FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Indicate the number of shares outstanding of each of the Registrant's
class of common stock, as of March 27, 1999: 158,896 shares of Common Stock,
$0.01 par value per share. All shares of the Registrant's Common Stock are
privately held, and there is no market price or bid and asked price for said
Common Stock.
LENFEST COMMUNICATIONS, INC.
TABLE OF CONTENTS
Part I
Item 1 BUSINESS...............................................................
Item 2. DESCRIPTION OF PROPERTY................................................
Item 3. LEGAL PROCEEDINGS......................................................
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................................
Item 6. SELECTED FINANCIAL DATA................................................
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.............................
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...............................................
Part III
Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................
Item 11.EXECUTIVE COMPENSATION..................................................
Item 12.SECURITY AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................................
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................
Part IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........
Item 1. BUSINESS.
General
Lenfest Communications, Inc. ("Lenfest" or the "Company") is
principally engaged in the development and operation of cable television systems
primarily through its subsidiaries which operate under the name of Suburban
Cable ("Suburban Cable"). Other subsidiaries hold the Company's investments in
other cable television system operating companies, media entities and companies
providing services to cable television system operating companies.
The Company's wholly owned and operated systems (the "Systems") are
located primarily in areas surrounding Philadelphia (Eastern Pennsylvania,
Southern New Jersey and Northern Delaware) in predominantly middle and
upper-middle income areas that in recent years have had favorable household
growth and income characteristics. Management believes the "clustering" of its
Systems and the favorable demographics of its service area have contributed to
its high operating cash flow growth and margins. From January 1, 1994 through
December 31, 1998, the Company's Systems and its advertising subsidiary
(collectively, the "Core Cable Television Operations") have experienced an
average Adjusted EBITDA margin of 48.7%. (Adjusted EBITDA and Adjusted EBITDA
margin are defined in the footnotes to the table under Item 6 "Selected
Financial Data".)
As of December 31, 1998, the Company's Systems served approximately
1,014,200 basic customers and passed approximately 1,382,600 homes. At December
31, 1998, the Company also held equity interests in other cable television
entities serving approximately 450,100 basic customers, of which approximately
356,700 were in areas near or contiguous to the Systems. The Company's
attributable portion in such other cable television entities is approximately
187,000 basic customers, giving the Company a combined domestic base of
approximately 1,201,200 basic customers.
H. F. (Gerry) Lenfest, President and Chief Executive Officer of the
Company, together with his children, and AT&T Corp. ("AT&T"), through an
indirect wholly owned subsidiary of AT&T's subsidiary, Tele-Communications, Inc.
("TCI"), LMC Lenfest, Inc., each beneficially owns 50% of the Company's
outstanding common stock. Mr. Lenfest is a cable industry pioneer who founded
the Company in 1974 and has grown the Company both internally and through
acquisitions. The Company believes that its affiliation with TCI provides
substantial benefits, including the ability to purchase programming and
equipment at rates approximating those available to TCI. See "Business --
Relationship with TCI" and "-- Programming and Equipment Supply."
Mr. Lenfest and LMC Lenfest, Inc. have an agreement that provides,
together with the amended and restated Certificate of Incorporation of the
Company, that Mr. Lenfest has the right to designate a majority of the Board of
Directors of the Company until January 1, 2002. During such period, vacancies in
respect of the directors designated by Mr. Lenfest are to be filled by designees
of Mr. Lenfest or in the event of Mr. Lenfest's death, of The Lenfest
Foundation. Thereafter, the Lenfest Family (H.F. (Gerry) Lenfest, his wife,
Marguerite Lenfest, their issue, and The Lenfest Foundation) and LMC Lenfest,
Inc. will have the right to appoint an equal number of members of the Company's
Board of Directors. This right will continue for so long as any member of the
Lenfest Family owns any stock in the Company.
Operating Strategy
Management believes that the Company has continued growth potential in
the business of providing analog television programming services, as well as in
the business of providing new products such as Internet access, digital video
and audio programming services, paging and other data services. As a base for
achieving that growth, the Company has implemented the following:
o Field Operations: The Company's operations are clustered in one
extended market area, divided into four regions of approximately equal
size. Management of these regions provides individualized focus on the
day-to-day requirements of the operations, including plant maintenance,
installations of new customers and service and repair functions.
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o Customer Management (i.e., Billing) System: The Company uses one common
Customer Management System platform. That standardized platform now
allows fulfillment of work order scheduling, sales, service and repair
and billing inquiries from any location for the entire cluster. This
state-of-the-art Customer Management System will also be the platform
for support of all new products.
o Customer Service: In May, 1997, the Company opened a Customer
Satisfaction Center ("Call Center") in New Castle County, Delaware. By
year end 1998, the Company supported the entire customer base from that
location. The Company intends to use the Call Center to provide
billing, sales and service for cable television and all new products.
o Marketing and Advertising Sales: The concentration of a significant
sized customer base in one cluster affords the Company enhanced
benefits in both marketing and the sale of advertising. The Company
utilizes the local market media (television, radio and print) to reach
a wide audience in an efficient manner given the match of the Company's
coverage area to the local media market.
Overview of Core Cable Television Operations
Development Of The Systems
The Company has grown since its founding in 1974 both through the
internal growth of its owned and operated cable television systems and through
acquisitions. Through its acquisitions, the Company has successfully developed a
substantial cluster of contiguous cable operating systems, which comprise the
Systems. This single cluster is located in areas surrounding Philadelphia, all
of which are no more than a two hour drive from the corporate offices of
Suburban Cable TV Co. Inc. ("Suburban") in Oaks, Pennsylvania, which is
approximately 20 miles northwest of Philadelphia.
The following table provides customer data for each of the years in the
five-year period ended December 31, 1998, for the Company's owned and operated
and affiliated cable television systems.
- - --------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Owned and Operated
Homes passed
Beginning of period 870,718 892,549 904,753 1,278,673 1,356,299
Internal growth 21,831 12,204 26,424 30,541 26,282
% Internal growth 2.51 % 1.37 % 2.11 % 2.30 % 1.93 %
Acquired --- --- 347,496 47,085 ---
End of period (a) 892,549 904,753 1,278,673 1,356,299 1,382,581
Basic customers
Beginning of period 550,703 577,377 596,366 927,249 991,758
Internal growth 26,674 18,989 24,817 27,564 22,439
% Internal growth 4.84 % 3.29 % 2.75 % 2.86 % 2.26 %
Acquired --- --- 306,066 36,900 ---
End of period (a) 577,377 596,366 927,249 991,758 1,014,197
Affiliated Systems
Homes passed
Beginning of period 505,521 518,425 538,082 594,068 607,399
Internal growth 12,904 19,657 25,053 13,331 12,440
% Internal growth 2.55 % 3.79 % 4.40 % 2.24 % 2.04 %
Acquired --- --- 30,933 --- ---
End of period 518,425 538,082 594,068 607,399 619,839
Attributable homes passed at
end of period (b) 185,457 229,390 248,720 254,294 259,226
Basic customers
Beginning of period 353,935 366,041 384,480 431,819 441,277
Internal growth 12,106 18,439 25,686 9,458 8,862
% Internal growth 3.42 % 5.04 % 6.32 % 2.19 % 2.00 %
Acquired --- --- 21,653 --- ---
End of period 366,041 384,480 431,819 441,277 450,139
Attributable basic customers 130,247 162,338 179,118 182,886 186,648
at end of period (b)
- - ----------
(a) Customers and homes passed for 1996 and 1997 have been restated as a
result of the conversion to a single billing system in 1997 resulting in
unified criteria for calculating customers and homes passed.
(b) For each affiliated cable television system, the number of attributable
homes passed and attributable basic customers is determined by multiplying
the Company's percentage equity interest in such cable television system
by the actual homes passed and actual basic customers of such system. As
of December 31, 1998, the Company held a 50% equity interest in Garden
State Cablevision L.P., an effective 30% equity interest in the cable
television subsidiaries of Susquehanna Cable Co., a 45% equity interest in
Raystay Co. and a 30% equity interest in Clearview Partners. See "--
Unrestricted Cable Television Systems." The Company receives no direct
customer revenue from attributable basic customers.
- - --------------------------------------------------------------------------------
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Technical Overview and Upgrade Strategy
The Company utilizes a combination of coaxial and fiber optic cables to
distribute a wide range of programming and other broadband services to its
customers. As of December 31, 1998, approximately 96% of the Systems had the
capacity to carry a minimum of 52 analog channels, and approximately 30% had the
capacity to carry a minimum of 78 analog channels.
The Company has commenced an upgrade of the Systems to increase the
channel capacity, improve the system reliability and provide the capability for
carrying enhanced, interactive two-way services such as telephony and Internet
access. The upgrade of the distribution plant will increase the total bandwidth
to 870 MHz utilizing a hybrid fiber coaxial design architecture ("HFC"). The HFC
network will serve approximately 500 homes from each node and will be supported
with back-up battery power and status monitoring. The HFC architecture will
improve the reliability of the network by reducing the number of cascaded
amplification devices. The 870 MHz bandwidth will permit the simultaneous
carriage of up to 135 analog television channels, or a combination of fewer
analog channels supplemented with digital channels and other enhanced two-way
interactive services.
Utilizing digital compression technology, up to 12 television program
channels can be compressed into the same spectrum that would be used by one
analog channel. The Company began field testing digital set top terminals in
1998, and will be launching digital video services to all Systems during 1999.
The initial digital service offering will include approximately 35 channels of
programming (a multiplex of premium channels, a variety of basic cable
programming, services such as Discovery Kids, Speedvision, ESPNews, and Romance
Classics), 30 channels of digital music and an electronic program guide. This
new service will be offered for an additional fee and will require a digital set
top box.
Rates And Ancillary Revenue Sources
Lenfest's cable television systems typically offer four levels of
programming services: basic; cable programming service ("CPS"); premium
services; and pay-per-view. As of December 31, 1998, the basic service package
consisted of local off-air broadcast channels, and public service/access
channels. The monthly rate charged for the basic service package ranged from
$8.32 to $14.00. The CPS package consisted of satellite-delivered networks such
as ESPN, MTV, CNN, The Discovery Channel and USA Network. The monthly rate for
the CPS package ranged from $13.62 to $20.96. Rates for basic services and
customer equipment and installation are currently subject to governmental
regulation. The authority of the FCC to regulate CPS tier rates expires on March
31, 1999. See "Legislation and Regulation."
The Company also offers premium services, which include HBO, Cinemax,
The Movie Channel, Showtime and STARZ. As of December 31, 1998, the monthly
charge for each of these services, priced
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individually, ranged from $8.95 to $11.95. Rates for premium services and
pay-per-view services are currently exempt from governmental regulation. See
"Legislation and Regulation."
Lenfest's systems typically offer four channels of pay-per-view
services, which include feature movies, special events and adult programming. As
of December 31, 1998, prices for movies and adult programming ranged from $1.95
to $6.95. Special event prices vary considerably based upon the type of event.
In addition to customer fees, ancillary sources of revenue for cable
television system operators include the sale of advertising time on locally
originated and satellite-delivered programming, as well as home shopping sales
commissions. All of the Company's systems are involved in local advertising
sales and offer one or both of the leading shop-at-home services, QVC and Home
Shopping Network ("HSN"), as part of the basic programming package. Lenfest
receives commissions from both QVC and HSN based on orders placed by Lenfest
customers.
Lenfest also receives revenue from the rental of converter boxes and
remote controls and from installation fees. All such revenues are regulated by
the 1992 Cable Act. See "Legislation and Regulation."
Programming and Equipment Supply
Through an agreement with Satellite Services, Inc. (a wholly owned
subsidiary of TCI), the Company is able to purchase a majority of its
programming services at rates closely approximating those paid by TCI, although
the Company retains the option to purchase programming from other parties.
Management believes that these rates are significantly lower than the Company
could obtain independently. Programming is the Company's largest single expense
item, accounting for 25.5% of total operating expense during 1998. The four
cable television operators in which the Company has an equity interest (Garden
State Cablevision L.P., Susquehanna Cable Co., Clearview Partners and Raystay
Co.) also obtain a significant amount of their programming pursuant to this
agreement.
In addition, the Company has been placed on the "approved list" of
major equipment vendors to receive the same discounts on equipment purchases as
are received by TCI. There can be no assurance that the Company will continue to
be eligible to receive these equipment discounts in the future.
Franchises
As of December 31, 1998, the Company held 339 cable television
franchises. These franchises are all non-exclusive and provide for the payment
of fees to the issuing authority. The Cable Communications Policy Act of 1984
(the "1984 Cable Act") prohibits franchising authorities from imposing annual
franchise fees in excess of 5% of the gross revenues attributable to customers
located in the franchise area and also permits the cable television system
operator to seek renegotiation and modification of franchise requirements if
warranted by changed circumstances. For the year ended December 31, 1998,
franchise fee payments made by the Company have averaged approximately 3.3% of
gross cable television revenues.
The 1984 Cable Act provides for an orderly franchise renewal process,
and it establishes comprehensive renewal procedures which require that an
incumbent franchisee's renewal application be assessed on its own merit and not
as part of a comparative process with competing applications. A franchising
authority may not unreasonably withhold the renewal of a franchise. If a
franchise renewal is denied and the system is acquired by the franchise
authority or a third party, then the franchise authority or other purchaser must
pay the operator the "fair market value" for the system covered by the
franchise. See "Legislation and Regulation."
The Company has never had a franchise revoked, and management believes
that its franchise relationships are good.
Unrestricted Cable Television Systems
4
In addition to the Systems, at December 31, 1998, Lenfest held
investments in four cable television system entities. Lenfest holds a 50% equity
interest in Garden State Cablevision L.P. ("Garden State"); an effective 30%
equity interest in the cable subsidiaries of Susquehanna Cable Co. ("SCC"); a
45% equity interest in Raystay Co. ("Raystay"); and a 30% equity interest in
Clearview Partners ("Clearview"). As of December 31, 1998, these entities
operated cable television systems serving approximately 450,100 basic customers,
of which approximately 356,700 were in areas contiguous to the Systems. As a
result of Lenfest's investment in these companies, the companies participate in
Lenfest's programming purchasing relationship with Satellite Services, Inc. See
" -- Programming and Equipment Supply."
Garden State serves the Cherry Hill, New Jersey area. The following
table provides customer data at year end for each of the years in the three-year
period ended December 31, 1998 for Garden State's cable television system.
Year Ended December 31,
---------------------------------------------
1996 1997 1998
------- ------- -------
Homes passed ............................... 294,390 297,783 301,672
Basic customers ............................ 204,179 208,204 212,494
Basic penetration .......................... 69.4% 69.9% 70.4%
SCC has systems in York and Williamsport, Pennsylvania as well as
smaller systems in Maine, Mississippi, Illinois and Indiana. The following table
provides customer data at year-end for each of the years in the three-year
period ended December 31, 1998 for SCC's cable television systems.
Year Ended December 31,
---------------------------------------------
1996 1997 1998
------- ------- -------
Homes passed ............................... 206,715 211,778 217,140
Basic customers ............................ 159,871 164,186 166,917
Basic penetration .......................... 77.3% 77.5% 76.8%
Beginning May 28, 1998, each of Lenfest and Susquehanna Media Co. (the
owner of the balance of the equity interest in SCC and its cable subsidiaries)
may offer to purchase all of the shares of stock of SCC and its cable
subsidiaries owned by the other. If the recipient of the offer rejects the
offer, the recipient is then obligated to purchase all of the shares of stock of
the person who made the offer on the same terms and conditions as were contained
in the initial offer. Lenfest has pledged its stock in SCC and in the SCC cable
subsidiaries as collateral for obligations incurred by Susquehanna Media Co.
Raystay owns and operates cable television systems in Pennsylvania. The
following table provides customer data at year end for each of the years in the
three-year period ended December 31, 1998 for Raystay's cable television
systems.
Year Ended December 31,
---------------------------------------------
1996 1997 1998
------- ------- -------
Homes passed ............................... 79,029 83,451 86,269
Basic customers ............................ 57,743 59,085 60,719
Basic penetration .......................... 73.1% 70.8% 70.4%
As of January 25, 1999, the Company, through its indirect wholly owned
subsidiary, Lenfest Raystay Holdings, Inc., entered into an agreement to acquire
the 55% of the stock of Raystay held by other shareholders.
Clearview owns and operates cable television systems in Pennsylvania
and Maryland. As of December 31, 1998, Clearview had approximately 10,009 basic
customers and passed approximately 14,758 homes.
Lenfest Advertising, Inc. (d/b/a Radius Communications)
Radius Communications is in the business of selling and inserting
advertising on the local avails given to the cable operators on all satellite
delivered channels.
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Effective January 1, 1997, Radius, through its subsidiary, Lenfest
Philadelphia Interconnect, Inc., entered into a partnership with a subsidiary of
Comcast Corporation ("Comcast") for the purpose of representing regional and
national cable advertising sales in the Greater Philadelphia market. Under the
agreement, the percentage interests of the partners is determined on the basis
of the number of cable customers of the Company and Comcast in the designated
market area at the beginning of the year. For 1998, Radius' partnership interest
was 71%. The partners have equal representation on the Executive Committee, and
Radius has been the managing partner of the partnership since its inception.
In addition, at December 31, 1998, Radius provided local cable
advertising sales and insertion for the Company and sixteen other cable
television system operators with approximately 2.3 million customers, of which
approximately 1,014,200 were customers of the Company.
StarNet, Inc.
StarNet, Inc. offers program promotion for basic, premium and
pay-per-view cable television through its "NuStar" service. StarNet also holds a
28% interest in a joint venture with Prevue Networks, Inc. ("Prevue"). The joint
venture is managed and operated by Prevue.
NuStar delivers and inserts fully tagged promotional spots for
programming into 25 cable television networks. Each spot targets specific viewer
groups and includes time specific information, channel numbers and system logos.
Up to 65 different programs are promoted monthly through NuStar. The spots are
delivered by NuStar through its satellite transponder to proprietary equipment
in cable system headends. NuStar launched its service in 1989, and as of
December 31, 1998 served cable television systems having 23 million customers.
In December 1996, StarNet converted its service to Digicipher II delivery on a
KU Band transponder and relaunched the NuStar service as Customized NuStar and
Classic NuStar. Customized NuStar provides individual MSO's with their own
satellite feed in order to insert promotional spots of their own choosing.
Other Investments
Lenfest International, Inc.
Subsidiaries of the Company and TCI each are partners in L-TCI
Associates, a partnership which held, as of December 31, 1998, a 29.0% interest
in Videopole, a French cable television company serving rural areas of France
and suburbs of Paris. As of December 31, 1998, Videopole held franchises in
areas with nearly 547,000 homes, had built cable television systems passing
approximately 350,000 homes, and served approximately 130,000 customers.
Videopole is controlled by Synergie Developpement et Services ("SDS") which is a
wholly owned subsidiary of D' Electricite De France, the French state-owned
electric company.
As of December 31, 1998, the Company's indirect interest in Videopole
was 23.2% and TCI's indirect interest was 5.8%.
As of January 20, 1999, the Company, through its subsidiary, Lenfest
International, purchased the 71% of Videopole owned by SDS. As a result, Lenfest
International holds a direct and indirect 94.2% interest in Videopole.
Competition
Cable systems compete to varying degrees with a number of other
communications and entertainment media for customers. These media include, but
are not limited to movie theaters and movie store rentals, Internet service,
sporting events, and the direct reception of broadcast signals by the viewer's
own antenna.
Other services compete directly with cable television by offering
similar video services. Currently, the most significant competition faced by the
Company is in providing service to commercial or multiple dwelling units (MDUs).
Competitors focus on MDUs because they can access a number of customers with one
contract thereby producing economies of scale.
6
Cable communications systems operate pursuant to franchises granted on
a non-exclusive basis. The 1992 Cable Act prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits franchising
authorities to operate cable systems. Well-financed businesses from outside the
cable industry (such as public utilities that own certain of the poles to which
cable is attached) may become competitors for franchises or providers of
competing services. See "Legislation and Regulation."
Private satellite master antenna television (SMATV), direct broadcast
systems (DBS), and Multi-channel Multipoint Distribution systems (MMDS) are the
three types of companies that offer direct competitive services. The possibility
of additional hardwire competition from companies like Bell Atlantic, RCN,
Connectiv, or PECO exists, but due to the level of effort required to build and
develop a hardwired video distribution service, the Company estimates any
significant threat from these entities to be several years away. RCN has filed
to be an OVS operator in a number of Suburban's franchise areas. Although RCN
has obtained franchise agreements in some of these areas, to the best of the
Company's knowledge, it has not started construction of any plant yet.
Cable operators face competition from SMATV systems that serve
condominiums, apartment and office complexes and private residential
developments. SMATV systems offer both reception of local television stations
and many of the same satellite-delivered programming services offered by
franchised cable communications systems. SMATV operators often enter into
exclusive agreements with building owners or homeowners' associations. These
services currently cannot offer non-broadcast local programming.
Cable communications systems also compete with wireless program
distribution services such as MMDS which use low-power microwave frequencies to
transmit video programming over-the-air to subscribers. At the beginning of 1998
there were two MMDS operators providing broadcast and satellite programming to
subscribers in areas served by the Systems, CAI Wireless and Orionvision. During
1998, CAI Wireless ceased residential service in the Philadelphia market. Its
commercial business was sold to OnePoint Communications, which operates only
commercial services. Suburban is aggressively pursuing a number of former CAI
residential properties. Orionvision currently has 5,000 customers within a 30
mile radius of its tower in Corbin City, New Jersey. About 60% of Orionvision's
customer base falls within Suburban Cable's New Jersey franchise areas. This
service using analog technology, offers fewer channels, albeit at a lower price,
than are currently available through Suburban Cable. The customer is required to
have an antenna installed on his house and needs a converter box to translate
the signals.
Additionally, the FCC has adopted regulations allocating frequencies in
the 28-Ghz band for a new multichannel wireless video service called Local
Multipoint Distribution Service ("LMDS") that is similar to MMDS. WNP
Communications was the top bidder for the spectrum allocated to the Philadelphia
market. To date no announcement about planned services has been made.
Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable systems. These technologies include direct broadcast
satellite service, commonly known as DBS. According to recent government and
industry reports, conventional, medium and high-power satellites currently
provide video programming to over 10.6 million individual households,
condominiums, apartment and office complexes in the United States. DBS providers
with medium and high-power satellites typically offer to their subscribers more
than 150 channels of programming, including program services similar to those
provided by cable systems.
DBS systems use video compression technology to increase channel
capacity and digital technology to improve the quality of the signals
transmitted to their subscribers. DBS service currently has certain competitive
advantages and disadvantages compared to cable service. Advantages of DBS
service include more programming, greater channel capacity and the digital
quality of signals delivered to subscribers. The disadvantages of DBS service
include high up-front customer equipment and installation costs and a lack of
local programming.
Two major companies are currently offering nationwide high-power DBS
services. Both companies have recently announced separate transactions that, if
completed, may significantly enhance the number of channels on which they can
provide programming to subscribers and may improve significantly their
competitive positions against cable operators. In addition, the FCC and Congress
are presently considering proposals to enhance the ability of DBS providers to
transmit local broadcast signals to local markets. The
7
Company is unable to predict the effect these transactions and proposals may
have on its business and operations.
DBS offers sports and movie packages to its customers that Suburban
Cable cannot currently offer due to technical and regulatory constraints. Higher
DBS penetrations are achieved in the rural areas where fewer customers can get
connected to cable at a reasonable cost.
DirecTV/USSB is now making concerted efforts to provide service to a
number of Suburban Cable's commercial/bulk accounts. Additionally, in 1998 Bell
Atlantic signed an agreement with DirecTV to sell DirecTV/USSB services to
residential customers as well as commercial/MDU accounts, in certain of its
operating areas. Bell Atlantic has commenced offering this service in certain
parts of Suburban Cable's service areas.
During 1999, certain of the Company's cable systems will offer, or plan
to offer, interactive online computer services to subscribers. This service will
compete with a number of other companies, many of whom have substantial
resources, such as:
o Existing Internet service providers, commonly known as ISP's
o Local telephone companies
o Long distance telephone companies
o Satellite providers, including DirecTV
Recently, a number of companies, including telephone companies and
ISP's, have requested local authorities and the FCC to require cable operators
to provide access to cable's broadband infrastructure so that these companies
may deliver competitive Internet services directly to customers over cable
facilities. In a recent report to Congress, the FCC declined to institute an
administrative proceeding to examine this issue at this time. At the present
time, certain municipalities are attempting to impose access obligations on a
cable operator as a condition for obtaining municipal consent for franchise
transfers or renewals; however, such conditions are currently being challenged
in court. It is expected that the FCC, Congress, and state and local regulatory
authorities will continue to consider similar actions in the future.
The deployment of Asymmetric Digital Subscriber Line technology, known
as ADSL, will allow Internet access to subscribers at data transmission speeds
equal to or greater than that of modems over conventional telephone lines.
Several telephone companies are introducing ADSL service and have requested the
FCC to allow them to provide high-speed broadband services, including
interactive online services, without regard to present service boundaries and
other regulatory restrictions. The Company is unable to predict the likelihood
of success of the online services offered by its competitors or the impact on
its business and operations of these competitive ventures.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable communications industry or on the
operations of the Company.
Employees
As of December 31, 1998, the Company had 1,988 full-time employees, of
which 152 employees were covered by collective bargaining agreements at two
locations.
As of December 31, 1998, the Company's Core Cable Television Operations
had 1,657 full-time employees, of which 152 employees were covered by collective
bargaining agreements at two locations.
The Company considers its relations with its employees to be good.
Legislation and Regulation
The cable television industry is regulated by the FCC, some states and
substantially all local governments. In addition, various legislative and
regulatory proposals under consideration from time to time
8
by the Congress and various federal agencies may in the future materially affect
the cable television industry. The following discussion summarizes certain
federal, state and local laws and regulations affecting cable television.
Federal Laws. The 1984 Cable Act, the 1992 Cable Act and the 1996
Telecommunications Act are the principal federal statutes governing the cable
industry. These statutes regulate the cable industry, among other things, with
respect to: (i) cable system rates for both basic and certain non-basic
services; (ii) programming access and exclusivity arrangements; (iii) access to
cable channels by unaffiliated programming services; (iv) leased access terms
and conditions; (v) horizontal and vertical ownership of cable systems; (vi)
consumer protection and customer service requirements; (vii) franchise renewals;
(viii) television broadcast signal mandatory carriage and retransmission
consent; (ix) technical standards; and (x) privacy of customer information.
Federal Regulations. The FCC, the principal federal regulatory agency
with jurisdiction over cable television, has promulgated regulations
implementing the federal statutes.
Rate Regulation. Nearly all cable television systems are subject to
local rate regulation of basic service pursuant to a formula established by the
FCC and enforced by local franchising authorities. Local franchising authorities
and/or the FCC are empowered to order a reduction of existing rates which exceed
the maximum permitted level for basic cable services and associated equipment,
and refunds can be required.
Additionally, the FCC reviews rates for non-basic service tiers (other
than per-channel or per-program services) in response to complaints filed by
franchising authorities (through March 31, 1999, only); prohibits cable
television systems from requiring subscribers to purchase service tiers above
basic service in order to purchase premium service if the system is technically
capable of doing so; and has adopted regulations to establish, on the basis of
actual costs, the price for installation of cable service and rental of cable
equipment. Regulation of non-basic tier rates is scheduled to terminate on March
31, 1999. Regulation of basic tier cable rates also ceases for any cable system
subject to "effective competition." The 1996 Telecommunications Act expanded the
definition of "effective competition" to include situations where a local
telephone company or its affiliate, or any multichannel video provider using
telephone company facilities, offers comparable video service by any means
except DBS.
The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and non-basic service rates. Alternatively,
cable operators have the opportunity to make cost-of-service showings which, in
some cases, may justify rates above the applicable benchmarks. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and programming costs. Cost-based adjustments to
these capped rates can also be made in the event a cable operator adds or
deletes channels or significantly upgrades its system. The rules also require
that charges for cable-related equipment (e.g., converter boxes and remote
control devices) and installation be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit.
Carriage of Broadcast Television Signals. Commercial television
broadcast stations which are "local" to a cable system must elect every three
years either to require the cable system to carry the station, subject to
certain exceptions, or to negotiate for "retransmission consent" to carry the
station. Broadcast stations typically seek monetary compensation or the carriage
of additional programming in return for granting retransmission consent. The
next three-year election between mandatory carriage and retransmission consent
for local commercial television stations will occur on October 1, 1999. Local
non-commercial television stations are also given mandatory carriage rights,
subject to certain exceptions. Unlike commercial stations, noncommercial
stations are not given the option to require negotiation of retransmission
consent. In addition, cable systems must obtain retransmission consent for the
carriage of all "distant" commercial broadcast stations, except for certain
"superstations," i.e., commercial satellite-delivered independent stations such
as WGN.
Deletion of Certain Programming. Cable television systems that serve
1,000 or more customers must delete the simultaneous or non-simultaneous network
programming of a distant station upon the appropriate request of a local
television station holding local exclusive rights to such programming. FCC
regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system.
9
Public and Leased Access Channels. The 1984 Cable Act permits local
franchising authorities to require operators to set aside certain channels for
public, educational and governmental access programming. The 1984 Cable Act
further requires cable television systems with thirty-six or more activated
channels to designate a portion of their channel capacity for commercial leased
access by unaffiliated third parties. The 1992 Cable Act requires leased access
rates to be set according to a formula determined by the FCC.
Ownership. The 1996 Telecommunications Act repealed the 1984 Cable
Act's restrictions on local exchange telephone companies ("LECs") from providing
video programming directly to customers within their local exchange telephone
service areas. With certain limited exceptions, a LEC may not acquire more than
a 10% equity interest in an existing cable system operating within the LEC's
service area. The 1996 Telecommunications Act also authorized LECs and others to
operate "open video systems" without obtaining a local cable franchise, although
LECs operating such systems can be required to obtain a local franchise by a
local governmental body. A recent appellate court decision however has held,
contrary to an earlier FCC ruling, that municipalities may require OVS operators
to obtain a franchise. The FCC has sought rehearing before the court on this
question.
The 1996 Telecommunications Act eliminated the FCC rule prohibiting
common ownership between a cable system and a national broadcast television
network, and the statutory ban covering certain common ownership interests,
operation or control between a television station and cable system within the
station's Grade B signal coverage area. However, the parallel FCC rule against
cable/television station cross-ownership remains in place, pending completion of
an ongoing rulemaking proceeding. Finally, the 1992 Cable Act prohibits common
ownership, control or interest in cable television systems and MMDS facilities
or SMATV systems having overlapping service areas, except in limited
circumstances. The 1996 Telecommunications Act exempts cable systems facing
"effective competition" from the MMDS and SMATV cross-ownership restrictions.
Pursuant to the 1992 Cable Act, the FCC has adopted rules which, with
certain exceptions, preclude a cable television system from devoting more than
40% of its first 75 activated channels to national video programming services in
which the cable system owner has an attributable interest. The FCC also has set
a limit of 30% of total nationwide cable homes that can be served by any
multiple cable system operator. This rule is presently undergoing judicial
review and the FCC is considering changes to the rule.
Renewal of Franchises. The 1984 Cable Act established renewal
procedures and criteria designed to protect incumbent franchisees against
arbitrary denials of renewal. While these formal procedures are not mandatory
unless timely invoked by either the cable operator or the franchising authority,
they can provide substantial protection to incumbent franchisees. The 1992 Cable
Act makes several changes to the renewal process which could make it easier in
some cases for a franchising authority to deny renewal. In the renewal process,
a franchising authority may seek to impose new and more onerous requirements,
such as upgraded facilities, increased channel capacity or enhanced services,
although the municipality must take into account the cost of meeting such
requirements.
Other FCC Regulations. Additional FCC regulations relate to a cable
system's carriage of local sports programming; privacy of customer information;
equipment compatibility; franchise transfers; franchise fees; closed captioning;
equal employment opportunity; pole attachments; application of the rules
governing political broadcasts; customer service; technical standards; home
wiring and limitations on advertising contained in non-broadcast children's
programming. The 1996 Telecommunications Act changes the formula for pole
attachment fees which will result in substantial increases in payments by cable
operators to utilities for pole attachment rights when telecommunications
services are delivered by cable systems.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations.
State and Local Regulation. Because a cable television uses local
streets and rights-of-way, cable television systems are subject to local
regulation, typically imposed through the franchising process, and certain
states have also adopted cable television legislation and regulations. Cable
franchises are nonexclusive, granted for fixed terms and usually terminable if
the cable operator fails to comply with material provisions. Franchises usually
call for the payment of fees (which are limited under the 1984 Cable Act to 5%
10
of the system's gross revenues from cable service) to the granting authority.
The terms and conditions of cable franchises vary materially from jurisdiction
to jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome.
The 1992 Cable Act prohibits exclusive franchises and allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise. Moreover, franchising authorities
are immunized from monetary damage awards arising from regulation of cable
television systems or decisions made on franchise grants, renewals, transfers
and amendments.
The foregoing does not describe all present and proposed federal, state
and local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or the Company can be
predicted at this time.
Item 2. DESCRIPTION OF PROPERTY.
The Company's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headends and distribution systems and customer drop equipment for each
of its cable television systems. The Company's cable distribution plant and
related equipment generally are attached to utility poles under pole rental
agreements with local public utilities and telephone companies, and in certain
locations are buried in underground ducts or trenches.
The Company owns or leases real property for signal receptions sites
and business offices in many of the communities served by its systems and for
its principal operating offices. See "Certain Transactions." On March 21, 1996,
Suburban entered into a lease for office space at 200 Cresson Boulevard, Oaks,
PA. The Company has moved administrative operations to this single location. The
office has approximately 57,000 square feet, which management believes is
adequate. The Company has exercised an option to buy this site, and closing is
expected to occur by the end of the second quarter of 1999. In 1997, the
Company, through one of its non-cable subsidiaries, purchased land adjacent to
its Oaks, PA office location where the Company expects to build a master
head-end facility.
The Company also has exercised an option to purchase the property in
New Castle County, Delaware where its Call Center is located. That purchase is
expected to close in the first quarter of 2000.
Management believes that its properties are in good operating condition
and are suitable and adequate for the Company's business operations.
Item 3. LEGAL PROCEEDINGS.
On January 20, 1995, Mr. Albert Hadid filed suit in the Federal Court
of Australia, New South Wales District Registry, against Australis Media Ltd,
("Australis") the Company and several other entities and individuals including
H. F. Lenfest (the "Defendants"), involved in the acquisition of a company of
which Mr. Hadid was the controlling shareholder, the assets of which included
the right to acquire License B from the Australian government. Mr. Hadid alleged
that the Company and Mr. Lenfest breached fiduciary duties that they owed to him
and claimed damages of A$220 million. In August 1995, Mr. Hadid amended the suit
to include allegations that the Defendants defrauded him by making certain
representations to him in connection with the acquisition of his company and to
claim total damages of A$718 million (approximately U.S. $440 million as of
December 31, 1998). The Defendants denied all claims made against them by Mr.
Hadid and stated their belief that Mr. Hadid's allegations are without merit.
The trial in this action began on February 2, 1998 and finished on
September 30, 1998. A decision is expected by mid year 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
11
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1998.
Item 5. MARKET FOR REGISTRANT`S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no established public trading market for the Company's common
stock. As of March 26, 1999, there were five record holders of the Company's
common stock. No dividends have been paid on the Company's common stock in the
period from January 1, 1996 through December 31, 1998. In addition, the
borrowing agreements which were and are in effect between the Company and the
lenders party thereto during such periods prohibit the payment of any dividends.
Item 6. SELECTED FINANCIAL DATA.
Summary Consolidated Financial And Operating Data (Dollars In Thousands Except
Per Customer Data)
The selected consolidated financial data as of and for each of the five
years in the period ended December 31, 1998 set forth below have been derived
from the audited Consolidated Financial Statements of the Company. These data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements for each of the three years in the period ended December 31, 1998
included elsewhere in this Form 10-K. The statement of operations data with
respect to the fiscal years ended December 31, 1994 and 1995 have been derived
from audited consolidated financial statements of the Company not included
herein.
12
- - ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands)
Statement of Operations Data 1994 1995 1996 1997 1998
------------- ------------- ------------- --------------- ---------------
Revenues $ 226,185 $ 254,225 $ 381,810 $ 447,390 $ 470,409
Programming expenses 49,267 55,322 82,804 93,088 104,535
Selling, general & administrative 50,269 55,262 82,688 105,470 105,058
Technical and other 27,269 34,529 50,449 56,109 65,335
Depreciation and amortization 72,813 74,272 111,277 129,939 135,358
--------- -------- ---------- ---------- ----------
Operating income 26,567 34,840 54,592 62,784 60,123
Interest expense (47,749) (60,909) (107,201) (120,788) (120,119)
Other income and expense (net) (7,072) 4,245 (90,361) (42,752) 10,579
--------- -------- ---------- ---------- ----------
Loss from continuing operations
before income taxes (28,254) (21,824) (142,970) (100,756) (49,417)
Income tax benefit (net) 10,174 10,724 14,329 36,179 3,140
--------- -------- ---------- ---------- ----------
Loss from continuing operations (18,080) (11,100) (128,641) (64,577) (46,277)
Discontinued operations, net of taxes (819) (395) 363 33,738 -
Extraordinary loss, net of taxes --- (6,739) (2,484) --- (7,360)
========= ======== ========== ========== ==========
Net loss $ (18,899) $ (18,234) $ (130,762) $ (30,839) $ (53,637)
========= ======== ========== ========== ==========
Balance Sheet Data
(end of period)
Total assets $ 664,555 $ 843,110 $ 1,221,788 $ 1,219,720 $ 1,175,127
Total debt 626,121 810,725 1,312,863 1,295,306 1,296,553
Stockholders' equity (deficit) (49,609) (45,192) (233,790) (254,264) (312,824)
Core Cable Television Operations (Restricted Group)
Financial Ratios and Other Data (a)
Revenues $ 212,800 $ 232,155 $ 365,508 $ 435,052 $ 458,819
Adjusted EBITDA (b) 105,711 115,261 183,012 208,070 213,521
Adjusted EBITDA margin (c) 49.7 % 49.6 % 50.1 % 47.8 % 46.5 %
Interest expense $ 47,016 $ 59,966 $ 105,463 $ 120,549 $ 120,119
Capital expenditures (d) 42,162 40,168 52,991 90,944 98,539
Total debt 616,657 807,535 1,309,735 1,293,579 1,296,553
Ratio of total debt to Adjusted EBITDA 5.83 x 7.01 x 7.16 x 6.28 x 6.07 x
Monthly revenue per average
basic cable customer $ 31.44 $ 32.97 $ 35.31 $ 37.78 $ 38.12
Annual Adjusted EBITDA per average
basic cable customer 187.42 196.40 212.13 216.85 212.89
Annual capital expenditures per
average basic cable customer (d) 74.75 68.44 61.42 92.78 98.25
Summary Customer Data
(end of period) (e)
Homes passed 892,549 904,753 1,278,673 1,356,299 1,382,581
Basic cable customers 577,377 596,366 927,249 991,758 1,014,197
Basic penetration 64.7 % 65.9 % 72.5 % 73.1 % 73.4 %
13
(a) The Core Cable Television Operations (Restricted Group) consists of all of
the Company's wholly owned cable television subsidiaries and Radius
Communications. Beginning in 1998, the Company made the decision to include
Radius Communications in the Restricted Group. Prior year data is restated
to reflect continuing operations including Radius. Financial ratios and
other information are presented for the Restricted Group to facilitate the
evaluation of the results of operations of those operating entities on
which the Company relies to service all of its debt obligations.
(b) Adjusted EBITDA represents consolidated net income from continuing
operations plus the provision for income taxes, interest expense,
depreciation, amortization, any other non-cash items reducing consolidated
net income and cash actually distributed by an unconsolidated affiliate,
minus all non-cash items increasing consolidated net income. Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to incur and service debt. Adjusted EBITDA should not
be considered by an investor as an alternative to net income (loss), as an
indicator of the operating performance of the Company or as an alternative
to cash flows as a measure of liquidity. Adjusted EBITDA is not a measure
under generally accepted accounting principles.
(c) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
(d) Excludes the purchase price of acquisitions consummated during the period.
(e) Customers and homes passed for 1996 and 1997 have been restated as a result
of the conversion to a single billing system in 1997 resulting in unified
criteria for calculating customers and homes passed.
- - --------------------------------------------------------------------------------
CAPITALIZATION
The following table sets forth the consolidated capitalization and cash
and cash equivalents of the Company as of December 31, 1998.
(Dollars in thousands)
Cash and Cash Equivalents $ 9,802
==============================
Total Debt
Bank credit facility $ 15,000
7 5/8% Senior Notes, net of discount 148,377
8-3/8% Senior Notes, net of discount 688,284
Obligations under capital leases 2,412
8-1/4% Senior Subordinated Notes, net of discount 148,221
10-1/2% Senior Subordinated Notes, net of discount 294,259
------------------------------
Total debt $ 1,296,553
------------------------------
Stockholders' Equity (Deficit)
Common stock $ 2
Additional paid-in capital 50,747
Accumulated deficit (359,149)
Accumulated other comprehensive income (loss) (4,424)
------------------------------
Total stockholders' equity (deficit) (312,824)
------------------------------
Total capitalization $ 983,729
==============================
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Substantially all of the Company's revenues are earned from customer
fees for cable television programming services, the sale of advertising,
commissions for products sold through home shopping networks and ancillary
services (such as rental of converters and remote control devices and
installations). Federal law and regulations, including the regulation of certain
aspects of the cable television industry, have affected adversely the Company's
ability to increase or restructure its rates for certain services. These
regulations are intended to limit future rate increases. See "Legislation and
Regulation."
14
The Company has generated increases in revenues and Adjusted EBITDA for
each of the past three fiscal years primarily through acquisitions and, to a
lesser extent, through internal customer growth, increases in monthly revenue
per customer, and growth in advertising and home shopping revenues. As used
herein, "Adjusted EBITDA" represents consolidated net income from continuing
operations plus the provision for income taxes, interest expense, depreciation,
amortization, any other non-cash items reducing consolidated net income and cash
actually distributed by an unconsolidated affiliate, minus all non-cash items
increasing consolidated net income. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service debt.
Adjusted EBITDA represents EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) adjusted to include cash distributions
received from unconsolidated and unrestricted affiliates. Adjusted EBITDA
corresponds to the definition of "EBITDA" contained in the Company's publicly
held debt securities and is presented for the convenience of the holders of the
Company's public debt securities. Adjusted EBITDA should not be considered as an
alternative to net income, as an indicator of the operating performance of the
Company or as an alternative to cash flows as a measure of liquidity. Neither
EBITDA nor Adjusted EBITDA is a measure under generally accepted accounting
principles.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
CONSOLIDATED RESULTS
Revenues for the company increased 5.2% to $470.4 million as compared
to 1997, primarily as a result of the Company's Core Cable Television
Operations.
Service and Programming Expenses increased 13.9% to $169.9 million for
the year ended December 31, 1998 compared to the prior year. These expenses are
related to technical salaries, general operating, and network programming costs.
The service and programming increase was primarily due to costs associated with
the Core Cable Television Operations.
Selling, General, and Administrative Expense decreased 0.4% to $105.1
million for the year ended December 31, 1998 compared to the prior year. These
expenses are associated with office salaries, facility, and marketing costs.
This decrease was primarily due to administrative expenses associated with the
Core Cable Television Operations.
Depreciation and Amortization Expense increased 4.2% to $135.4 million
for the year ended December 31, 1998 compared to the prior year. This increase
was primarily due to additional capital expenditures associated with the Core
Cable Television Operations.
Adjusted EBITDA increased 1.6% to $199.3 million for the year ended
December 31, 1998 compared to the prior year. The increase was primarily due to
the Core Cable Television Operations. The Adjusted EBITDA margin decreased to
42.4% in 1998 compared to 43.9% for 1997. This decrease was primarily caused by
costs associated with the Core Cable Television Operations.
Interest Expense decreased 0.6% to $120.1 million for the year ended
December 31, 1998 compared to the prior year. The decrease was primarily due to
refinancing of existing indebtedness with debt carrying a lower interest rate.
Loss from continuing operations before income tax decreased 51.0% to
$49.4 million. The decrease was attributable to a loss associated with the
write-down of the Company's investment in Australis. In 1997 the Company
experienced an $44.6 million write-down of the investment in Australis. In 1998,
the Company experienced no such write-down.
Core Cable Television Operations
Beginning with the quarter ended December 31, 1998, the Company has
included the consolidated financial results of Radius with the results of its
cable television operations (collectively, the "Core Cable
15
Television Operations"). The financial results for the Company's Core Cable
Operations have been restated to include the results of Radius since its
inception in 1996.
Revenues increased 5.5% to $458.8 million for the year ended December
31, 1998 compared to the prior year. This increase was due primarily to the
revenue associated with the basic and CPS tiers and customer equipment and
installation, ("regulated services"). The regulated service revenue increased
11.5% or $34.9 million compared to the prior year. This increase was primarily
attributable to internal customer growth of approximately 2.3%, and rate
increases occurring predominately in the second and fourth quarters.
Non-regulated service revenue decreased 10.1% or $6.9 million for the year ended
December 31, 1998 compared to the prior year. This decrease was primarily as a
result of the regional sports network, Prism, ceasing operations on September
30, 1997. Revenues for Radius increased 39.0%, or $10.1 million, to $36.2
million, representing 42.8% of the increase in revenue for the Core Cable
Television Operations for the year ended December 31, 1998 compared to the prior
year. This increase was primarily attributable to increased advertising sales.
Service and Programming Expenses increased 20.5% to $164.4 million for
the year ended December 31, 1998 compared to the prior year. These expenses are
related to technical salaries, general operating costs, and programming costs.
The programming expense increase was primarily due to customer costs associated
with the basic and CPS tier services. The technical service increase was
primarily due to increased salary costs associated with the consolidation
efforts of the Company. Service and programming expenses for Radius increased
44.3%, or $6.4 million, to $20.8 million, representing 22.8% of the increase in
expenses of the Core Cable Television Operations for the year ended December 31,
1998. This increase was primarily attributable to increased advertising sales.
Selling, General and Administrative Expense decreased 11.7% to $84.7
million for the year ended December 31, 1998 compared to the prior year. These
expenses are associated with office salaries, facility, and marketing costs.
This decrease was primarily due to the Company's cable television operations and
the changing of its methodology of recording franchise fee expense, which
occurred beginning with the quarter ended March 31, 1998 (see below). Selling,
general and administrative expenses for Radius increased 18.9%, or $1.8 million,
to $11.3 million for the year ended December 31, 1998 compared to the prior
year. This increase was primarily due to increased selling expenses.
Beginning with the quarter ended March 31, 1998, the Company determined
that franchise fees collected and remitted would no longer be included as a
revenue or expense item since the Company collects and remits the franchise fee
to the appropriate authorities and since the fee appears as a separate line item
on a customer's bill. 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.
Depreciation and Amortization Expense increased 5.0%, or $6.3 million,
to $133.3 million for the year ended December 31, 1998 compared to the prior
year. The depreciation and amortization expenses for Radius increased 36.9%, or
$0.7 million, to $2.7 million for the year ended December 31, 1998 compared to
the prior year. These increases were primarily due to increased capital
expenditures related to the Company's cable systems and Radius.
Adjusted EBITDA increased 2.6% to $213.5 million for the year ended
December 31, 1998 compared to the prior year. The increase was primarily
associated with increased regulated service revenue. The Adjusted EBITDA margin
decreased to 46.5% in 1998 compared to 47.8% for 1997. This decrease was
primarily caused by an increase in programming and service expenses. Excluding
the consolidation of the Radius financial results, the Adjusted EBITDA margin
for cable television operations decreased to 48.6% in 1998 compared to 49.8% for
1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED RESULTS
The financial results for the Company's Core Cable Television
Operations have been restated to include the results of Radius for the years
ended 1997 and 1996.
Revenues for the company increased 17.2% to $447.4 million as compared
to 1996, primarily as a result of the Company's Core Cable Television
Operations. The TCI Exchange, the Sammons Acquisition,
16
the Salem Acquisition, the Shore Acquisition, and the Turnersville Acquisition,
which are described in Note 4 to the financial statements included herein
(collectively, the "Acquisitions"), accounted for approximately $40.2 million or
61.3% of the increase.
Service and Programming Expenses increased 12.0% to $149.2 million for
the year ended December 31, 1997 compared to the prior year. These expenses are
related to technical salaries, general operating, and network programming costs.
The service and programming increase was primarily due to increased costs
associated with the Core Cable Television Operations.
Selling, General, and Administrative Expense increased 27.6% to $105.5
million for the year ended December 31, 1997 compared to the prior year. These
expenses are associated with office salaries, facility, and marketing costs.
This increase was primarily due to administrative expenses associated with the
Core Cable Television Operations.
Depreciation and Amortization Expense increased 16.8% to $129.9 million
for the year ended December 31, 1997 compared to the prior year. This increase
was primarily due to the Acquisitions and additional capital expenditures
associated with the Core Cable Television Operations.
Adjusted EBITDA increased 15.2% to $196.2 million for the year ended
December 31, 1997 compared to the prior year. The increase was primarily due to
the Core Cable Television Operations. The Adjusted EBITDA margin decreased to
43.9% in 1997 compared to 44.6% for 1996. This decrease was primarily caused by
one-time costs associated with the consolidation effort related to the Core
Cable Television Operations.
Interest Expense increased 12.7% to $120.8 million for the year ended
December 31, 1997 compared to the prior year. The increase was primarily due to
higher average outstanding indebtedness related to the Acquisitions.
Loss from continuing operations before income tax decreased 29.5% to
$100.8 million. The decrease was attributable to a loss associated with the
write-down of the Company's investment in Australis. The 1997 write-down of the
Company's investment in Australis was $44.6 million compared to an $86.4 million
write-down of the investment in the prior year.
Core Cable Television Operations
Revenues increased 19.0% to $435.1 million for the year ended December
31, 1997 compared to the prior year. The increase was due primarily to the
revenue associated with basic and CPS tiers and customer equipment and
installation, ("regulated services"). The regulated service revenue increased
24.3% or $60.4 million compared to the prior year. This increase was primarily
attributable to the realization of the full effect of the Acquisitions, internal
customer growth of approximately 2.9%, and rate increases occurring
predominately in the second and fourth quarters. Non-regulated service revenue
decreased 7.1% or $6.0 million for the year ended December 31, 1997 compared to
the prior year. This decrease was primarily as a result of the regional sports
network, Prism, ceasing operations on September 30, 1997. On October 1, 1997,
the Company added the new regional sports network, Comcast SportsNet to the
regulated CPS tier. Advertising, home shopping, and non-recurring revenue
increased 22.3% or $4.8 million for the year ended December 31, 1997 compared to
the prior year. This increase was primarily attributable to the Acquisitions and
internal customer growth. Revenues for Radius increased 71.4%, or $10.9 million,
to $26.1 million representing 15.6% of the increase in the revenues for the Core
Cable Television Operations for the year ended December 31, 1997. This increase
was primarily attributed to increased advertising sales.
Service and Programming Expenses increased 17.3% to $136.4 million for
the year ended December 31, 1997 compared to the prior year. These expenses are
related to technical salaries, general operating costs, and programming costs.
The technical service increase was primarily due to increased costs associated
with the consolidation efforts of the Company's cable television operations,
which included integrating the Acquisitions. The programming expense increase
was primarily due to the Acquisitions and increased customer costs associated
with the basic and CPS tier services. Service and programming expenses for
Radius increased 69.3%, or $5.9 million, to $14.4 million, representing 29.3% of
the increase in expenses for the Core Cable Television Operations for the year
ended December 31, 1997. This increase was primarily due to increased
advertising sales.
17
Selling, General and Administrative Expense increased 34.8% to $95.9
million for the year ended December 31, 1997 compared to the prior year. These
expenses are associated with office salaries, facility, and marketing costs.
This increase was primarily due to the Acquisitions and expenses associated with
the consolidation efforts of the Company, which included migrating customer
service to the new Call Center. Selling, general and administrative expenses for
Radius increased 60.6%, or $3.6 million, to $9.5 million representing 14.5% of
the increase in expenses for the Core Cable Television Operations for the year
ended December 31, 1997. This increase was primarily due to increased selling
expenses.
Depreciation and Amortization Expense increased 17.8%, or $19.2
million, to $126.9 million for the year ended December 31, 1997 compared to the
prior year. This increase was primarily due to the Acquisitions as well as
additional capital expenditures. Depreciation and amortization expenses for
Radius increased $1.3 million to $1.9 million, representing 6.8% of the increase
in expenses for the Core Cable Television Operation for the year ended December
31, 1997 compared to the prior year. Radius' increase was primarily due to
increased capital expenditures.
Adjusted EBITDA increased 13.7% to $208.1 million for the year ended
December 31, 1997 compared to the prior year. The increase was primarily
associated with the Acquisitions. The Adjusted EBITDA margin decreased to 47.8%
in 1997 compared to 50.1% for 1996. This decrease was primarily caused by
one-time costs associated with the consolidation efforts of the Company in its
cable television operations.
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 has
adopted SFAS 131 effective January 1, 1998. The adoption of SFAS No. 131 did 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 FASB has also recently issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for fiscal quarters of fiscal
years beginning after June 15, 1999. The Company has not yet adopted SFAS No.
133. The adoption of SFAS No. 133 is not expected to have a significant impact
on the company's financial statement disclosures.
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 Company's current accounting treatment
of these costs closely conforms to the requirements of SOP 98-1. Therefore, the
18
adoption of SOP 98-1 is not expected to have a significant impact on the
Company's consolidated financial statements and related footnotes.
The AICPA recently issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that entities
expense start-up costs and organization costs as they are incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged. The Company has not yet adopted SOP 98-5. The
adoption of SOP 98-5 is not expected to have a significant impact on the
Company's consolidated financial statements and the related footnotes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's businesses require cash for operations, debt service,
capital expenditures and acquisitions. To date, cash requirements have been
funded by cash flow from operations and borrowings.
Financing Activities. At December 31, 1998, the Company had aggregate
total indebtedness of approximately $1,296.6 million. The Company's senior
indebtedness of $854.1 million consisted of: (i) $836.7 million of 7 5/8% and 8
3/8% Senior Notes; (ii) obligations under the Bank Credit Facility (as defined
below) of $15.0 million; and (iii) obligations under capital leases of
approximately $2.4 million. At December 31, 1998, the Company had approximately
$442.5 million of 8 1/4% and 10 1/2% Senior Subordinated Notes outstanding. The
Senior Subordinated Notes are general unsecured obligations of the Company
subordinate in right of payment to all present and future senior indebtedness of
the Company.
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 an unsecured revolving credit facility 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 purposes and possibly for future acquisitions of cable systems. The
commitments under the Bank Credit Facility expire on March 31, 2006. As of
December 31, 1998, $15.0 million was outstanding under the Bank Credit Facility.
The Company expects to draw under the Bank Credit Facility for the funds to be
used to acquire the Raystay stock. See "Business - Unrestricted Cable Television
Systems".
Loans outstanding under the Bank Credit Facility bear interest at
floating rates. The Bank Credit Facility contains customary covenants, including
restrictive covenants, which impose certain limitations on the Company and its
wholly owned cable operating subsidiaries and Radius, including, among other
things, incurring additional indebtedness, the payment of dividends, the
repurchase of stock, the making of certain payments and purchases, the making of
acquisitions and investments, the creation of certain liens, disposing or
acquiring assets, sale-leaseback transactions, and transactions with affiliates.
The Bank Credit Facility also includes financial covenants requiring the Company
to maintain certain financial ratios at specified levels. The Bank Credit
Facility also contains customary default provisions, including nonpayment of
principal, interest, fees and other amounts when due, violation of covenants,
failure of representations and warranties to be true and correct in all material
respects when made, cross defaults and cross acceleration to other debt
obligations, bankruptcy events, unsatisfied judgments in excess of specified
amounts and change of control.
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 $76.8
million for the twelve month period ended December 31, 1998 compared to
approximately $89.1 million for the twelve month period ended December 31, 1997.
During the twelve month period ended December 31, 1998, the Company was required
to make interest payments of approximately $112.7 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
$120.6 million.
Future minimum lease payments under all capital leases and
non-cancelable operating leases for each of the years 1999 through 2002 are $5.6
million, $4.4 million, $3.0 million and $1.4 million, respectively.
On September 30, 1998, the Company purchased from H. F. Lenfest and
Marguerite Lenfest the three properties owned by them which had been leased to
subsidiaries of the Company. Suburban purchased two of the properties for an
aggregate price of approximately $1.5 million, and StarNet purchased the third
property for a price of approximately $4.5 million. The purchase price for each
of the properties was
19
determined as a result of an independent appraisal done for the Company by
Cushman & Wakefield of Pennsylvania, Inc.
The Company has recorded a net deferred tax asset of $80.4 million, net
of a valuation allowance of $47.0 million, reflecting the estimated benefit of
approximately $435 million in loss carryforwards, which expire in varying
amounts between the years 2000 - 2018. Realization depends on generating
sufficient taxable income before expiration of the loss carryforwards. Although
realization is not assured, the Company believes that commencing in 2004, it
will begin to generate taxable income as a result of increasing revenues, the
elections of slower tax depreciation methods and anticipated declines in
amortization deductions. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. See Note 17 of the
Company's Consolidated Financial Statements included herein 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. As of December 31, 1998, the
Company believes the amount subject to the guarantee under the license
agreements was approximately $26.4 million. The Company has agreed to indemnify
Mr. Lenfest against loss from such guaranty to the fullest extent permitted
under the Company's debt obligations. Under the terms of the Bank Credit
Facility, however, Mr. Lenfest's claims for indemnification are limited to the
lesser of the actual claim or $33.5 million. The Company does not believe that
Mr. Lenfest's guarantee will be called, and, as of the date hereof, there has
been no demand for payment under the guarantee of the program license
obligations.
Capital Expenditures. During 1999, the Company expects to make
approximately $180 million of capital expenditures, of which approximately $160
million is expected to be spent for the upgrading of certain of its cable
television systems, including wide deployment of fiber optics, maintenance
including plant extensions, installations, and other fixed assets as well as
other capital projects associated with implementing the Company's clustering
strategy. The amount of such capital expenditures for years subsequent to 1999
will depend on numerous factors, many of which are beyond the Company's control,
including responding to competition and increasing capacity to handle new
product offerings in affected cable television systems. The Company anticipates
that capital expenditures for years subsequent to 1999 will continue to be
significant.
Resources. Management believes, based on its current business plans,
that the Company has sufficient funds available from operating cash flow and
from borrowing capacity under the Bank Credit Facility to fund its operations,
capital expenditure plans and debt service. To the extent the Company seeks
additional acquisitions, it may need to obtain additional financing. However,
the Company's ability to borrow funds under the Bank Credit Facility requires
that the Company be in compliance with certain financial ratios at specified
levels or obtain the consent of the lenders thereunder to a waiver or amendment
of the applicable financial ratios. As of December 31, 1998, Management believes
that the Company was in compliance with such financial ratios.
Year 2000 Readiness Disclosure
The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As a
result, on or near the change of the century, date-sensitive systems may
recognize the Year 2000 as 1900, or not at all, which may cause systems to fail
or process financial and operational information incorrectly.
The Company has developed plans to address its Year 2000 issues. The
plans are designed to encompass all businesses of the Company including both
internal and external interfaces to vendors. The plans address three broad
areas: (1) internal information technology systems - including financial and
operational application systems, computer hardware and systems software and
communication systems; (2) non-information technology systems - such as building
systems, headend devices and other devices with embedded computer chips; and (3)
third party compliance - which addresses Year 2000 compliance efforts of key
vendors and suppliers. The project plans consist of the following phases:
1) Organizational awareness - general awareness of the Year 2000 issues,
which has been completed, and ongoing communication of Year 2000
project status.
20
2) Inventory of current applications.
3) Risk assessment of inventoried systems, with identification of
mission-critical systems.
4) Replacement/remediation of systems.
5) Year 2000 testing and conversion of systems.
6) Contingency planning.
Program management offices, staffed with business unit personnel have
been established to address Year 2000 issues. These offices report to an
Executive Steering Committee which is responsible for the Company's Year 2000
program. This Committee was formed in the spring of 1997 to review and monitor
the Company's Year 2000 program. It is made up of members of Senior Management
responsible for various areas of the Company's business. The Committee meets
regularly to review corporate-wide Year 2000 issues and progress.
Internal information technology systems - As of October 1998 the
inventory for mission-critical systems had been substantially completed. The
risk assessment phase is in process in parallel with systems
replacement/remediation, with target completion dates ranging from March 1999
through June 1999. Testing and conversion plans have been, or are currently
being, developed and implemented. The Company expects that mission-critical
internal systems will be Year 2000 compliant by September 1999. The Company
also expects to complete testing of mission-critical external interfaces by
September 1999. Based on the current status of project plans, the Company
believes that Year 2000 events caused by the Company's internal financial and
operational systems would not have a material adverse impact on the Company's
operations or financial condition.
Non-information technology systems - The inventory and risk assessment
phases are currently in process. Based on the results of these phases,
replacement/remediation plans will be developed for mission-critical equipment
and facilities. These plans are expected to be implemented by September 1999.
Given the nature of this Company's business units, the Company believes that any
events caused by Year 2000 failures of non-information technology systems would
be short-term in nature and would not have a material adverse impact on the
Company's operations or financial condition.
Third party compliance - The Company has identified, and initiated
communications with, key third party suppliers and customers to determine
potential exposure to these third parties' failure to remediate their own Year
2000 issues. The Company expects to complete its third party reviews by July
1999 and will develop contingency plans to address potential third party Year
2000 failures. However, an extended outage by utilities (electric, water,
telephone, etc.), key third-party suppliers or financial institutions, could
have material adverse impacts on the Company's operations and financial
condition.
Contingency Plans
Company resources to date have been focused primarily on Year 2000
remediation. The Company maintains contingency plans for computer failures,
power outages, natural disasters, etc. Year 2000 contingency plans for
mission-critical systems, in the areas discussed above, will be developed and
integrated with the existing contingency plans where appropriate by December
1999.
Costs
The Company currently estimates spending approximately $2.0 million,
including internal costs, to complete its Year 2000 compliance program,
including approximately $1.0 million that has been expended through fiscal 1998.
Year 2000 costs related to systems or equipment replacement are capitalized in
accordance with the Company's accounting policies. Year 2000 remediation costs
are expensed as incurred.
The Company's ability to achieve Year 2000 compliance, the level of
costs associated therewith and the resultant impact on operations and financial
condition could be adversely impacted by, among other things, the availability
and cost of applicable resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the ongoing compliance
program.
21
Inflation
The net impact of inflation on operations has not been material in the
last three years due to the relatively low rates of inflation during this
period. If the rate of inflation increases the Company may increase customer
rates to keep pace with the increase in inflation, although there may be timing
delays.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
The financial statements and supplementary data are included herein
beginning at page F-1.
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the period beginning January 1, 1996 and ended December 31,
1998, there have been no disagreements with any independent accountant engaged
as the principal accountant to audit the Company's financial statements nor has
any such person resigned, declined to stand for the reelection or been
dismissed.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
Directors And Executive Officers
The directors and executive officers of the Company are as set forth
below:
Name Age Position
---- --- --------
H. F. Lenfest ................... 68 President, CEO and Director
H. Chase Lenfest ................ 35 Director
Brook J. Lenfest ................ 30 Director
John C. Malone .................. 58 Director
Leo J. Hindery, Jr................ 52 Director
William R. Fitzgerald............. 41 Director
Harry F. Brooks ................. 60 Executive Vice President, Assistant Secretary
Samuel W. Morris, Jr. ........... 55 Senior Vice President - General Counsel and Secretary
Maryann V. Bryla ................ 33 Senior Vice President - Chief Financial Officer, Treasurer
Donald L. Heller ................ 53 Vice President
H. F. Lenfest is the founder, a director and President and Chief
Executive Officer of the Company, the sole director of each of the Company's
subsidiaries and the President of each of the subsidiaries other than Suburban,
Lenfest Advertising and its subsidiaries, StarNet and its subsidiaries,
Tri-State Media, CAM Systems and TeleSTAR Marketing("TeleSTAR"). Mr. Lenfest's
principal occupation since 1974 has been serving as the President and CEO of the
Company and its subsidiaries. He is the brother-in-law of Harry F. Brooks. Mr.
Lenfest is currently a director of TelVue Corporation.
H. Chase Lenfest has served as a Director of the Company since December
1997 and is Vice President of Local Sales of Lenfest Advertising, Inc. since
December 1998. Prior to that he was Director of Local Sales. From January 1996
to January 1997, he was the Regional Photo Classified Manager of Lenfest
Programming Services, Inc. He was employed by TelVue Corporation from February
1994 until January 1996. From March 1988 to January 1994, he was a stockbroker
with Wheat First Butcher & Singer. He is the son of H. F.
Lenfest and the nephew of Harry Brooks.
Brook J. Lenfest has served as a Director of the Company since December
1997 and is Vice President - Business Development for Suburban since September
1, 1998. Prior to that he was Vice
22
President and Director of Operations for StarNet, Inc. from May, 28, 1997. He
was an officer of StarNet, Inc. since January 1995. Prior to that he was Vice
President-Business Development, Director of Communications and Product Manager
for StarNet, Inc. From 1993 to 1994, he was Marketing Manager for the Company's
South Jersey Cablevision (now Lenfest Atlantic, Inc.) subsidiary. Prior to 1993,
he held various positions at Garden State Cablevision. He is the son of H. F.
Lenfest and the nephew of Harry Brooks.
John C. Malone has served as a Director of the Company since January
1982 other than for a brief period in 1997. Dr. Malone has served as the Chief
Executive Officer of TCI since January 1994, and as Chairman of the Board of TCI
since November 1996. Dr. Malone served as President of TCI from January 1994 to
March 1997, as Chief Executive Officer of TCI Communications, Inc., a subsidiary
of TCI ("TCIC"), from March 1992 to October 1994 and as President of TCIC from
1973 to October 1994. Dr. Malone is also a director of TCI, TCIC,
Tele-Communications International, Inc., TCI Pacific Communications, Inc., TCI
Satellite Entertainment, Inc., BET Holdings, Inc., The AT Home Corporation and
The Bank of New York. Dr. Malone resigned as director of the Company on March 9,
1999, the effective date of the merger of TCI into AT&T.
Leo J. Hindery, Jr. has served as a Director of the Company since May
22, 1998. Mr. Hindery has served as President and Chief Operating Officer for
TCI since May 1997. Mr. Hindery has served as President and Chief Executive
Officer of TCIC since March 1997 and has served as President and Chief Executive
Officer of TCI Pacific since September 1997. Mr. Hindery has served as a
director of TCIC since March 1997, has served as a director of TCI Pacific since
September 1997, and has served as Chairman of the Board and a director of TCI
Music, Inc., a subsidiary of TCI since January 1997. Mr. Hindery was appointed
as director of Tele-Communications International in April 1998. In addition, Mr.
Hindery is President, Chief Executive Officer and/or a Director of many of TCI's
subsidiaries. Mr. Hindery was previously founder, Managing General Partner and
Chief Executive Officer of InterMedia partners, a cable TV operator, and its
affiliated entities from 1988 to March 1997. Mr. Hindery is a director of United
Video Satellite Group, Inc. and AT Home Corporation, both of which are
consolidated subsidiaries of TCI. Mr. Hindery is also a director of TCI
Satellite Entertainment, Inc. and Cablevision Systems Corporation.
William R. Fitzgerald has served as a Director of the Company since
March 9, 1999 when he replaced Dr. Malone. Mr. Fitzgerald has served as Chief
Operating Officer of TCIC since November 1998 and as an Executive Vice President
of TCIC since December 1997. Mr. Fitzgerald served as a Senior Vice President of
TCIC from March 1996 to December 1997. Prior to joining TCI, Mr. Fitzgerald was
a Senior Vice President and a Partner in Daniels & Associates, a brokerage and
investment banking company, from 1988 to 1996.
Harry F. Brooks was Executive Vice President and Assistant Secretary of
the Company since 1991. He retired from the Company as of the close of business
on December 31, 1998. He is the brother-in-law of H.F. Lenfest and the uncle of
Chase Lenfest and Brook Lenfest.
Samuel W. Morris, Jr. has been Senior Vice President-General Counsel of
the Company since November 1998, and Secretary since December 17, 1997. Prior to
November 1998, Mr. Morris had been Vice President-General Counsel since November
1993. Prior November, 1993, he was a founding partner in the law firm of Hoyle,
Morris & Kerr, where he remains Of Counsel. Mr. Morris is also Vice
President-General Counsel and Secretary of each of the Company's subsidiaries
Maryann V. Bryla has been Senior Vice President and Chief Financial
Officer of the Company since November 1998 and Treasurer and Assistant Secretary
since January 1998. Prior to that, Ms. Bryla was Vice President of Finance of
the Company since March 1997 and Assistant Vice President of Finance of the
Company since 1996. From March 1993 to June 1996, Ms. Bryla was a lending
officer in the Telecommunication and Media Lending Division of PNC Bank, N.A.
From September 1988 to February 1993, she was an Assistant Treasurer and Manager
in the North America Corporate Finance Syndications Division at The Chase
Manhattan Bank. Ms. Bryla is also Assistant Secretary of Lenfest Clearview, Inc.
and StarNet, Inc. and Treasurer of all of the Company's wholly owned
subsidiaries. Ms. Bryla has served as Director of Videopole since January 1999.
Donald L. Heller has been a Vice President of the Company since March
1993. Prior to assuming his current position, Mr. Heller was, from June 1984 to
January 1993, the Vice President and General Manager of Sportschannel Prism
Associates, a regional cable television service which provided movies and
professional sports. He is currently a director of TelVue Corporation.
23
All directors serve until the next annual meeting of stockholders and
until their successors have been elected and have qualified. All executive
officers serve at the discretion of the Board of Directors. The directors of the
Company receive no compensation in their capacity as directors.
Other Principal Employees
Joseph Cece has been President and Chief Operating Officer of Suburban
Cable since January 1999. Prior to joining Suburban, he was employed by
Cablevision Systems Corporation in Woodbury, N.Y. from September 1993 to
December 1998. He held a variety of executive positions at Cablevision,
including President of Digital Services. In that role, he was responsible for
all of the company's initiatives in high-speed cable modems, telephony and
digital video. He was also President and Chief Operating Officer of Cablevision
Lightpath, Inc., Cablevision's commercial telephony operation. From October 1988
to June 1993, Mr. Cece was President and Publisher of TV Guide, the nation's
largest magazine.
Debra A. Krzywicki has been an Executive Vice President of Suburban
since January 1, 1996, and a Vice President of Suburban from 1989 to December
31, 1995. She is primarily responsible for marketing, programming, customer
service, training and public relations.
Robert M. Lawrence has been an Executive Vice President of Suburban
since January 1996, and a Regional Vice President and General Manager of
Suburban from March 1982 to December 31, 1995. He is responsible for technical
operations, engineering, information systems and purchasing.
Item 11. EXECUTIVE COMPENSATION.
The Company has no long-term compensation plans. The following table
sets forth certain information for the years ended December 31, 1996, 1997 and
1998 concerning cash and non-cash compensation earned by the CEO and the four
other most highly compensated executive officers of the Company whose combined
salary and bonus exceeded $100,000 during such periods.
24
- - --------------------------------------------------------------------------------
Summary Compensation Table
Annual Compensation
Name and All Other
Principal Position Year Salary Bonus Compensation
- - --------- -------- ---- ------ ----- ------------
H. F. Lenfest 1998 $ 821,716 $ --- $ 226,303(a) (b)
President and CEO 1997 749,996 --- 255,022(a) (b)
1996 1,000,000 --- 268,135(a) (b)
Samuel W. Morris, Jr. 1998 $ 310,862 $ 24,000 $ 8,000(a)
Senior Vice President and 1997 262,496 25,000 8,000(a)
General Counsel 1996 250,000 30,000 7,500(a)
Robert Lawrence 1998 $ 220,199 $ 25,000 $ 8,000(a)
Executive Vice President 1997 206,596 20,000 8,000(a)
Suburban 1996 190,000 --- 7,500(a)
Debra A. Krzywicki 1998 $ 210,199 $ 25,000 $ 6,461(a)
Executive Vice President 1997 189,404 --- 8,000(a)
Suburban 1996 170,000 --- 7,500(a)
Harry F. Brooks (c) 1998 $ 171,022 $ --- $ 8,000(a)
Executive Vice President 1997 157,500 42,500 8,000(a)
1996 150,000 --- 7,500(a)
- - ----------
(a) Matching contributions under the Company's 401(k) Plan for the individuals
in years noted. The contribution for Mr. Lenfest for the years 1998, 1997
and 1996 were $8,000, $8,000 and $7,500, respectively.
(b) Pursuant to agreements between the Company and a foundation and trusts
created by H. F. Lenfest, the foundation and the trusts have purchased
split-dollar life insurance policies on H. F. Lenfest's life and on the
joint lives of Mr. Lenfest and his wife, Marguerite Lenfest. Under these
agreements, the Company pays (i) the premium on each policy, minus a sum
equal to the lesser of the applicable one-year term premium cost computed
under the Internal Revenue Service Ruling 55-747 or the cost of comparable
one-year term life insurance in the amount of each policy or (ii) the
entire premium. The trusts and foundation are the beneficiaries of the
insurance policies. However, the Company has been granted a security
interest in the death benefits of each policy equal to the sum of all
premium payments made by the Company. These arrangements are designed so
that if the assumptions made as to mortality experience, policy dividends
and expenses are realized, the Company, upon the deaths of Mr. and Mrs.
Lenfest or the surrender of the policies, will recover all of its insurance
premium payments. The premiums paid by the Company in 1998, 1997 and 1996
pursuant to these arrangements were $346,043, each year. The amounts in
this column include the present value of such premium payments using an
imputed interest rate, such present value calculated based upon Mr. and
Mrs. Lenfest's remaining life expectancy, which totaled $218,303, $247,022
and $260,635 in 1998, 1997 and 1996, respectively.
(c) Mr. Brooks retired from the Company on December 31, 1998. In connection
with his retirement, the Company agreed to pay him $1,350,000 in two equal
installments, $675,000 in January, 1999, and $675,000 in January, 2000. The
Company has paid the first installment. Mr. Brooks' retirement arrangement
provides that he render consulting services to the Company at its request.
- - --------------------------------------------------------------------------------
Compensation Committee Interlocks And Insider Participation
The Company has no compensation committee. H. F. Lenfest has
participated in the past, and is expected to continue to participate, in the
deliberations of the Board of Directors concerning executive compensation.
Item 12. SECURITY AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 1998, certain
information with respect to theCommon Stock beneficially owned by each director,
all officers and directors of the Company as a group, and each person known to
the Company to own beneficially more than 5% of such Common Stock. Unless
otherwise noted, the individuals have sole voting and investment power.
25
Shares of Percent of
Name and Address Common Stock Common Stock
- - ---------------- ------------ ------------
H. F. Lenfest, Director (a)(b)(c)(d)(g) 79,448 50.0%
John C. Malone, Director (e)(f) 79,448 50.0%
Brook J. Lenfest, Director (a)(c)(d)(g) 14,862 9.4%
H. Chase Lenfest, Director (a)(c)(d)(g) 14,862 9.4%
Diane A. Lenfest (a)(c)(g) 14,862 9.4%
LMC Lenfest, Inc. (c)(h) 79,448 50.0%
(an indirect wholly owned subsidiary of TCI)
All officers and directors as a 158,896 100.0%
group (10 persons)
- - ----------
(a) Such person's address is c/o The Lenfest Group, 200 Cresson Boulevard,
Oaks, PA 19456.
(b) Includes 14,862 and 14,862 shares owned by Brook J. Lenfest and H. Chase
Lenfest which are held in trusts established by each of them, and 14,862
shares owned by Diane A. Lenfest, respectively, all of whom are children of
Mr. Lenfest. See Notes (d) and (g) below.
(c) H. F. Lenfest and LMC Lenfest, Inc. have an agreement that provides,
together with the amended and restated Certificate of Incorporation of the
Company, that Mr. Lenfest has the right to designate a majority of the
Board of Directors until the earlier of January 1, 2002 or until his death.
During such period, vacancies in respect of the directors designated by Mr.
Lenfest shall be filled by designees of Mr. Lenfest or, in the event of Mr.
Lenfest's death, of The Lenfest Foundation. Thereafter, the Lenfest Family
and LMC Lenfest, Inc. will have the right to appoint an equal number of
members of the Company's Board of Directors. This right will continue for
so long as any member of the Lenfest Family owns any stock in the Company.
Pursuant to a separate agreement, each of H. F. Lenfest, Brook J. Lenfest,
H. Chase Lenfest and Diane A. Lenfest (the "Lenfest Shareholders") have
granted to LMC Lenfest, Inc. a right of first refusal with respect to their
shares of stock in the Company and LMC Lenfest, Inc. has granted a right of
first refusal to the Lenfest Shareholders with respect to its shares of
stock in the Company.
(d) Each of Mr. Lenfest, Brook J. Lenfest and H. Chase Lenfest hold their
34,862 shares, 14,862 shares and 14,862 shares, respectively, in trusts
established by each of them, each of which is terminable at will.
(e) Dr. Malone's address is c/o Terrace Tower II, 5619 DTC Parkway, Englewood,
CO 80111.
(f) Includes 79,448 shares owned by LMC Lenfest, Inc., of which Dr. Malone is
an affiliate. Dr. Malone disclaims beneficial ownership of these shares.
(g) Each of Brook J. Lenfest, H. Chase Lenfest and Diane A. Lenfest has given
to H. F. Lenfest an irrevocable proxy granting him the power (until March
30, 2000) to vote their shares for the election of directors. H. F. Lenfest
disclaims beneficial ownership of these shares.
(h) LMC Lenfest, Inc.'s address is 8101 East Pacific Avenue, Suite 500,
Englewood, CO 80111.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company is a party to an agreement with Satellite Services, Inc.
("SSI"), an affiliate of TCI, the indirect parent of LMC Lenfest, Inc., a 50%
stockholder of the Company and an affiliate of Dr. Malone, pursuant to which SSI
provides certain cable programming to the Company at a rate fixed as a
percentage in excess of the rate available to TCI. Management believes that
these rates are significantly less than the rates that the Company could obtain
independently. For the year ended December 31, 1998, the Company incurred
programming expenses under its agreement with SSI of approximately $70.5
million.
Garden State obtains its cable television programming from SSI through
the Company. The programming services are at a rate which is not more than
Garden State could obtain independently. For the year ended December 31, 1998,
Garden State obtained approximately $17.9 million of programming through the
Company.
The Company, through StarNet, Inc., sells cross channel tune-in
promotional services for cable television to affiliates of TCI. For the year
ended December 31, 1998, the Company generated revenues of $0.9 million for such
services.
During the first nine months of 1998, the Company rented three office
and warehouse spaces from H. F. Lenfest and Marguerite Lenfest. For the year
ended December 31, 1998, the Company paid the Lenfests an aggregate of $0.8
million in rent. Rental payments were on terms that were no less favorable than
those the Company could obtain from independent parties. On September 30, 1998,
the Company purchased the three properties. Suburban purchased two of the
properties for an aggregate price of approximately $1.5 million,
26
and StarNet. purchased the third property for a price of approximately $4.5
million. The purchase price for each of the properties was determined as a
result of an independent appraisal done for the Company by Cushman & Wakefield
of Pennsylvania, Inc.
For the year ended December 31, 1998, the Company incurred pay-per-view
order placement fees to TelVue Corporation, an affiliate of H. F. Lenfest, $0.4
million for pay-per-view order placement services.
In November 1994, Mr. Lenfest and TCI International, Inc. jointly and
severally guaranteed $67.0 million in program license obligations of the
distributor of Australis' movie programming. At December 31, 1998, the amount
subject to the guarantee under the license agreements was approximately $26.4
million. The Company has agreed to indemnify Mr. Lenfest's obligations under
this guarantee.
The Company had agreed to pay the legal expenses of H. F. Lenfest and
Marguerite Lenfest related to a pending SEC action against them. H. F. Lenfest
and Marguerite Lenfest have agreed to repay such expenses if it is subsequently
determined that the Company is not permitted to make such payments under
Delaware corporate law. During 1998, Mr. Lenfest began paying the legal fees for
this action personally. At the trial held in October, 1998, the Lenfests were
found not liable. The Company is assessing whether it must reimburse Mr. Lenfest
for the fees he paid personally in 1998 and/or whether it is entitled to
reimbursement from Mr. Lenfest and others for the fees paid previously on Mr.
and Mrs. Lenfest's behalf.
Dr. Malone, a director of the Company until March 9, 1999, is a
director of The Bank of New York, which is the Trustee under the Indentures for
the Company's Senior Notes and Senior Subordinated Notes and a lender under the
Bank Credit Facility.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following financial statements are filed as part of the report:
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Consolidated Balance Sheets, December 31, 1997 and 1998
Consolidated Statements of Operations and Comprehensive Income (Loss),
Years Ended December 31, 1996, 1997 and 1998
Consolidated Statements of Changes in Stockholders' Equity (Deficit),
Years Ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1997
and 1998
Notes to Consolidated Financial Statements
(a)(2) Independent Certified Public Accountants' Report and Financial
Statement Schedule.
The following Independent Certified Public Accountants' Report and
Financial Statement Schedule are filed as a part of the report:
(i) Report of Independent Certified Public Accountants on Schedule
(ii) Schedule II -- Valuation and Qualifying Accounts
(a)(3) Exhibits.
The following Exhibits are furnished as part of this Report:
Exhibit
Number Title or Description
------ --------------------
*2.1 Amended and Restated Asset Exchange Agreement, dated September 8, 1995, between LenComm, Inc. and
Lenfest West, Inc. and Heritage Cablevision of Delaware, Inc.
27
*++++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.
+++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.
28
####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 Satellite Services, Inc.
and the Company.
*10.2 Supplemental Agreement, dated December 15, 1981, by and between TCI Growth, Inc., H.F. Lenfest,
Marguerite Lenfest and the Company and Joinder Agreement executed by LMC Lenfest, Inc.
*10.3 Amendment to Supplemental Agreement, dated May 4, 1984 between the Company and TCI Growth, Inc.
*10.4 Agreement, dated July 1, 1990, between H.F. Lenfest, Marguerite B. Lenfest, Diane A. Lenfest, H. Chase
Lenfest, Brook J. Lenfest and the Lenfest Foundation, Tele-Communications, Inc. and Liberty Media
Corporation.
*10.5 Agreement and Consent, dated as of November 1, 1990, by and among TCI Development Corporation, TCI
Holdings, Inc., TCI Liberty, Inc., Liberty Cable, Inc., H.F. Lenfest, Marguerite B. Lenfest, H. Chase
Lenfest, Brook J. Lenfest, Diane A. Lenfest and the Company.
*10.6 Letter Agreement, dated as of December 18, 1991, among Liberty Media Corporation, the Company,
Marguerite B. Lenfest, Diane A. Lenfest, H. Chase Lenfest, Brook J. Lenfest and the Lenfest
Foundation.
*10.7 Irrevocable Proxies of H. Chase Lenfest, Diane A. Lenfest and Brook J. Lenfest, each dated March 30,
1990.
*10.8 Partnership Agreement of L-TCI Associates, dated April 1993, between Lenfest International, Inc. and
UA-France, Inc.
*10.9 Stock Pledge Agreement, dated May 28, 1993, between Lenfest York, Inc. and CoreStates Bank, N.A., as
Collateral Agent.
*10.11 Pledge Agreement, dated July 29, 1994, between Lenfest Raystay Holdings, Inc. and Farmers Trust
Company as Collateral Agent.
*++++10.12 Agreement, dated September 30, 1986, between the Company and Tele-Communications, Inc.
*10.13 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.
+10.14 Agreement, dated as of February 29, 1996, in favor of the Company by H.F. Lenfest.
+10.15 Sublease Agreement, dated March 21, 1996, between Suburban Cable TV Co. Inc. and Surgical Laser
Technologies, Inc.
29
##10.16 Letter, dated March 6, 1997, from H. F. Lenfest to the Company.
###10.17 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.).
####10.18 Letter, dated March 26, 1998 (effective September 30, 1997), from H. F. Lenfest to the Company.
!10.19 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.
++ 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.
(a) Reports on Form 8-K.
None.
30
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants ......................................... F-2
Consolidated Balance Sheets, December 31, 1997 and 1998 .................................... F-3
Consolidated Statements of Operations and Comprehensive Income (Loss),
Years Ended December 31, 1996, 1997 and 1998 ............................................ F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit),
Years Ended December 31, 1996, 1997 and 1998 ............................................ F-6
Consolidated Statements of Cash Flows, Years Ended December 31, 1996, 1997 and 1998 ........ F-7
Notes to Consolidated Financial Statements.................................................. F-9
FINANCIAL STATEMENTS SCHEDULE
Report of Independent Certified Public Accountants on Schedule ............................. F-38
Schedule II - Valuation and Qualifying Accounts ........................................... F-39
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Lenfest
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations and comprehensive income (loss),
changes in stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lenfest
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
March 5, 1999
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
-----------------------------------
1997 1998
-------------- --------------
ASSETS
Cash and cash equivalents $ 15,623 $ 9,802
Marketable securities 14,452 18,854
Accounts receivable, trade and other, less allowance
for doubtful accounts of $2,923 in 1997 and $3,603 in 1998 23,206 24,482
Inventories 2,153 1,071
Prepaid expenses 2,960 2,878
Property and equipment, net of accumulated
depreciation 413,787 431,455
Investments in affiliates, accounted for under the equity
method, and related receivables 46,471 37,235
Other investments, at cost 10,410 10,410
Goodwill, net of amortization 73,136 68,637
Deferred franchise costs, net of amortization 507,023 465,420
Other intangible assets, net of amortization 28,341 19,399
Deferred Federal tax asset (net) 74,251 80,371
Other assets 7,907 5,113
------------- -------------
$ 1,219,720 $ 1,175,127
============= =============
See accompanying notes. (continued)
F-3
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, (continued)
(Dollars in thousands)
December 31,
-----------------------------------
1997 1998
-------------- --------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Notes payable $ 1,287,988 $ 1,294,141
Obligations under capital leases - related party 3,722 -
Obligations under capital leases - unrelated parties 3,596 2,412
Accounts payable and accrued expenses - unrelated parties 50,867 73,051
Accounts payable - affiliate 26,304 22,968
Customer service prepayments and deposits 6,984 6,041
Deferred gain on terminated interest swaps 7,063 6,518
Deferred state tax liability (net) 9,580 9,406
Investment in Garden State Cablevision L.P. 77,880 73,414
------------- -------------
TOTAL LIABILITIES 1,473,984 1,487,951
Commitments and contingencies
MINORITY INTEREST in equity of consolidated
subsidiary - -
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 (305,512) (359,149)
Accumulated other comprehensive income (loss) arising from unrealized net
gains (losses) on marketable securities, net of deferred taxes of $269 in
1997 and $55 in 1998 499 (4,424)
------------- -------------
(254,264) (312,824)
------------- -------------
$ 1,219,720 $ 1,175,127
============= =============
See accompanying notes.
F-4
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------
1996 1997 1998
------------ ------------ ------------
REVENUES $ 381,810 $ 447,390 $ 470,409
OPERATING EXPENSES
Service 29,299 33,772 46,958
Programming - from affiliate 57,344 62,892 70,502
Programming - other cable 25,460 30,196 34,033
Selling, general and administrative 82,688 105,470 105,058
Direct costs - non-cable 21,150 22,337 18,377
Depreciation 65,712 78,801 86,754
Amortization 45,565 51,138 48,604
----------- ----------- -----------
327,218 384,606 410,286
----------- ----------- -----------
OPERATING INCOME 54,592 62,784 60,123
OTHER INCOME (EXPENSE)
Interest expense (107,201) (120,788) (120,119)
Equity in net (losses) of unconsolidated affiliates (17,870) (7,334) (3,864)
(Loss) on Australis Media Ltd. securities (86,400) (44,572) -
Other income and expense (net) 13,909 9,154 14,443
----------- ----------- -----------
(197,562) (163,540) (109,540)
----------- ----------- -----------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (142,970) (100,756) (49,417)
INCOME TAX BENEFIT (NET) 14,329 36,179 3,140
----------- ----------- -----------
(LOSS) FROM CONTINUING
OPERATIONS (128,641) (64,577) (46,277)
DISCONTINUED OPERATIONS (net of applicable income taxes) 363 33,738 -
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY LOSS (128,278) (30,839) (46,277)
EXTRAORDINARY LOSS
Early extinguishment of debt, net of applicable income tax benefit
of $1,337 in 1996 and $1,645 in 1998 (2,484) - (7,360)
----------- ----------- -----------
NET LOSS (130,762) (30,839) (53,637)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Unrealized gains (losses) on securities:
Unrealized holding (losses) arising during the period (144,014) (18,303) (2,484)
Less: reclassification adjustment for realized (gains) losses
included in net loss 86,178 28,668 (2,439)
----------- ----------- -----------
(57,836) 10,365 (4,923)
----------- ----------- -----------
COMPREHENSIVE LOSS $ (188,598) $ (20,474) $ (58,560)
=========== =========== ===========
See accompanying notes.
F-5
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
(Dollars in thousands)
Year Ended December 31,
------------------------------------------------
1996 1997 1998
------------- ------------ -------------
COMMON STOCK
BALANCE AT BEGINNING
AND END OF YEAR $ 2 $ 2 $ 2
============ =========== ============
ADDITIONAL PAID-IN CAPITAL
BALANCE AT BEGINNING
AND END OF YEAR $ 50,747 $ 50,747 $ 50,747
============ =========== =============
ACCUMULATED DEFICIT
Balance at beginning of year $ (143,911) $ (274,673) $ (305,512)
Net (loss) (130,762) (30,839) (53,637)
------------ ----------- ------------
BALANCE AT END OF YEAR $ (274,673) $ (305,512) $ (359,149)
============ =========== ============
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year $ 47,970 $ (9,866) $ 499
Net unrealized gain (loss) on marketable securities, net of
deferred tax liabilities (57,836) 10,365 (4,923)
------------ ----------- ------------
BALANCE AT END OF YEAR $ (9,866) $ 499 $ (4,424)
============ =========== ============
TOTAL STOCKHOLDERS'
EQUITY (DEFICIT) $ (233,790) $ (254,264) $ (312,824)
============ =========== ============
See accompanying notes.
F-6
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------
1996 1997 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (130,762) $ (30,839) $ (53,637)
(Income) from discontinued operations (363) (1,469) -
(Gain) on sale of assets of discontinued operations - (32,269) -
Extraordinary loss 2,484 - 7,360
----------- ----------- -----------
Loss from continuing operations (128,641) (64,577) (46,277)
Adjustments to reconcile net loss from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 111,277 129,939 135,358
Accretion of debt discount 1,081 1,788 1,891
Accretion of discount on marketable securities (1,026) (477) -
Net (gains) on sales of marketable securities (342) (468) (3,766)
Loss on Australis Media Ltd. securities 86,400 44,572 -
(Gain) on disposition of equity investment (7,210) (7,318) (12,221)
Deferred income tax (benefit) (15,226) (21,431) (4,455)
Write off of assets upon rebuild of cable systems 846 - -
(Gain) loss on sales of property and equipment (326) 694 2,469
Equity in net losses of unconsolidated affiliates 17,870 7,334 3,864
Minority interests (2,492) (945) -
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable (7,100) (3,321) (1,276)
Inventories 2,175 604 1,082
Prepaid expenses 278 (596) 82
Other assets (3,363) 1,305 1,297
Deferred gain on terminated interest swaps - 7,063 (545)
Accounts payable and accrued expenses:
Affiliate 5,650 13,449 (3,336)
Unrelated parties 6,599 12,086 22,184
Customer service prepayments and deposits 637 (1,630) (943)
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 67,087 118,071 95,408
----------- ----------- -----------
See accompanying notes. (continued)
F-7
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
(Dollars in thousands)
Year Ended December 31,
-----------------------------------------------------
1996 1997 1998
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of cable systems $ (604,032) $ (84,500) $ -
Non cable acquisitions (5,600) - -
Purchases of property and equipment (57,397) (94,519) (107,994)
Purchases of marketable securities (582) (3,091) (2,333)
Proceeds from transfer of cable system 4,500 - -
Proceeds from sales of property and equipment 381 1,091 177
Proceeds from sales of marketable securities 1,952 45,223 9,480
Proceeds from sale of assets of discontinued operations - 70,250 -
Discontinued operations (255) (18,558) 1,497
Loans to Australis Media (41,139) - -
Proceeds from Australis Media note receivable 41,139 - -
Investments in unconsolidated affiliates (4,183) (9,346) (287)
Distributions from unconsolidated affiliates 45,932 775 2,285
(Increase) in other intangible assets - investing (4,539) (8,876) (369)
Loans and advances to unconsolidated affiliates (470) (4,849) (2,337)
Loans and advances from unconsolidated affiliates 8,390 3,627 2,178
-------------- ------------- -------------
NET CASH (USED IN)
INVESTING ACTIVITIES (615,903) (102,773) (97,703)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in debt 942,023 105,000 311,386
Early extinguishment of debt (448,821) - (67,375)
Other debt reduction:
Notes (80,345) (122,000) (241,470)
Obligations under capital leases (256) (1,490) (4,874)
(Increase) in other intangible assets - financing (9,045) (347) (1,193)
-------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 403,556 (18,837) (3,526)
-------------- ------------- -------------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (145,260) (3,539) (5,821)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 164,422 19,162 15,623
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 19,162 $ 15,623 $ 9,802
============== ============= =============
See accompanying notes.
F-8
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Lenfest Communications, Inc.
and subsidiaries ("the Company") is presented to assist in understanding its
financial statements. These accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation of
the consolidated financial statements.
Business Activities and Concentrations of Credit Risk
The Company, through its cable subsidiaries, owns and operates a single cluster
of cable television systems located in the suburbs of Philadelphia,
Pennsylvania, from Harrisburg, Pennsylvania through Wilmington, Delaware and
south through Atlantic City, New Jersey. In addition, the Company, through its
non-cable subsidiaries, provides cable advertising, promotional, traffic and
billing, telemarketing, paging, internet and digital video services. The
Company's ability to collect the amounts due from customers is primarily
affected by economic fluctuations in these geographic areas.
The Company maintains cash balances at several financial institutions located
primarily in the Philadelphia Area. Accounts at each institution are insured by
either the FDIC or another institutional insurance fund up to $100,000 and
$500,000, respectively. The Company maintains cash balances in excess of the
insured amounts.
Basis of Consolidation, Restatement and Reclassification
The consolidated financial statements include the accounts of Lenfest
Communications, Inc. and those of all wholly owned and majority owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain amounts in the prior years have been restated and reclassified to
conform with the 1998 presentation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable debt securities
with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. Inventories consist of equipment assembled and sold by some of the
Company's non-cable wholly owned subsidiaries.
F-9
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Property and Equipment
Property and equipment are stated at cost. For acquired systems or companies,
the purchase price has been allocated to net assets on the basis of fair market
values as determined by the reproduction cost technique, which involves
determining the current cost of all labor, materials and overhead necessary to
create the assets, and then deducting allowances for depreciation and
obsolescence. Depreciation is provided using the accelerated and straight-line
methods of depreciation for financial reporting purposes at rates based on
estimated useful lives. For income tax purposes, recovery of capital costs for
property and equipment is made using accelerated methods over statutory recovery
periods.
Expenditures for renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Property and Equipment Under Capital Leases
Property and equipment capitalized under capital leases are amortized on the
straight-line method over the term of the leases or the estimated useful lives
of the assets. Amortization of leased assets is included in depreciation expense
in the consolidated statements of operations and comprehensive income (loss).
Capitalization of Self Constructed Assets
All costs attributable to cable television plant, including materials, direct
labor and construction overhead are capitalized. Initial customer installation
costs including material, labor and overhead are capitalized and depreciated
over eight years. The costs of subsequently disconnecting and reconnecting are
charged to expense. Installation income has been fully recognized.
Deferred Franchise Costs, Goodwill and Other Intangible Assets
Deferred franchise costs, goodwill and other intangible assets acquired in
connection with the purchases of cable systems and other companies have been
valued at acquisition cost on the basis of the allocation of the purchase price
on a fair market value basis to net assets as determined by the projected
earnings method, which discounts projected earnings over a fifteen year period
to a present value. Additions to these assets are stated at cost. Other
intangible assets consist of debt acquisition costs, organization costs and
covenants not to compete. Goodwill represents the cost of acquired cable systems
and companies in excess of amounts allocated to specific assets based on their
fair market values. Deferred franchise costs are amortized on the straight-line
method over the legal franchise lives, generally 10 to 20 years. Other
intangible assets are being amortized on the straight-line method over their
legal or estimated useful lives, generally ranging from 5 to 10 years. Goodwill
is amortized on the straight-line method over 20 to 40 years.
Valuation of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company assesses, on an on-going basis, the recoverability
of long-lived assets based on estimates of future undiscounted cash flows for
the applicable business compared to net book value. Long-lived assets include
property and equipment, deferred franchise costs, goodwill and other intangible
assets. If the future undiscounted cash flow estimate is less than net book
value, net book value is then reduced to the fair value of the assets. The
Company also evaluates the depreciation and amortization periods of tangible and
intangible assets, including goodwill, to determine whether events or
circumstances warrant revised estimates of useful lives. As of December 31,
1998, management believes that no revisions to the remaining useful lives or
writedowns of long-lived assets are required.
F-10
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Investments
Investments in non-publicly traded entities that do not have a readily
ascertainable fair market value, in which the voting interest is less than 20%,
are generally carried at cost. Investments in marketable equity securities are
carried at fair market value and any unrealized appreciation (depreciation) is
included in accumulated other comprehensive income (loss), net of deferred
taxes. For those investments in affiliates in which the Company's voting
interest is 20% to 50%, the equity method of accounting is used. Under this
method, the original investment, recorded at cost, is adjusted to recognize the
Company's share of the net earnings or losses of the affiliates as they occur
rather than as dividends or other distributions are received, limited to the
extent of the Company's investment in, advances to and guarantees for the
investee. The Company's share of net earnings or losses of affiliates includes
the amortization of purchase adjustments.
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the current
exchange rate as of the end of the year. Statement of operations items are
translated at average currency exchange rates.
Income Taxes
The Company files a consolidated Federal tax return. Investment and other tax
credits are recognized under the flow-through method of accounting.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
Revenue Recognition
The Company bills its customers in advance; however, revenue is recognized as
cable television services are provided. Receivables are generally collected
within 30 days. Credit risk is managed by disconnecting services to customers
who are delinquent. Other revenues are recognized as services are provided or
equipment is delivered. Revenues obtained from the connection of customers of
the cable television system are less than related direct selling costs;
therefore, such revenues are recognized as received.
F-11
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("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 has
adopted SFAS 131 effective January 1, 1998. The adoption of SFAS No. 131 did 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 FASB has also recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for fiscal quarters of fiscal years beginning after
June 15, 1999. The Company has not yet adopted SFAS No. 133. The adoption of
SFAS No. 133 is not expected to have a significant impact on the Company's
consolidated financial statements and related footnotes.
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 Company's current accounting treatment of these costs
closely conforms to the requirements of SOP 98-1. Therefore, the adoption of SOP
98-1 is not expected to have a significant impact on the Company's consolidated
financial statements and related footnotes.
The AICPA recently issued Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that entities expense
start-up costs and organization costs as they are incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged. The Company has not yet adopted SOP 98-5. The
adoption of SOP 98-5 is not expected to have a significant impact on the
Company's consolidated financial statements and the related footnotes.
F-12
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 2 - COMMON STOCK OWNERSHIP AND CONTROL
The 158,896 shares of common stock outstanding at December 31, 1997 and 1998,
are 50% owned by H.F. (Gerry) Lenfest and his three children and 50% by LMC
Lenfest, Inc., an indirect wholly owned subsidiary of Tele-Communications, Inc.
("TCI"), a wholly owned subsidiary of AT&T Corp. Mr. Lenfest's children have
granted irrevocable proxies to him. These proxies expire March 30, 2000.
Pursuant to an agreement among H.F. Lenfest, his children and the Lenfest
Foundation and LMC Lenfest, Inc. dated December 18, 1991, and the amended and
restated Articles of Incorporation of the Company, Mr. Lenfest has the right to
continue as chief executive officer of the Company until January 1, 2002, and
has the right to designate a majority of the Board of Directors of the Company
until January 1, 2002. During such period, vacancies in respect of the directors
designated by Mr. Lenfest shall be filled by designees of Mr. Lenfest or, in the
event of Mr. Lenfest's death, by The Lenfest Foundation. Thereafter, Mr.
Lenfest, Mrs. Lenfest, their issue and the Lenfest Foundation ("The Lenfest
Family"), acting as a group and LMC Lenfest, Inc. will have the right to appoint
an equal number of members of the Company's Board of Directors. This right will
continue for so long as any member of the Lenfest Family owns any stock in the
Company.
NOTE 3 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------------
1996 1997 1998
------------- ------------ -------------
Cash paid during the year for: (Dollars in thousands)
Interest:
Continuing operations $ 103,836 $ 120,580 $ 112,675
Discontinued operations 494 612 -
Income taxes:
Continuing operations $ - $ 1,522 $ -
Discontinued operations - - 120
Supplemental Schedules Relating to Acquisitions
Year Ended December 31,
-----------------------------------
1996 1997
-------------- --------------
(Dollars in thousands)
Property and equipment $ 170,085 $ 27,965
Deferred franchise costs 398,260 53,797
Goodwill and other intangible assets 32,543 2,738
Equity interests in affiliates 2,877 -
Other assets 5,867 -
------------- -------------
$ 609,632 $ 84,500
============= =============
There were no acquisitions in 1998.
F-13
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 3 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOW - (continued)
Noncash Investing and Financing Transactions
On February 12, 1998, the Company's wholly owned subsidiary, Lenfest Telephony,
Inc., exchanged its 50% general partnership interest in Hyperion
Telecommunications of Harrisburg ("HTH") for a warrant to acquire 731,624 shares
(the effective number of shares after a stock split) or approximately 2% of
Class A common stock of Hyperion Telecommunications, Inc. ("Hyperion"), the
other 50% general partner in HTH. The value of the warrant was estimated to be
$11.7 million, based on the initial public offering of the Class A common stock
of Hyperion in May 1998. The Company believes that this value approximated fair
market value of the warrant on February 12, 1998. A gain of $11.5 million, which
represents the excess of the market value of the partnership interest over its
book value, has been included in the accompanying consolidated statement of
operations and comprehensive income (loss). The warrant was exercised in May
1998.
On December 16, 1997, The Box Worldwide, Inc. ("Box") merged with a subsidiary
of TCI Music, Inc. ("TCI Music"), an affiliate of TCI. As a result of the
merger, the Company's 7.1 million shares of Box were converted into rights to
receive 501,290 shares of TCI Music preferred stock. A former employee of the
Company had an option to purchase 14,000 of these shares. This option was not
exercised and expired on December 31, 1998. Each share of the TCI Music
preferred stock is convertible into three shares of TCI Music series A common
stock.
On December 23, 1996, the Company received 18 million shares of voting stock of
Australis Media Limited ("Australis") and 52.2 million non-voting debentures of
Australis in connection with the termination of a technical services agreement
with Australis and also received 500,000 shares of voting stock for late
repayment of a loan to the Company by Australis. Also on December 23, 1996, the
Company converted 5 million non-voting debentures of Australis into 5 million
shares of voting stock.
On October 31, 1996, the Company financed $80 million used to acquire additional
debt and equity securities of Australis.
On September 30, 1996, the Company contributed the right to receive assets of a
cable television system for a partnership interest (See Note 4). Also, in
September 1996, the Company contributed the assets that comprise the business
known as "The Barker" to a newly formed joint venture (See Note 4).
On May 10, 1996, the Company entered into an agreement to guarantee up to $75
million of a new $125 million Australis bank facility as part of
recapitalization plans pursued by Australis. On May 2, 1996, the Company entered
into a stand-by $75 million senior subordinated credit facility in order to
provide any required funding under this guaranty. As of October 31, 1996, the
guaranty and stand-by facility were terminated.
In February 1996, the Company exchanged the assets of its cable television
systems in the East San Francisco Bay area, its 41.67% partnership interest in
Bay Cable Advertising, and the right to receive assets of a cable television
system located in Fort Collins, CO, for the assets of a cable television system
serving Wilmington, Delaware and the surrounding area. A gain of $7.2 million,
which represents the excess of the market value of the partnership interest over
its book value, has been included in the accompanying consolidated statements of
operations and comprehensive income (loss) (See Note 4).
In 1997 and 1998, the Company incurred additional capital lease obligations of
$4.6 million and $0.4 million, respectively.
F-14
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 3 - SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOW - (continued)
During 1997 and 1998, the Company disposed of $6.0 million and $1.6 million,
respectively of fully depreciated plant in connection with the rebuild of
certain of its systems.
NOTE 4 - NEW BUSINESS AND ACQUISITIONS
Domestic Cable
On January 10, 1997, the Company acquired a cable television system from Cable
TV Fund 14-A, Ltd., an affiliate of Jones Intercable, Inc., for approximately
$84.5 million, subject to certain adjustments. The system, located in
Turnersville, New Jersey, passed approximately 47,000 homes and served
approximately 36,900 basic customers. For financial reporting purposes, the
Company accounts for the acquisition of these assets under the purchase method.
This acquisition was funded in part by borrowings under the bank credit
facility.
On September 30, 1996, the Company through its newly formed subsidiary, Lenfest
Clearview, Inc. ("Clearview") completed the acquisition of a 30% general
partnership interest in a newly formed general partnership, Clearview Partners
(the "Partnership"). The Company contributed $0.5 million and its right to
receive the assets of the Gettysburg, PA cable television and its right to
exchange the Gettysburg system for the assets of the Stewartstown, PA cable
television system owned by GS Communications, Inc. Clearview CATV, Inc., an
unaffiliated company, contributed the assets and certain liabilities of its
cable television system located in Maryland and Pennsylvania to the Partnership
for a 70% general partnership interest. The Partnership's systems passed
approximately 13,400 homes and served approximately 9,650 basic customers. The
Company reports its proportionate share of partnership net income (loss) on the
equity method. The Company's cash contribution was made from available funds.
On April 30, 1996, the Company acquired a cable television system from
Tri-County Cable Television Company, an affiliate of Time Warner, for
approximately $16 million. The system, located in Salem, NJ, passed
approximately 10,600 homes and served approximately 7,700 basic customers. On
the same date, the Company acquired a cable television system from Shore Cable
Company of New Jersey for approximately $11 million. The system, located in
Ventnor, NJ, passed approximately 6,100 homes and served approximately 5,000
basic customers. For financial reporting purposes, the Company accounts for the
acquisition of these assets under the purchase method. These acquisitions were
funded in part by borrowings under the existing bank credit facility.
On February 29, 1996, the Company acquired four cable television systems and
equity interests in three affiliates from Sammons Communications, Inc. for
approximately $531 million. The systems, which are located in Bensalem and
Harrisburg, PA and in Vineland and Atlantic City/Pleasantville, N.J., passed
approximately 358,000 homes and served approximately 282,000 basic customers.
The equity interests consisted of a 50% partnership interest in Hyperion
Telecommunications of Harrisburg, a 50% partnership interest in Atlantic
Communication Enterprises and a 25% partnership interest in Cable Adcom. For
financial reporting purposes, the Company accounts for the acquisition of these
assets under the purchase method. The acquisition was funded in part by $420
million borrowed under the Company's bank credit facility existing at that date,
and the remaining proceeds from a public offering of debt securities in November
1995. The purchase price included the assets of a fifth system, located in
Gettysburg, PA, to which the Company did not take title. The Company managed the
Gettysburg system from February 29, 1996, until the assets of the system were
transferred to GS Communications, Inc. on September 30, 1996. (See Note 3)
F-15
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - NEW BUSINESS AND ACQUISITIONS - (continued)
In February 1996, the Company completed an exchange transaction with a
subsidiary of TCI whereby the Company exchanged the assets of its cable
television systems in the East San Francisco Bay area with a book value of $33.2
million , its 41.67% partnership interest in Bay Cable Advertising with a book
value of $3.5 million and a fair market value of $10.8 million, and the right to
receive assets of a cable television system located in Fort Collins, CO, which
right was acquired for $54.4 million, less settlement adjustments of $8.8
million, for the assets of a cable television system, serving Wilmington,
Delaware and the surrounding area. The assets of the Wilmington system have been
recorded at the net book value of the cable television system assets exchanged
and the market value of the partnership interest, less the settlement
adjustment. A gain of $7.2 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. The acquisition of these
cable systems were financed with proceeds from the Company's public offering of
debt securities in November 1995.
The accompanying consolidated financial statements include the results of
operations for these acquisitions since the dates of the acquisitions.
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1996:
1996 1997 1998
---------- ---------- ----------
(Dollars in thousands)
Revenues $ 418,109 $ 447,848 $ 470,409
---------- ---------- ----------
Loss from continuing operations $ (143,619) $ (64,683) $ (46,277)
---------- ---------- ----------
Net loss $ (145,740) $ (30,945) $ (53,637)
---------- ---------- ----------
Other
During 1998, the Company created Tri-State Media, Inc., for the production of
cable television programming, Suburban Digital Services, Inc., for the provision
of digital video and Suburban Networks, Inc., for the provision of internet
service. In 1996, the Company created Suburban Connect, Inc., to provide paging
systems and service. All of these entities are wholly owned subsidiaries.
Effective January 1, 1997, the Company, through its subsidiary, Lenfest
Philadelphia Interconnect, Inc., entered into a partnership with a subsidiary of
Comcast Corporation ("Comcast") for the purpose of representing regional and
national cable advertising sales in the Greater Philadelphia market. Under the
agreement, the percentage interests of the partners is determined on the basis
of the number of cable customers of the Company and Comcast in the designated
market area at the beginning of the year. For 1998, the Company's partnership
interest was 71%. The partners have equal representation on the Executive
Committee. Lenfest Advertising, Inc. d/b/a Radius Communications ("Radius"), a
wholly owned subsidiary of the Company has been the managing partner of the
partnership since inception. In addition to its management activities Radius
continues to provide local cable advertising sales and insertion for the Company
and sixteen other cable television system operators. The Company uses the equity
method to account for this investment.
F-16
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 4 - NEW BUSINESS AND ACQUISITIONS - (continued)
On September 30, 1996, Radius acquired the assets of Metrobase Cable Advertising
from a subsidiary of Harron Communications Corp. for approximately $4.5 million.
For financial reporting purposes, the Company accounts for the acquisition of
these assets under the purchase method. This acquisition was funded from
available funds.
On September 11, 1996, StarNet, Inc. ("StarNet"), a wholly owned subsidiary of
the Company, entered into a joint venture with Prevue Networks, Inc. ("Prevue"),
a wholly owned subsidiary of United Video Satellite Group, Inc. ("UVSG"), to
combine the two companies' pay-per-view promotion services. StarNet contributed
The Barker(R) service to the joint venture and received a 28% partnership
interest. The joint venture, Sneak Prevue, L.L.C., is based in Tulsa, Oklahoma
and is managed and controlled by UVSG. The Company reports its proportionate
share of net income (loss) on the equity method.
In February 1996, Radius purchased the Philadelphia area assets of Cable AdNet
Partners, a subsidiary of TCI, for approximately $1.1 million.
NOTE 5 - MARKETABLE SECURITIES
The aggregate cost and market values of the securities at December 31, 1997 and
1998 are as follows:
1997 1998
-------------- ---------------
(Dollars in thousands)
Aggregate cost basis $ 13,684 $ 23,223
Unrealized gain (loss) 768 (4,369)
------------- -------------
Fair value $ 14,452 $ 18,854
============= =============
All of the Company's securities are considered to be available for sale. Net
realized gains from the sale of marketable securities, in the amount of $0.3
million, $0.5 million and $3.8 million are included in other income and expense
(net) in 1996, 1997 and 1998, respectively. The specific identification method
is used to determine the cost of each security at the time of sale.
The Company, through its subsidiaries, StarNet, StarNet Interactive
Entertainment, Inc. and Suburban Cable TV Co. Inc. ("Suburban") owned a total of
7.1 million shares of Box. The Company used the equity method to account for
this investment. On December 16, 1997, Box merged with a subsidiary of TCI Music
and the Company's shares of Box were converted into rights to receive .5 million
shares of TCI Music preferred stock. The investment in TCI Music is accounted
for as marketable securities. The Company's cost basis in the securities is
approximately $11.3 million. The fair value of the securities at December 31,
1998 was approximately $7.4 million.
The Company owned securities representing a 13.6% voting interest and a 41.5%
economic interest in Australis Media Limited ("Australis"), a publicly held
Australian pay television company. The Company had acquired its interest in
Australis through a series of investments totaling $131.0 million. During 1996
and 1997, the Company recognized losses for declines in market value that were
determined to be other than temporary. The investment had been completely
written-off as of December 31, 1997.
F-17
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 6 - INVENTORIES
The schedule of inventories at December 31, 1997 and 1998 are as follows:
1997 1998
------------ ------------
(Dollars in thousands)
Raw materials $ 2,153 $ 1,071
=========== ===========
At December 31, 1997 and 1998, inventories have been written down to estimated
net realizable value and the accompanying consolidated statements of operations
for 1997 and 1998 include corresponding charges of $0.9 million and $0.7
million, respectively, which have been included with direct costs - non-cable.
NOTE 7 - PROPERTY AND EQUIPMENT
The schedule of property and equipment at December 31, 1997 and 1998 is as
follows:
Estimated
Useful Lives
1997 1998 in Years
-------------- -------------- -----------------
(Dollars in thousands)
Land $ 4,246 $ 4,854 -
Buildings and improvements 30,779 41,254 10-39
Cable distribution systems 659,366 724,615 5-12
Computer hardware and software 25,325 34,155 3-5
Office equipment, furniture and
fixtures 12,609 14,832 7
Vehicles 15,758 19,178 5
Other equipment 15,560 23,464 5-7
Assets under capital leases 9,269 5,376 5-15
------------- -------------
772,912 867,728
Accumulated depreciation 359,125 436,273
------------- -------------
$ 413,787 $ 431,455
============= =============
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P.
The Company, through several subsidiaries, owns non-controlling interests in
several general partnerships and corporations. Any subsidiary of the Company
that is a general partner is liable, as a matter of partnership law, for all
debts of such partnership. Investments and advances in affiliates accounted for
under the equity method amounted to $46.5 million and $37.2 million at December
31, 1997 and 1998, respectively. Net losses recognized under the equity method
for the years ended December 31, 1996, 1997 and 1998 were $17.9 million, $7.3
million and $3.9 million, respectively. Under the equity method, the initial
investments are recorded at cost. Subsequently, the carrying amount of the
investments are adjusted to reflect the Company's share of net income or loss of
the affiliates as they occur. Losses in excess of amounts recorded as
investments on the Company's books have been offset against loans and advances
to these unconsolidated affiliates to the extent they exist.
F-18
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
The Company, through its subsidiary, Lenfest Jersey, Inc., owns a 10.005%
general partnership interest and a 39.995% limited partnership in Garden State
Cablevision L.P. ("Garden State"), a cable company serving approximately 212,000
customers in southern New Jersey at December 31, 1998. Under a consulting
agreement, the Company advises Garden State on various operational and financial
matters for a consulting fee of 3% of Garden State's gross revenues. Garden
State also obtains its cable television programming from Satellite Services,
Inc., an affiliate of TCI, through the Company. The programming services are at
a rate which is not more than Garden State could obtain independently. For the
years ended December 31, 1996, 1997 and 1998, the total programming obtained
through the Company was approximately $13.7 million, $14.7 million and $17.9
million, respectively.
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 income or losses. In
addition, the Company is required to make up its partner capital deficits upon
the termination or liquidation of the Garden State partnership. Because of the
requirement to make up capital deficits, the accompanying financial statements
reflect equity in accumulated losses, net of related receivable, in excess of
the investments in Garden State in the amount of $77.9 million and $73.4 million
at December 31, 1997 and 1998, respectively.
Summarized audited financial information of Garden State, accounted for under
the equity method, at December 31, 1997 and 1998, is as follows:
1997 1998
--------------- ---------------
(Dollars in thousands)
Financial Position
Cash and cash equivalents $ 5,271 $ 10,406
Accounts receivable, net 3,551 3,560
Other current assets 666 1,071
Property and equipment, net 83,863 94,702
Deferred assets, net 55,938 41,825
------------- -------------
TOTAL ASSETS $ 149,289 $ 151,564
============= =============
Debt $ 324,000 $ 318,000
Liabilities to the Company 3,579 5,640
Accounts payable and accrued expenses 12,388 9,768
Customer prepayments and deposits 875 960
Other liabilities 1,523 1,458
Partners' deficit (193,076) (184,262)
------------- --------------
TOTAL LIABILITIES AND DEFICIT $ 149,289 $ 151,564
============= =============
F-19
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
1996 1997 1998
-------------- -------------- --------------
(Dollars in thousands)
Results of Operations
Revenues $ 100,756 $ 109,126 $ 114,129
Operating expenses (43,608) (45,902) (46,634)
Management and consulting fees (6,045) (6,548) (6,848)
Depreciation and amortization (48,524) (44,698) (30,042)
------------- ------------- -------------
OPERATING INCOME 2,579 11,978 30,605
Interest expense (16,405) (22,787) (21,791)
------------- ------------- -------------
NET INCOME (LOSS) $ (13,826) $ (10,809) $ 8,814
============= ============= =============
Cash Flows
Cash flows from operating activities $ 26,132 $ 32,815 $ 37,924
Cash flows from investing activities (22,759) (23,308) (26,768)
Cash flows from financing activities (1,774) (9,094) (6,021)
------------- ------------- -------------
INCREASE IN CASH AND
CASH EQUIVALENTS 1,599 413 5,135
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 3,259 4,858 5,271
------------- ------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 4,858 $ 5,271 $ 10,406
============= ============= =============
Summarized financial information of affiliates other than Garden State,
accounted for under the equity method, at December 31, 1997 and 1998, is as
follows:
1997 1998
--------------- ---------------
(Dollars in thousands)
Financial Position
Cash and cash equivalents $ 6,595 $ 3,054
Accounts receivable, net 16,793 30,665
Other current assets 31,658 2,828
Property and equipment, net 209,333 234,160
Deferred tax asset 550 94
Other assets, net 62,000 61,800
------------- -------------
TOTAL ASSETS $ 326,929 $ 332,601
============= =============
F-20
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
1997 1998
------------- -------------
(Dollars in thousands)
Financial Position - (continued)
Liabilities to the Company $ 4,435 $ 6,144
Accounts payable and accrued expenses 44,131 37,817
Debt 136,089 81,653
Deferred tax liability 12,343 12,565
Payable to related party (not the Company) 90,991 194,652
Other liabilities 29,985 49,125
Equity (deficit) 8,955 (49,355)
------------- -------------
TOTAL LIABILITIES
AND EQUITY $ 326,929 $ 332,601
============= =============
1996 1997 1998
------------- ------------- -------------
(Dollars in thousands)
Results of Operations
Revenues $ 125,534 $ 156,405 $ 154,861
Operating expenses (96,909) (120,782) (107,436)
Depreciation and amortization (25,755) (32,357) (35,091)
------------- ------------- -------------
OPERATING INCOME 2,870 3,266 12,334
Interest expense (16,964) (18,284) (21,393)
Other income and expense (net) 1,054 9,565 (1,453)
------------- ------------- -------------
NET (LOSS) $ (13,040) $ (5,453) $ (10,512)
============= ============= =============
Cash Flows
Cash flows from operating activities $ 6,070 $ 35,378 $ 16,805
Cash flows from investing activities (57,436) (74,331) (49,211)
Cash flows from financing activities 46,450 34,153 32,344
------------- ------------- -------------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (4,916) $ (4,800) $ (62)
============= ============= =============
F-21
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
The following table of the Company's investments, other than Garden State,
accounted for under the equity method, reflects ownership percentage as of
December 31, 1998, and the carrying amount including related receivables, as of
December 31, 1997 and 1998:
December
31, 1998
Ownership
Percentage 1997 1998
---------- ------------- -------------
(Dollars in thousands)
Susquehanna Cable Co. Subsidiaries
("SCC Subs")(Note 9) 30% $ 10,671 $ 11,307
Raystay Co. ("Raystay") (Note 26) 45% 11,807 11,142
Videopole (Note 26) 29% 11,117 -
MetroNet Communications and Globenet
Communications ("MetroNet") 50% 1,086 927
Hyperion Telecommunications of
Harrisburg ("Hyperion") (Note 3) - 217 -
Sneak Prevue, L.L.C. ("Sneak Prevue")
(Note 4) 28% 2,512 2,569
Clearview Partners ("Clearview") (Note 4) 30% 1,825 2,858
Cable Adcom ("Adcom") - 1,533 -
Philadelphia Interconnect ("Interconnect")
(Note 4) 71% 3,843 5,814
Others 1,860 2,618
------------- -------------
$ 46,471 $ 37,235
============= =============
The carrying amounts of Garden State, SCC Subs and Raystay at December 31, 1998
include excess purchase accounting adjustments of $13.1 million, $22.0 million
and $11.0 million, respectively. The excess amounts are being written off based
on the depreciation and amortization methods and lives of the related tangible
and intangible assets. None of the investments in common stock at December 31,
1998 have quoted market prices available.
The Company's indirect, wholly owned subsidiary, LenNet, Inc., owns a 50%
general partnership interest in MetroNet Communications, a company that provides
microwave transmissions of voice and data between two points of presence for its
customers located throughout the United States and a 50% general partnership
interest in Globenet Communications, a company that provides international call
back telephone service for its customers located in foreign countries.
Videopole's financial statements are prepared in accordance with accounting
principles generally accepted in France ("French GAAP"). U.S. generally accepted
accounting principles ("U.S. GAAP") differ in certain significant respects from
French GAAP applied by Videopole. The Company records its equity share of
Videopole's operating results calculated in accordance with U.S. GAAP.
F-22
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE
CABLEVISION L.P. - (continued)
The following table reflects the Company's share of income or losses of Garden
State and each of the aforementioned affiliates:
1996 1997 1998
-------------- ------------ -----------
(Dollars in thousands)
Garden State $ (5,068) $ (3,340) $ 6,652
SCC Subs (1,010) (208) 636
Raystay (1,575) 4,826 (665)
Videopole (7,408) (7,200) (11,122)
MetroNet (92) 81 204
Hyperion (734) (826) -
Sneak Prevue (326) (426) (224)
Clearview (100) - 305
Adcom 1,070 851 109
Interconnect - 359 244
Other (2,627) (1,451) (3)
------------- ------------ -----------
$ (17,870) $ (7,334) $ (3,864)
============= ============ ===========
NOTE 9 - OTHER INVESTMENTS
Other investments, accounted for under the cost method, are summarized as
follows:
1997 1998
------------- -------------
(Dollars in thousands)
Susquehanna Cable Co., Inc. (a) $ 10,359 $ 10,359
Other 51 51
------------- -------------
$ 10,410 $ 10,410
============= =============
(a) The Company has 14.9% ownership of the voting stock of Susquehanna Cable Co.
Inc. and accounts for this investment under the cost method. Susquehanna is
an indirect subsidiary of Susquehanna Pfaltzgraff Co. and is the parent
company of five cable operating subsidiaries, of which the Company has a
direct ownership interest of the voting stock of 17.75%. The Company's
investment in these subsidiaries are accounted for under the equity method
because the Company's direct and indirect ownership interests in these
subsidiaries is thirty percent (30%).
NOTE 10 - GOODWILL
The excess of the purchase price paid over the acquired net assets has been
allocated to goodwill. Accumulated amortization at December 31, 1997 and 1998,
was $28.6 million and $32.4 million, respectively.
F-23
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 11 - DEFERRED FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS
A schedule of deferred franchise costs and other intangible assets and
accumulated amortization at December 31, 1997 and 1998, is as follows:
Accumulated
Amount Amortization Net
------------- ------------- -------------
(Dollars in thousands)
December 31, 1997
Deferred franchise costs $ 693,050 $ 186,027 $ 507,023
============= ============= =============
Debt acquisition costs $ 12,589 $ 4,735 $ 7,854
Covenants not to compete 12,500 7,117 5,383
Other deferred assets 19,920 4,816 15,104
------------- ------------- -------------
$ 45,009 $ 16,668 $ 28,341
============= ============= =============
December 31, 1998
Deferred franchise costs $ 693,217 $ 227,797 $ 465,420
============= ============= =============
Debt acquisition costs $ 1,793 $ 53 $ 1,740
Covenants not to compete 12,500 8,367 4,133
Other deferred assets 19,717 6,191 13,526
------------- ------------- -------------
$ 34,010 $ 14,611 $ 19,399
============= ============= =============
NOTE 12 - NOTES PAYABLE
Notes payable consisted of the following at December 31, 1997 and 1998:
1997 1998
------------- -------------
(Dollars in thousands)
8-3/8% senior notes due November 1, 2005 (a) $ 687,082 $ 688,284
10-1/2% senior subordinated notes due June 15, 2006 (b) 293,781 294,259
7-5/8% senior notes due February 15, 2008 (c) - 148,377
8-1/4% senior subordinated notes due February 15, 2008 (d) - 148,221
Bank credit facility (e) 240,000 15,000
11.30% senior promissory notes due September 1, 2000 (f) 45,000 -
11.84% senior promissory notes due May 15, 1998 (g) 10,500 -
9.93% senior promissory notes due September 30, 2001 (h) 11,625 -
------------- -------------
$ 1,287,988 $ 1,294,141
============= =============
F-24
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - NOTES PAYABLE - (continued)
(a) These notes, which are stated net of an unamortized discount of $11.7
million at December 31, 1998, were issued through a public offering in
November 1995. The notes require semi-annual interest payments. The notes
are not redeemable at the option of the Company prior to maturity. Upon a
Change of Control Triggering Event, holders of the notes may require the
Company to purchase all or a portion of the notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest.
The net proceeds were used to provide funds for the early extinguishment of
debt, to pay off notes payable to banks, and to provide funding for the
exchange of assets with TCI (Note 4) and to provide partial funding for the
cable television systems acquired from Sammons Communications, Inc.
(Note 4).
(b) These notes, which are stated net of an unamortized discount of $5.7 million
at December 31, 1998, were issued through a private placement in June 1996
and were later exchanged for publicly traded notes in a public offering in
September 1996. The notes require semi-annual interest payments. The notes
are general unsecured obligations of the Company subordinate in right of
payment to all present and future senior indebtedness of the Company. The
net proceeds were used, together with $150 million from initial borrowings
under the term loan portion of the bank credit facility to prepay all
amounts outstanding under the Company's former bank credit facility. The
Company incurred extraordinary charges from the write-off of the unamortized
loan costs associated with the old bank credit facility. These charges
increased net loss by $2.5 million, net of income tax benefits of $1.3
million in 1996.
(c) These notes, which are stated net of unamortized discount of $1.6 million at
December 31, 1998, were issued through a private placement in February 1998
and were later exchanged for publicly traded notes in a public offering in
September 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. The Company
incurred extraordinary charges from the write-off of the unamortized loan
costs associated with retired debt. These charges increased net loss by $7.4
million, net of income tax benefits of $1.6 million.
(d) These notes, which are stated net of unamortized discount of $1.8 million at
December 31, 1998, were issued through a private placement in February 1998
and were later exchanged for publicly traded notes in a public offering in
September 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 (c).
(e) On August 4, 1998, the Company amended and restated its existing bank credit
facility. The new facility establishes senior 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 this facility for operations, capital
expenditures, general corporate purposes and possibly for future
acquisitions of cable systems. Principal payments and commitment reductions
are scheduled to commence on December 31, 2001, with quarterly reductions
thereafter until the termination of the facility on March 31, 2006. Loans
outstanding under the facility bear interest, at the Company's option, at
either (i) the Base Rate plus an applicable margin or (ii) LIBOR plus an
applicable margin, in each case based upon certain levels of leverage
ratios. The weighted average interest rate during 1998 was 6.28%.
(f) These notes were payable to a group consisting of several insurance
companies. The notes were repaid with the proceeds of the private placement
offerings described in (c) and (d). The interest rate at December 31, 1997
was 11.30%.
F-25
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 12 - NOTES PAYABLE - (continued)
(g) These notes were payable to an insurance company and to its assignees. The
notes were repaid with the proceeds of the private placement offerings
described in (c) and (d). The interest rate at December 31, 1997 was 11.84%.
(h) This consisted of a note payable to an insurance company. The note was
repaid with the proceeds of the private placement offerings described in (c)
and (d). The interest rate at December 31, 1997 was 9.93%.
The above debt agreements place certain financial restrictions on the
Company and its restricted subsidiaries which, among others, require meeting
certain ratios relating to interest coverage and debt coverage.
Maturities of notes payable, excluding the unamortized discount of $20.9 million
are as follows:
(Dollars in thousands)
Year Ending December 31,
------------------------
1999 $ -
2000 -
2001 750
2002 1,500
2003 2,250
Thereafter 1,310,500
----------
$1,315,000
==========
The Company had also entered into four interest rate swap agreements. These
agreements effectively changed the Company's interest rate on $300 million of
its fixed rate debt to a floating rate based on LIBOR. On October 31, 1997, the
Company terminated all four interest rate swap agreements and received $8.8
million in consideration of early termination. The Company has recorded the gain
as "Deferred gain on terminated interest swaps" on its consolidated balance
sheet and is amortizing the gain as a reduction in interest expense to June 15,
2006, which is the maturity date of the fixed rate debt obligation.
NOTE 13 - LEASES
Subsidiaries of the Company had entered into three leases for office and
warehouse space from H.F. Lenfest and his wife. The leases were classified as
capital leases. On September 30, 1998, the Company purchased the three
properties from H.F. Lenfest and his wife for an aggregate price of
approximately $6.0 million. The purchase price for each of the properties was
determined as a result of an independent appraisal.
The Company has entered into other capital lease agreements. The agreements are
for the financing of equipment. The economic substance of the leases is that the
Company is financing the acquisition of the assets through the leases and,
accordingly, they are recorded in the Company's assets and liabilities.
F-26
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 13 - LEASES - (continued)
Future minimum lease payments under all capital leases and non-cancelable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1998:
Capital Operating
Leases Leases
------------- -------------
(Dollars in thousands)
Year Ending December 31,
------------------------
1999 $ 1,770 $ 3,834
2000 666 3,772
2001 352 2,603
2002 - 1,372
2003 - 1,312
Thereafter - 558
-------------- --------------
TOTAL MINIMUM LEASE PAYMENTS 2,788 $ 13,451
=============
LESS AMOUNT REPRESENTING
INTEREST (376)
-------------
PRESENT VALUE OF MINIMUM
LEASE PAYMENTS $ 2,412
=============
Property and equipment under capitalized leases at December 31, 1997 and 1998,
are summarized as follows:
1997 1998
------------- ---------------
(Dollars in thousands)
Buildings - related party $ 3,893 $ -
Equipment 5,376 5,376
------------- -------------
9,269 5,376
Accumulated depreciation 3,174 2,697
------------- --------------
$ 6,095 $ 2,679
============= =============
Rental expense for all operating leases, principally office and warehouse
facilities, pole rent and satellite transponders, from continuing operations,
amounted to $8.6 million, $8.1 million and $8.5 million for the years ended
December 31, 1996, 1997 and 1998, respectively. In addition, the Company made
total payments to H.F. Lenfest and his wife for buildings under capitalized
leases of $0.6 million, $0.6 million and $0.4 million in 1996, 1997 and 1998,
respectively.
In addition to fixed rentals, certain leases require payment of maintenance and
real estate taxes and contain escalation provisions based on future adjustments
in price indices. It is expected that, in the normal course of business,
expiring leases will be renewed or replaced by leases on other properties; thus,
it is anticipated that future minimum operating lease commitments will not be
less than the amount shown for 1999.
On April 8, 1996, the Company entered into a five year agreement with GE
American Communications, Inc. requiring monthly payments of $0.2 million to
lease a transponder on the GE-1 communications satellite.
F-27
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 14 - RESEARCH AND DEVELOPMENT
The Company, through its subsidiaries CAM Systems, Inc., StarNet Development,
Inc., Suburban Connect, Inc. and StarNet, Inc., incurred research and
development costs of $2.4 million, $1.1 million and $0.4 million for the years
ended December 31, 1996, 1997 and 1998, respectively, in connection with the
development of new equipment and computer software. StarNet Development, Inc.
ceased operations in 1996. These costs have been included with direct costs -
non-cable on the accompanying consolidated statements of operations and
comprehensive income (loss).
NOTE 15 - SELF INSURANCE
The Company has a partially self-insured health benefit program that provides
health, death and disability benefits to substantially all employees. Death
benefits, long-term disability and some medical benefits are provided through
the purchase of life, disability and medical insurance. Other claims are paid as
incurred. Claims paid in excess of predetermined amounts are reimbursed under a
stop loss insurance policy. The Company has accrued a liability for estimated
claims incurred, but not reported.
In prior years, claims were paid from a trust organized under Internal Revenue
Code Section 501(c)(9) - Voluntary Employees Beneficiary Association (VEBA). The
trust was prefunded by contributions from each participating subsidiary. This
trust was terminated during 1998.
NOTE 16 - 401(k) PLAN
The Company provides a 401(k) profit sharing plan. The Company matches the
entire amount contributed by a participating, eligible employee up to five
percent (5%) of salary subject to statutory limitations. For the years ended
December 31, 1996, 1997 and 1998, the Company matched contributions of $1.2
million, $1.4 million and $1.5 million, respectively, in its continuing
operations.
NOTE 17 - CORPORATE INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
in accordance with Financial Accounting Standards Board Statement (SFAS) No.
109, "Accounting for Income Taxes". SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the financial statement or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Differences between financial reporting
and tax bases arise most frequently from differences in timing of income and
expense reorganization. Deferred income tax expense is measured by the change in
the net deferred income tax asset or liability during the year. The provisions
for income tax benefit (expense) from continuing operations consist of the
following components:
1996 1997 1998
------------- --------------- ------------
(Dollars in thousands)
Current
Federal $ (211) $ 15,013 $ -
State (686) (265) (1,315)
------------- -------------- ------------
(897) 14,748 (1,315)
Deferred
Federal 3,581 (1,359) 1,202
State 769 (514) 174
Benefit of operating loss carryforward 10,746 54,025 18,917
(Increase) decrease in valuation allowance 130 (30,721) (15,838)
------------- -------------- ------------
15,226 21,431 4,455
------------- -------------- ------------
$ 14,329 $ 36,179 $ 3,140
============= ============== ============
F-28
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 17 - CORPORATE INCOME TAXES - (continued)
The current tax benefit from continuing operations for 1997 represents tax
savings resulting from utilization of current losses to eliminate the tax
expense incurred by the current income and gain from discontinued operations.
The categories of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
Federal State
---------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
(Dollars in thousands)
Deferred Tax Assets:
Allowance for doubtful accounts $ 985 $ 1,143 $ 290 $ 338
Deferred start-up costs 27 - - -
Net operating loss carryforward 133,465 152,382 - -
Investments in affiliates, principally
due to differences in taxable income 3,570 7,091 280 556
Investments and other tax credits 1,553 871 249 249
----------- ----------- ----------- ------------
Gross Deferred Tax Asset 139,600 161,487 819 1,143
Deferred Tax Liabilities:
Property and equipment, principally
due to differences in depreciation (21,246) (22,628) (6,414) (6,953)
Property and equipment and intangible
assets arising from purchase
accounting adjustments (12,695) (11,456) (3,985) (3,596)
Unrealized gain on marketable
securities (269) (55) - -
----------- ----------- ----------- -----------
Gross Deferred Tax Liability (34,210) (34,139) (10,399) (10,549)
----------- ----------- ----------- -----------
Net deferred tax asset (liability)
before valuation allowance 105,390 127,348 (9,580) (9,406)
Valuation allowance (31,139) (46,977) - -
----------- ----------- ----------- -----------
Net Deferred Tax Asset (Liability) $ 74,251 $ 80,371 $ (9,580) $ (9,406)
=========== =========== =========== ===========
The difference between the income tax benefit (net) and the amounts expected by
applying the U.S. Federal income tax rate of 35% to loss before income taxes is
as follows:
1996 1997 1998
------------- ------------- -------------
(Dollars in thousands)
Federal income tax benefit at statutory rates $ 50,040 $ 35,265 $ 17,296
Nondeductible amortization of goodwill and
other intangibles (949) (949) (949)
Nondeductible loss on marketable securities (30,240) - -
Net operating losses applied towards
prior years audit adjustments (6,306) - -
Increase in valuation allowance - - (15,838)
Provision for state income taxes, net of
Federal income tax benefit 54 (506) (741)
Other 1,730 2,369 3,372
-------------- ------------- --------------
$ 14,329 $ 36,179 $ 3,140
============== ============= ==============
F-29
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 17 - CORPORATE INCOME TAXES - (continued)
The Company has a net operating loss carryforward of approximately $435 million
on a tax reporting basis. The carryforward will begin to expire in 2000, if not
utilized. The Company has available an alternative minimum tax credit of $0.4
million for indefinite carryover to subsequent years. The Company also has
available unused general business tax credits, after reduction required under
the Tax Reform Act of 1986, of approximately $0.9 million for carryover to
subsequent years. The operating loss and general business tax credits expire as
follows:
Net
Tax Operating
Credits Losses
--------------- --------------
(Dollars in thousands)
Year Ending December 31,
------------------------
1999 $ 361 $ -
2000 485 1,020
2001 5 11,770
2002 5 13,138
2003 - 19,817
2004 5 35,600
2005 - 39,076
2006 10 4,439
2007 - 10,269
2008 - -
2009 - 21,397
2010 - 23,710
2011 - 46,261
2012 - 154,831
2013-2017 - -
2018 - 54,048
------------- -------------
$ 871 $ 435,376
============= =============
NOTE 18 - OTHER INCOME AND EXPENSE
The schedules of other income and expense from continuing operations for the
years ended December 31, 1996, 1997 and 1998 are as follows:
Year Ended December 31,
----------------------------------------------------
1996 1997 1998
------------- -------------- -------------
(Dollars in thousands)
(Loss) on disposal of assets upon rebuild of
cable systems $ (846) $ - $ -
Gain (loss) on sales of property and equipment 326 (694) (2,469)
Gain on sales of marketable securities 342 468 3,766
Gain on disposition of equity investment (See Note 3) 7,210 7,318 12,221
Interest and dividend income 4,699 1,242 1,240
Minority interest in net loss of L-TCI Associates 2,492 945 -
Miscellaneous income (expense) (314) (125) (315)
------------- -------------- -------------
$ 13,909 $ 9,154 $ 14,443
============= ============== =============
F-30
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 19 - 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
resulted in a gain of $32.3 million, net of applicable income taxes of $17.7
million. The sale represents the disposition of the major segment of the
Company's tower rental, microwave service, video, voice and data service
businesses. The assets sold were not material to the cable television operations
of the Company.
Operating results of MCN for the years ended December 31, 1996 and 1997, are
shown separately in the accompanying consolidated statements of operations and
comprehensive income (loss) under the caption "Discontinued Operations" and
consist of the following:
1996 1997
------------- --------------
(Dollars in thousands)
Revenues $ 15,508 $ 15,496
Operating expenses (9,961) (9,812)
Depreciation and amortization (4,104) (2,862)
------------- -------------
OPERATING INCOME 1,443 2,822
Interest expense (715) (598)
Other income 23 42
Income tax (expense) (388) (797)
------------- -------------
NET INCOME $ 363 $ 1,469
============= =============
NOTE 20 - COMMITMENTS AND CONTINGENCIES
Mr. Lenfest, for the benefit of the Company, and TCI have jointly and severally
guaranteed an aggregate of $67 million obligation of Australis incurred in
connection with the purchase of program licenses in April 1995. The terms of the
guarantees provide that the amount of the guarantees will be reduced on a
dollar-for-dollar basis with payments made by Australis under the licenses. The
Company has agreed to indemnify Mr. Lenfest against loss from such guaranty to
the fullest extent permitted under the Company's debt obligations. Under the
terms of its bank credit facility, however, Mr. Lenfest's claims for
indemnification are limited to the lesser of the actual claim or $33.5 million.
At December 31, 1998, the amount subject to guarantee under the license
agreements was approximately $26.4 million.
The Company has exercised an option to purchase a property, located in Oaks, PA,
that it is leasing for its corporate offices. The purchase is expected to be
completed by June 30, 1999. The Company has also exercised an option to purchase
a property, located in New Castle County, DE, that it is leasing for its call
center. This purchase is expected to close in the first quarter of 2000.
F-31
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 20 - 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 of which the Plaintiff was the
controlling shareholder, the assets of which included the right to acquire
Satellite License B from the Australian government. The Plaintiff alleged that
the Defendants defrauded him by making certain representations to him in
connection with the acquisition of his company and claims total damages of A$718
million (approximately U.S. $440 million as of December 31, 1998). The Plaintiff
also alleged that Australis and Mr. Lenfest owed to him a fiduciary duty and
that both parties breached this duty. The Defendants have denied all claims made
against them by the Plaintiff and stated their belief that the Plaintiff's
allegations are without merit. They are defending this action vigorously. The
trial in this action began on February 2, 1998, and ended on September 30, 1998.
The Company expects a decision by mid year. 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, the results of operations or the cash
flows of the Company.
The Company's operating cable television subsidiaries hold various franchises
and, in connection therewith, are obligated to pay franchise fees based on
certain gross revenues. For the years ended December 31, 1996 and 1997,
franchise fees in the amount of $10.8 million and $12.8 million, respectively
were paid. For the year ended December 31, 1998, franchise fees in the amount of
$14.4 million will be paid.
NOTE 21 - RELATED PARTY TRANSACTIONS
The Company is party to an agreement whereby Satellite Services, Inc. provides
certain cable television programming to the Company and its unconsolidated cable
television affiliates with programming services at a rate which is not more than
the Company could obtain independently. For the years ended December 31, 1996,
1997 and 1998, the Company incurred programming expenses of $57.3 million, $62.9
million and $70.5 million, respectively, under this agreement.
The Company, through its subsidiaries, StarNet and StarNet Development, Inc.,
generates revenue from cross channel tune-in promotional services for cable
television and equipment sales to affiliates of TCI. For the years ended
December 31, 1996, 1997 and 1998, the Company has generated revenues of $4.8
million, $1.9 million and $0.9 million, respectively, from affiliates of TCI.
The Company incurred pay-per-view order placement fees to TelVue Corporation, an
affiliate of Mr. Lenfest, of $0.3 million, $0.5 million and $0.4 million for the
years ended December 31, 1996, 1997 and 1998, respectively.
During 1996, the Company loaned a total of $41.1 million to Australis. All loans
were repaid with interest.
Subsidiaries of the Company had leasing arrangements with a principal
stockholder for office and warehouse facilities and, in 1998, purchased those
facilities (See Note 13).
John C. Malone, a director of the Company, is a director of The Bank of New
York, which is the trustee under the indentures for the Company's senior notes
and senior subordinated notes and a lender under the bank credit facility.
F-32
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 22 - SEGMENT INFORMATION
The Company operates primarily in the cable television industry. This segment
develops and operates cable television systems and holds investments in other
cable television operating companies. Other segments provide cable advertising,
promotional, traffic and billing, telemarketing, paging, internet and digital
video services. These segments do not meet the quantitative guidelines for
reportable segments.
The segments' accounting policies are the same as those described in the summary
of significant accounting policies. Management of the Company evaluates
performance based on operating income before depreciation and amortization.
Operating income before depreciation and amortization is commonly referred to in
the cable television industry as "operating cash flow". Operating cash flow is a
measure of a company's ability to generate cash to service its obligations,
including debt service obligations, and to finance capital and other
expenditures. Operating cash flow does not purport to represent net income or
net cash provided by operating activities, as those terms are defined under
generally accepted accounting principles, and should not be considered as an
alternative to such measurements as an indicator of the Company's performance.
Information concerning continuing operations by reportable segment as of and for
each of the three years ended December 31, was as follows:
1996 1997 1998
------------- ------------- --------------
(Dollars in thousands)
Revenues
Cable television $ 354,561 $ 413,792 $ 430,451
All others 33,038 40,017 49,768
Intersegment revenues (5,789) (6,419) (9,810)
------------- ------------- --------------
$ 381,810 $ 447,390 $ 470,409
============= ============= ==============
Operating income (loss) before
depreciation and amortization
Cable television $ 177,250 $ 200,550 $ 204,853
All others (11,381) (7,827) (9,372)
------------- ------------- --------------
$ 165,869 $ 192,723 $ 195,481
============= ============= ==============
Depreciation and amortization
Cable television $ 107,115 $ 124,973 $ 130,554
All others 4,162 4,966 4,804
------------- ------------- --------------
$ 111,277 $ 129,939 $ 135,358
============= ============= ==============
Operating income (loss)
Cable television $ 70,135 $ 75,577 $ 74,299
All others (15,543) (12,793) (14,176)
------------- ------------- --------------
$ 54,592 $ 62,784 $ 60,123
============= ============= ==============
F-33
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 22 - SEGMENT INFORMATION, (continued)
1996 1997 1998
------------- ------------- --------------
(Dollars in thousands)
Interest expense
Cable television $ 105,463 $ 120,549 $ 120,119
All others 1,738 239 -
------------- ------------- --------------
$ 107,201 $ 120,788 $ 120,119
============= ============= ==============
Equity in net income (losses) of
unconsolidated affiliates
Cable television $ (15,161) $ (5,922) $ (4,194)
All others (2,709) (1,412) 330
------------- ------------- --------------
$ (17,870) $ (7,334) $ (3,864)
============= ============= ==============
Identifiable assets
Cable television $ 1,116,214 $ 1,090,563 $ 1,097,698
All others 88,232 134,410 82,226
Intersegment receivables (3,629) (5,253) (4,797)
------------- ------------- --------------
$ 1,200,817 $ 1,219,720 $ 1,175,127
============= ============= ==============
Long-term debt, including obligations
under capital leases
Cable television $ 1,309,735 $ 1,293,579 $ 1,296,553
All others 3,128 1,727 -
------------- ------------- --------------
$ 1,312,863 $ 1,295,306 $ 1,296,553
============= ============= ==============
Expenditures for long-lived assets
Cable television acquisitions $ 606,755 $ 84,500 $ -
Other cable television 59,630 95,764 95,851
All others 11,351 7,978 13,705
------------- --------------
-------------
$ 677,736 $ 188,242 $ 109,556
============= ============= ==============
Operating income (loss) $ 54,592 $ 62,784 $ 60,123
Interest expense (107,201) (120,788) (120,119)
Equity in net (losses) of unconsolidated
affiliates (17,870) (7,334) (3,864)
Loss on Australis Media Ltd. securities (86,400) (44,572) -
Other income and expense (net) 13,909 9,154 14,443
------------- ------------- --------------
LOSS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES $ (142,970) $ (100,756) $ (49,417)
============== ============= ==============
F-34
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Deposits on
Converters
The carrying amount approximates fair market value because of the short maturity
of those instruments
Marketable Securities
The fair market values of securities are estimated based on quoted market prices
for those investments.
Other Investments
The Company's investment in Susquehanna Cable Co., Inc. is carried at cost. (See
Note 9). There are no quoted market prices for Susquehanna, which is a holding
company that has majority ownership in cable operating subsidiaries in which the
Company also has ownership interests. The Company uses the equity method to
account for its ownership in the subsidiaries. (See Note 8). Because of its
relationship with subsidiaries, the Company does not believe that it is
practicable to estimate fair market value for its investment in Susquehanna.
Long-term Debt
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on current rates at which the
Company could borrow funds with similar remaining maturities.
The estimated fair values of the Company's financial instruments as of December
31, 1998 are as follows:
Carrying Fair
Amount Value
------------ ------------
(Dollars in thousands)
Balance Sheet Financial Instruments
Cash and cash equivalents $ 9,802 $ 9,802
Marketable securities 18,854 18,854
Long-term debt (1,294,141) (1,432,000)
Deposits on converters (3,247) (3,247)
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
F-35
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 24 - REGULATORY MATTERS
The Federal Communications Commission ("FCC") has adopted regulations under The
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") governing rates charged to customers for basic and tier service and
for equipment and installation charges (the "Regulated Services"). The 1992
Cable Act placed the Company's basic service, equipment and installation rates
under the jurisdiction of local franchising authorities and its tier service
rates under the jurisdiction of the FCC. The rate regulations do not apply to
services offered on an individual service basis, such as per-channel or
pay-per-view services. The rate regulations adopt a benchmark price cap system
for measuring the reasonableness of existing basic and tier service rates.
Alternatively, cable operators have the opportunity to make cost-of-service
showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. The regulations also provide that future rate increases may
not exceed an inflation-indexed amount, plus increases in certain costs beyond
the cable operator's control, such as taxes, franchise fees and increased
programming costs. Cost-based adjustments to these capped rates can also be made
in the event a cable operator adds or deletes channels. There is also a
streamlined cost-of-service methodology available to justify a rate increase on
basic and regulated nonbasic tiers for "significant" system rebuilds or
upgrades.
Effective March 31, 1999, fee regulation of rates for tier service is scheduled
to expire. Rate regulation will continue for basic service rates, charges for
cable-related equipment (e.g. converter boxes and remote control devices) and
installation services.
The Company believes that it has complied in all material respects with the
provision of the 1992 Cable Act, including its rate setting provisions. However,
the Company's rates for Regulated Services are subject to review by the FCC, if
a complaint has been filed, or the appropriate franchise authority, if such
authority has been certified. If, as a result of the review process, a cable
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received. Any refunds of the excess portion of tier service rates would be
retroactive to the date of the complaint. Any refunds of the excess portion of
all other Regulated Service rates would be retroactive to one year prior to the
Refund Order issued by the applicable franchise authority. The amount of
refunds, if any, which could be payable by the Company in the event that systems
rates are successfully challenged by franchising authorities is not considered
to be material.
NOTE 25 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses of continuing operations consist of the
following as of December 31:
1997 1998
------------- -----------
(Dollars in thousands)
Accounts payable - unrelated parties $ 11,619 $ 20,647
Accounts payable - affiliate 26,304 22,968
Accrued interest 14,101 20,193
Accrued franchise fees 7,898 8,841
Accrued programming - unrelated parties 6,697 5,838
Accrued copyright fees 1,318 807
Accrued payroll and fringe benefits 2,407 6,454
Accrued rate refund liability 1,625 642
Accrued sales taxes 424 659
Accrued other 4,778 8,970
------------- -----------
$ 77,171 $ 96,019
============= ===========
F-36
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
NOTE 26 - SUBSEQUENT EVENTS
As of January 20, 1999, the Company through its subsidiary, Lenfest
International, Inc. ("International") purchased 71% of Videopole, a French cable
television holding and management company that franchises, builds and operates
cable television systems in medium to small communities in France. International
has an 80% partnership interest in L-TCI Associates, a partnership that owns 29%
of stock of Videopole. As a result of the purchase, the Company's direct and
indirect interest in Videople is 94.2%.
On January 25, 1999, the Company's indirect wholly owned subsidiary, Lenfest
Raystay Holdings, Inc. entered into an agreement to acquire the 55% of the stock
of Raystay held by other shareholders. The Company expects to complete the
acquisition in the second quarter of 1999. The Company initially acquired 31.99%
of the outstanding stock of Raystay on July 29, 1994, and exercised options to
acquire additional stock increasing its ownership to 45% on June 29, 1995.
F-37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries
We have audited in accordance with generally accepted auditing standards, the
consolidated balance sheets of Lenfest Communications, Inc. and subsidiaries as
of December 31, 1997 and 1998, and the related consolidated statements of
operations and comprehensive income (loss), changes in stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998, and have issued our report thereon dated March 5, 1999, which
is included in the December 31, 1998, annual report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement Schedule II. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statement taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
March 5, 1999
F-38
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1997 and 1998
Column A Column B Column C Column D Column E
-------- ------------- ------------- ------------- -------------
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
------------- ------------- ------------- -------------
(Dollars in thousands)
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET
ACCOUNTS:
Allowance for doubtful accounts
Year ended December 31, 1996 $ 940 $ 4,674 $ 3,629 $ 1,985
============= ============= ============= =============
Year ended December 31, 1997 $ 1,985 $ 9,715 $ 8,777 $ 2,923
============= ============= ============= =============
Year ended December 31, 1998 $ 2,923 $ 6,424 $ 5,744 $ 3,603
============= ============= ============= =============
F-39
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LENFEST COMMUNICATIONS, INC.
DATE: March 30, 1999 By: /s/ H. F. Lenfest
---------------------
H. F. Lenfest
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ H. F. Lenfest Chairman of the Board, Director and March 30, 1999
- - ----------------------------- President
H. F. Lenfest (Principal Executive Officer)
/s/ H. Chase Lenfest Director March 30, 1999
- - -----------------------------
H. Chase Lenfest
/s/ Brook J. Lenfest Director March 30, 1999
- - -----------------------------
Brook J. Lenfest
/s/ Leo J. Hindery, Jr. Director March 30, 1999
- - -----------------------------
Leo J. Hindery, Jr.
Director
William R. Fitzgerald
/s/ Maryann V. Bryla Senior Vice President - Chief March 30, 1999
Maryann V. Bryla Financial Officer and Treasurer
(Principal Financial Officer)