are intended to
limit future rate increases. See "Legislation and Regulation."
16
The Company has generated increases in revenues and EBITDA for each of the
past three fiscal years primarily through acquisitions and, to a lesser extent,
through internal customer growth, increases in monthly revenue per customer and,
growth in advertising and home shopping revenues. As used herein, "EBITDA"
represents consolidated net income from continuing operations plus the provision
for income taxes, interest expense, depreciation, amortization, any other
non-cash items reducing consolidated net income and cash actually distributed by
an unconsolidated affiliate, minus all non-cash items increasing consolidated
net income. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to incur and service debt. 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, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED RESULTS
Revenues for the company increased 17.2% to $447.4 million as compared to
1996, primarily as a result of the Company's Core Cable Television Operations.
The TCI Exchange, the Sammons Acquisition, the Salem Acquisition, the Shore
Acquisition, and the Turnersville Acquisition, which are described in Note 5 to
the financial statements included herein (collectively, the "Acquisitions"),
accounted for approximately $40.2 million or 61.3% of the increase.
Service and Programming Expenses increased 12.0% to $149.2 million for the
year ended December 31, 1997 compared to the prior year. These expenses are
related to technical salaries, general operating, and network programming costs.
The service and programming increase was primarily due to increased costs
associated with the Core Cable Television Operations.
Selling, General, and Administrative Expense increased 27.6% to $105.5
million for the year ended December 31, 1997 compared to the prior year. These
expenses are associated with office salaries, facility, and marketing costs.
This increase was primarily due to administrative expenses associated with the
Core Cable Television Operations.
Depreciation and Amortization Expense increased 16.8% to $129.9 million
for the year ended December 31, 1997 compared to the prior year. This increase
was primarily due to the Acquisitions and additional capital expenditures
associated with the Core Cable Television Operations.
EBITDA increased 15.2% to $196.2 million for the year ended December 31,
1997 compared to the prior year. The increase was primarily due to the Core
Cable Television Operations. The EBITDA margin decreased to 43.9% in 1997
compared to 44.6% for 1996. This decrease was primarily caused by one time costs
associated with the consolidation effort related to the Core Cable Television
Operations.
Interest Expense increased 12.7% to $120.8 million for the year ended
December 31, 1997 compared to the prior year. The increase was primarily due to
higher average outstanding indebtedness related to the Acquisitions.
Loss from continuing operations before income tax decreased 24.4% to
$108.1 million. The decrease was attributable to a loss associated with the
write-down of the Company's investment in Australis. The 1997 write-down of the
Company's investment in Australis was $44.6 million compared to an $86.4 million
write-down of the investment in the prior year.
Core Cable Television Operations
Revenues increased 16.7% to $413.8 million for the year ended December 31,
1997 compared to the prior year. Revenues for basic and CPS tiers and customer
equipment and installation, ("regulated services") increased 24.3 % or $60.4
million compared to the prior year. This increase was primarily
17
attributable to the realization of the full effect of the Acquisitions, strong
internal customer growth of approximately 2.9%, and rate increases occurring
predominately in the second and fourth quarters. Non-regulated service revenue
decreased 7.1% or $6.0 million for the year ended December 31, 1997 compared to
the prior year. This decrease was primarily as a result of the regional sports
network, Prism, ceasing operations on September 30, 1997. On October 1, 1997,
the Company added the new regional sports network, Comcast SportsNet to the
regulated CPS tier. Advertising, home shopping, and non-recurring revenue
increased 22.3% or $4.8 million for the year ended December 31, 1997 compared to
the prior year. This increase was primarily attributable to the Acquisitions and
internal customer growth.
Service and Programming Expenses increased 13.2% to $126.9 million for the
year ended December 31, 1997 compared to the prior year. These expenses are
related to technical salaries, general operating costs, and programming costs.
The technical service increase was primarily due to increased costs associated
with the consolidation efforts of the Company which included integrating the
Acquisitions. The programming expense increase was primarily due to the
Acquisitions and increased customer costs associated with the basic and CPS tier
services.
Selling, General and Administrative Expense increased 32.5% to $86.4
million for the year ended December 31, 1997 compared to the prior year. These
expenses are associated with office salaries, facility, and marketing costs.
This increase was primarily due to the Acquisitions and expenses associated with
the consolidation efforts of the Company which included migrating customer
service to the new Call Center.
Depreciation and Amortization Expense increased 16.7% to $125.0 million
for the year ended December 31, 1997 compared to the prior year. This increase
was primarily due to the Acquisitions as well as additional capital
expenditures.
EBITDA increased 12.6% to $205.9 million for the year ended December 31,
1997 compared to the prior year. The increase was primarily associated with the
Acquisitions. The EBITDA margin decreased to 49.7% in 1997 compared to 51.6% for
1996. This decrease was primarily caused by one-time costs associated with the
consolidation efforts of the Company.
Unrestricted Subsidiaries
The largest of the Company's Unrestricted Subsidiaries in 1997 were Radius
Communications and StarNet.
Lenfest Advertising, Inc. (d/b/a Radius Communications)
- - -------------------------------------------------------
Revenues, prior to payment of affiliate fees, increased 70.2% to $25.9
million as compared to 1996, primarily as a result of the full realization of
the MetroBase Advertising acquisition in September 1996. Affiliate fees
increased 68.3% to $11.8 million, of which $4.8 million was paid to the Company.
Affiliate fees paid to the Company are eliminated in consolidation.
Operating Expenses increased proportionately to the increase in
revenues for the year ended December 31, 1997, due to the expansion of the
combined sales forces of Cable AdNet and MetroBase advertising.
Depreciation and Amortization Expense increased by 83.3% to $1.9 million
as compared to 1996 as a result of the purchasing of Digital Insertion equipment
used in daily operations.
Operating income decreased 28.6% to $0.5 million for the year ended
December 31, 1997, compared to $0.7 million in the prior year.
StarNet, Inc.
- - -------------
Revenues decreased by 38.1% to $5.0 million for the year ended December
31, 1997, primarily due to the elimination of The Barker(R) and Promoter
services.
Direct expenses decreased 36.3% to $6.0 million as compared to 1996 due
primarily to the reduction of operational expenses eliminated with the
termination of The Barker(R) and Promoter services.
Depreciation and Amortization Expense decreased by 23.7% to $1.2 million
as compared to 1996 as a result of assets related to The Barker(R) being
transferred to Sneak Prevue, LLC, a partnership between StarNet, Inc. and
Prevue.
Operating loss decreased by 23.8% to $2.1 million in 1997 compared to $2.8
million in 1996.
18
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
CONSOLIDATED RESULTS
Revenues for the company increased 50.2% to $381.8 million for the year
ended December 31, 1996 as compared to 1995, primarily as a result of the
Company's Core Cable Television Operations. The Acquisitions accounted for
approximately $103.9 million or 81.4% of the increase.
Service and Programming Expenses increased 48.3% to $133.3 million for the
year ended December 31, 1996 compared to the prior year. These expenses are
related to technical salaries, general operating and programming costs. The
service and programming increase was primarily due to increased costs associated
with the Acquisitions.
Selling, General and Administrative Expense increased 49.6% to $82.7
million for the year ended December 31, 1996 compared to the prior year. These
expenses are associated with customer service, office, and marketing. This
increase was primarily due to selling and administrative expenses associated
with the Acquisitions.
Depreciation and Amortization Expense increased 49.8% to $111.3 million
for the year ended December 31, 1996 compared to the prior year. This increase
was primarily due to the Acquisitions.
EBITDA increased 54.0% to $170.3 million for the year ended December 31,
1996 compared to the prior year. The increase was primarily due to the
Acquisitions. The EBITDA margin increased to 44.6% in 1996 compared to 43.5% for
1995. This increase was primarily a result of an increase in EBITDA for Core
Cable Television Operations.
Interest Expense increased 76.0% to $107.2 million for the year ended
December 31, 1996 compared to the prior year. The increase was primarily due to
higher average outstanding indebtedness related to the Acquisitions.
Loss from continuing operations before income tax increased 555.1% to
$143.0 million. The increase was attributable to a loss associated with the
write-down of the Company's investment in Australis.
Core Cable Television Operations
Revenues increased 52.7% to $354.6 million for the year ended December 31,
1996 compared to the prior year. Revenues for regulated services increased 56.3
% or $89.6 million compared to the prior year. This increase was primarily
attributable to the Acquisitions, internal customer growth of approximately
2.8%, and rate increases occurring predominately in the second and fourth
quarters. Non-regulated service revenue increased 43.9% or $25.8 million for the
year ended December 31, 1996 compared to the prior year. This increase was
primarily as a result of the Acquisitions. Advertising, home shopping and
non-recurring revenue increased 49.4% or $7.1 million compared to the prior
year. This increase was primarily attributable to the Acquisitions.
Service and Programming Expenses increased 57.9% to $112.1 million for the
year ended December 31, 1996 compared to the prior year. These expenses are
related to technical salaries, general operating, and programming costs. The
technical service increase was primarily associated the Acquisitions. The
programming expense increase was primarily due to the Acquisitions and increased
customer costs associated with the basic and CPS tier services.
Selling, General and Administrative Expense increased 37.6% to $65.2
million for the year ended December 31, 1996 compared to the prior year. These
expenses are associated with office salaries, facility, and marketing costs.
This increase was primarily associated with the Acquisitions.
19
Depreciation and Amortization Expense increased 50.8% to $107.1 million
for the year ended December 31, 1997 compared to the prior year. This increase
was primarily due to the Acquisitions as well as increased capital expenditures.
EBITDA increased 58.7% to $182.9 million for the year ended December 31,
1996 compared to the prior year. The increase was primarily associated with the
Acquisitions. The EBITDA margin increased to 51.6% in 1996 compared to 49.6% for
1995. This increase was primarily caused by cash distributions made to the
Company by certain Unrestricted Subsidiaries and affiliates.
Unrestricted Subsidiaries
Lenfest Advertising, Inc. (d/b/a Radius Communications)
- - -------------------------------------------------------
Revenues, prior to payment of affiliate fees, were $15.2 million.
Affiliate fees were $7.0 million, of which $4.3 million was paid to the Company.
Affiliate fees paid to the Company are eliminated in consolidation.
Operating Expenses, including affiliate fees, totaled $13.8 million.
Operating Income was $0.7 million.
Radius, which began operations in 1996 in connection with the purchase of
certain advertising assets, had no revenue or expenses in 1995.
StarNet, Inc.
- - -------------
Revenues decreased 8.8% to $8.1 million in 1996 as compared to 1995, the
net result of the elimination of The Barker(R) and Promoter services in
November of 1996.
Direct expenses decreased 12.4% to $9.4 million due primarily to the
reduction of operational expenses eliminated with the termination of
The Barker(R) and Promoter services.
Depreciation and Amortization Expense increased 11.0% to $1.5 million for
the year ended December 31, 1996, primarily as a result of purchasing assets
related to The Barker(R).
Operating loss was $2.8 million for the year ended December 31, 1996, as
compared to $3.4 million for the prior year.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the "FASB") has recently issued
its Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company is in the process of
determining the preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
The FASB has also recently issued its SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ( "SFAS No. 131"). SFAS No.
131 established standards for the way that public business enterprises report
information about operating segments in interim financial reports issued to
stockholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS No. 131 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
The Company's businesses require cash for operations, debt service,
capital expenditures and acquisitions. To date, cash requirements have been
funded by cash flow from operations and borrowings.
Financing Activities. At December 31, 1997, the Company had aggregate
total indebtedness of
20
approximately $1,295.3 million. The Company's senior indebtedness of
approximately $1,001.5 million consisted of: (i) three debt obligations in the
amount of approximately $45.0 million, $10.5 million and $11.6 million
(collectively, the "Private Placement Notes"); (ii) $687.1 million of 8-3/8%
Notes; (iii) $240 million under a bank credit facility dated as of June 27, 1996
(the "Bank Credit Facility"); and (iv) obligations under capital leases of
approximately $7.3 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, 1997, the term loan was fully drawn.
At December 31, 1997, the only outstanding senior subordinated
indebtedness was the Company's Subordinated Notes which were issued on June 27,
1996 pursuant to a private offering to certain institutional and other
accredited investors and subsequently exchanged in a registered exchange offer
for publicly traded 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.
On February 5, 1998, the Company issued $150 million of 7-5/8% Senior
Notes due 2008 and $150 million of 8-1/4% Senior Subordinated Notes due 2008.
The proceeds of this offering were used to repay the Private Placement Notes,
pay off and cancel the Company's bank term loan facility and to pay down the
revolving credit facility. As of March 27, 1998, the Company's revolving credit
facility had no outstanding borrowings.
The Bank Credit Facility contains provisions which limit 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 December 31, 1997 through December 30, 1999 in excess of
5.00:1 and 4.50:1 commencing on December 31, 1999 and thereafter; and (ii) a
Total Debt Leverage Ratio in excess of 6.50:1 at December 31, 1997, and
declining to 6.00:1 commencing on December 31, 1998 and thereafter. The Company
expects to refinance the Bank Credit Facility in 1998.
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 Company's borrowings. There are no restrictions relating to the payment to
the Company of dividends, advances or other payments by any of the Company's
subsidiaries.
Cash flow generated from continuing operations, excluding changes in
operating assets and liabilities that result from timing issues and considering
only adjustments for non-cash charges, was approximately $89.1 million for the
year ended December 31, 1997 compared to approximately $62.2 million for the
year ended December 31, 1996. In 1997, the Company was required to make interest
payments of approximately $120.6 million on outstanding debt obligations,
whereas in 1996, the Company was required under its then existing debt
obligations to make interest payments of approximately $103.8 million. This
increase was primarily attributable to increased debt incurred by the Company in
connection with the Acquisitions.
Future minimum lease payments under all capital leases and non-cancelable
operating leases for each of the years 1998 through 2001 are $5.9 million (of
which $680,000 is payable to a principal stockholder), $5.9 million (of which
$714,000 is payable to a principal stockholder), $5.5 million (of which $750,000
is payable to a principal stockholder) and $3.8 million (of which $788,000 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 2012.
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.
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. At December 31, 1997, the amount
subject to the guarantee under the license agreements was approximately $47.5
million.
21
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. Effective March 6, 1997, as
subsequently amended, Mr. Lenfest released the parent Company and its cable
operating subsidiaries from their indemnity obligation until the last to occur
of January 1, 1999 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.
Capital Expenditures. It is anticipated that during 1998, the Company will
spend at least $80.0 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 1998 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 and whether a particular cable television system has sufficient
capacity to handle new product offerings. The Company, however, anticipates that
capital expenditures for years subsequent to 1998 will continue to be
significant.
Resources. 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 1998. 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.
Year 2000 Issue. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Certain of the Company's computer programs that have date-sensitive software may
recognize the date using "00" as the year 1900 rather than the year 2000 (the
"Year 2000 Issue"). If this situation occurs, the potential exists for computer
system failure or miscalculations by computer programs, which could cause
disruption of operations.
The Company is in the process of identifying the computer systems that
will require modification or replacement so that they will properly utilize
dates beyond December 31, 1999. The Company has initiated communications with
all of its significant software suppliers to determine their plans for
remediating the Year 2000 Issue in their software which the Company uses or
relies upon. The Company's estimate to complete the remediation plan includes
the estimated time associated with mitigating the Year 2000 Issue for third
party software. However, there can be no guarantee that the systems of other
companies on which the Company relies will be converted on a timely basis, or
that a failure to convert by another company would not have material adverse
effect on the Company.
The Company continues to use both internal and external resources to
reprogram or replace software for Year 2000 Issue modifications. The costs
directly attributable to the Year 2000 Issue are not expected to have a material
effect on the Company's financial position, results of operation or cash flows.
The costs of the project and the date on which the Company plans to
complete the Year 2000 Issue modifications and replacements are based on
management's best estimates, which were derived using assumptions of future
events, including the continued availability of resources and the reliability of
third party modification plans. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
plans.
22
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, 1995 and ended December 31, 1997,
there have been no disagreements with any independent accountant engaged as the
principal accountant to audit the Company's financial statements nor has any
such person resigned, declined to stand for the reelection or been dismissed.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
Directors And Executive Officers
The directors and executive officers of the Company are as set forth
below:
Name Age Position
---- --- --------
H. F. Lenfest ................... 67 President, CEO and Director
H. Chase Lenfest ................ 34 Director
Brook J. Lenfest ................ 29 Director
John C. Malone .................. 57 Director
William R. Fitzgerald ........... 40 Director
Harry F. Brooks ................. 60 Executive Vice President, Assistant Secretary
Marguerite B. Lenfest ........... 64 Treasurer
Samuel W. Morris, Jr. ........... 54 Vice President - General Counsel and Secretary
Maryann V. Bryla ................ 32 Vice President - Finance, Assistant Secretary
Donald L. Heller ................ 52 Vice President
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
Services, Inc. and TeleSTAR Marketing, Inc. ("TeleSTAR"). 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.
H. Chase Lenfest has served as a Director of the Company since December
1997 and is Director of Local Sales of Lenfest Programming Services, Inc. From
January 1996 to January 1997, he was the Regional Photo Classified Manager of
Lenfest Programming Services, Inc. He was employed by TelVue Corporation from
February 1994 until January 1996. Prior to 1994, he was a stockbroker with Wheat
First Butcher & Singer. He is the son of H. F. and Marguerite B. Lenfest.
Brook J. Lenfest has served as a Director of the Company since December
1997 and is Vice President and Director of Operations for the StarNet, Inc. He
has been an officer of StarNet, Inc. since January 1995. Prior to assuming his
current position, he was Vice President-Business Development,
23
Director of Communications and Product Manager for StarNet, Inc. From 1993 to
1994, he was Marketing Manager for the Company's South Jersey Cablevision (now
Lenfest Atlantic, Inc.) subsidiary. Prior to that he held various positions at
Garden State Cablevision. He is the son of H. F. and Marguerite B. Lenfest.
John C. Malone has served as a director of the Company since January 1982
other than for a brief period in 1997. Dr. Malone has served as the Chief
Executive Officer of TCI since January 1994, and as Chairman of the Board of TCI
since November 1996. Dr. Malone served as President of TCI from January 1994 to
March 1997, as Chief Executive Officer of TCI Communications, Inc., a subsidiary
of TCI ("TCIC"), from March 1992 to October 1994 and as President of TCIC from
1973 to October 1994. Dr. Malone is also a director of TCI, TCIC,
Tele-Communications International, Inc., TCI Pacific Communications, Inc., TCI
Satellite Entertainment, Inc., BET Holdings, Inc., The At Home Corporation and
The Bank of New York.
William R. Fitzgerald has served as a Director of the Company since
January 30, 1998. Mr. Fitzgerald serves as Executive Vice President of Corporate
Development and Partnership Relations for TCI. Mr. Fitzgerald joined TCI
Communications, Inc. in March of 1996. Prior to joining TCI, he was a Senior
Vice President and Partner with Daniels & Associates. Before joining Daniels &
Associates, Mr. Fitzgerald was a Vice President at The First National Bank of
Chicago.
Harry F. Brooks is Executive Vice President and 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.
Marguerite B. Lenfest has served as 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 of the
Company since November 1993 and Secretary since December 17, 1997. 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 a director of Australis Media Ltd. since January 1998.
Maryann V. Bryla has been Vice President, Finance of the Company since
March 1997 and Assistant Secretary since January 1998. 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 the Telecommunication and Media Lending
Division of PNC Bank, N.A. Prior to that, she was an Assistant Treasurer and
Manager in the North America Corporate Finance Syndications Division at The
Chase Manhattan Bank. Ms. Bryla is also Assistant Secretary of Lenfest
Clearview, Inc. and StarNet, Inc. and Treasurer of Suburban.
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 provided movies and
professional sports. Mr. Heller is also Vice President of Lenfest International,
Inc. and Lenfest Australia, Inc. He is currently a director of TelVue
Corporation and Australis Media Ltd.
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,
24
and a Vice President of Suburban from 1989 to December 31, 1995. She has been
Assistant Secretary of the Company since January 1998. She is primarily
responsible for marketing, programming, customer service, training and public
relations.
Robert M. 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 has been Assistant Secretary of the Company
since January 1998. 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, 1995, 1996 and 1997
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 1997 $ 749,996 $ --- $ 255,022(a) (b)
President and CEO 1996 1,000,000 --- 268,135(a) (b)
1995 500,000 750,000 293,218(a) (b)
Samuel W. Morris, Jr. 1997 $ 262,496 $ 25,000 $ 8,000(a)
Vice President and 1996 250,000 30,000 7,500(a)
General Counsel 1995 200,000 100,000 7,500(a)
Robert Lawrence 1997 $ 206,596 $ 20,000 $ 8,000(a)
Executive Vice President 1996 190,000 --- 7,500(a)
Suburban 1995 115,000 15,500 5,750(a)
Debra A. Krzywicki 1997 $ 189,404 $ --- $ 8,000(a)
Executive Vice President 1996 170,000 --- 7,500(a)
Suburban 1995 105,000 --- 5,250(a)
Harry F. Brooks 1997 $ 157,500 $ 40,000 $ 8,000(a)
Executive Vice President 1996 150,000 --- 7,500(a)
1995 135,000 --- 6,750(a)
- - ----------------
(a) Matching contributions under the Company's 401(k) Plan for the individuals in years noted. The contribution
for Mr. Lenfest for the years 1997, 1996 and 1995 were $8,000, $7,500 and $7,500, respectively.
(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 1997,
1996 and 1995 pursuant to these arrangements were $346,043, $346,043 and $325,471, 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 $247,022,
$260,635 and $232,985 in 1997, 1996 and 1995, 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.
- - --------------------------------------------------------------------------------------------------------------------
25
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, 1997, 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)(g) 79,448 50.0%
John C. Malone, Director (e)(f) 79,448 50.0%
Brook J. Lenfest (a)(c)(d)(g) 14,862 9.4%
H. Chase Lenfest (a)(c)(d)(g) 14,862 9.4%
Diane A. Lenfest (a)(c)(g) 14,862 9.4%
LMC Lenfest, Inc. (c)(f)(h) 79,448 50.0%
(an indirect wholly owned subsidiary of TCI)
All officers and directors as a 158,896 100.0%
group (10 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 Notes (d) and (g) below.
(c) H. F. Lenfest and LMC Lenfest, Inc. 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 Shareholders") 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 Shareholders 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
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, 1997, the Company incurred
programming expenses under its agreement with SSI of approximately $62.9
million.
Garden State obtains its cable television programming from SSI through the
Company. The programming services are at a rate which is not more than Garden
State could obtain independently. For the year ended December 31, 1997, Garden
State obtained approximately $14.7 million of programming through the Company.
26
The Company, through its StarNet, Inc., sells cross channel tune-in
promotional services for cable television to affiliates of TCI. For the year
ended December 31, 1997, the Company generated revenues of $1.9 million for such
services.
Through October 31, 1997, the Company rented four office and warehouse
spaces from H. F. Lenfest and Marguerite Lenfest. Thereafter, the Company rented
three. For the year ended December 31, 1997, the Company paid the Lenfests an
aggregate of $647,000 under such leases. Rental payments are on terms that are
no less favorable than those the Company could obtain from independent parties.
For the year ended December 31, 1997, the Company incurred pay-per-view
order placement fees to TelVue Corporation, an affiliate of H. F. Lenfest,
$470,000 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. At December 31, 1997, the amount
subject to the guarantee under the license agreements was approximately $47.5
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. Effective March 6, 1997, as
subsequently amended, Mr. Lenfest released the parent Company and its cable
operating subsidiaries from their indemnity obligation until the last to occur
of January 1, 1999 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.
The Company has agreed to pay the legal expenses of H. F. Lenfest and
Marguerite Lenfest related to a pending SEC action against them. 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 paid the legal expenses of Harry Brooks related to the federal
criminal action against him as disclosed in the Company's Report on Form 10-K
for the year ended December 31, 1996. The Company also paid Mr. Brooks an amount
which enabled him to pay the $25,000 fine levied against him in such action and
to pay the costs of his work release and home confinement program.
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 Senior
Notes and Subordinated Notes and a lender under the Bank Credit Facility.
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, 1996 and 1997
Consolidated Statements of Operations, Years Ended December 31,
1995, 1996 and 1997
Consolidated Statements of Changes in
Stockholders' Equity (Deficit), Years Ended December 31, 1995, 1996
and 1997
Consolidated Statements of Cash Flows, Years Ended December 31, 1995,
1996 and 1997
Notes to Consolidated Financial Statements
27
(a)(2) Independent Certified Public Accountants' Report and Financial
Statement Schedule.
The following Independent Certified Public Accountants' Report and
Financial Statement Schedule are filed as a part of the report:
(i) Report of Independent Certified Public Accountants on
Schedule
(ii) Schedule II -- Valuation and Qualifying Accounts
(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:
1 Purchase Agreement, dated January 30, 1998, between the Company, Salomon Brothers Inc. and
NationsBanc Montgomery Securities LLC.
*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.
28
*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.
4.7 Registration Agreement, dated January 30, 1998, between the Company, Salomon Brothers Inc. and
NationsBanc Montgomery Securities
4.8 Indenture, dated as of February 5, 1998, between the Company and The Bank of New York relating to
the $150,000,000 7 5/8% Senior Notes due 2008.
4.9 Form of $150,000,000 7 5/8% Senior Notes due 2008. (In accordance with Item 601 of Regulation S-K
similar notes between the same parties which reference CUSIP No. 526055 AF 5 and CUSIP No. U52547
AA 1 have not been filed because they are identical in all material respects to the filed exhibit.)
4.10 Indenture, dated as of February 5, 1998, between the Company and The Bank of New York relating to
the $150,000,000 8 1/4% Senior Subordinated Notes due 2008.
4.11 Form of $150,000,000 8 1/4% Senior Subordinated Notes due 2008. (In accordance with Item 601 of
Regulation S-K similar notes between the same parties which reference CUSIP No. U52547 AB 9
and CUSIP No. 526055 AH 1 have not been filed because they are identical in all material respects
to the filed exhibit.)
*10.1 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, dated as of May
Marguerite Lenfest and Satellite Services, Inc. and Communications, Inc.
29
*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.)
30
**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.)
31
++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.
###10.43 Agreements, dated as of June 5, 1997, between H. F. Lenfest and Lenfest Jersey,
Inc., Lenfest York, Inc., Lenfest Raystay, Inc. and MCN, Inc. (formerly, MicroNet, Inc.).
10.44 Letter, dated March 26, 1998 (effective September 30, 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.
32
## Incorporated by reference to the Company's Report on Form 10-K, dated March 22,
1997, for the year ended December 31, 1996.
### Incorporated by reference to the Company's Report on Form 10-Q, dated August 14,
1997, for the quarter ended June 30, 1997.
(b) Reports on Form 8-K.
None.
33
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants. . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1996 and 1997. . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations, Years Ended December 31, 1995, 1996 and 1997. . . . . F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit),
Years Ended December 31, 1995, 1996 and 1997. . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows, Years Ended December 31, 1995, 1996 and 1997. . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-9
FINANCIAL STATEMENTS SCHEDULE
Report of Independent Certified Public Accountants on Schedule. . . . . . . . . . . . . . . F-38
Schedule II -- Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . F-39
F-1
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. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1997, 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, 1997. 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 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
provide a reasonable basis for our opinion.
In our opinion, 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, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company has sold
substantially all of the assets of MicroNet, Inc. and MicroNet Delmarva
Associates, L.P., wholly owned subsidiaries of the Company. Prior period
financial statements have been restated to reflect the continuing operations of
the Company.
Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
March 4, 1998 (except as to the first paragraph of Note 20,
as to which the date is March 26, 1998)
F-2
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
-----------------------------------
1996 1997
-------------- --------------
ASSETS
Cash and cash equivalents $ 19,162 $ 15,623
Marketable securities 79,830 14,452
Accounts receivable - trade and other, less allowance
for doubtful accounts of $1,985 in 1996 and $2,923 in 1997 19,885 23,206
Inventories 2,757 2,153
Prepaid expenses 2,364 2,960
Property and equipment, net of accumulated
depreciation 372,387 413,787
Investments in affiliates, accounted for under the equity
method, and related receivables 41,333 46,471
Other investments, at cost 10,410 10,410
Goodwill, net of amortization 74,404 73,136
Deferred franchise costs, net of amortization 494,568 507,023
Other intangible assets, net of amortization 24,908 28,341
Deferred Federal tax asset (net) 52,257 74,251
Net assets of discontinued operations 20,971 2,660
Other assets 6,552 5,247
-------------- --------------
$ 1,221,788 $ 1,219,720
============== ==============
See accompanying notes. (continued)
F-3
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, (continued)
(Dollars in thousands)
December 31,
-----------------------------------
1996 1997
-------------- --------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Notes payable $ 1,303,200 $ 1,287,988
Obligations under capital leases - related party 5,186 3,722
Obligations under capital leases - unrelated parties 4,477 3,596
Accounts payable and accrued expenses - unrelated parties 38,781 50,867
Accounts payable - affiliate 12,855 26,304
Customer service prepayments and deposits 8,614 6,984
Deferred interest - 7,063
Deferred state tax liability (net) 9,066 9,580
Investment in Garden State Cablevision L.P. 72,454 77,880
-------------- --------------
TOTAL LIABILITIES 1,454,633 1,473,984
MINORITY INTEREST in equity of consolidated
subsidiaries 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 $317 in 1996 and $2,830 in 1997 (9,866) 5,256
Accumulated deficit (274,673) (310,269)
-------------- --------------
(233,790) (254,264)
-------------- --------------
$ 1,221,788 $ 1,219,720
============== ==============
See accompanying notes.
F-4
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------
1995 1996 1997
------------- ------------ -------------
REVENUES $ 254,225 $ 381,810 $ 447,390
OPERATING EXPENSES
Service 15,670 29,299 33,772
Programming - from affiliate 37,685 57,344 62,892
Programming - other cable 17,637 25,460 30,196
Selling, general and administrative 55,262 82,688 105,470
Direct costs - non-cable 18,859 21,150 22,337
Depreciation 49,126 65,712 78,801
Amortization 25,146 45,565 51,138
------------- ------------ -------------
219,385 327,218 384,606
------------- ------------ -------------
OPERATING INCOME 34,840 54,592 62,784
OTHER INCOME (EXPENSE)
Interest expense (60,909) (107,201) (120,788)
Equity in net (losses) of unconsolidated affiliates (10,682) (17,870) (7,334)
Recognized (loss) on decline in market value of securities -
Australis Media Limited - (86,400) (44,572)
Other income and expense (net) 14,927 13,909 1,836
------------- ------------ -------------
(56,664) (197,562) (170,858)
------------- ------------ -------------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (21,824) (142,970) (108,074)
INCOME TAX BENEFIT (NET) 10,724 14,329 38,740
------------- ------------ -------------
(LOSS) FROM CONTINUING
OPERATIONS (11,100) (128,641) (69,334)
DISCONTINUED OPERATIONS (net of applicable income taxes)
Income (loss) from discontinued operations of MicroNet,
Inc. and affiliates (395) 363 1,469
Gain on sale of assets of MicroNet, Inc. and affiliates - - 32,269
------------- ------------ -------------
(395) 363 33,738
------------- ------------ -------------
(LOSS) BEFORE
EXTRAORDINARY LOSS (11,495) (128,278) (35,596)
EXTRAORDINARY (LOSS)
Early extinguishment of debt, net of income taxes of
$3,629 in 1995 and $1,337 in 1996 (6,739) (2,484) -
------------- ------------ -------------
NET (LOSS) $ (18,234) $ (130,762) $ (35,596)
============= ============ =============
See accompanying notes.
F-5
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------
1995 1996 1997
------------ ------------ -------------
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 $ (9,866)
Net unrealized gain (loss) on marketable securities, net of
deferred tax liabilities 22,651 (57,836) 15,122
------------ ----------- ------------
BALANCE AT END OF YEAR $ 47,970 $ (9,866) $ 5,256
============ =========== ============
ACCUMULATED DEFICIT
Balance at beginning of year $ (125,677) $ (143,911) $ (274,673)
Net (loss) (18,234) (130,762) (35,596)
----------- ----------- ------------
BALANCE AT END OF YEAR $ (143,911) $ (274,673) $ (310,269)
=========== =========== ============
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) $ (45,192) $ (233,790) $ (254,264)
============ =========== ============
See accompanying notes.
F-6
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (18,234) $ (130,762) $ (35,596)
(Income) loss from discontinued operations 395 (363) (1,469)
(Gain) on sale of assets of discontinued operations - - (32,269)
Extraordinary loss 6,739 2,484 -
------------ ------------- ------------
Loss from continuing operations (11,100) (128,641) (69,334)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 74,272 111,277 129,939
Accretion of debt discount 328 1,081 1,788
Accretion of discount on marketable securities - (1,026) (477)
Net (gains) on sales of marketable securities (13,517) (342) (468)
Recognized loss on decline in market value of securities -
Australis Media Limited - 86,400 44,572
(Gain) on disposition of partnership interest - (7,210) -
Deferred income tax (benefit) (10,724) (15,226) (23,992)
Write off of assets upon rebuild of cable systems 282 846 -
(Gain) loss on sales of property and equipment (115) (326) 694
Equity in net losses of unconsolidated affiliates 10,682 17,870 7,334
Loss on other investments 75 - -
Minority interests (1,347) (2,492) (945)
Changes in operating assets and liabilities, net of effects from acquisitions:
Cash - restricted escrow 3,273 - -
Accounts receivable 2,675 (7,100) (3,321)
Inventories 2,260 2,175 604
Prepaid expenses 594 278 (596)
Other assets (291) (3,363) 1,305
Deferred interest - - 7,063
Accounts payable and accrued expenses:
Affiliate (433) 5,650 13,449
Unrelated parties 11,749 6,599 12,086
Customer service prepayments and deposits (70) 637 (1,630)
----------- ------------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 68,593 67,087 118,071
------------ ------------- -----------
See accompanying notes. (continued)
F-7
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of cable systems $ - $ (604,032) $ (84,500)
Acquisition of the minority interest of South Jersey
Cablevision Associates (8,838) - -
Non cable acquisitions - (5,600) -
Purchases of property and equipment (44,144) (57,397) (94,519)
Purchases of marketable securities (2,678) (582) (3,091)
Purchases of other investments (71) - -
Proceeds from transfer of cable system - 4,500 -
Proceeds from sales of property and equipment 192 381 1,091
Proceeds from sales of marketable securities 16,545 1,952 45,223
Proceeds from sale of assets of discontinued operations - - 70,250
Discontinued operations (1,677) (255) (18,558)
Loans to Australis Media - (41,139) -
Proceeds from Australis Media note receivable 19,240 41,139 -
Investments in unconsolidated affiliates (19,492) (4,183) (9,346)
Distributions from unconsolidated affiliates 1,826 45,932 775
(Increase) in other intangible assets - investing (306) (4,539) (8,876)
Loans and advances to unconsolidated affiliates (726) (470) (4,849)
Loans and advances from unconsolidated affiliates 1,110 8,390 3,627
------------- ------------- -------------
NET CASH (USED IN)
INVESTING ACTIVITIES (39,019) (615,903) (102,773)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in debt 741,363 942,023 105,000
Early extinguishment of debt (91,118) (448,821) -
Other debt reduction:
Notes (515,528) (80,345) (122,000)
Obligations under capital leases (49) (256) (1,490)
(Increase) in other intangible assets - financing (4,110) (9,045) (347)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 130,558 403,556 (18,837)
------------- ------------- --------------
NET INCREASE
(DECREASE) IN CASH 160,132 (145,260) (3,539)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,290 164,422 19,162
-------------- -------------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 164,422 $ 19,162 $ 15,623
============== ============== ============
See accompanying notes.
F-8
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1996 and 1997
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 and provides satellite delivered
cross channel tune-in promotional services for cable television. The Company's
ability to collect the amounts due from customers is primarily affected by
economic fluctuations in these geographic areas.
The Company maintains cash balances at several financial institutions located
primarily in the Philadelphia Area. Accounts at each institution are insured by
either the FDIC 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, Change in Reporting Entity and Restatement
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 eighty percent (80%) 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 1995 or 1996.
Since the amounts are not material and have no effect on net loss, the prior
period financial statements were not restated to reflect the change in
consolidation policy.
The prior period financial statements have been restated to reflect the
continuing operations of the Company. See Note 2 -- Discontinued Operations.
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-9
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 Self Constructed Assets
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.
Valuation of Long-Lived Assets
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 long-lived 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 depreciation and amortization periods of tangible and intangible assets to
determine whether events or circumstances warrant revised estimates of useful
lives. As of December 31, 1997, management believes that no revisions to the
remaining useful lives or writedowns of long-lived assets are required.
F-10
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Investments
Investments in non-publicly traded entities that do not have a readily
ascertainable fair market value, in which the voting 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 Swap 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.
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.
F-11
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the "FASB") has recently issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 established standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company is in the process of
determining its preferred format. The adoption of SFAS No. 130 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
The FASB has also recently issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also established standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 will have no impact on
the Company's consolidated results of operations, financial position or cash
flows.
NOTE 2 - DISCONTINUED OPERATIONS
Effective October 31, 1997, MicroNet, Inc. and MicroNet Delmarva Associates, LP
(collectively "MicroNet"), each a wholly owned subsidiary of the Company, sold
substantially all of their assets and Suburban Cable TV Co. Inc., Lenfest
Atlantic, Inc. and Lenfest New Castle County sold certain of their towers. The
purchase price was approximately $70.3 million, subject to adjustments. The sale
resulted in a gain of $32.3 million, net of applicable income taxes of $17.7
million. The sale represents the disposition of the major segment of the
Company's tower rental, microwave service, video, voice and data service
businesses. The assets sold were not material to the cable television operations
of the Company.
The 1995 and 1996 consolidated financial statements and notes thereto have been
restated to reflect continuing operations of the Company. The net assets of
MicroNet have been separately classified in the accompanying consolidated
balance sheet under the caption "Net assets of discontinued operations" and
consist of the following at December 31, 1996 and 1997:
1996 1997
-------------- --------------
(Dollars in thousands)
Cash $ 1,471 $ -
Accounts receivable 2,916 2,660
Prepaid expenses 460 -
Property and equipment 16,642 -
Goodwill 4,120 -
Other intangible assets 1,168 -
Deferred federal tax asset 3,363 -
Other assets 60 -
Notes payable (7,000) -
Accounts payable and accrued expenses (1,596) -
Deferred state tax liability (99) -
Customer service prepayments (534) -
------------- --------------
$ 20,971 $ 2,660
============= ==============
F-12
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 2 - DISCONTINUED OPERATIONS - (continued)
Operating results of MicroNet for the years ended December 31, 1995, 1996 and
1997, are shown separately in the accompanying consolidated statements of
operations under the caption "Income (loss) from discontinued operations of
MicroNet, Inc. and affiliates" and consist of the following:
Year Ended December 31,
---------------------------------------------------
1995 1996 1997
------------- ------------ ------------
(Dollars in thousands)
Revenues $ 12,024 $ 15,508 $ 15,496
Operating expenses (8,794) (9,961) (9,812)
Depreciation and amortization (3,428) (4,104) (2,862)
------------ ----------- -----------
OPERATING INCOME (LOSS) (198) 1,443 2,822
Interest expense (629) (715) (598)
Other income 61 23 42
Income tax (expense) benefit 371 (388) (797)
------------ ----------- -----------
NET INCOME (LOSS) $ (395) $ 363 $ 1,469
============ =========== ===========
NOTE 3 - COMMON STOCK OWNERSHIP AND CONTROL
The 158,896 shares of common stock outstanding at December 31, 1996 and 1997,
are 50% owned by members of the Lenfest Family ("H.F. (Gerry) Lenfest,
Marguerite Lenfest, their issue and The Lenfest Foundation") 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 4 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
Cash paid during the year for: (Dollars in thousands)
Interest:
Continuing operations $ 55,326 $ 103,836 $ 120,580
Discontinued operations 519 494 612
Income taxes:
Continuing operations $ 160 $ - $ 1,522
Discontinued operations - - -
F-13
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOW - (continued)
Supplemental Schedules Relating to Acquisitions
Year Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
(Dollars in thousands)
Property and equipment $ 3,585 $ 170,085 $ 27,965
Deferred franchise costs 2,124 398,260 53,797
Minority interest in partnership equity 3,129 - -
Goodwill and other intangible assets - 32,543 2,738
Equity interests in affiliates - 2,877 -
Other asset - 5,867 -
------------ ------------ -------------
$ 8,838 $ 609,632 $ 84,500
============ ============ =============
Noncash Investing and Financing Transactions
On December 16, 1997, The Box Worldwide, Inc. ("Box") merged with a subsidiary
of TCI Music, Inc. ("TCI Music"), an affiliate of TCI. As a result of the
merger, the Company's 7,111,319 shares of Box were converted into rights to
receive 501,290 shares of TCI Music preferred stock. A former employee of the
Company has an option to purchase 14,000 of these shares. This option will
expire on December 31, 1998. Each share of the TCI Music preferred stock is
convertible into three shares of TCI Music series A common stock.
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 12).
On September 30, 1996, the Company contributed the right to receive assets of a
cable television system for a partnership interest (See Note 5). 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 5).
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, its 41.67% partnership interest in
Bay Cable Advertising, and the right to receive assets of a cable television
system located in Fort Collins, CO, for the assets of a cable television system
serving Wilmington, Delaware and the surrounding area. 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 accompanying consolidated statement of
operations (See Note 5).
In 1996 and 1997, the Company incurred additional capital lease obligations of
$4,635,000 and $449,000, respectively.
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.
F-14
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOW - (continued)
During 1995 and 1997, the Company disposed of $4,231,000 and $5,972,000,
respectively of fully depreciated plant in connection with the rebuild of
certain of its systems.
NOTE 5 - NEW BUSINESS AND ACQUISITIONS
Domestic Cable
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, located in
Turnersville, New Jersey, passed approximately 47,000 homes and served
approximately 36,900 basic customers. For financial reporting purposes, the
Company accounts for the acquisition of these assets under the purchase method.
This acquisition was funded in part by borrowings under the bank credit
facility.
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 passed approximately 13,400
homes and served 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, NJ cable television system for
approximately $16,000,000. The system passed approximately 10,600 homes and
served 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 passed approximately 6,100
homes and served 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 borrowings under the
existing bank credit facility.
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., passed
approximately 358,000 homes and served 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 purchase price included the assets of a fifth system, located
in Gettysburg, PA, to which the Company did not take title. The Company managed
the Gettysburg system from February 29, 1996, until the assets of the system
were transferred to GS Communications, Inc. on September 30, 1996.
F-15
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 5 - NEW BUSINESS AND ACQUISITIONS - (continued)
In February 1996, the Company completed an exchange transaction with a
subsidiary of TCI whereby 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
accompanying consolidated statement of operations. The acquisition of these
cable systems were financed with proceeds from the Company's public offering of
debt securities in November 1995.
On June 29, 1995, the Company, through its subsidiary, Lenfest Raystay Holdings,
Inc., exercised options 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 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 owned and operated
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. The accounts of Lenfest Atlantic, Inc.
are included in these consolidated financial statements.
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 8).
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, 1995:
1995 1996 1997
------------ ------------ -------------
(Dollars in thousands)
Revenues $ 382,389 $ 418,109 $ 447,848
------------ ------------ -------------
Loss from continuing operations $ (46,902) $ (143,619) $ (69,440)
------------ ------------ -------------
Net loss $ (54,036) $ (145,740) $ (35,702)
------------ ------------ -------------
F-16
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 5 - NEW BUSINESS AND ACQUISITIONS - (continued)
Other
The Company, through its subsidiaries, StarNet, StarNet Interactive
Entertainment, Inc. and Suburban Cable TV Co. Inc., owned a total of 7,111,319
shares of Box. The Company used the equity method to account for this
investment. On December 16, 1997, Box merged with a subsidiary of TCI Music and
the Company's shares of Box were converted into rights to receive 501,290 shares
of TCI Music preferred stock. The investment in TCI Music is accounted for as
marketable securities. The Company's cost basis in the securities is
approximately $2.7 million. The fair value of the securities at December 31,
1997 was approximately $8.6 million.
Effective January 1, 1997, the Company, through its subsidiary, Lenfest
Philadelphia Interconnect, Inc., entered into a partnership with Comcast
Philadelphia Interconnect Partner for the purpose of representing regional and
national cable advertising sales in the Greater Philadelphia market. Under the
agreement, the percentage interests of the partners is determined on the basis
of the number of customers of the partners in the designated market area at the
beginning of the year. For 1997, the Company's partnership interest was 72%. The
partners have equal representation on the Executive Committee and the Company
will be the managing partner of the partnership for its first two years. Lenfest
Advertising, Inc., d/b/a Radius Communications ("Radius"), a wholly owned
subsidiary of the Company, will continue to provide local cable advertising
sales and insertion for the Company and sixteen other cable television system
operators. The Company uses the equity method to account for this investment.
On September 30, 1996, 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.
The Company, through its wholly owned subsidiary, Lenfest International, Inc.,
is a partner in L-TCI Associates ("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 was obligated to make additional capital contributions pursuant to its
stock subscription agreement. In 1995 through 1997, 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. During 1995 through 1997, the Company invested an aggregate of
$19,233,000 to fund the L-TCI contributions. The additional investments
increased the Company's ownership percentage of L-TCI to approximately 80%. The
accounts of L-TCI are included in the Company's consolidated financial
statements. The Company uses the equity method to account for L-TCI's interest
in Videopole.
F-17
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 6 - INVENTORIES
The schedule of inventories at December 31, 1996 and 1997 are as follows:
1996 1997
------------ ------------
(Dollars in thousands)
Raw materials $ 2,285 $ 2,153
Finished goods and work-in process 472 -
------------ ------------
$ 2,757 $ 2,153
============ ============
At December 31, 1996 and 1997, inventories have been written down to estimated
net realizable value and the accompanying consolidated statements of operations
for 1996 and 1997 include corresponding charges of $1,047,000 and $948,000,
respectively, which have been included with direct costs - non-cable.
NOTE 7 - PROPERTY AND EQUIPMENT
The schedule of property and equipment of continuing operations at December 31,
1996 and 1997 is as follows:
Estimated
Useful Lives
1996 1997 in Years
-------------- -------------- -----------------
(Dollars in thousands)
Land $ 2,993 $ 4,246 -
Building and improvements 25,462 30,779 10-39
Cable distribution systems 578,874 659,366 5-12
Computer hardware and software 11,283 25,325 3-5
Office equipment, furniture and
fixtures 9,726 12,609 7
Vehicles 12,571 15,758 5
Other equipment 10,580 15,560 5-7
Assets under capital leases 9,767 9,269 5-15
-------------- --------------
661,256 772,912
Accumulated depreciation 288,869 359,125
-------------- --------------
$ 372,387 $ 413,787
============== ==============
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P.
The Company, through several subsidiaries, owns non-controlling 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 $41,333,000 and $46,471,000 at
December 31, 1996 and 1997, respectively. Net losses recognized under the equity
method for the years ended December 31, 1995, 1996 and 1997 were $10,682,000,
$17,870,000 and $7,334,000, 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 loans and advances
to these unconsolidated affiliates to the extent they exist.
F-18
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
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 serving approximately 208,000
customers in southern New Jersey at December 31, 1997. 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 5, 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, 1995, 1996 and 1997, the total programming obtained through the Company was
approximately $11,985,000, $13,659,000 and $14,650,000, respectively.
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 $72,454,000 and $77,880,000 at
December 31, 1996 and 1997, respectively.
Summarized audited financial information of Garden State, accounted for under
the equity method, at December 31, 1996 and 1997, is as follows:
1996 1997
--------------- ---------------
(Dollars in thousands)
Financial Position
Cash and cash equivalents $ 4,858 $ 5,271
Accounts receivable, net 2,683 3,551
Other current assets 1,033 666
Property and equipment, net 75,920 83,863
Deferred assets, net 85,204 55,938
-------------- --------------
TOTAL ASSETS $ 169,698 $ 149,289
============== ==============
Debt $ 333,000 $ 324,000
Liabilities to the Company 3,246 3,579
Accounts payable and accrued expenses 13,674 12,388
Customer prepayments and deposits 947 875
Other liabilities 1,098 1,523
Partners' deficit (182,267) (193,076)
-------------- --------------
TOTAL LIABILITIES AND DEFICIT $ 169,698 $ 149,289
============== ==============
F-19
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
1995 1996 1997
-------------- -------------- --------------
(Dollars in thousands)
Results of Operations
Revenues $ 91,771 $ 100,756 $ 109,126
Operating expenses (40,595) (43,608) (45,902)
Depreciation and amortization (46,976) (48,524) (44,698)
------------- ------------- -------------
OPERATING INCOME 4,200 8,624 18,526
Interest expense (19,166) (16,405) (22,787)
Other expense (5,590) (6,045) (6,548)
------------- ------------- -------------
NET LOSS $ (20,556) $ (13,826) $ (10,809)
============= ============= =============
Cash Flows
Cash flows from operating activities $ 30,452 $ 26,132 $ 32,815
Cash flows from investing activities (14,794) (22,759) (23,308)
Cash flows from financing activities (17,009) (1,774) (9,094)
------------- ------------- -------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,351) 1,599 413
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,610 3,259 4,858
------------- ------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 3,259 $ 4,858 $ 5,271
============= ============= =============
Summarized financial information of affiliates other than Garden State, accounted for under the equity method, at
December 31, 1996 and 1997, is as follows:
1996 1997
--------------- ---------------
(Dollars in thousands)
Financial Position
Cash and cash equivalents $ 5,972 $ 6,595
Accounts receivable, net 11,071 16,793
Other current assets 13,071 31,658
Property and equipment, net 172,864 209,333
Due from related party (not the Company) 533 -
Deferred tax asset 8,730 550
Other assets, net 44,806 62,000
-------------- --------------
TOTAL ASSETS $ 257,047 $ 326,929
============== ==============
F-20
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
1996 1997
--------------- ---------------
(Dollars in thousands)
Financial Position - (continued)
Liabilities to the Company $ 2,375 $ 4,435
Accounts payable and accrued expenses 47,202 44,131
Debt 135,086 136,089
Deferred tax liability 11,943 12,343
Payable to related party (not the Company) 67,136 90,991
Other liabilities 9,195 29,985
Equity (deficit) (15,890) 8,955
-------------- --------------
TOTAL LIABILITIES
AND EQUITY $ 257,047 $ 326,929
============== ==============
1995 1996 1997
--------------- --------------- ---------------
(Dollars in thousands)
Results of Operations
Revenues $ 124,171 $ 125,534 $ 156,405
Operating expenses (84,615) (96,909) (120,782)
Depreciation and amortization (15,876) (25,755) (32,357)
------------- ------------- -------------
OPERATING INCOME 23,680 2,870 3,266
Interest expense (8,988) (16,964) (18,284)
Other income and expense (net) (2,548) 1,054 9,565
------------- ------------- -------------
NET INCOME (LOSS) $ 12,144 $ (13,040) $ (5,453)
============= ============= =============
Cash Flows
Cash flows from operating activities $ 18,146 $ 6,070 $ 35,378
Cash flows from investing activities (24,598) (57,436) (74,331)
Cash flows from financing activities 4,289 46,450 34,153
------------- ------------- -------------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (2,163) $ (4,916) $ (4,800)
============= ============= =============
F-21
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
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, 1996 and 1997:
1996 1997
--------------- ---------------
(Dollars in thousands)
Susquehanna Cable Co. Subsidiaries ("SCC Subs")(Note 9) $ 10,880 $ 10,671
The Box Worldwide, Inc. ("Box") (Note 5) 4,161 -
Raystay Co. ("Raystay") (Note 5) 6,981 11,807
Videopole (Note 5) 9,015 11,117
MetroNet Communications and GlobeNet ("MetroNet") 1,674 1,086
Hyperion Telecommunications of Harrisburg ("Hyperion") 1,043 217
Sneak Prevue, L.L.C. ("Sneak Prevue") (Note 5) 3,091 2,512
Clearview Partners ("Clearview") (Note 5) 1,825 1,825
Cable Adcom ("Adcom") 1,481 1,533
Philadelphia Interconnect ("Interconnect") (Note 5) - 3,843
Others 1,182 1,860
-------------- --------------
$ 41,333 $ 46,471
============== ==============
Lenfest York, Inc., a subsidiary of the Company, owns a 30% equity interest in
five subsidiaries of Susquehanna Cable Co. 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, Area of Dominant Influence ("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., owned a 50% partnership interest in
Hyperion Telecommunications of Harrisburg (See Note 26).
The following table reflects the Company's share of earnings or losses of Garden
State and each of the aforementioned affiliates:
1995 1996 1997
--------------- --------------- ---------------
(Dollars in thousands)
Garden State $ (8,527) $ (5,068) $ (3,340)
SCC Subs (1,263) (1,010) (208)
Box 132 (2,671) (1,414)
Raystay (886) (1,575) 4,826
Videopole (2,644) (7,408) (7,200)
BCA 1,711 50 -
MetroNet 190 (92) 81
Hyperion - (734) (826)
Sneak Prevue - (326) (426)
Clearview - (100) -
Adcom 530 1,070 851
Interconnect - - 359
Other 75 (6) (37)
------------- ------------- -------------
$ (10,682) $ (17,870) $ (7,334)
============= ============= =============
F-22
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - 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, ADI (See Note
5).
NOTE 9 - OTHER INVESTMENTS
Other investments, accounted for under the cost method, are summarized as
follows:
1996 1997
--------------- ---------------
(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 10 - GOODWILL
The excess of the purchase price paid over the acquired net assets has been
allocated to goodwill. Accumulated amortization at December 31, 1996 and 1997,
was $25,202,000 and $28,594,000, respectively.
F-23
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 11 - DEFERRED FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS
A schedule of deferred franchise costs and other intangible assets and
accumulated amortization of continuing operations at December 31, 1996 and 1997,
is as follows:
Accumulated
Amount Amortization Net
------------- ----------------- --------------
(Dollars in thousands)
December 31, 1996
Deferred franchise costs $ 639,131 $ 144,563 $ 494,568
============== ============== ==============
Debt acquisition costs $ 12,572 $ 3,157 $ 9,415
Covenants not to compete 12,500 5,867 6,633
Other deferred assets 11,368 2,508 8,860
-------------- -------------- --------------
$ 36,440 $ 11,532 $ 24,908
============== ============== ==============
December 31, 1997
Deferred franchise costs $ 693,050 $ 186,027 $ 507,023
============== ============== ==============
Debt acquisition costs $ 12,589 $ 4,735 $ 7,854
Covenants not to compete 12,500 7,117 5,383
Other deferred assets 19,920 4,816 15,104
-------------- -------------- --------------
$ 45,009 $ 16,668 $ 28,341
============== ============== ==============
NOTE 12 - MARKETABLE SECURITIES
The Company's investment in the securities of Australis Media Limited
("Australis") consists of 77,982,000 shares of voting common stock and
269,427,000 non-voting convertible debentures. The debentures are classified as
equity securities by Australis as 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 aggregate cost and market values of the securities at December 31, 1996 and
1997 are as follows:
Gross
Aggregate Unrealized Fair
Cost Gain (Loss) Value
-------------- ----------------- --------------
(Dollars in thousands)
December 31, 1996
Australis Media Limited convertible debentures $ 33,687 $ (7,952) $ 25,735
Australis Media Limited common stock 10,885 (2,505) 8,380
Australis Media Limited discount notes 41,026 - 41,026
Other marketable equity securities 3,781 908 4,689
-------------- ------------- --------------
$ 89,379 $ (9,549) $ 79,830
============== ============= ==============
December 31, 1997
Other marketable equity securities $ 6,366 $ 8,086 $ 14,452
============== ============= ==============
F-24
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - MARKETABLE SECURITIES - (continued)
In December 1993, the Company acquired 11,000,000 shares of the voting stock and
173,000,000 non-voting debentures of 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.
On October 31, 1996, the Company purchased senior subordinated discount notes of
Australis Holding Pty Limited, with a face value of $71,339,000, and 71,339
warrants for an aggregate of $40 million. These discount notes and warrants were
sold in May 1997, for $41.5 million. 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 an aggregate of $40 million. At the time of the
transaction, these securities had a fair value of $13.6 million, 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.
At December 31, 1997, the Australis securities were no longer listed on the
Australian Stock Exchange and were considered to be worthless. The Company
determined that the decline in market value was other than temporary and,
accordingly, recognized a loss of $44.6 million, resulting from a write-down of
the Australis investment.
In accordance with the Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", all of the
Company's securities are considered to be available for sale. Net realized gains
from the sale of marketable securities, in the amount of $13,517,000, $342,000
and $468,000 are included in other income and expense (net) in 1995, 1996 and
1997, 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 13 - NOTES PAYABLE
Notes payable of continuing operations consisted of the following at
December 31, 1996 and 1997:
1996 1997
--------------- ---------------
(Dollars in thousands)
8-3/8% senior notes due November 1, 2005 (a) $ 685,970 $ 687,082
10-1/2% senior subordinated notes due June 15, 2006 (b) 293,105 293,781
Bank credit facility (c) 230,000 240,000
11.30% senior promissory notes due September 1, 2000 (d) 60,000 45,000
11.84% senior promissory notes due May 15, 1998 (e) 21,000 10,500
9.93% senior promissory notes due September 30, 2001 (f) 13,125 11,625
-------------- --------------
$ 1,303,200 $ 1,287,988
============== ==============
F-25
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 13 - NOTES PAYABLE - (continued)
(a) These notes, which are stated net of an unamortized discount of
$12,918,000 at December 31, 1997, 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 5) and
to provide partial funding for the cable television systems acquired from
Sammons Communications, Inc. (Note 5).
(b) These notes, which are stated net of an unamortized discount of
$6,219,000 at December 31, 1997, were issued through a private placement
in June 1996 and were later exchanged for publicly traded notes in 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
in 1996.
(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 weighted
average interest rate at December 31, 1997 was 7.37%.
(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 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 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-26
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 13 - NOTES PAYABLE - (continued)
Maturities of notes payable, excluding the unamortized discount of $19,137,000
are as follows:
(Dollars in thousands)
Year Ending December 31,
1998 $ 27,450
1999 43,800
2000 44,250
2001 37,875
2002 63,750
Thereafter 1,090,000
---------------
$ 1,307,125
===============
The Company had entered into interest rate cap agreements to reduce the impact
of changes in interest rates on its floating rate long-term debt. The three
interest rate cap agreements with commercial banks, having notional principal
amounts of $50,000,000, $25,000,000 and $25,000,000, terminated on July 18,
1996, November 8, 1996 and February 28, 1997, respectively. No gain or loss was
realized upon the termination of these interest rate cap agreements.
The Company had also entered into four interest rate swap agreements. These
agreements effectively changed the Company's interest rate on $300,000,000 of
its fixed rate debt to a floating rate based on LIBOR. On October 31, 1997, the
Company terminated all four interest rate swap agreements and received
$8,750,000 in consideration of early termination. The Company has recorded the
gain as "Deferred interest" on its consolidated balance sheet and is amortizing
the gain as a reduction in interest expense to June 15, 2006, which is the
maturity date of the fixed rate debt obligation.
NOTE 14 - LEASES
Subsidiaries of the Company have entered into three 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, 1997, two
of the leases provide for an aggregate minimum monthly payment of $31,000. On
each anniversary date of these two leases, the monthly payment will increase by
a minimum of 6%. At December 31, 1997, the minimum monthly payment of the third
lease is $24,000. On each anniversary date of the third lease, the minimum
monthly payment will increase by $957.
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.
F-27
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 14 - LEASES - (continued)
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, 1997:
Capital Capital
Leases - Leases -
Principal Unrelated Operating
Stockholder Parties Leases
----------------- ---------------- ---------------
(Dollars in thousands)
Year Ending December 31,
1998 $ 680 $ 1,338 $ 3,858
1999 714 1,338 3,830
2000 750 975 3,772
2001 788 422 2,603
2002 826 1 1,285
Thereafter 2,562 - 834
-------------- -------------- --------------
TOTAL MINIMUM LEASE PAYMENTS 6,320 4,074 $ 16,182
==============
LESS AMOUNT REPRESENTING
INTEREST (2,598) (478)
-------------- --------------
PRESENT VALUE OF MINIMUM
LEASE PAYMENTS $ 3,722 $ 3,596
============== ==============
Property and equipment under capitalized leases at December 31, 1996 and 1997,
are summarized as follows:
1996 1997
--------------- ---------------
(Dollars in thousands)
Buildings - related party $ 5,132 $ 3,893
Equipment 4,635 5,376
-------------- --------------
9,767 9,269
Accumulated depreciation 2,406 3,174
-------------- --------------
$ 7,361 $ 6,095
============== ==============
Rental expense for all operating leases, principally office and warehouse
facilities, pole rent and satellite transponders from continuing operations,
amounted to $6,867,000, $8,561,000 and $8,085,000 for the years ended December
31, 1995, 1996 and 1997, respectively. In addition, the Company made total
payments to a principal stockholder for buildings under capitalized leases of
$584,000, $615,000 and $647,000 in 1995, 1996 and 1997, 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 1998.
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.
F-28
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 15 - RESEARCH AND DEVELOPMENT
The Company, through its subsidiaries CAM Systems, Inc., StarNet Development,
Inc., Suburban Connect, Inc. and StarNet, Inc., incurred research and
development costs of $1,037,000, $2,427,000 and $1,139,000 for the years ended
December 31, 1995, 1996 and 1997, 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 16 - 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 17 - 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, 1995, 1996 and 1997,
the Company matched contributions of $777,000, $1,190,000 and $1,393,000,
respectively, in its continuing operations.
NOTE 18 - 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) from continuing operations
consist of the following components:
1995 1996 1997
--------------- --------------- ---------------
(Dollars in thousands)
Current
Federal $ - $ (211) $ 15,013
State - (686) (265)
-------------- ------------- -------------
- (897) 14,748
Deferred
Federal 1,213 3,581 (1,359)
State 2,994 769 (514)
Benefit of operating loss carryforward 6,420 10,746 25,699
Decrease in valuation allowance 97 130 166
-------------- ------------- -------------
10,724 15,226 23,992
-------------- ------------- -------------
$ 10,724 $ 14,329 $ 38,740
============== ============= =============
F-29
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 18 - CORPORATE INCOME TAXES - (continued)
The current tax benefit from continuing operations for 1997 represents tax
savings resulting from utilization of current losses to eliminate the tax
expense incurred by the current income and gain from discontinued operations.
The categories of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
Federal State
------------------------------- ------------------------------
1996 1997 1996 1997
------------- -------------- ------------- -------------
(Dollars in thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $ 619 $ 985 $ 186 $ 290
Deferred start-up costs 187 27 - -
Net operating loss carryforward 75,515 105,139 - -
Investments in affiliates, principally
due to differences in taxable income 2,704 3,570 - 280
Investments and other tax credits 1,719 1,553 249 249
------------ ------------ ------------- ------------
Gross Deferred Tax Asset 80,744 111,274 435 819
Deferred Tax Liabilities:
Property and equipment, principally
due to differences in depreciation (13,818) (21,246) (4,246) (6,414)
Investments in affiliates, principally
due to differences in taxable income - - (881) -
Property and equipment and intangible
assets arising from purchase
accounting adjustments (13,934) (12,695) (4,374) (3,985)
Unrealized gain on marketable
securities (317) (2,830) - -
----------- ----------- ------------ -----------
Gross Deferred Tax Liability (28,069) (36,771) (9,501) (10,399)
----------- ----------- ------------ -----------
Net deferred tax asset (liability)
before valuation allowance 52,675 74,503 (9,066) (9,580)
Valuation allowance (418) (252) - -
----------- ----------- ------------ -----------
Net Deferred Tax Asset (Liability) $ 52,257 $ 74,251 $ (9,066) $ (9,580)
=========== =========== ============ ===========
The difference between the income tax benefit (net) and the amounts expected by
applying the U.S. Federal income tax rate of 35% to loss before income taxes is
as follows:
1995 1996 1997
--------------- --------------- ---------------
(Dollars in thousands)
Federal income tax benefit at statutory rates $ 7,638 $ 50,040 $ 37,826
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 1,946 54 (506)
Other 2,089 1,730 2,369
-------------- -------------- --------------
$ 10,724 $ 14,329 $ 38,740
============== ============== ==============
F-30
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 18 - CORPORATE INCOME TAXES - (continued)
The Company has a net operating loss carryforward of approximately $300,000,000
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 $1,123,000 for carryover to
subsequent years. The general business tax credits expire as follows:
(Dollars in thousands)
Year Ending December 31,
1998 $ 252
1999 361
2000 485
2001 5
2002 5
2003-2006 15
-------
$ 1,123
=======
NOTE 19 - OTHER INCOME AND EXPENSE
The schedules of other income and expense from continuing operations for the
years ended December 31, 1995, 1996 and 1997 are as follows:
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(Dollars in thousands)
(Loss) on disposal of assets upon rebuild of
cable systems $ (282) $ (846) $ -
Gain (loss) on sales of property and equipment 115 326 (694)
Gain on sales of marketable securities 13,517 342 468
Gain on disposition of partnership interest (See Note 4) - 7,210 -
Interest and dividend income 2,051 4,699 1,242
Minority interest in net loss of South Jersey Cablevision 212 - -
Minority interest in net loss of L-TCI Associates 1,135 2,492 945
Litigation settlements (1,900) - (282)
Miscellaneous income (expense) 79 (314) 157
-------------- -------------- --------------
$ 14,927 $ 13,909 $ 1,836
============== ============== ==============
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.
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.
F-31
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 20 - COMMITMENTS AND CONTINGENCIES
Mr. 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. The
Company has agreed to indemnify Mr. Lenfest against loss from such guaranty to
the fullest extent permitted under the Company's debt obligations. Under the
terms of its bank credit facility, however, Mr. Lenfest's claims for
indemnification are limited to $33.5 million. Effective March 6, 1997, as
subsequently amended, Mr. Lenfest released the parent Company and its cable
operating subsidiaries from their indemnity obligation until the last to occur
of January 1, 1999 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 under an
agreement dated June 5, 1997. At December 31, 1997, the amount subject to
guarantee under the license agreements was approximately $47.5 million.
On January 20, 1995, an individual (the "Plaintiff") filed suit in the Federal
Court of Australia, New South Wales District Registry against the Company and
several other entities and individuals (the "Defendants") including 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. $467 million as of
December 31, 1997). 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.
The Company has also been named as a defendant in various legal proceedings
arising in the ordinary course of business. In the opinion of management, the
ultimate amount of liability with respect to the above actions will not
materially affect the financial position, the results of operations or the cash
flows of the Company.
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, 1995 and 1996,
franchise fees in the amount of $9,166,000 and $10,824,000, respectively were
paid. For the year ended December 31, 1997, franchise fees in the amount of
$12,764,000 will be paid.
NOTE 21 - 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 with programming services at
a rate which is not more than the Company could obtain independently. For the
years ended December 31, 1995, 1996 and 1997, the Company recorded programming
expenses of $37,685,000, $57,344,000 and $62,892,000, respectively, under this
agreement.
The Company, through its subsidiaries, StarNet and StarNet Development, Inc.,
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, 1995, 1996 and 1997, the Company has generated revenues of
$3,900,000, $4,789,000 and $1,945,000 respectively, from affiliates of TCI.
F-32
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 21 - RELATED PARTY TRANSACTIONS - (continued)
Cable AdNet Partners, an affiliate of TCI, paid Suburban approximately
$2,637,000 for the year ended December 31, 1995, 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 5).
The Company incurred pay-per-view order placement fees to TelVue Corporation,
an affiliate of Mr. Lenfest, of $190,000, $325,000 and $470,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
During 1996, the Company loaned a total of $41,139,000 to Australis. All loans
were repaid with interest.
In January 1995, Mr. 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 under its bank credit facility
dated June 24, 1994. The loan was repaid on April 20, 1995.
Subsidiaries of the Company have entered into various leasing arrangements with
a principal stockholder for office and warehouse facilities. (See Note 14).
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 senior notes
and senior subordinated notes and a lender under the bank credit facility.
NOTE 22 - SEGMENT INFORMATION
The Company operates primarily in the cable television industry. Certain
subsidiaries of the Company operate in other industries which provide
promotional, cable advertising traffic and billing services. Information
concerning continuing operations by industry segment as of and for each of the
three years ended December 31, was as follows:
Cable Other Total
--------------- --------------- ---------------
(Dollars in thousands)
Year Ended December 31, 1995
Revenues $ 232,155 $ 22,070 $ 254,225
============== ============== ==============
Operating income (loss) $ 44,199 $ (9,359) $ 34,840
============== ============== ==============
Depreciation and amortization $ 71,054 $ 3,218 $ 74,272
============== ============== ==============
Capital expenditures, including
acquisitions $ 47,658 $ 5,324 $ 52,982
============== ============== ==============
Identifiable assets $ 576,855 $ 254,590 $ 831,445
============== ============== ==============
F-33
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 22 - SEGMENT INFORMATION - (continued)
Cable Other Total
--------------- --------------- ---------------
(Dollars in thousands)
Year Ended December 31, 1996
Revenues $ 354,561 $ 27,249 $ 381,810
============== ============== ==============
Operating income (loss) $ 70,135 $ (15,543) $ 54,592
============== ============== ==============
Depreciation and amortization $ 107,115 $ 4,162 $ 111,277
============== ============== ==============
Capital expenditures, including
acquisitions $ 655,735 $ 11,294 $ 667,029
============== ============== ==============
Identifiable assets $ 1,026,116 $ 174,701 $ 1,200,817
============== ============== ==============
Year Ended December 31, 1997
Revenues $ 413,792 $ 33,598 $ 447,390
============== ============== ==============
Operating income (loss) $ 75,577 $ (12,793) $ 62,784
============== ============== ==============
Depreciation and amortization $ 124,973 $ 4,966 $ 129,939
============== ============== ==============
Capital expenditures, including
acquisitions $ 172,010 $ 7,009 $ 179,019
============== ============== ==============
Identifiable assets $ 1,090,563 $ 126,497 $ 1,217,060
============== ============== ==============
NOTE 23 - 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.
F-34
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS - (continued)
Other Investments
The Company's investment in Susquehanna Cable Co., Inc. is carried at cost. (See
Note 9). 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 8). 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.
The estimated fair values of the Company's financial instruments as of December
31, 1997 are as follows:
Carrying Fair
Amount Value
----------------- -----------
(Dollars in thousands)
Balance Sheet Financial Instruments
Cash and cash equivalents $ 15,623 $ 15,623
Marketable securities 14,452 14,452
Long-term debt (1,287,988) (1,371,625)
Deposits on converters (3,878) (3,878)
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.
F-35
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 24 - REGULATORY MATTERS
The Federal Communications Commission ("FCC") has adopted regulations under The
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") governing rates charged to customers for basic and tier service and
for equipment and installation charges (the "Regulated Services"). The 1992
Cable Act placed the Company's basic service, equipment and installation rates
under the jurisdiction of local franchising authorities and its tier service
rates under the jurisdiction of the FCC. The rate regulations do not apply to
services offered on an individual service basis, such as per-channel or
pay-per-view services. The rate regulations adopt a benchmark price cap system
for measuring the reasonableness of existing basic and tier service rates.
Alternatively, cable operators have the opportunity to make cost-of-service
showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be made
in the event a cable operator adds or deletes channels. 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.
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 25 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses of continuing operations consist of the
following as of December 31:
1996 1997
--------------- ---------------
(Dollars in thousands)
Accounts payable - unrelated parties $ 8,930 $ 11,619
Accounts payable - affiliate 12,855 26,304
Accrued copyright fees 1,460 1,318
Accrued franchise fees 7,011 7,898
Accrued interest 13,995 14,101
Accrued payroll and fringe benefits 1,680 2,407
Accrued rate refund liability - 1,625
Accrued sales taxes 553 424
Accrued other 5,152 11,475
-------------- --------------
$ 51,636 $ 77,171
============== ==============
F-36
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 25 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES - (continued)
Accrued payroll and fringe benefits includes $610,000 for severance packages for
customer satisfaction specialists that are anticipated to be paid in 1998. In
May 1997, the Company opened a customer satisfaction center in New Castle
County, Delaware and proceeded to migrate inbound telephone customer service to
that location. By year-end, approximately 55% of the Company's customer base was
supported by that location. Specialists who elected not to migrate to the new
center were entitled to receive severance pay and benefits. This total expense
amounted to approximately $797,000 and is included in selling, general and
administrative expenses in the accompanying consolidated statement of
operations.
NOTE 26 - SUBSEQUENT EVENTS
On February 5, 1998, the Company issued $150,000,000 7-5/8% Senior Notes due
2008 and $150,000,000 8-1/4% Senior Subordinated Notes due 2008, through a
private offering. The proceeds of the notes are net of estimated issuance costs
of $3,575,000. The notes require semi-annual interest payments. The Senior Notes
are not redeemable by the Company prior to maturity. The Senior Subordinated
Notes may be redeemed, in whole or in part, at the option of the Company, on or
after February 15, 2003. 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 for the early extinguishment of
existing debt.
On February 12, 1998, the Company's wholly owned subsidiary, Lenfest Telephony,
Inc., exchanged its 50% general partnership interest in Hyperion for a warrant
to purchase 225,115 shares of Class A common stock of Hyperion
Telecommunications, Inc., the other 50% general partner in Hyperion. No exercise
price is payable in connection with the exercise of the warrant.
F-37
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, 1996 and 1997, 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, 1997, and have issued our
report thereon dated March 4, 1998 (except as to the first paragraph of Note 20,
as to which the date is March 26, 1998), which is included in the December 31,
1997, 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,
presents fairly, in all material respects, the information set forth therein.
Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
March 4, 1998
F-38
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1996 and 1997
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, 1995 $ 775 $ 3,512 $ 3,347 $ 940
============== ============== ============== ==============
Year ended December 31, 1996 $ 940 $ 4,674 $ 3,629 $ 1,985
============== ============== ============== ==============
Year ended December 31, 1997 $ 1,985 $ 9,715 $ 8,777 $ 2,923
============== ============== ============== ==============
F-39
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
DATE: March 27, 1998 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 March 27, 1998
- - ------------------------- and President
H. F. Lenfest (Principal Executive Officer)
/s/ H. Chase Lenfest Director March 27, 1998
- - -------------------------
H. Chase Lenfest
/s/ Brook J. Lenfest Director March 27, 1998
- - -------------------------
Brook J. Lenfest
/s/ John C. Malone Director March 27, 1998
- - -------------------------
John C. Malone
/s/ William R. Fitzgerald Director March 27, 1998
- - -------------------------
William R. Fitzgerald
/s/ Harry F. Brooks Executive Vice President March 27, 1998
- - ------------------------- (Principal Financial Officer)
Harry F. Brooks
/s/ Maryann V. Bryla Assistant Treasurer March 27, 1998
- - ------------------------- (Principal Accounting Officer)
Maryann V. Bryla
EXHIBIT INDEX
Exhibit
Number
- - -------
1. Purchase Agreement, dated January 30, 1998, between the Company, Salomon Brothers
Inc. and NationsBanc Montgomery Securities LLC.
4.7 Registration Agreement, dated January 30, 1998, between the Company, Salomon Brothers
Inc. and NationsBanc Montgomery Securities LLC.
4.7 Indenture, dated as of February 5, 1998, between the Company and The Bank of New York
relating to the $150,000,000 7-5/8% Senior Notes due 2008.
4.9 Form of $150,000,000 7-5/8% Senior Notes due 2008. (In accordance with Item 601 of
Regulation S-K similar notes between the same parties which reference CUSIP No. 526055
AF 5 and CUSIP No. U52547 AA 1 have not been filed because they are identical in all
material respects to the filed exhibit.)
4.10 Indenture, dated as of February 5, 1998, between the Company and The Bank of New York
relating to the $150,000,000 8-1/4% Senior Subordinated Notes due 2008.
4.11 Form of $150,000,000 8-1/4% Senior Subordinated Notes due 2008. (In accordance with
Item 601 of Regulation S-K similar notes between the same parties which referennnce CUSIP
No. U52547 AB 9 and CUSIP No. 526055 AH 1 have not been filed because they are identical
in all material respects to the filed exhibit.)
10.44 Letter, dated March 26, 1998 (effective September 30, 1997), from H. F. Lenfest to the Company.
27. Financial Data Schedule