FORM 10-Q/A
AMENDMENT NO. 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2094942
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1105 North Market St., Suite 1300,
P. O. Box 8985,
Wilmington, Delaware 19899
-------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(302) 427-8602
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of May 15, 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.
This Form 10-Q/A is being filed to amend Part I Items 1 and 2 of the
quarterly report on Form 10-Q of Lenfest Communications, Inc. for the quarterly
period ended March 31, 1998, which was filed with the Securities and Exchange
Commission on May 15, 1998 and amended on July 2, 1998.
LENFEST COMMUNICATIONS, INC.
Index
-----
Part I. Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and as of December 31, 1997 2
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 (unaudited) and March 31, 1997 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
1
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1998 1997
---------- ----------
(Unaudited) (*)
ASSETS
Cash and cash equivalents $ 22,017 $ 15,623
Marketable securities 11,825 14,452
Accounts receivable, trade and other, less allowance for
doubtful accounts of $2,659 in 1998 and $2,923 in 1997 17,510 23,206
Inventories 2,242 2,153
Prepaid expenses 3,278 2,960
Property and equipment, net of accumulated depreciation
of $381,128 in 1998 and $359,125 in 1997 409,677 413,787
Investments, principally in affiliates, and related receivables 67,262 56,881
Goodwill, net of amortization of $29,508 in 1998 and
$28,594 in 1997 72,222 73,136
Deferred franchise costs, net of amortization of $198,459 in
1998 and $186,027 in 1997 494,601 507,023
Other intangible assets, net of amortization of $14,400 in 1998
and $16,668 in 1997 24,333 28,341
Deferred Federal tax asset, net 77,671 74,251
Net assets of discontinued operations 375 2,660
Other assets 6,355 5,247
---------- ----------
$1,209,368 $1,219,720
========== ==========
(*) Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
2
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, (continued)
(Dollars in thousands)
March 31, December 31,
1998 1997
----------- -----------
(Unaudited) (*)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable and obligations under capital leases $ 1,286,145 $ 1,295,306
Accounts payable and accrued expenses - unrelated parties 61,201 50,867
Accounts payable - affiliate 21,653 26,304
Customer service prepayments and deposits 7,310 6,984
Deferred interest 6,930 7,063
Deferred state tax liability (net) 9,505 9,580
Investment in Garden State Cablevision, L.P. 77,747 77,880
----------- -----------
TOTAL LIABILITIES 1,470,491 1,473,984
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 158,896 shares authorized,
issued and outstanding 2 2
Additional paid-in capital 50,747 50,747
Accumulated deficit (312,387) (305,512)
Accumulated other comprehensive income, arising from
unrealized net gains on marketable securities, net of
deferred taxes of $278 in 1998 and $269 in 1997 515 499
----------- -----------
(261,123) (254,264)
----------- -----------
$ 1,209,368 $ 1,219,720
=========== ===========
(*)Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
3
[THIS PAGE INTENTIONALLY LEFT BLANK]
4
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-------------------------
1998 1997
-------- --------
REVENUES $ 110,665 $107,668
OPERATING EXPENSES
Service 10,779 8,755
Programming - from affiliate 17,335 15,687
Programming - other cable 7,584 7,775
Selling, general and administrative 22,719 22,391
Direct costs - non-cable 3,559 5,452
Depreciation 22,133 18,611
Amortization 14,523 13,514
-------- --------
98,632 92,185
-------- --------
OPERATING INCOME 12,033 15,483
OTHER INCOME (EXPENSE)
Interest expense (31,499) (31,917)
Equity in net income (losses) of unconsolidated
affiliates (814) 1,292
Gain on exchange of partnership interest 11,489 -
Other income and expense (net) 4,122 510
-------- --------
(16,702) (30,115)
-------- --------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (4,669) (14,632)
INCOME TAX BENEFIT (NET) 855 4,271
-------- --------
(LOSS) FROM CONTINUING OPERATIONS (3,814) (10,361)
DISCONTINUED OPERATIONS
Income from discontinued operations of Lenfest MCN, Inc.
(formerly known as MicroNet, Inc. and affiliates),
net of income taxes of $371 - 900
-------- --------
(LOSS) BEFORE EXTRAORDINARY LOSS (3,814) (9,461)
EXTRAORDINARY LOSS
Early extinguishment of debt, net of income taxes of $1,645 (3,061) -
-------- --------
NET (LOSS) (6,875) (9,461)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during the period 3,680 9,492
Less: reclassification adjustment for gains included
in net (loss) (3,664) (73)
-------- --------
16 9,419
-------- --------
COMPREHENSIVE INCOME (LOSS) $ (6,859) $ (42)
======== ========
See accompanying notes to condensed consolidated financial statements.
5
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-----------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (6,875) $ (9,461)
(Income) from discontinued operations - (900)
Extraordinary loss 3,061 -
---------- ----------
Loss from continuing operations (3,814) (10,361)
Adjustments to reconcile loss from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 36,656 32,125
Accretion of debt discount 438 376
Accretion of deferred interest (132) -
Accretion of discount on marketable securities (net) - (26)
(Gain) on exchange of partnership interest (11,489) -
Net (gains) on sales of marketable securities (3,664) (73)
Deferred income tax (benefit) (1,855) (4,271)
(Gain) on sale of property and equipment (33) (28)
Equity in net (income) losses of unconsolidated affiliates 814 (1,292)
Minority interest - (282)
Changes in operating assets and liabilities, net of effects
from acquisitions
Accounts receivable 5,696 (611)
Inventories (89) 497
Prepaid expenses (318) (995)
Other assets (1,108) (1,227)
Accounts payable and accrued expenses:
Unrelated parties 10,334 18,273
Affiliate (4,651) (491)
Customer service prepayments and deposits (156) (278)
---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 26,629 31,336
---------- ----------
See accompanying notes to condensed consolidated financial statements.
6
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-----------------------------
1998 1997
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of cable systems $ - $ (84,500)
Purchases of property and equipment (18,023) (14,508)
Purchases of marketable securities (1,078) (301)
Proceeds from sales of property and equipment 33 28
Proceeds from sales of marketable securities 7,878 189
Discontinued operations 2,285 1,083
Investments in unconsolidated affiliates - (6,592)
Distributions from unconsolidated affiliates 475 75
(Increase) in other intangible assets - investing (165) (747)
Loans and advances to unconsolidated affiliates (890) (181)
Loans and advances from unconsolidated affiliates 570 1,966
---------- ----------
NET CASH (USED) IN
INVESTING ACTIVITIES (8,915) (103,488)
CASH FLOWS FROM FINANCING ACTIVITIES
Increases in debt 296,386 75,000
Early extinguishment of debt (67,375) -
Other debt reduction:
Notes (240,000) (15,000)
Obligations under capital leases (331) (170)
(Increase) in other intangible assets - financing - (252)
---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (11,320) 59,578
---------- ----------
NET INCREASE
(DECREASE) IN CASH 6,394 (12,574)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 15,623 19,162
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 22,017 $ 6,588
========== ==========
See accompanying notes to condensed consolidated financial statements.
7
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Condensed Financial Information and Results of Operations
- ---------------------------------------------------------
In the opinion of the management of the Company and subsidiaries (the
"Company"), the accompanying condensed unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and with the regulations of the Securities and Exchange Commission
and contain all adjustments (consisting of only normal recurring adjustments)
necessary to make the condensed consolidated financial statements not misleading
and to present fairly the consolidated financial condition as of March 31, 1998,
the consolidated results of operations and consolidated cash flows for the three
months ended March 31, 1998 and 1997.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K dated March 27, 1998. The results of operations for the periods ended
March 31, 1998 and 1997, are not necessarily indicative of operating results for
the full year.
Prior period financial statements and notes thereto have been restated to
reflect the continuing operations of the Company.
NOTE 2 - DISCONTINUED OPERATIONS
Effective October 31, 1997, Lenfest MCN, Inc., (formerly MicroNet, Inc.) and
Lenfest MCN Delmarva Associates LP (formerly MicroNet Delmarva Associates LP),
collectively "MCN", 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 $70.3 million, subject to adjustments. 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 net assets of
MCN have been separately classified in the accompanying condensed consolidated
balance sheet under the caption "Net assets of discontinued operations" and
consist of the following at March 31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
-------------- --------------
(Dollars in thousands)
Accounts receivable $ 375 $ 2,660
============== ==============
8
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 2 - DISCONTINUED OPERATIONS, (continued)
Operating results of MCN for the three months ended March 31, 1997, are shown
separately in the accompanying consolidated statements of operations and
comprehensive income (loss) under the caption "Income from discontinued
operations of Lenfest MCN, Inc." and consist of the following:
Three Months Ended
March 31, 1997
----------------------
(Dollars in thousands)
Revenues $ 5,068
Operating expenses (2,783)
Depreciation and amortization (909)
-------------
OPERATING INCOME 1,376
Interest expense (117)
Other income 12
Income tax (expense) (371)
-------------
NET INCOME $ 900
=============
NOTE 3 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
------------------------------------
1998 1997
-------------- --------------
(Dollars in thousands)
Cash paid during the period for
Interest $ 8,703 $ 8,346
============== ==============
Income taxes $ - $ 1,522
============== ==============
Supplemental Schedule Relating to Acquisitions
1998 1997
-------------- --------------
(Dollars in thousands)
Property and equipment $ - $ 27,965
Deferred franchise costs - 53,797
Goodwill and other intangible assets - 2,738
-------------- --------------
$ - $ 84,500
============== ==============
Noncash Investing and Financing Activities
On February 12, 1998, the Company exchanged a partnership interest for a warrant
to acquire Class A common stock in Hyperion Telecommunications, Inc. (See Note
4).
9
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 4 - GAIN FROM EXCHANGE OF PARTNERSHIP INTEREST
On February 12, 1998, the Company's wholly owned subsidiary, Lenfest Telephony,
Inc., exchanged its 50% general partnership interest in Hyperion
Telecommunications of Harrisburg ("HTH") for a warrant to acquire 731,624 shares
(the effective number of shares after a stock split) or approximately 2% of
Class A common stock of Hyperion Telecommunications, Inc. ("Hyperion"), the
other 50% general partner in HTH. No exercise price is payable with the exercise
of the warrant. The value of the warrant was estimated to be $11.7 million,
based on the initial public offering of the Class A common stock of Hyperion in
May 1998. The Company believes that this value approximated fair market value of
the warrant on February 12, 1998. A gain of $11.5 million, which represents the
excess of the market value of the partnership interest over its book value, has
been included in the accompanying consolidated statement of operations and
comprehensive income (loss). The stock is included in investments in the
accompanying condensed consolidated balance sheet as it was not readily
marketable at March 31, 1998. Due to the small percentage of ownership and the
Company's inability to exercise influence over Hyperion, the Company has
discontinued the usage of the equity method. The Company accounts for this
investment in accordance with SFAS 115.
NOTE 5 - MARKETABLE SECURITIES
The aggregate cost basis and market values of marketable securities at March 31,
1998 and December 31, 1997 are as follows:
Aggregate Gross
Cost Unrealized Fair
Basis Gain Value
----------- ---------- -----------
(Dollars in thousands)
March 31, 1998 $ 11,032 $ 793 $ 11,825
=========== =========== ===========
December 31, 1997 $ 13,684 $ 768 $ 14,452
=========== =========== ===========
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
$3,664,000 and $73,000 are included in the accompanying consolidated statements
of operations for 1998 and 1997, respectively. The specific identification
method is used to determine the cost of each security at the time of sale.
NOTE 6 - INVESTMENTS, PRINCIPALLY IN AFFILIATES
The Company, through several subsidiaries, owns non-controlling interests in
several general partnerships and corporations. Under the equity method, the
initial investments are recorded at cost. Subsequently, the carrying amount of
the investments are adjusted to reflect the Company's share of net income or
loss of the affiliates as they occur. Losses in excess of amounts recorded as
investments on the Company's books have been offset against loans and advances
to these unconsolidated affiliates to the extent they exist.
The Company, through its subsidiary, Lenfest Jersey, Inc., owns a 10.005%
general partnership interest and a 39.995% limited partnership interest in
Garden State Cablevision L.P. ("Garden State"), a cable company serving
approximately 209,000 customers in southern New Jersey at March 31, 1998. The
Company accounts for its investment in Garden State under the equity method. The
Company is allocated a total of 50% of Garden State's losses. In addition, the
Company is required to make up its partner capital deficits upon termination or
liquidation of the Garden State partnership. Because of the requirement to make
up capital deficits, the accompanying financial statements reflect equity in
accumulated losses, net of related receivables, in excess of the investments in
Garden State in the amount of $77,747,000 and $77,880,000 at March 31, 1998 and
December 31, 1997, respectively.
10
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 6 - INVESTMENTS, PRINCIPALLY IN AFFILIATES, (continued)
Summarized statements of operations of Garden State, accounted for under the
equity method for the three months ended March 31, 1998 and 1997, are as
follows:
1998 1997
------------- -------------
(Dollars in thousands)
Results of Operations
Revenues $ 27,730 $ 26,730
Operating expenses (11,391) (11,574)
Management and consulting fees (1,663) (1,604)
Depreciation and amortization (8,725) (11,481)
------------- -------------
OPERATING INCOME (LOSS) 5,951 2,071
Interest expense (5,605) (5,766)
------------- -------------
NET INCOME (LOSS) $ 346 $ (3,695)
============= =============
NOTE 7 - LONG-TERM DEBT
Notes payable and obligations under capital leases consisted of the following at
March 31, 1998 and December 31, 1997:
March 31, December 31,
1998 1997
------------- -------------
(Dollars in thousands)
8-3/8% senior notes due November 1, 2005 $ 687,374 $ 687,082
10-1/2% senior subordinated notes due June 15, 2006 293,897 293,781
7-5/8% senior notes due February 15, 2008 (a) 148,258 -
8-1/4% senior subordinated notes due February 15, 2008 (b) 148,159 -
Bank credit facility - 240,000
11.30% senior promissory notes due September 1, 2000 - 45,000
11.84% senior promissory notes due May 15, 1998 1,470 10,500
9.93% senior promissory notes due September 30, 2001 - 11,625
Obligations under capital leases 6,987 7,318
------------- -------------
$ 1,286,145 $ 1,295,306
============= =============
(a) These notes, which are stated net of unamortized discount of $1.7
million at March 31, 1998, were issued through a private placement in
February 1998. 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, together with the
proceeds from the 8-1/4% senior subordinated notes discussed below, were
used to provide funds for the early extinguishment of debt and to pay
down the bank credit facility.
(b) These notes, which are stated net of unamortized discount of $1.8
million at March 31, 1998, were issued through a private placement in
February 1998. 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 Company may prepay the notes in 2003. The net proceeds were
used as discussed in (a) above.
11
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 8 - CORPORATE INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
in accordance with Financial Accounting Standards Board Statement (SFAS) No.
109, "Accounting for Income Taxes". SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the financial statement or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Differences between financial reporting
and tax bases arise most frequently from differences in timing of income and
expense recognition. Deferred income tax expense is measured by the change in
the net deferred income tax asset or liability during the period.
The net income tax benefit differs from amounts expected by applying the U.S.
Federal income tax rate of 35% to loss before income taxes primarily from
nondeductible amortization on goodwill and certain other intangibles and
provision for state income taxes.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
In November 1994, Mr. Lenfest and TCI International, Inc., an affiliate of TCI,
jointly and severally guaranteed $67 million in program license obligations of
the distributor of Australis' movie programming. As of March 31, 1998, the
Company estimates that the guarantee under the license agreements was
approximately $42.9 million. The Company has agreed to indemnify Mr. Lenfest
against loss from such guaranty to the fullest extent permitted under the
Company's debt obligations. Under the terms of 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. As a result, the Company will remain indirectly
liable under the non-cable subsidiary indemnity.
On May 5, 1998, the Trustee for the holders of Australis' bond indebtedness
appointed receivers in order to wind up the affairs of Australis. Consequently,
it is probable that Australis will not continue to make payments to the movie
partnership for film product thereby denying that partnership funds with which
to pay the movie studios whose license payments are guaranteed by Mr. Lenfest
and TCI International, Inc. However, the Company believes that the movie
partnership has entered into back up arrangements with Foxtel, the partnership
of News Corporation and Telstra, to purchase movies from the partnership at
approximately the same price and under the same minimum guarantee arrangements
that the partnership had with Australis. Because of this arrangement, the
Company believes that payments will continue to be made by the partnership
pursuant to its license agreements with the movie studios. Consequently, the
Company believes that Mr. Lenfest's guarantee will not be called, and so the
Company's non-cable subsidiaries will not be required to pay any amounts to Mr.
Lenfest pursuant to the indemnification.
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
12
connection with the acquisition of his company and claims total damages of $718
million (approximately U.S. $475 million as of March 31, 1998). 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
trial in this action began on February 2, 1998, and is expected to last until
sometime in the third quarter of 1998. As of June 22, 1998, the Plaintiff and
other witnesses testifying on his behalf have completed their testimony and
cross examination. The Defendants have begun the presentation of their case.
While the Company continues to deny all of Mr. Hadid's claims, neither it nor
its counsel can predict the outcome of the trial.
The Company has also been named as a defendant in various legal proceedings
arising in the ordinary course of business. In the opinion of management, the
ultimate amount of liability with respect to the above actions will not
materially affect the financial position or the results of operations of the
Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Substantially all of the Company's revenues are earned from customer
fees for cable television programming services, the sale of advertising,
commissions for products sold through home shopping networks and ancillary
services (such as rental of converters, remote control devices and
installations).
The Company has generated increases in revenues and Adjusted EBITDA for
the three months ended March 31, 1998 primarily due to increases in monthly
revenue per customer generated during 1997 and internal customer growth. As used
herein, Adjusted EBITDA represents EBITDA (earnings before interest expense,
income taxes, depreciation and amortization) adjusted to include cash
distributions received from unconsolidated and unrestricted affiliates. Adjusted
EBITDA corresponds to the definition of "EBITDA" contained in the Company's
publicly held debt securities. Consequently, Adjusted EBITDA and Adjusted EBITDA
margin are presented for the convenience of the holders of the Company's public
debt securities and industry analysts. Adjusted EBITDA should not be considered
as an alternative to net income as an indicator of the operating performance of
the Company or as an alternative to cash flows as a measure of liquidity.
Adjusted EBITDA and EDITDA are not measures under generally accepted accounting
principles.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1997
CONSOLIDATED RESULTS
Revenues increased $3.0 million, or 2.8%, to $110.7 million for the quarter
ended March 31, 1998 as compared to the corresponding 1997 period. The increase
was primarily due to strong internal customer growth and the full effect of the
rate increases implemented during 1997 associated with the Company's Core Cable
Television Operations.
Beginning with the quarter ended March 31, 1998, the Company changed its
treatment of franchise fees. Historically, the franchise fees were not
separately itemized on the customer's bill, because prior to 1998 the Company
used several different billing systems each of which limited the number of lines
of text that could be printed on a bill. As a consequence, there was no room for
a separate listing of franchise fees included in the total amount due. Such fees
were considered part of the monthly charge for basic services and equipment and,
therefore, were treated as an item of revenue and an item of expense. The 1992
Cable Act encouraged cable television operators to state separately each charge
on a customer's bill and permitted such separately stated charges to be passed
through directly to the customers. Effective January 1, 1998, all of the
Company's cable television systems were using a new, single billing system in
connection with its efforts to consolidate its Core Cable Television Operations.
The new billing system permits the printing of increased number of lines of
text, and the Company began listing the franchise fee separately. Consequently,
beginning with the quarter ended March 31, 1998, the Company determined that
franchise fees collected would no longer be included in revenue or as an item of
expense since the Company merely collects and remits to the appropriate
franchising authorities the franchise fees. The Company believes that its
current method of accounting for the franchise fees is consistent with the
financial statement presentation utilized in the cable television industry. For
the period ended March 31, 1998, the changed treatment of franchise fees had the
effect of reducing revenue by $2.0 million. Had the Company used the current
methodology in the corresponding 1997 period, the increase in revenue for the
quarter ended March 31, 1998 would have been approximately $5.0 million, a 4.8%
increase from the corresponding 1997 period.
Service Expenses increased 23.1% to $10.8 million for the quarter ended March
31, 1998 compared to the corresponding 1997 period. The increase was primarily
due to costs associated with the Company's Core Cable Television Operations.
14
Programming Expenses increased 6.2% to $24.9 million for the quarter ended March
31, 1998 compared to the corresponding 1997 period. The increase was due to
increases in programming costs associated with the Company's Core Cable
Television Operations.
Selling, General and Administrative Expense increased $0.3 million, or 1.5%, to
$22.7 million for the quarter ended March 31, 1998 compared to the corresponding
1997 period. These expenses are associated with salaries, facility, and
marketing costs. The increase was primarily due to legal fees incurred in
connection with the Australis Media, Ltd. litigation. See "Legal Proceedings" in
the Company's Form 10-K, filed March 27, 1998. As a result of the changed
treatment of accounting for franchise fees, selling, general and administrative
expense for the quarter ended March 31, 1998 was reduced by $2 million, the
amount of franchise fees collected and paid in the quarter. Had the Company used
the current methodology in the corresponding 1997 period, the increase in
selling, general and administrative expense for the quarter ended March 31, 1998
would have been approximately $2.3 million, a 10.4% increase over the
corresponding 1997 period.
Direct Costs Non-Cable decreased 34.7% to $3.6 million for the quarter ended
March 31, 1998 compared to the corresponding 1997 period. The decrease was
primarily due to the elimination of certain activities conducted by the
Company's Non-Cable Operations.
Depreciation and Amortization Expense increased 14.1% to $36.7 million for the
quarter ended March 31, 1998 compared to the corresponding 1997 period primarily
as a result of additional capital expenditures associated with the Company's
Core Cable Television Operations.
Adjusted EBITDA increased 3.7% to $49.8 million for the quarter ended March 31,
1998 compared to the corresponding 1997 period. The Adjusted EBITDA margin
increased to 45.0% in the 1998 period compared to 44.6% for 1997 period. These
increases were primarily related to the Company's Core Cable Television
Operations.
Interest Expense decreased 1.3% to $31.5 million for the quarter ended March 31,
1998 compared to the corresponding 1997 period. The decrease was primarily due
to lower interest rates on outstanding borrowings and lower average outstanding
indebtedness.
Loss from continuing operations before income tax decreased 68.1% to $4.7
million. The decrease was attributable to a gain of $11.5 million realized on
the exchange of a partnership interest.
The Company has not established a valuation allowance for the net operating
losses, because it believes that all of the Company's net operating losses will
be utilized before they expire. The net operating losses begin to expire in the
year 2000 and will fully expire in 2012. The Company believes the net operating
losses should start to be used in the year 2000 and should be fully utilized
before they expire. The Company believes that commencing in 2000 it will begin
generating taxable income as a result of increased revenues, the anticipated
elections of slower tax depreciation methods and anticipated declines in
amortization deductions. See Note 18 of the Company's Consolidated Financial
Statements included in the Company's Form 10-K dated March 27, 1998, as amended,
for the minimum amounts of taxable income required each year for the Company to
fully utilize its net operating losses for such year until such losses expire.
CORE CABLE TELEVISION OPERATIONS
Revenues increased 3.5% to $103.5 million for the quarter ended March 31, 1998
compared to the corresponding 1997 period. Revenues for basic and CPS tiers,
customer equipment, and installation ("regulated services") increased 11.2 % or
$8.1 million compared to the corresponding 1997 period. This increase was
primarily attributable to strong internal customer growth of approximately 3.3%
over the prior year period and the realization of the full effect of rate
increases implemented over the course of 1997. Non-regulated service revenue
decreased 16.6% or $3.5 million for the quarter ended March 31, 1998 compared to
the corresponding 1997 period. This decrease was primarily a result of the
discontinuation of the Prism regional sports network service which occurred as
of October 1, 1997. Other revenue decreased 16.0% or $1.1 million compared to
the corresponding 1997 period. The decrease was primarily a result of the
Company changing its methodology of recording franchise fee revenues and
expenses as described above.
Service Expenses increased 23.1% to $10.8 million for the quarter ended March
31, 1998 compared to the corresponding 1997 period. These expenses are related
to technical salaries and general operating
15
expenses. The increase was primarily associated with customer installation,
plant maintenance costs and the continuing expense related to the consolidation
efforts of the Company.
Programming Expenses increased 6.2% to $24.9 million for the quarter ended March
31, 1998 compared to the corresponding 1997 period. The programming expense
increase was primarily due to increased network programming costs and increased
number of customers associated with the basic and CPS tier services.
Selling, General and Administrative Expense decreased 9.2% to $16.5 million for
the quarter ended March 31, 1998 compared to the corresponding 1997 period.
These expenses are associated with salaries, facility, and marketing costs. The
decrease was primarily a result of the Company changing its methodology of
recording franchise fee revenues and expenses as described above.
Depreciation and Amortization Expense increased 15.2% to $35.7 million for the
quarter ended March 31, 1998 compared to the corresponding 1997 period. This
increase was primarily due to increased capital expenditures.
Adjusted EBITDA increased 3.4% to $52.4 million for the quarter ended March 31,
1998 compared to the corresponding 1997 period. The increase was primarily
attributable to strong internal customer growth of approximately 3.3% and the
realization of the full effect of the rate increases implemented during 1997.
The Adjusted EBITDA margin was 50.6% in both 1998 and 1997.
NON-CABLE INVESTMENTS
Radius Communications
- ---------------------
Revenues, prior to payment of affiliate fees, increased 20.8% to $6.4 million
for the quarter ended March 31, 1998 compared to the corresponding 1997 period.
Operating Expenses increased 9.0% to $5.7 million for the quarter ended March
31, 1998 compared to the corresponding 1997 period. The increase was primarily
due to increased selling expenses. Affiliate fees increased 2.2% to $2.5 million
of which $1.4 million was paid to the Company. Affiliate fees paid to the
Company are eliminated in consolidation.
Adjusted EBITDA was $0.7 million for the quarter ended March 31, 1998 compared
to $0.1 million for the corresponding 1997 period.
Depreciation and Amortization Expense increased by 17.5% to $0.5 million for the
quarter ended March 31, 1998 compared to the corresponding 1997 period. The
increase was primarily due to the continued deployment of digital advertising
insertion equipment used for operations and expansion of sales offices.
Operating Income was $0.3 million for the quarter ended March 31, 1998 compared
to an Operating Loss of $0.4 million for the corresponding 1997 period.
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. On February 5, 1998, the Company issued $150 million in
principal amount of Senior Notes and $150 million in principal amount of Senior
Subordinated Notes. The proceeds and cash on hand were used to prepay existing
indebtedness, accrued interest and prepayment premiums in the aggregate amount
of $313.8 million. As a result, at March 31, 1998, the Company had aggregate
total indebtedness of approximately $1,286.1 million. The Company's senior
indebtedness of $844.1 million consisted of: (i) a debt obligation in the amount
of $1.5 million due May 15, 1998; (ii) $835.6 million of Senior Notes; and (iii)
obligations under capital leases of approximately $7.0 million. At March 31,
1998, the outstanding subordinated indebtedness was approximately $442.0 million
of Senior Subordinated Notes.
16
The Senior Subordinated Notes are general unsecured obligations of the Company
subordinate in right of payment to all present and future senior indebtedness of
the Company.
In addition, the Company has in place a $300 million revolving credit
facility with a group of banks ("Bank Credit Facility"). As of May 14, 1998, the
Company's Bank 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 ratio of operating cash flow for the most recently
completed financial quarter multiplied by four to senior indebtedness for the
quarter ended March 31, 1998 through December 30, 1999 in excess of 5.00:1 and
4.50:1 commencing on December 31, 1999 and thereafter ("Senior Debt Leverage
Ratio"); and (ii) a ratio of operating cash flow for the most recently completed
financial quarter multiplied by four to total indebtedness in excess of 6.50:1
at March 31, 1998, and declining to 6.00:1 commencing on December 31, 1998 and
thereafter ("Total Debt Leverage Ratio"). The Company expects to refinance the
Bank Credit Facility in 1998. The Company is prohibited from paying dividends
under the Bank Credit Facility. In addition, the Company is limited in the
amount of dividends it can pay pursuant to the terms of the Notes.
Operations. Cash flow generated from continuing operations, excluding
changes in operating assets and liabilities that result from timing issues and
considering only adjustments for non-cash charges, was approximately $16.9
million for the three month period ended March 31, 1998 compared to
approximately $16.2 million for the three month period ended March 31, 1997.
During the three month period ended March 31, 1998, the Company was required to
make interest payments of approximately $8.7 million on outstanding debt
obligations, whereas in the same period in the prior year, the Company was
required under its then existing debt obligations to make interest payments of
$8.3 million.
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 carry forwards which it expects to
utilize notwithstanding recent losses. The net operating losses begin to expire
in the year 2000 and will fully expire in 2012. The Company believes the net
operating losses should start to be used in the year 2000 and should be fully
utilized before they expire. The Company believes that commencing in 2000 it
will begin generating taxable income as a result of increased revenues, the
anticipated elections of slower tax depreciation methods and anticipated
declines in amortization deductions. See Note 18 of the Company's Consolidated
Financial Statements included in the Company's Form 10-K dated March 27, 1998,
as amended, for the minimum amounts of taxable income required each year for the
Company to fully utilize its net operating losses for such year until such
losses expire.
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. As of March 31, 1998, the Company
believes the guarantee under the license agreements was approximately $42.9
million. The Company has agreed to indemnify Mr. Lenfest against loss from such
guaranty to the fullest extent permitted under the Company's debt obligations.
Under the terms of the Bank Credit Facility, however, Mr. Lenfest's claims for
indemnification are limited to $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 non-cable subsidiaries have
agreed to indemnify Mr. Lenfest for his obligations under the guarantee. As a
result, the Company will remain indirectly liable under the non-cable
subsidiaries' indemnity.
On May 5, 1998, the Trustee for the holders of Australis' bond
indebtedness appointed receivers in order to wind up the affairs of Australis.
Consequently, it is probable that Australis will not continue to make payments
to the movie partnership for film product thereby denying that partnership funds
with which to pay the movie studios whose license payments are guaranteed by Mr.
Lenfest and TCI International, Inc. However, the Company believes that the movie
partnership has entered into back up arrangements with Foxtel, the partnership
of News Corporation and Telstra, to purchase movies from the
17
partnership at approximately the same price and under the same minimum guarantee
arrangements that the partnership had with Australis. Because of this
arrangement, the Company believes that payments will continue to be made by the
partnership pursuant to its license agreements with the movie studios.
Consequently, the Company believes that Mr. Lenfest's guarantee will not be
called, and so the Company's non-cable subsidiaries will not be required to pay
any amounts to Mr. Lenfest pursuant to the indemnification.
Capital Expenditures. During 1998, the Company expects to make
approximately $100 million of capital expenditures, of which approximately $90.0
million will be spent for capital expenditures for its Core Cable Television
Operations. These capital expenditures will be for the upgrading of certain of
its cable television systems, including wide deployment of fiber optics,
maintenance including plant extensions, installations, and other fixed assets as
well as other capital projects associated with implementing the Company's
clustering strategy. The amount of such capital expenditures for years
subsequent to 1998 will depend on numerous factors, many of which are beyond the
Company's control, including responding to competition and increasing capacity
to handle new product offerings in affected cable television systems. The
Company anticipates that capital expenditures for years subsequent to 1998 will
continue to be significant.
Resources. Management believes, based on its current business plans,
that the Company has sufficient funds available from operating cash flow and
from borrowing capacity under the Bank Credit Facility to fund its operations,
capital expenditure plans and debt service. To the extent the Company seeks
additional acquisitions, it may need to obtain additional financing. However,
the Company's ability to borrow funds under the Bank Credit Facility requires
that the Company be in compliance with 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 and supporting vendors' computer programs and other
electronic equipment have date-sensitive software which may recognize "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 all of the Company's systems
will properly utilize dates beyond December 31, 1999. The Company has initiated
communications with most 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 has retained a consultant to review it
systems, to identify which systems are in need of remediation and to prepare a
remediation report. The Company expects to receive the consultant's report and
to have identified all systems in need of remediation not later than September
30, 1998. As it identifies systems in need of remediation, the Company will
develop and implement appropriate remediation measures. The Company expects to
complete the remediation processes for all of its operations not later than the
end of the third quarter of 1999. 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 a
material adverse effect on the Company.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income" ("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. In accordance with the provisions of SFAS No. 130, the
Company has adopted the pronouncement, effective January 1, 1998, by reporting
net consolidated comprehensive income (loss) in the Consolidated Statements of
Operations and Comprehensive Income (Loss). Prior periods have been restated for
comparative purposes as required.
18
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 interim financial reports issued to
stockholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt SFAS 131 by December 31, 1998. The adoption of SFAS No. 131 will not have
a significant impact on the Company's Consolidated Financial Statements and the
related footnotes.
The FASB has also recently issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post Retirement Benefits" ("SFAS No. 132"). SFAS No.
132 establishes standards for the way businesses disclose pension and other post
retirement benefit plans. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997. The Company adopted SFAS No. 132 effective January 1,
1998. Financial statement disclosures for prior periods do not require
restatement since the adoption of SFAS No. 132 does not have a significant
impact on the Company's financial statement disclosures.
The American Institute of Certified Public Accountants ("AICPA")
recently issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
defines which costs of computer software developed or obtained for internal use
are capital and which costs are expense. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. Earlier application is encouraged. The
Company has not yet adopted SOP 98-1.
The AICPA recently issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that entities
expense start-up costs and organization costs as they are incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged. The Company has adopted SOP 98-1 effective January 1,
1998. The adoption of SOP 98-5 does not have a significant impact on the
Company's Consolidated Financial Statements and the related footnotes.
Inflation
The net impact of inflation on operations has not been material in the
last three years due to the relatively low rates of inflation during this
period. If the rate of inflation increases the Company may increase customer
rates to keep pace with the increase in inflation, although there may be timing
delays.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LENFEST COMMUNICATIONS, INC.
DATE: August 13, 1998 By: /s/ Maryann V. Bryla
--------------------
Maryann V. Bryla
Vice President (authorized
officer and Principal Financial Officer)