FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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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)
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 August 13, 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.
LENFEST COMMUNICATIONS, INC.
Index
Part I. Financial Information Page
----
Item 1. Financial Statements
Report on Review by Independent Certified Public
Accountants 2
Condensed Consolidated Balance Sheets as of June 30, 1998
(unaudited) and as of December 31, 1997 3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three months and six months ended June 30, 1998 (unaudited) and
June 30, 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 (unaudited) and June 30, 1997 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Statement by Management Concerning Review of Interim Financial
Information by Independent Certified Public Accountants 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
1
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of
Lenfest Communications, Inc. and subsidiaries as of June 30, 1998, and the
related consolidated statements of operations and comprehensive income (loss)
for the three month and six month periods ended June 30, 1998 and 1997, and
the consolidated statements of cash flows for the six months ended June 30,
1998 and 1997, included in the accompanying Securities and Exchange Commission
Form 10-Q for the period ended June 30, 1998. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the condensed
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficit) and cash flows for the year then ended (not
presented herein). In our report dated March 4, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1997, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
/s/ Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
August 4, 1998
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
1998 1997
---------- ----------
(Unaudited) (*)
ASSETS
Cash and cash equivalents $ 9,359 $ 15,623
Marketable securities 21,227 14,452
Accounts receivable, trade and other, less allowance for
doubtful accounts of $3,035 in 1998 and $2,923 in 1997 22,048 23,206
Inventories 1,828 2,153
Prepaid expenses 2,449 2,960
Property and equipment, net of accumulated depreciation
of $398,619 in 1998 and $359,125 in 1997 411,932 413,787
Investments, principally in affiliates, and related receivables 54,633 56,881
Goodwill, net of amortization of $30,513 in 1998 and
$28,594 in 1997 71,217 73,136
Deferred franchise costs, net of amortization of $208,538 in
1998 and $186,027 in 1997 484,555 507,023
Other intangible assets, net of amortization of $15,111 in 1998
and $16,668 in 1997 23,618 28,341
Deferred Federal tax asset, net 80,332 74,251
Net assets of discontinued operations 375 2,660
Other assets 5,788 5,247
---------- ----------
$1,189,361 $1,219,720
========== ==========
(*) Condensed from audited financial statements.
See independent certified public accountants' review report and accompanying
notes.
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, (continued)
(Dollars in thousands)
June 30, December 31,
1998 1997
----------- -----------
(Unaudited) (*)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable and obligations under capital leases $ 1,284,835 $ 1,295,306
Accounts payable and accrued expenses - unrelated parties 52,080 50,867
Accounts payable - affiliate 28,803 26,304
Customer service prepayments and deposits 6,897 6,984
Deferred interest 6,797 7,063
Deferred state tax liability (net) 9,405 9,580
Investment in Garden State Cablevision, L.P. 75,825 77,880
----------- -----------
TOTAL LIABILITIES 1,464,642 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 (324,421) (305,512)
Accumulated other comprehensive income (loss) arising from unrealized net
gains (losses) on marketable securities,
net of deferred taxes of $97 in 1998 and $269 in 1997 (1,609) 499
----------- -----------
(275,281) (254,264)
----------- -----------
$ 1,189,361 $ 1,219,720
=========== ===========
(*) Condensed from audited financial statements.
See independent certified public accountants' review report and accompanying
notes.
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUES $ 117,326 $ 112,117 $ 227,991 $ 219,785
OPERATING EXPENSES
Service 12,132 9,151 22,911 17,906
Programming - from affiliate 17,373 15,594 34,708 31,281
Programming - other cable 7,973 8,277 15,557 16,052
Selling, general and administrative 26,733 25,330 49,452 47,720
Direct costs - non-cable 4,962 5,112 8,521 10,565
Depreciation 20,316 19,486 42,449 38,118
Amortization 11,509 12,435 26,032 25,949
--------- --------- --------- ---------
100,998 95,385 199,630 187,591
--------- --------- --------- ---------
OPERATING INCOME 16,328 16,732 28,361 32,194
OTHER INCOME (EXPENSE)
Interest expense (29,312) (29,000) (60,811) (60,864)
Equity in net income (losses) of unconsolidated
affiliates 774 (2,110) (40) (818)
Gain on disposition of partnership interest -- -- 11,489 --
Other income and expense (net) (2,424) 848 1,698 1,358
--------- --------- --------- ---------
(30,962) (30,262) (47,664) (60,324)
--------- --------- --------- ---------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (14,634) (13,530) (19,303) (28,130)
INCOME TAX BENEFIT (NET) 2,600 3,860 3,455 8,126
--------- --------- --------- ---------
(LOSS) FROM CONTINUING OPERATIONS (12,034) (9,670) (15,848) (20,004)
DISCONTINUED OPERATIONS -- 397 -- 1,270
--------- --------- --------- ---------
(LOSS) BEFORE EXTRAORDINARY LOSS (12,034) (9,273) (15,848) (18,734)
EXTRAORDINARY LOSS
Early extinguishment of debt, net of applicable
income taxes of $1,645 -- -- (3,061) --
--------- --------- --------- ---------
NET (LOSS) (12,034) (9,273) (18,909) (18,734)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
the period (2,124) (10,531) 274 (1,065)
Less: reclassification adjustment for (gains)
losses included in net loss -- 80 (2,382) 33
--------- --------- --------- ---------
(2,124) (10,451) (2,108) (1,032)
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ (14,158) $ (19,724) $ (21,017) $ (19,766)
========= ========= ========= =========
See independent certified public accountants' review report and accompanying
notes.
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
----------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(18,909) $(18,734)
(Income) from discontinued operations -- (1,270)
Extraordinary loss 3,061 --
-------- --------
Loss from continuing operations (15,848) (20,004)
Adjustments to reconcile net (loss) to net cash provided
by operating activities
Depreciation and amortization 68,481 64,067
Accretion of debt discount 917 999
Accretion of deferred interest (266) --
Accretion of discount on marketable securities (net) -- (477)
Net (gains) losses on sales of marketable securities (3,664) 50
(Gain) on disposition of partnership interest (11,489) --
Deferred income tax (benefit) (4,455) (8,200)
Net (gains) losses on sale/disposal of property and equipment 2,414 (107)
Equity in net losses of unconsolidated affiliates 40 818
Minority interest -- (564)
Changes in operating assets and liabilities, net of effects
from acquisitions
Accounts receivable 1,158 (4,640)
Inventories 325 (14)
Prepaid expenses 511 (1,066)
Other assets (541) 2,766
Accounts payable and accrued expenses:
Unrelated parties 1,213 6,182
Affiliate 2,499 (93)
Customer service prepayments and deposits (87) (494)
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 41,208 39,223
-------- --------
See independent certified public accountants' review report and accompanying
notes.
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
------------------------------
1998 1997
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of cable systems $ -- $ (84,500)
Purchases of property and equipment (43,041) (50,630)
Purchases of marketable securities (1,078) (553)
Proceeds from sales of property and equipment 33 107
Proceeds from sales of marketable securities 7,878 41,813
Discontinued operations 2,285 1,761
Investments in unconsolidated affiliates (282) (6,592)
Distributions from unconsolidated affiliates 675 75
(Increase) in other intangible assets - investing (369) (1,313)
Loans and advances to unconsolidated affiliates (1,170) (698)
Loans and advances from unconsolidated affiliates 705 2,980
--------- ---------
NET CASH (USED IN)
INVESTING ACTIVITIES (34,364) (97,550)
CASH FLOWS FROM FINANCING ACTIVITIES
Increases in debt 296,386 105,000
Early extinguishment of debt (67,375) --
Other debt reduction:
Notes (241,470) (60,500)
Obligations under capital leases (649) (675)
(Increase) in other intangible assets - financing -- (347)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (13,108) 43,478
--------- ---------
NET (DECREASE) IN CASH (6,264) (14,849)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 15,623 19,162
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 9,359 $ 4,313
========= =========
See independent certified public accountants' review report and accompanying
notes.
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Condensed Financial Information and Results of Operations
In the opinion of the management of Lenfest Communications, Inc. and
subsidiaries (the "Company"), the accompanying condensed unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with the regulations of the
Securities and Exchange Commission and contain all adjustments (consisting of
only normal recurring adjustments) necessary to make the condensed
consolidated financial statements not misleading and to present fairly the
consolidated financial condition as of June 30, 1998, the consolidated results
of operations and comprehensive income (loss) for the three and six months
ended June 30, 1998 and 1997, and consolidated cash flows for the six months
ended June 30, 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 June 30, 1998 and 1997, are not necessarily indicative of
operating results for the full year.
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 approximately $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 business. 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 June 30, 1998 and
December 31, 1997:
June 30, December 31,
1998 1997
------------- -------------
(Dollars in thousands)
Accounts receivable $ 375 $ 2,660
============= =============
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 month and six month periods ended June
30, 1997 is shown separately in the accompanying consolidated statements of
operations under the caption Discontinued Operations and consist of the
following:
Three Six
Months Months
Ended Ended
June 30, June 30,
1997 1997
------- -------
(Dollars in thousands)
Revenues $ 4,328 $ 9,396
Operating expenses (2,721) (5,504)
Depreciation and amortization (888) (1,776)
------- -------
OPERATING INCOME 719 2,116
Interest expense (180) (350)
Other income 18 30
Income tax (expense) (160) (526)
------- -------
NET INCOME $ 397 $ 1,270
======= =======
NOTE 3 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
--------------------------
1998 1997
------- -------
(Dollars in thousands)
Cash paid during the period for
Interest $54,247 $60,524
======= =======
Income taxes $ 120 $ 1,522
======= =======
Supplemental Schedule Relating to Acquisitions
1998 1997
------- -------
(Dollars in thousands)
Property and equipment $ - $25,350
Deferred franchise costs - 59,150
------- -------
$ - $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 Telecommunication, Inc.
(See Note 4).
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).
NOTE 5 - MARKETABLE SECURITIES
The aggregate cost basis and market values of marketable securities at June
30, 1998 and December 31, 1997 are as follows:
June 30, December 31,
1998 1997
------------- -------------
(Dollars in thousands)
Aggregate cost basis $ 22,739 $ 13,684
Unrealized gain (loss) (1,512) 768
------------- -------------
Fair value $ 21,227 $ 14,452
============= =============
All of the Company's securities are considered to be available for sale. Net
realized gains (losses) from the sale of marketable securities, in the amount
of $3,664,000 and ($50,000) 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 210,000 customers in southern New Jersey at June 30, 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 $75,825,000 and $77,880,000
at June 30, 1998 and December 31, 1997, respectively.
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 six months ended June 30, 1998 and 1997, are as follows:
1998 1997
------------- -------------
(Dollars in thousands)
Results of Operations
Revenues $ 56,241 $ 54,546
Operating expenses (22,720) (23,022)
Management and consulting fees (3,374) (3,273)
Depreciation and amortization (15,587) (22,892)
------------- -------------
OPERATING INCOME 14,560 5,359
Interest expense (11,222) (11,364)
------------- -------------
NET INCOME (LOSS) $ 3,338 $ (6,005)
============= =============
NOTE 7 - LONG-TERM DEBT
Notes payable and obligations under capital leases consisted of the following
at June 30, 1998 and December 31, 1997:
June 30, December 31,
1998 1997
---------- ----------
(Dollars in thousands)
8-3/8% senior notes due November 1, 2005 $ 687,674 $ 687,082
10-1/2% senior subordinated notes due June 15, 2006 294,015 293,781
7-5/8% senior notes due February 15, 2008 (a) 148,318 --
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 -- 10,500
9.93% senior promissory notes due September 30, 2001 -- 11,625
Obligations under capital leases 6,669 7,318
---------- ----------
$1,284,835 $1,295,306
========== ==========
(a) These notes, which are stated net of unamortized discount of $1.7
million at June 30, 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 June 30, 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, at its option, prepay the notes beginning in
2003. The net proceeds were used as discussed in (a) above.
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 June 30,
1998, the Company estimates that the guarantee under the license agreements
was approximately $36.9 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.
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 9 - COMMITMENTS AND CONTINGENCIES, (continued)
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 $718 million (approximately U.S. $445
million as of June 30, 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.
NOTE 10 - SUBSEQUENT EVENT
On August 4, 1998, the Company amended and restated its existing bank credit
facility. The new facility establishes unsecured revolving credit facility
commitments under which the Company may borrow up to $300 million, which can
be increased to $550 million under certain circumstances. The commitments
under this facility expire on March 31, 2006.
LENFEST COMMUNICATIONS AND SUBSIDIARIES
STATEMENT BY MANAGEMENT CONCERNING REVIEW OF
INTERIM FINANCIAL INFORMATION BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The June 30, 1998 and 1997 condensed consolidated financial statements
included in this filing on Form 10-Q have been reviewed by Pressman Ciocca
Smith LLP, Independent Certified Public Accountants, in accordance with
established professional standards and procedures for such a review.
The review report of Pressman Ciocca Smith LLP is included in Part I, Item 1.
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). 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" in the Company's Form 10-K, filed March 27, 1998, as amended.
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 EBIDTA
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 EBITDA are not measures under
generally accepted accounting principles.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
CONSOLIDATED RESULTS
Revenues increased $5.2 million, or 4.7%, to $117.3 million for the quarter
ended June 30, 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
recognition of franchise fees. 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
June 30, 1998 this had the effect of reducing revenue by $2.2 million. Had the
Company used the previous methodology in the current period, the increase in
revenue for the quarter ended June 30, 1998 would have been approximately $7.4
million, a 6.6% increase from the corresponding 1997 period.
2
Service Expenses increased 32.6% to $12.1 million for the quarter ended June 30,
1998 compared to the corresponding 1997 period. The increase was primarily due
to costs associated with the Company's Core Cable Television Operations.
Programming Expenses increased 6.2% to $25.3 million for the quarter ended June
30, 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 $1.4 million, or 5.5%, to
$26.7 million for the quarter ended June 30, 1998 compared to the corresponding
1997 period. These expenses are associated with salaries, administrative, legal,
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 subsequently
amended. As a result of the changed treatment of accounting for franchise fees,
as described above, selling, general and administrative expense for the quarter
ended June 30, 1998 is reduced by $2.2 million. Had the Company used the
previous methodology in the current period, the increase in selling, general and
administrative expense for the quarter ended June 30, 1998 would have been
approximately $3.6 million, a 14.3% increase over the corresponding 1997 period.
Direct Costs Non-Cable decreased 2.9% to $5.0 million for the quarter ended June
30, 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 decreased 0.3% to $31.8 million for the
quarter ended June 30, 1998 compared to the corresponding 1997 period. This
decrease is primarily associated with the Company's Non-Cable Operations.
Adjusted EBITDA decreased 0.7% to $49.1 million for the quarter ended June 30,
1998 compared to the corresponding 1997 period. The Adjusted EBITDA margin
decreased to 41.9% in the 1998 period compared to 44.1% for 1997 period. These
decreases were primarily related to the Company's Core Cable Television
Operations.
Interest Expense increased 1.1% to $29.3 million for the quarter ended June 30,
1998 compared to the corresponding 1997 period.
Loss from continuing operations before income tax increased 8.2% to $14.6
million. The increase was attributable to a loss resulting from the disposal of
customer equipment.
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 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 2.2% to $106.6 million for the quarter ended June 30, 1998
compared to the corresponding 1997 period. Revenues for basic and CPS tiers,
customer equipment, and installation ("regulated services") increased 12.3% or
$9.2 million compared to the corresponding 1997 period. This increase was
primarily attributable to strong internal customer growth of approximately 2.5%
over the prior year period and the realization of the full effect of rate
increases instituted over the course of 1997. Non-
3
regulated service revenue decreased 17.4% or $3.7 million for the quarter ended
June 30, 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.
Service Expenses increased 32.6% to $12.1 million for the quarter ended June 30,
1998 compared to the corresponding 1997 period. These expenses are related to
technical salaries and general operating 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 $25.3 million for the quarter ended June
30, 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 4.7% to $19.3 million for
the quarter ended June 30, 1998 compared to the corresponding 1997 period. These
expenses are associated with salaries, facility, administrative 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.
Had the Company used the previous methodology in the current period, the
increase in selling, general and administrative expense for the quarter ended
June 30, 1998 would have been approximately $1.3 million, a 6.3% increase over
the corresponding 1997 period.
Depreciation and Amortization Expense increased 1.1% to $30.8 million for the
quarter ended June 30, 1998 compared to the corresponding 1997 period.
Adjusted EBITDA decreased 4.0% to $50.8 million for the quarter ended June 30,
1998 compared to the corresponding 1997 period. The Adjusted EBITDA margin
decreased to 47.7% in the 1998 period compared to 50.7% for 1997 period. The
decrease was primarily attributable to increased service expenses and marketing
associated with new product development.
NON-CABLE INVESTMENTS
Radius Communications
- ---------------------
Revenues, prior to payment of affiliate fees, increased 26.6% to $8.3 million
for the quarter ended June 30, 1998 compared to the corresponding 1997 period.
Operating Expenses increased 12.9% to $6.7 million for the quarter ended June
30, 1998 compared to the corresponding 1997 period. The increase was primarily
due to increased selling expenses. Affiliate fees increased 8.0% to $3.3 million
of which $1.8 million was paid to the Company. Affiliate fees paid to the
Company are eliminated in consolidation.
Adjusted EBITDA was $1.6 million for the quarter ended June 30, 1998 compared to
$0.6 million for the corresponding 1997 period.
Depreciation and Amortization Expense increased by 14.0% to $0.6 million for the
quarter ended June 30, 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 $0.9 million for the quarter ended June 30, 1998 compared
to an Operating Loss of $0.1 million for the corresponding 1997 period.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
4
CONSOLIDATED RESULTS
Revenues increased $8.2 million, or 3.7%, to $228.0 million for the six-month
period ended June 30, 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.
As discussed above, in the quarter ended March 31, 1998, the Company changed its
treatment of franchise fees. For the six-month period ended June 30, 1998 this
had the effect of reducing Revenue by $4.3 million. Had the Company used the
previous methodology in the current period, the increase in Revenue for the
six-month period ended June 30, 1998 would have been approximately $12.5
million, a 5.7% increase from the corresponding 1997 period.
Service Expenses increased 28.0% to $22.9 million for the six-month period ended
June 30, 1998 compared to the corresponding 1997 period. The increase was
primarily due to costs associated with the Company's Core Cable Television
Operations.
Programming Expenses increased 6.2% to $50.3 million for the six-month period
ended June 30, 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 $1.7 million, or 3.6%, to
$49.5 million for the six-month period ended June 30, 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, as described above,
selling, general and administrative expense for the six-month period ended June
30, 1998 is reduced by $4.3 million. Had the Company used the previous
methodology in the current period, the increase in selling, general and
administrative expense for the six-month period ended June 30, 1998 would have
been approximately $6.0 million, a 12.6% increase over the corresponding 1997
period.
Direct Costs Non-Cable decreased 19.4% to $8.5 million for the six-month period
ended June 30, 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 6.9% to $68.5 million for the
six-month period ended June 30, 1998 compared to the corresponding 1997 period.
This increase is primarily associated with increased capital expenditures
related to the Company's Core Cable Television Operations.
Adjusted EBITDA increased 1.4% to $98.9 million for the six-month period ended
June 30, 1998 compared to the corresponding 1997 period. The Adjusted EBITDA
margin decreased to 43.4% in the 1998 period compared to 44.4% for 1997 period.
This decrease was primarily related to the Company's Core Cable Television
Operations.
Interest Expense decreased 0.1% to $60.8 million for the six-month period ended
June 30, 1998 compared to the corresponding 1997 period.
Loss from continuing operations before income tax decreased 31.4% to $19.3
million. The decrease was attributable to a gain of $11.5 million realized on
the exchange of a partnership interest.
CORE CABLE TELEVISION OPERATIONS
Revenues increased 2.8% to $210.1 million for the six-month period ended June
30, 1998 compared to the corresponding 1997 period. Revenues for basic and CPS
tiers, customer equipment, and installation ("regulated services") increased
11.8% or $17.3 million compared to the corresponding 1997 period.
5
This increase was primarily attributable to strong internal customer growth of
approximately 2.7% 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 17.0% or $7.2 million for the six-month period ended
June 30, 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.
Service Expenses increased 28.0% to $22.9 million for the six-month period ended
June 30, 1998 compared to the corresponding 1997 period. These expenses are
related to technical salaries and general operating 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 $50.3 million for the six-month period
ended June 30, 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 6.8% to $35.8 million for
the six-month period ended June 30, 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.
Had the Company used the previous methodology in the current period, the
increase in selling, general and administrative expense for the six-month period
ended June 30, 1998 would have been approximately $1.7 million, a 4.4% increase
over the corresponding 1997 period.
Depreciation and Amortization Expense increased 8.2% to $66.5 million for the
six-month period ended June 30, 1998 compared to the corresponding 1997 period.
Adjusted EBITDA decreased 0.4% to $103.2 million for the six-month period ended
June 30, 1998 compared to the corresponding 1997 period. The Adjusted EBITDA
margin decreased to 49.1% in the 1998 period compared to 50.7% for 1997 period.
The decrease was primarily attributable to increased service and programming
expenses.
NON-CABLE INVESTMENTS
Radius Communications
- ---------------------
Revenues, prior to payment of affiliate fees, increased 24.1% to $14.7 million
for the six-month period ended June 30, 1998 compared to the corresponding 1997
period.
Operating Expenses increased 12.1% to $12.4 million for the six-month period
ended June 30, 1998 compared to the corresponding 1997 period. The increase was
primarily due to increased selling expenses. Affiliate fees increased 5.4% to
$5.8 million of which $3.2 million was paid to the Company. Affiliate fees paid
to the Company are eliminated in consolidation.
Adjusted EBITDA was $2.3 million for the six-month period ended June 30, 1998
compared to $0.7 million for the corresponding 1997 period.
Depreciation and Amortization Expense increase by 15.7% to $1.1 million for the
six-month period ended June 30, 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 $1.2 million for the six-month period ended June 30, 1998
compared to an Operating Loss of $0.5 million for the corresponding 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
6
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 June 30, 1998, the Company had aggregate total
indebtedness of approximately $1284.8 million. The Company's senior indebtedness
of $842.7 million consisted of: (i) $836.0 million of Senior Notes; and (ii)
obligations under capital leases of approximately $6.7million. At June 30, 1998,
the Company had approximately $442.1 million of Senior Subordinated Notes. 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.
On August 4, 1998, the Company amended and restated its existing bank
credit facility (as amended and restated, the "Bank Credit Facility"). The Bank
Credit Facility establishes unsecured revolving credit facility commitments
under which the Company may borrow up to $300 million, which can be increased to
$550 million under certain conditions. The Company intends to use the
availability under the Bank Credit Facility for operations, capital
expenditures, general corporate purpose and possibly for future acquisitions of
cable systems. The commitments under the Bank Credit Facility expire on March
31, 2006. As of the date hereof, no amounts are outstanding under the Bank
Credit Facility.
Loans outstanding under the Bank Credit Facility bear interest at
floating rates. The Bank Credit Facility contains customary covenants, including
restrictive covenants, which impose certain limitations on the Company and its
wholly-owned cable operating subsidiaries, including, among other things,
incurring additional indebtedness, the payment of dividends, the repurchase of
stock, the making of certain payments and purchases, the making of acquisitions
and investments, the creation of certain liens, disposing or acquiring assets,
sale-leaseback transactions, and transactions with affiliates. The Bank Credit
Facility also includes financial covenants requiring the Company to maintain
certain financial ratios at specified levels. The Bank Credit Facility also
contains customary default provisions, including nonpayment of principal,
interest, fees and other amounts when due, violation of covenants, failure of
representations and warranties to be true and correct in all material respects
when made, cross defaults and cross acceleration to other debt obligations,
bankruptcy events, unsatisfied judgments in excess of specified amounts and
change of control.
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 $36.1
million for the six month period ended June 30, 1998 compared to approximately
$36.6 million for the six month period ended June 30, 1997. During the six month
period ended June 30, 1998, the Company was required to make interest payments
of approximately $54.2 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 $60.5 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 carryforwards 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 filed with the Company's Form 10-K on 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, H.F. Lenfest and TCI International, Inc. jointly and
severally guaranteed $67.0 million in program license obligations of the
distributor of movie programming for Australis Media Ltd.
7
("Australis"). As of June 30, 1998, the Company believes the amount subject to
the guarantee under the license agreements was approximately $36.9 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.
Subsequent thereto, Australis' assets were liquidated, and it has ceased to
conduct business. Australis will not 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. As of the date hereof, there has been
no demand for payment under the guarantee by the movie studios.
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 certain financial ratios at specified
levels or obtain the consent of the lenders thereunder to a waiver or amendment
of the applicable financial ratios. As of June 30, 1998, Management believes
that the Company was in compliance with such financial 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 its
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
8
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.
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 expenses. 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.
Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8K
9
(a) Exhibits.
Exhibit
Number Title or Description
- ------ --------------------
The following Exhibits are furnished as part of this Report:
*2.1 Amended and Restated Asset Exchange Agreement, dated September 8,
1995, between LenCom, 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 the
Company.
*2.4 Asset Purchase Agreement, dated as of September 7, 1995, by and
between Lenfest Atlantic, Inc. and Tri-County Cable Television
Company.
*2.5 Letter Agreement, dated July 13, 1995, between Suburban Cable TV
Co., Inc., and Service Electric Cable TV, Inc.
*2.6 Letter Agreement, dated August 11, 1995, between Suburban Cable
TV Co., Inc., and Service Electric Cablevision, Inc.
***2.7 Assignment and Assumption Agreement, dated as of February 16,
1996, by and between Heritage Cablevision of Delaware, Inc. and
Lenfest New Castle County, a Delaware general partnership.
***2.8 Bill of Sale, Assignment and Assumption and Release, dated as of
February 16, 1996, by and among Lenfest New Castle County,
Heritage Cablevision of Delaware, Inc. and The World Company.
+2.9 Asset Purchase Agreement, dated March 28, 1996, between Cable TV
Fund 14-A, Ltd. and Lenfest Atlantic, Inc.
+++3.1 Restated Certificate of Incorporation of the Company.
+++3.2 Amended and Restated Bylaws of the Company.
*4.1 Form of $700,000,000 8 3/8% Senior Note Due 2005.
**4.2 Indenture between the Company and The Bank of New York, dated as
of November 1, 1995.
+++4.3 Indenture, dated as of June 15, 1996, between the Company and The
Bank of New York.
+++4.4 Form of Certificated Note, dated June 27, 1996, between the
Company and Salomon Brothers Inc. (In accordance with Item 601 of
Regulation S-K similar Notes between the Company and Salomon
Brothers Inc. have not been filed because they are identical in
all material respects to the filed exhibit.)
+++4.5 Form of 10 1/2% Senior Subordinated Note, dated June 27, 1996, in
the principal sum of $296,700,000.
10
+++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 LLC.
####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 Programming Supply Agreement, effective as of September 30, 1986,
between ease , dated as of May Marguerite Lenfest and Satellite
Services, Inc. and the Company.
*10.2 Lease, dated as of May 1, 1990, by and between H.F. Lenfest and
Marguerite Lenfest and Suburban Cable TV Co. Inc.
*10.3 Lease, dated as of May 1, 1990, by and between H.F. Lenfest and
Marguerite Lenfest and Suburban Cable TV Co. Inc.
*10.4 Lease, dated as of May 24, 1990, by and between H.F. Lenfest and
Marguerite Lenfest and MicroNet, Inc.
*10.5 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).
*10.6 Supplemental Agreement, dated December 15, 1981, by and between
TCI Growth, Inc., H.F. Lenfest, Marguerite Lenfest and the
Company and Joinder Agreement executed by LMC Lenfest, Inc.
*10.7 Amendment to Supplemental Agreement, dated May 4, 1984 between
the Company and TCI Growth, Inc.
*10.8 Agreement, dated July 1, 1990, between H.F. Lenfest, Marguerite
B. Lenfest, Diane A. Lenfest, H. Chase Lenfest, Brook J. Lenfest
and the Lenfest Foundation, Tele-Communications, Inc. and Liberty
Media Corporation.
*10.9 Agreement and Consent, dated as of November 1, 1990, by and among
TCI Development Corporation, TCI Holdings, Inc., TCI Liberty,
Inc., Liberty Cable, Inc., H.F. Lenfest, Marguerite B. Lenfest,
H. Chase Lenfest, Brook J. Lenfest, Diane A. Lenfest and the
Company
*10.10 Letter Agreement, dated as of December 18, 1991, among Liberty
Media Corporation, the Company, Marguerite B. Lenfest, Diane A.
Lenfest, H. Chase Lenfest, Brook J. Lenfest and the Lenfest
Foundation.
11
*10.11 Irrevocable Proxies of H. Chase Lenfest, Diane A. Lenfest and
Brook J. Lenfest, each dated March 30, 1990.
*10.12 Partnership Agreement of L-TCI Associates, dated April 1993,
between Lenfest International, Inc. and UA-France, Inc.
*10.13 Stock Pledge Agreement, dated May 28, 1993, between Lenfest York,
Inc. and CoreStates Bank, N.A., as Collateral Agent.
*10.14 Pledge Agreement, dated July 29, 1994, between Lenfest Raystay
Holdings, Inc. and Farmers Trust Company as Collateral Agent.
*++++10.15 Agreement, dated September 30, 1986, between the Company and
Tele-Communications, Inc.
*10.16 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.
+10.17 First Amendment, dated as of February 29, 1996, to Credit
Agreement, dated as of December 14, 1995, by and among the
Company, 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.
+10.18 Agreement, dated as of February 29, 1996, in favor of the Company
by H.F. Lenfest.
+10.19 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.
+10.20 Sublease Agreement, dated March 21, 1996, between Suburban Cable
TV Co. Inc. and Surgical Laser Technologies, Inc.
+10.21 Letter Agreement, dated November 30, 1995, between the Company
and The Prudential Insurance Company of America.
+10.22 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.)
++10.23 Form of Second Amendment, dated as of April 29, 1996, to Credit
Agreement, dated as of December 14, 1995, by and among the
Company, 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.
++10.24 Form of Letter Agreement, dated May 2, 1996, between the Company
and The Prudential Insurance Company of America.
++10.25 Form of Letter Agreement, dated May 2, 1996, between the Company
and The Prudential Insurance Company of America. (In accordance
with Item 601 of Regulation S-K, agreements between the Company
and ECM Fund, L.P. I and Equitable Life Assurance Society have
not been filed because they are identical in all material
respects to the filed exhibit.)
++10.26 Form of Senior Subordinated Credit Agreement, dated as of May 2,
1996, between the Company and The Toronto-Dominion Bank.
12
+++10.27 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.)
+++10.28 Letter Agreement, dated June 20, 1996, between the Company and
The Prudential Insurance Company of America.
+++10.29 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.
+++10.30 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.
#10.31 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.
#10.32 Form of First Amendment, dated as of October 28, 1996, to Credit
Agreement, dated as of June 27, 1996, by and among the Company,
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 Letter, dated March 6, 1997, from H. F. Lenfest to the Company.
###10.34 Agreements, dated as of June 5, 1997, between H. F. Lenfest and
Lenfest Jersey, Inc., Lenfest York, Inc., Lenfest Raystay, Inc.
and Lenfest MCN, Inc. (formerly, MicroNet, Inc.).
####10.35 Letter, dated March 26, 1998 (effective September 30, 1997), from
H. F. Lenfest to the Company.
!10.36 Form of Second Amendment, dated as of January 27, 1998, to Credit
Agreement, dated as of June 27, 1996, by and among the Company,
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.
!10.37 Amended and Restated Loan Agreement, dated as August 4, 1998,
among Lenfest Communications, Inc., a certain Lead Arranger,
certain Arranging Agents, a certain Documentation Agent, a
certain Syndication Agent, the Lenders, and a certain
Administrative Agent.
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.
13
++ 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.
++++ Confidential portions have been omitted pursuant to Rule 406 and
filed separately with the Commission.
# Incorporated by reference to the Company's Report on Form 10-Q,
dated November 14, 1996, for the quarter ended September 30,
1996.
## Incorporated by reference to the Company's Report on Form 10-K,
dated March 22, 1997, for the year ended December 31, 1996.
### Incorporated by reference to the Company's Report on Form 10-Q,
dated August 14, 1997, for the quarter ended June 30, 1997.
#### Incorporated by reference to the Company's Report on Form 10-K,
dated March 27, 1998, for the year ended December 31, 1997.
! Incorporated by reference to the Company's Registration Statement
on Form S-4, as amended, No. 333-51589, dated May 1, 1998.
(b) Reports on Form 8-K.
On June 4, 1998, the Company filed a Form 8-K indicating a change
on the Company's Board of Directors.
14
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 and Treasurer (authorized
officer and Principal Financial Officer)