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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 33-96804
LENFEST COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2094942
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1105 North Market St., Suite 1300,
P. O. Box 8985,
Wilmington, Delaware 19899
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(Address of Principal executive offices) (Zip Code)
(302) 427-8602
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __X__
Indicate the number of shares outstanding of each of the Registrant's
class of common stock, as of March 27, 1998: 158,896 shares of Common Stock,
$0.01 par value per share. All shares of the Registrant's Common Stock are
privately held, and there is no market price or bid and asked price for said
Common Stock.
This Form 10-K/A is being filed to amend Part I Item 1, Part II Items
6,7 and 8 and Part III Items 10, 11, 13 and 14 of the annual report on Form 10-K
of Lenfest Communications, Inc. for the fiscal year ended December 31, 1997,
which was filed with the Securities and Exchange Commission on March 27, 1998.
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1. The following paragraphs of Business - Unrestricted Cable Television
Systems with respect to Raystay Co. are amended and restated in their
entirety as follows:
Item 1. BUSINESS.
Unrestricted Cable Television Systems
In addition to its Core Cable Television Operations, at December 31,
1997, Lenfest held investments in four cable television system
entities. Lenfest holds a 50% equity interest in Garden State
Cablevision L.P. ("Garden State"); a 30% equity interest in the cable
subsidiaries of Susquehanna Cable Co. ("SCC"); a 45% equity interest
in Raystay Co. ("Raystay"); and a 30% equity interest in Clearview
Partners ("Clearview"). As of December 31, 1997, these entities
operated cable television systems serving approximately 441,300 basic
customers, of which approximately 380,000 are served by systems which
are near or contiguous to the Company's cluster of cable television
systems. As a result of Lenfest's investment in these companies, the
companies participate in Lenfest's programming purchasing relationship
with Satellite Services, Inc. See " -- Programming and Equipment
Supply."
Garden State serves the Cherry Hill, New Jersey area. The following
table provides customer data at year end for each of the years in the
three-year period ended December 31, 1997 for Garden State's cable
television system.
Year Ended December 31,
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1995 1996 1997
---- ---- ----
Homes passed ............ 292,454 294,390 297,783
Basic customers ......... 200,086 204,179 208,204
Basic penetration ....... 68.4% 69.4% 69.9%
SCC has systems in York and Williamsport, Pennsylvania as well as
smaller systems in Maine, Mississippi, Illinois and Indiana. The
following table provides customer data at year end for each of the
years in the three-year period ended December 31, 1997 for SCC's cable
television systems.
Year Ended December 31,
------------------------------------------
1995 1996 1997
---- ---- ----
Homes passed ............ 182,465 206,715 211,778
Basic customers ......... 137,885 159,871 164,186
Basic penetration ....... 75.6% 77.3% 77.5%
Beginning May 28, 1998, each of Lenfest and Susquehanna Media Co. (the
owner of the balance of the equity interest in SCC and its cable
subsidiaries) may offer to purchase all of the shares of stock of SCC
and its cable subsidiaries owned by the other. If the recipient of the
offer rejects the offer, the recipient is then obligated to purchase
all of the shares of stock of the person who made the offer on the
same terms and conditions as were contained in the initial offer.
Lenfest has pledged its stock in SCC and in the SCC cable subsidiaries
as collateral for obligations incurred by Susquehanna Media Co.
Raystay owns and operates cable television systems in Pennsylvania.
The following table provides customer data at year end for each of the
years in the three-year period ended December 31, 1997 for Raystay's
cable television systems.
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Year Ended December 31,
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1995 1996 1997
---- ---- ----
Homes passed ............ 63,163 79,029 83,451
Basic customers ......... 46,509 57,743 59,085
Basic penetration ....... 73.6% 73.1% 70.8%
Beginning July 30, 1998, upon a change of control which results in the
Company controlling Raystay, the stockholders of Raystay have the right
to cause the Company to purchase their shares at the then fair market
value of the shares, determined without discount for lack of
marketability or minority interest, subject to certain conditions. In
addition, effective September 30, 2002 either the Company or the other
stockholders of Raystay may offer to purchase all of the other's shares
of stock. If the recipient of the offer rejects the offer, the
recipient is then obligated to purchase all the shares of stock of the
other party(ies) on the same terms and conditions as were contained in
the initial offer.
Clearview owns and operates cable television systems in Pennsylvania
and Maryland. As of December 31, 1997, Clearview had approximately
9,800 basic customers and passed approximately 14,400 homes.
2. Summary Consolidated Financial and Operating Data is amended and restated
in its entirety as follows:
Item 6. SELECTED FINANCIAL DATA.
Summary Consolidated Financial And Operating Data (Dollars In Thousands Except
Per Customer Data)
The selected consolidated financial data as of and for each of the
five years in the period ended December 31, 1997 set forth below have
been derived from the audited Consolidated Financial Statements of the
Company. These data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements for each of the
three years in the period ended December 31, 1997 included elsewhere
in this Form 10-K. The statement of operations data with respect to
the fiscal years ended December 31, 1993 and 1994 have been derived
from audited consolidated financial statements of the Company not
included herein.
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<TABLE>
<CAPTION>
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Year Ended December 31,
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(Dollars in thousands)
Statement of Operations Data* 1993 1994 1995 1996 1997
------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ 205,326 $ 226,185 $ 254,225 $ 381,810 $ 447,390
Programming expenses 44,033 49,267 55,322 82,804 93,088
Selling, general & administrative 46,527 50,269 55,262 82,688 105,470
Technical and other 20,167 27,269 34,529 50,449 56,109
Depreciation and amortization 62,089 72,813 74,272 111,277 129,939
-------- --------- -------- ----------- -----------
Operating income 32,510 26,567 34,840 54,592 62,784
Interest expense (35,090) (47,749) (60,909) (107,201) (120,788)
Other income and expense (net) (10,232) (7,072) 4,245 (90,361) (50,070)
-------- --------- -------- ----------- -----------
Loss from continuing operations (12,812) (28,254) (21,824) (142,970) (108,074)
before income taxes
Income tax benefit 2,018 10,174 10,724 14,329 38,740
-------- --------- -------- ----------- -----------
Loss from continuing operations (10,794) (18,080) (11,100) (128,641) (69,334)
Discontinued operations, net of taxes (1,073) (819) (395) 363 33,738
Extraordinary loss, net of taxes --- --- (6,739) (2,484) ---
======== ========= ======== =========== ===========
Net loss $ (11,867) $ (18,899) $ (18,234) $ (130,762) $ (35,596)
======== ========= ======== =========== ===========
Balance Sheet Data*
(end of period)
Total assets $ 634,938 $ 664,555 $ 843,110 $ 1,221,788 $ 1,219,720
Total debt 612,392 626,121 810,725 1,312,863 1,295,306
Stockholders' equity (deficit) (56,029) (49,609) (45,192) (233,790) (254,264)
Core Cable Television Operations (Restricted Group)
Financial Ratios and Other Data (a)
Revenues $ 197,630 $ 212,800 $ 232,155 $ 354,561 $ 413,792
Adjusted EBITDA (b) (c) 100,476 105,711 115,261 182,905 205,861
Adjusted EBITDA margin (d) 50.8 % 49.7 % 49.6 % 51.6 % 49.7 %
Cash flows from:
Operating activities $ 62,531 $ 60,057 $ 71,911 $ 74,801 $ 114,017
Investing activities (158,216) (59,350) (60,085) (626,437) (96,226)
Financing activities 91,467 1,392 146,832 403,632 (18,645)
Interest expense 34,699 47,016 59,966 105,463 120,549
Capital expenditures (e) 41,658 42,162 40,168 51,703 87,510
Total debt 609,159 616,657 807,535 1,309,735 1,293,579
Ratio of total debt to Adjusted
EBITDA 6.06 x 5.83 x 7.01 x 7.16 x 6.28 x
Monthly revenue per average
basic customer $ 32.05 $ 31.44 $ 32.97 $ 34.25 $ 35.18
Annual Adjusted EBITDA per average
basic customer 195.51 187.42 196.40 212.00 210.04
Annual capital expenditures per
average basic customer (e) 81.06 74.75 68.44 59.93 89.28
Summary Customer Data
(end of period) (a)
Homes passed 870,718 892,549 904,753 1,278,673 1,388,887
Basic customers 550,703 577,377 596,366 927,249 991,758
Basic Penetration 63.2 % 64.7 % 65.9 % 72.5 % 71.4 %
</TABLE>
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* Prior year data is restated to reflect continuing operations.
(a) The Core Cable Television Operations (Restricted Group) consists of all of
the Company's wholly owned cable television subsidiaries. Financial ratios
and other information are presented for the Restricted Group to facilitate
the evaluation of the results of operations of those operating entities on
which the Company relies to service all of its debt obligations.
(b) 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 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 and EBITDA are not measures under generally accepted
accounting principles.
(c) CAH, Inc. became a part of the restricted group in 1996. CAH, Inc. has not
been included in the 1993-1995 presentation.
(d) Adjusted EBITDA margin measures Adjusted EBITDA as a percentage of
revenues.
(e) Excludes the purchase price of acquisitions consummated during the period.
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3. Management's Discussion and Analysis of Financial Condition and Results of
Operations is amended and restated in its entirety as follows:
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."
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 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. Adjusted EBITDA and EBITDA are not
measures under generally accepted accounting principles.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
CONSOLIDATED RESULTS
Revenues for the company increased 17.2% to $447.4 million as compared
to 1996, primarily as a result of the Company's Core Cable Television
Operations. The TCI Exchange, the Sammons Acquisition, the Salem
Acquisition, the Shore Acquisition, and the Turnersville Acquisition,
which are described in Note 5 to the financial statements included
herein (collectively, the "Acquisitions"), accounted for approximately
$40.2 million or 61.3% of the increase.
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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 24.4% to
$108.1 million. The decrease was attributable to a loss associated with
the write-down of the Company's investment in Australis. The 1997
write-down of the Company's investment in Australis was $44.6 million
compared to an $86.4 million write-down of the investment in the prior
year. At December 31, 1997, the Australis securities were no longer
listed on the Australian Stock Exchange and were considered to be
worthless. On May 5, 1998, the Trustee for the holders of Australis'
bond indebtedness appointed receivers in order to wind up the affairs
of Australis. Subsequent thereto, Australis' assets have been
liquidated and it has ceased to conduct business. The Company does not
expect this investment to have a material impact on future operations.
Core Cable Television Operations
Revenues increased 16.7% to $413.8 million for the year ended December
31, 1997 compared to the prior year. Revenues for basic and CPS tiers
and customer equipment and installation, ("regulated services")
increased 24.3 % or $60.4 million compared to the prior year. This
increase was primarily attributable to the realization of the full
effect of the Acquisitions, strong internal customer growth of
approximately 2.9%, and rate increases occurring predominately in the
second and fourth quarters. Non-regulated service revenue decreased
7.1% or $6.0 million for the year ended December 31, 1997 compared to
the prior year. This decrease was primarily as a result of the regional
sports
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network, Prism, ceasing operations on September 30, 1997. On October 1,
1997, the Company added the new regional sports network, Comcast
SportsNet to the regulated CPS tier. Advertising, home shopping, and
non-recurring revenue increased 22.3% or $4.8 million for the year
ended December 31, 1997 compared to the prior year. This increase was
primarily attributable to the Acquisitions and internal customer
growth.
Service and Programming Expenses increased 13.2% to $126.9 million for
the year ended December 31, 1997 compared to the prior year. These
expenses are related to technical salaries, general operating costs,
and programming costs. The technical service increase was primarily due
to increased costs associated with the consolidation efforts of the
Company which included integrating the Acquisitions. The programming
expense increase was primarily due to the Acquisitions and increased
customer costs associated with the basic and CPS tier services.
Selling, General and Administrative Expense increased 32.5% to $86.4
million for the year ended December 31, 1997 compared to the prior
year. These expenses are associated with office salaries, facility, and
marketing costs. This increase was primarily due to the Acquisitions
and expenses associated with the consolidation efforts of the Company
which included migrating customer service to the new Call Center.
Depreciation and Amortization Expense increased 16.7% to $125.0 million
for the year ended December 31, 1997 compared to the prior year. This
increase was primarily due to the Acquisitions as well as additional
capital expenditures.
Adjusted EBITDA increased 12.6% to $205.9 million for the year ended
December 31, 1997 compared to the prior year. The increase was
primarily associated with the Acquisitions. The Adjusted EBITDA
margin decreased to 49.7% in 1997 compared to 51.6% for 1996. This
decrease was primarily caused by one-time costs associated with the
consolidation efforts of the Company.
Unrestricted Subsidiaries
The largest of the Company's Unrestricted Subsidiaries in 1997 were
Radius Communications and StarNet.
Lenfest Advertising, Inc. (d/b/a Radius Communications)
Revenues, prior to payment of affiliate fees, increased 70.2% to $25.9
million as compared to 1996, primarily as a result of the full
realization of the MetroBase Advertising acquisition in September 1996.
Affiliate fees increased 68.3% to $11.8 million, of which $4.8 million
was paid to the Company. Affiliate fees paid to the Company are
eliminated in consolidation.
Operating Expenses increased proportionately to the increase in
revenues for the year ended December 31, 1997, due to the expansion of
the combined sales forces of Cable AdNet and MetroBase advertising.
Depreciation and Amortization Expense increased by 83.3% to $1.9
million as compared to 1996 as a result of the purchasing of Digital
Insertion equipment used in daily operations.
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Operating income decreased 28.6% to $0.5 million for the year ended
December 31, 1997, compared to $0.7 million in the prior year.
StarNet, Inc.
Revenues decreased by 38.1% to $5.0 million for the year ended December
31, 1997, primarily due to the elimination of The Barker (R) and
Promoter services.
Direct expenses decreased 36.3% to $6.0 million as compared to 1996 due
primarily to the reduction of operational expenses eliminated with the
termination of The Barker (R) and Promoter services.
Depreciation and Amortization Expense decreased by 23.7% to $1.2
million as compared to 1996 as a result of assets related to The Barker
(R) being transferred to Sneak Prevue, LLC, a partnership between
StarNet, Inc. and Prevue.
Operating loss decreased by 23.8% to $2.1 million in 1997 compared to
$2.8 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
CONSOLIDATED RESULTS
Revenues for the company increased 50.2% to $381.8 million for the year
ended December 31, 1996 as compared to 1995, primarily as a result of
the Company's Core Cable Television Operations. The Acquisitions
accounted for approximately $103.9 million or 81.4% of the increase.
Service and Programming Expenses increased 48.3% to $133.3 million for
the year ended December 31, 1996 compared to the prior year. These
expenses are related to technical salaries, general operating and
programming costs. The service and programming increase was primarily
due to increased costs associated with the Acquisitions.
Selling, General and Administrative Expense increased 49.6% to $82.7
million for the year ended December 31, 1996 compared to the prior
year. These expenses are associated with customer service, office, and
marketing. This increase was primarily due to selling and
administrative expenses associated with the Acquisitions.
Depreciation and Amortization Expense increased 49.8% to $111.3 million
for the year ended December 31, 1996 compared to the prior year. This
increase was primarily due to the Acquisitions.
Adjusted EBITDA increased 54.0% to $170.3 million for the year ended
December 31, 1996 compared to the prior year. The increase was
primarily due to the Acquisitions. The Adjusted EBITDA margin
increased to 44.6% in 1996 compared to 43.5% for 1995. This increase
was primarily a result of an increase in Adjusted EBITDA for Core
Cable Television Operations.
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Interest Expense increased 76.0% to $107.2 million for the year ended
December 31, 1996 compared to the prior year. The increase was
primarily due to higher average outstanding indebtedness related to the
Acquisitions.
Loss from continuing operations before income tax increased 555.1% to
$143.0 million. The increase was attributable to a loss associated with
the write-down of the Company's investment in Australis. Due to
uncertainty of the long-term financing of Australis, the Company
determined that the decline in market value was other than temporary.
Core Cable Television Operations
Revenues increased 52.7% to $354.6 million for the year ended December
31, 1996 compared to the prior year. Revenues for regulated services
increased 56.3 % or $89.6 million compared to the prior year. This
increase was primarily attributable to the Acquisitions, internal
customer growth of approximately 2.8%, and rate increases occurring
predominately in the second and fourth quarters. Non-regulated service
revenue increased 43.9% or $25.8 million for the year ended December
31, 1996 compared to the prior year. This increase was primarily as a
result of the Acquisitions. Advertising, home shopping and
non-recurring revenue increased 49.4% or $7.1 million compared to the
prior year. This increase was primarily attributable to the
Acquisitions.
Service and Programming Expenses increased 57.9% to $112.1 million for
the year ended December 31, 1996 compared to the prior year. These
expenses are related to technical salaries, general operating, and
programming costs. The technical service increase was primarily
associated the Acquisitions. The programming expense increase was
primarily due to the Acquisitions and increased customer costs
associated with the basic and CPS tier services.
Selling, General and Administrative Expense increased 37.6% to $65.2
million for the year ended December 31, 1996 compared to the prior
year. These expenses are associated with office salaries, facility, and
marketing costs. This increase was primarily associated with the
Acquisitions.
Depreciation and Amortization Expense increased 50.8% to $107.1 million
for the year ended December 31, 1997 compared to the prior year. This
increase was primarily due to the Acquisitions as well as increased
capital expenditures.
Adjusted EBITDA increased 58.7% to $182.9 million for the year ended
December 31, 1996 compared to the prior year. The increase was
primarily associated with the Acquisitions. The Adjusted EBITDA
margin increased to 51.6% in 1996 compared to 49.6% for 1995. This
increase was primarily caused by cash distributions made to the Company
by certain Unrestricted Subsidiaries and affiliates.
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Unrestricted Subsidiaries
Lenfest Advertising, Inc. (d/b/a Radius Communications)
Revenues, prior to payment of affiliate fees, were $15.2 million.
Affiliate fees were $7.0 million, of which $4.3 million was paid to the
Company. Affiliate fees paid to the Company are eliminated in
consolidation.
Operating Expenses, including affiliate fees, totaled $13.8
million.
Operating Income was $0.7 million.
Radius, which began operations in 1996 in connection with the purchase
of certain advertising assets, had no revenue or expenses in 1995.
StarNet, Inc.
Revenues decreased 8.8% to $8.1 million in 1996 as compared to 1995,
the net result of the elimination of The Barker (R) and Promoter
services in November of 1996.
Direct expenses decreased 12.4% to $9.4 million due primarily to the
reduction of operational expenses eliminated with the termination of
The Barker (R) and Promoter services.
Depreciation and Amortization Expense increased 11.0% to $1.5 million
for the year ended December 31, 1996, primarily as a result of
purchasing assets related to The Barker (R).
Operating loss was $2.8 million for the year ended December 31, 1996,
as compared to $3.4 million for the prior year.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (the "FASB") has recently
issued its Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income
and its components in the financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The Company is in the process of
determining the preferred format. The adoption of SFAS No. 130 will
have no impact on the Company's consolidated results of operations,
financial position or cash flows.
The FASB has also recently issued its SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ( "SFAS No. 131").
SFAS No. 131 established standards for the way that public business
enterprises report information about operating segments in interim
financial reports issued to stockholders. It also established standards
for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. Financial statement
disclosures for prior periods are required to be restated. The Company
is in the process of evaluating the disclosure requirements. The
adoption
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of SFAS No. 131 will have no impact on the Company's consolidated
results of operations, financial position or cash flows.
Liquidity and Capital Resources
The Company's businesses require cash for operations, debt service,
capital expenditures and acquisitions. To date, cash requirements have
been funded by cash flow from operations and borrowings.
Financing Activities. At December 31, 1997, the Company had aggregate
total indebtedness of approximately $1,295.3 million. The Company's
senior indebtedness of approximately $1,001.5 million consisted of: (i)
three debt obligations in the amount of approximately $45.0 million,
$10.5 million and $11.6 million (collectively, the "Private Placement
Notes"); (ii) $687.1 million of 8-3/8% Notes; (iii) $240 million under
a bank credit facility dated as of June 27, 1996 (the "Bank Credit
Facility"); and (iv) obligations under capital leases of approximately
$7.3 million. The Company issued the Private Placement Notes from 1988
to 1991 in connection with the refinancing of revolving bank debt. The
Bank Credit Facility consists of a $150 million term loan facility and
a $300 million revolving credit facility. At December 31, 1997, the
term loan was fully drawn.
At December 31, 1997, the only outstanding senior subordinated
indebtedness was the Company's Subordinated Notes which were issued on
June 27, 1996 pursuant to a private offering to certain institutional
and other accredited investors and subsequently exchanged in a
registered exchange offer for publicly traded Subordinated Notes. The
Subordinated Notes are general unsecured obligations of the Company
subordinate in right of payment to all present and future senior
indebtedness of the Company.
On February 5, 1998, the Company issued $150 million of 7-5/8% Senior
Notes due 2008 and $150 million of 8-1/4% Senior Subordinated Notes due
2008. The proceeds of this offering were used to repay the Private
Placement Notes, pay off and cancel the Company's bank term loan
facility and to pay down the revolving credit facility. As of March 27,
1998, the Company's revolving credit facility had no outstanding
borrowings.
The Bank Credit Facility contains provisions which limit the Company's
ability to make certain investments in excess of $50 million in the
aggregate and prohibiting the Company from having: (i) a ratio of
operating cash flow for the most recently completed financial quarter
multiplied by four to senior indebtedness for the quarter ended
December 31, 1997 through December 30, 1999 in excess of 5.00:1 and
4.50:1 commencing on December 31, 1999 and thereafter ("Senior Debt
Leverage Ratio"); and (ii) a ratio of operating cash flow for the
most recently completed financial quarter multiplied by four to total
indebtedness in excess of 6.50:1 at December 31, 1997, and declining
to 6.00:1 commencing on December 31, 1998 and thereafter ("Total Debt
Leverage Ratio"). The Company expects to refinance the Bank Credit
Facility in 1998.
The Company's operations are conducted through its direct and indirect
subsidiaries. As a holding company, the Company has no independent
operations and, therefore, is dependent on the cash flow of its
subsidiaries to meet its own obligations, including the payment of
interest and principal
-11-
<PAGE>
obligations on the Company's borrowings. There are no restrictions
relating to the payment to the Company of dividends, advances or other
payments by any of the Company's subsidiaries.
Cash flow generated from continuing operations, excluding changes in
operating assets and liabilities that result from timing issues and
considering only adjustments for non-cash charges, was approximately
$89.1 million for the year ended December 31, 1997 compared to
approximately $62.2 million for the year ended December 31, 1996. In
1997, the Company was required to make interest payments of
approximately $120.6 million on outstanding debt obligations, whereas
in 1996, the Company was required under its then existing debt
obligations to make interest payments of approximately $103.8 million.
This increase was primarily attributable to increased debt incurred by
the Company in connection with the Acquisitions.
Future minimum lease payments under all capital leases and
non-cancelable operating leases for each of the years 1998 through 2001
are $5.9 million (of which $680,000 is payable to a principal
stockholder), $5.9 million (of which $714,000 is payable to a principal
stockholder), $5.5 million (of which $750,000 is payable to a principal
stockholder) and $3.8 million (of which $788,000 is payable to a
principal stockholder), respectively.
The Company has net operating loss carryforwards which it expects to
utilize notwithstanding recent and expected near term losses. The net
operating losses begin to expire in the year 2001 and will fully expire
in 2012. Management bases its expectation on its belief that
depreciation and amortization expense will level off and that interest
expense will decline as debt is repaid, resulting in higher levels of
pretax income.
In November 1994, Mr. Lenfest and TCI International, Inc. jointly and
severally guaranteed $67.0 million in program license obligations of
the distributor of Australis' movie programming. At December 31, 1997,
the amount subject to the guarantee under the license agreements was
approximately $47.5 million.
The Company had agreed to indemnify Mr. Lenfest against loss from such
guaranty to the fullest extent permitted under the Company's debt
obligations. Under the terms of the Bank Credit Facility, however, Mr.
Lenfest's claims for indemnification are limited to $33.5 million.
Effective March 6, 1997, as subsequently amended, Mr. Lenfest released
the parent Company and its cable operating subsidiaries from their
indemnity obligation until the last to occur of January 1, 1999 and the
last day of any fiscal quarter during which the Company could incur the
indemnity obligation without violating the terms of the Bank Credit
Facility. Certain of the Company's Unrestricted Subsidiaries have
agreed to indemnify Mr. Lenfest for his obligations under the
guarantee. As a result, the Company will remain indirectly liable under
the Unrestricted Subsidiaries' indemnity.
Capital Expenditures. It is anticipated that during 1998, the Company
will spend at least $80.0 million for capital expenditures for its Core
Cable Television Operations. These capital expenditures will be for the
upgrading of certain of its cable television systems, maintenance and
other capital projects associated with implementing the Company's
clustering strategy. The amount of such capital expenditures for years
subsequent to 1998 will depend on numerous factors, many of which are
beyond the Company's control. These factors include whether competition
in a particular market necessitates a cable television system upgrade
and whether a particular
-12-
<PAGE>
cable television system has sufficient capacity to handle new product
offerings. The Company, however, anticipates that capital expenditures
for years subsequent to 1998 will continue to be significant.
Resources. Management believes that the Company has sufficient funds
available from operating cash flow and from borrowing capacity under
the Bank Credit Facility to fund its operations, capital expenditure
plans and debt service throughout 1998. However, the Company's ability
to borrow funds under the Bank Credit Facility requires that the
Company be in compliance with the Senior and Total Debt Leverage Ratios
or obtain the consent of the lenders thereunder to a waiver or
amendment of the applicable Senior or Total Debt Leverage Ratio.
Management believes that the Company will be in compliance with such
Debt Leverage Ratios.
Year 2000 Issue. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Certain of the Company's and supporting vendors'
computer programs and other electronic equipment have date-sensitive
software which may recognize "00" as the year 1900 rather than the
year 2000 (the "Year 2000 Issue"). If this situation occurs, the
potential exists for computer system failure or miscalculations by
computer programs, which could cause disruption of operations.
The Company is in the process of identifying the computer systems that
will require modification or replacement so that all of the Company's
systems will properly utilize dates beyond December 31, 1999. The
Company has initiated communications with most of its significant
software suppliers to determine their plans for remediating the Year
2000 Issue in their software which the Company uses or relies upon. The
Company has retained a consultant to review its systems, to identify
which systems are in need of remediation and to prepare a remediation
report. The Company expects to receive the consultant's report and to
have identified all systems in need of remediation not later than
September 30, 1998. As it identifies systems in need of remediation,
the Company will develop and implement appropriate remediation
measures. The Company expects to complete the remediation processes
for all of its operations not later than the end of the third quarter
of 1999. However, there can be no guarantee that the systems of other
companies on which the Company relies will be converted on a timely
basis, or that a failure to convert by another company would not have
material adverse effect on the Company.
-13-
<PAGE>
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.
4. The following paragraphs of Management - Directors and Executive Officers
are amended and restated in their entirety as follows:
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
MANAGEMENT
Directors And Executive Officers
H. Chase Lenfest has served as a Director of the Company since December
1997 and is Director of Local Sales of Lenfest Programming Services,
Inc. From January 1996 to January 1997, he was the Regional Photo
Classified Manager of Lenfest Programming Services, Inc. He was
employed by TelVue Corporation from February 1994 until January 1996.
From March 1988 to January 1994, he was a stockbroker with Wheat
First Butcher & Singer. He is the son of H. F. and Marguerite B.
Lenfest and the nephew of Harry F. Brooks.
Brook J. Lenfest has served as a Director of the Company since December
1997 and is Vice President and Director of Operations for StarNet, Inc.
He has been an officer of StarNet, Inc. since January 1995. Prior to
assuming his current position, he was Vice President-Business
Development, 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. and Marguerite B. Lenfest and the
nephew of Harry F. Brooks.
Harry F. Brooks is Executive Vice President and Assistant Secretary of
the Company. He has been Executive Vice President since 1991 and a Vice
President since 1983. Mr. Brooks is also Vice President/Assistant
Treasurer/Assistant Secretary of each of the Company's subsidiaries
other than TeleSTAR (where he is Treasurer and Assistant Secretary),
Lenfest Raystay Holdings, Inc. (where he is Vice President and
Assistant Secretary) and Lenfest Atlantic, Inc. He is the brother of
Marguerite B. Lenfest and the uncle of Chase Lenfest and Brook
Lenfest.
Maryann V. Bryla has been Vice President, Finance of the Company since
March 1997 and Assistant Secretary since January 1998. Prior to that,
Ms. Bryla was Assistant Vice President of Finance of the Company since
November 1996 and Director of Investor Relations since June 1996. 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 Suburban.
-14-
<PAGE>
5. The following table of Executive Compensation is amended and restated in
its entirety as follows:
Item 11. EXECUTIVE COMPENSATION.
The Company has no long-term compensation plans. The following table
sets forth certain information for the years ended December 31, 1995,
1996 and 1997 concerning cash and non-cash compensation earned by the
CEO and the four other most highly compensated executive officers of
the Company whose combined salary and bonus exceeded $100,000 during
such periods.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Summary Compensation Table
Annual Compensation
Name and All Other
Principal Position Year Salary Bonus Compensation
- - ------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
H. F. Lenfest 1997 $ 749,996 $ --- $ 255,022(a) (b)
President and CEO 1996 1,000,000 --- 268,135(a) (b)
1995 500,000 750,000 293,218(a) (b)
Samuel W. Morris, Jr. 1997 $ 262,496 $ 25,000 $ 8,000(a)
Vice President and 1996 250,000 30,000 7,500(a)
General Counsel 1995 200,000 100,000 7,500(a)
Robert Lawrence 1997 $ 206,596 $ 20,000 $ 8,000(a)
Executive Vice President 1996 190,000 --- 7,500(a)
Suburban 1995 115,000 15,500 5,750(a)
Debra A. Krzywicki 1997 $ 189,404 $ --- $ 8,000(a)
Executive Vice President 1996 170,000 --- 7,500(a)
Suburban 1995 105,000 --- 5,250(a)
Harry F. Brooks 1997 $ 157,500 $ 42,500 $ 8,000(a)
Executive Vice President 1996 150,000 --- 7,500(a)
1995 135,000 --- 6,750(a)
</TABLE>
(a) Matching contributions under the Company's 401(k) Plan for the
individuals in years noted. The contribution for Mr. Lenfest for the
years 1997, 1996 and 1995 were $8,000, $7,500 and $7,500,
respectively.
(b) Pursuant to agreements between the Company and a foundation and
trusts created by H. F. Lenfest, the foundation and the trusts have
purchased split-dollar life insurance policies on H. F. Lenfest's life
and on the joint lives of Mr. Lenfest and his wife, Marguerite Lenfest,
an officer and director of the Company. Under these agreements, the
Company pays the entire premium. The trusts and foundation are the
beneficiaries of the insurance policies. However, the Company has been
granted a security interest in the death benefits of each policy equal
to the sum of all premium payments made by the Company. These
arrangements are designed so that if the assumptions made as to
mortality experience, policy dividends and expenses are realized, the
Company, upon the deaths of Mr. and Mrs. Lenfest or the surrender of
the policies, will recover all of its insurance premium payments. The
premiums paid by the Company in 1997, 1996 and 1995 pursuant to these
arrangements were $346,043, $346,043 and $325,471, respectively. The
amounts in this column include the present value of such premium
payments using an imputed interest rate, such present value calculated
based upon Mr. and Mrs. Lenfest's remaining life expectancy, which
totaled $247,022, $260,635 and $232,985 in 1997, 1996 and 1995,
respectively. In addition, in 1995, Mr. Lenfest received $52,733 of
additional compensation, of which $50,213 consisted of the payment by
the Company of expenses incurred by Mr. Lenfest in connection with
personal investments.
-15-
<PAGE>
6. The following paragraph of Certain Relationships and Related Transactions
is amended and restated in its entirety as follows:
The Company had agreed to indemnify Mr. Lenfest against loss from such
guaranty to the fullest extent permitted under the Company's debt
obligations. Under the terms of the Bank Credit Facility, however, Mr.
Lenfest's claims for indemnification are limited to $33.5 million.
Effective March 6, 1997, as subsequently amended, Mr. Lenfest released
the parent Company and its cable operating subsidiaries from their
indemnity obligation until the last to occur of January 1, 1999 and the
last day of any fiscal quarter during which the Company could incur the
indemnity obligation without violating the terms of the Bank Credit
Facility. Certain of the Company's Unrestricted Subsidiaries have
agreed to indemnify Mr. Lenfest for his obligations under the
guarantee. As a result, the Company will remain indirectly liable under
the Unrestricted Subsidiaries' indemnity.
7. The list of financial statements filed as a part of this report is amended
and restated in its entirety as follows:
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following financial statements are filed as part of the report:
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Consolidated Balance Sheets, December 31, 1996 and 1997
Consolidated Statements of Operations, Years Ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Changes in Stockholders' Equity (Deficit),
Years Ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows,
Years Ended December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
GARDEN STATE CABLEVISION L.P.
Report of Independent Public Accountants
Balance Sheets, December 31, 1996 and 1997
Statements of Operations, Years Ended December 31, 1995, 1996 and 1997
Statements of Cash Flows, Years Ended December 31, 1995, 1996 and 1997
Statements of Partners' (Deficit) Capital, Years Ended
December 31, 1995, 1996 and 1997
Notes to 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
-16-
<PAGE>
8. The index to Consolidated Financial Statements is amended and restated in
its entirety as follows:
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
FINANCIAL STATEMENTS
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ..................................... F-2
Consolidated Balance Sheets, December 31, 1996 and 1997 ............................... F-3
Consolidated Statements of Operations, Years Ended December 31, 1995, 1996 and 1997 ... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit),
Years Ended December 31, 1995, 1996 and 1997 ........................................ F-6
Consolidated Statements of Cash Flows, Years Ended December 31, 1995, 1996 and 1997 ... F-7
Notes to Consolidated Financial Statements ............................................. F-9
GARDEN STATE CABLEVISION L.P
Report of Independent Public Accountants ............................................... F-38
Balance Sheets, December 31, 1996 and 1997 ............................................. F-39
Statements of Operations, Years Ended December 31, 1995, 1996 and 1997 ................. F-40
Statements of Cash Flows, Years Ended December 31, 1995, 1996 and 1997 ................. F-41
Statements of Partners' (Deficit) Capital, Years Ended December 31, 1995, 1996 and 1997 F-42
Notes to Financial Statements ......................................................... F-43
FINANCIAL STATEMENTS SCHEDULE
Report of Independent Certified Public Accountants on Schedule ........................ F-49
Schedule II - Valuation and Qualifying Accounts ....................................... F-50
</TABLE>
-17-
<PAGE>
9. The Report of Independent Certified Public Accountants is amended and
restated in its entirety as follows:
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Lenfest
Communications, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows
for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Lenfest Communications, Inc. and subsidiaries as of December 31, 1996
and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company has
sold substantially all of the assets of MicroNet, Inc. and MicroNet
Delmarva Associates, L.P., wholly owned subsidiaries of the Company.
Prior period financial statements have been restated to reflect the
continuing operations of the Company.
Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
March 4, 1998 (except as to the sixth paragraph of Note
12 and the first paragraph and second paragraph of Note 20,
as to which the date is June 22, 1998)
-18-
<PAGE>
10. Notes 1, 8, 12, 20 and 22 to Consolidated Financial Statements are amended
and restated in their entirety as follows:
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Lenfest
Communications, Inc. and subsidiaries ("the Company") is presented to
assist in understanding its financial statements. These accounting
policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the consolidated
financial statements.
Business Activities and Concentrations of Credit Risk
The Company, through its cable subsidiaries, owns and operates clusters
of cable television systems located in the suburbs of Philadelphia,
Pennsylvania, from Harrisburg, Pennsylvania through Wilmington,
Delaware and south through Atlantic City, New Jersey. In addition, the
Company, through its non-cable subsidiaries, sells advertising for
cable television systems and provides satellite delivered cross channel
tune-in promotional services for cable television. The Company's
ability to collect the amounts due from customers is primarily affected
by economic fluctuations in these geographic areas.
The Company maintains cash balances at several financial institutions
located primarily in the Philadelphia Area. Accounts at each
institution are insured by either the FDIC or another institutional
insurance fund up to $100,000 and $500,000, respectively. The Company
maintains cash balances in excess of the insured amounts.
Basis of Consolidation, Change in Reporting Entity and Restatement
The consolidated financial statements include the accounts of Lenfest
Communications, Inc. and those of all wholly owned subsidiaries. In
addition, effective 1995, the accounts of L-TCI Associates, a
partnership that is owned approximately eighty percent (80%) by the
Company, are also included. Significant intercompany accounts and
transactions have been eliminated in consolidation.
During 1996, the Company acquired an additional 50% interest in
Atlantic Communication Enterprises, which increased its holdings to
100%. Accordingly, the Company changed its method of accounting for
this investment from the equity method to consolidation as required by
generally accepted accounting principles. This change in consolidation
policy had no effect on net loss for 1995 or 1996. Since the amounts
are not material and have no effect on net loss, the prior period
financial statements were not restated to reflect the change in
consolidation policy.
The prior period financial statements have been restated to reflect the
continuing operations of the Company. See Note 2 - Discontinued
Operations.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-19-
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
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.
Property and Equipment
Property and equipment are stated at cost. For the newly acquired
systems or companies, the purchase price has been allocated to net
assets on the basis of fair market values as determined by 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.
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.
-20-
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Valuation of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company assesses, on an on-going basis,
the recoverability of long-lived assets based on estimates of future
undiscounted cash flows for the applicable business acquired compared
to net book value. 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 undiscounted cash flow estimate. The
Company also evaluates the depreciation and amortization periods of
tangible and intangible assets to determine whether events or
circumstances warrant revised estimates of useful lives. As of December
31, 1997, management believes that no revisions to the remaining useful
lives or writedowns of long-lived assets are required.
-21-
<PAGE>
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE CABLEVISION
L.P.
The Company, through several subsidiaries, owns non-controlling
interests in several general partnerships and corporations. Any
subsidiary of the Company that is a general partner is, as such,
liable, as a matter of partnership law, for all debts of such
partnership. Investments and advances in affiliates accounted for under
the equity method amounted to $41,333,000 and $46,471,000 at December
31, 1996 and 1997, respectively. Net losses recognized under the equity
method for the years ended December 31, 1995, 1996 and 1997 were
$10,682,000, $17,870,000 and $7,334,000, respectively. Under the equity
method, the initial investments are recorded at cost. Subsequently, the
carrying amount of the investments are adjusted to reflect the
Company's share of net income or loss of the affiliates as they occur.
Losses in excess of amounts recorded as investments on the Company's
books have been offset against loans and advances to these
unconsolidated affiliates to the extent they exist.
The Company, through its subsidiary, Lenfest Jersey, Inc., owns a
10.005% general partnership interest and a 39.995% limited partnership
in Garden State Cablevision L.P. (Garden State), a cable company
serving approximately 208,000 customers in southern New Jersey at
December 31, 1997. Under a consulting agreement, the Company advises
Garden State on various operational and financial matters for a
consulting fee that was equal to 1.5% of Garden State's gross revenues.
On January 10, 1995, in connection with the increase in ownership
described in Note 5, the consulting fee was changed to 3% of gross
revenues. Due to restrictions contained in Garden State's debt
agreements, the payment of a portion of these fees had been deferred.
In December 1996, the Company received a $50 million distribution from
Garden State. The distribution received included $8.1 million of prior
accrued management fees that had been deferred. Garden State also
obtains its cable television programming from Satellite Services, Inc.
through the Company. The programming services are at a rate which is
not more than Garden State could obtain independently. For the years
ended December 31, 1995, 1996 and 1997, the total programming obtained
through the Company was approximately $11,985,000, $13,659,000 and
$14,650,000, respectively.
The Company accounts for its investment in Garden State under the
equity method. Effective January 10, 1995, the Company is allocated a
total of 50% of Garden State's losses. Previously, the Company was
allocated 49.5% of losses. In addition, the Company is required to make
up its partner capital deficits upon the termination or liquidation of
the Garden State partnership. Because of the requirement to make up
capital deficits, the accompanying financial statements reflect equity
in accumulated losses, net of related receivable, in excess of the
investments in Garden State in the amount of $72,454,000 and
$77,880,000 at December 31, 1996 and 1997, respectively.
Summarized audited financial information of Garden State, accounted for under
the equity method, at December 31, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Financial Position
Cash and cash equivalents $ 4,858 $ 5,271
Accounts receivable, net 2,683 3,551
Other current assets 1,033 666
Property and equipment, net 75,920 83,863
Deferred assets, net 85,204 55,938
-------------- --------------
TOTAL ASSETS $ 169,698 $ 149,289
============== ==============
Debt $ 333,000 $ 324,000
Liabilities to the Company 3,246 3,579
Accounts payable and accrued expenses 13,674 12,388
Customer prepayments and deposits 947 875
Other liabilities 1,098 1,523
Partners' deficit (182,267) (193,076)
-------------- --------------
TOTAL LIABILITIES AND DEFICIT $ 169,698 $ 149,289
============== ==============
</TABLE>
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<PAGE>
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE CABLEVISION
L.P. - (continued)
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Results of Operations
Revenues $ 91,771 $ 100,756 $ 109,126
Operating expenses (40,595) (43,608) (45,902)
Depreciation and amortization (46,976) (48,524) (44,698)
-------------- -------------- --------------
OPERATING INCOME 4,200 8,624 18,526
Interest expense (19,166) (16,405) (22,787)
Other expense (5,590) (6,045) (6,548)
-------------- -------------- --------------
NET LOSS $ (20,556) $ (13,826) $ (10,809)
============== ============== ==============
Cash Flows
Cash flows from operating activities $ 30,452 $ 26,132 $ 32,815
Cash flows from investing activities (14,794) (22,759) (23,308)
Cash flows from financing activities (17,009) (1,774) (9,094)
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,351) 1,599 413
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,610 3,259 4,858
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 3,259 $ 4,858 $ 5,271
============== ============== ==============
</TABLE>
Summarized financial information of affiliates other than Garden State,
accounted for under the equity method, at December 31, 1996 and 1997, is as
follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Financial Position
Cash and cash equivalents $ 5,972 $ 6,595
Accounts receivable, net 11,071 16,793
Other current assets 13,071 31,658
Property and equipment, net 172,864 209,333
Due from related party (not the Company) 533 -
Deferred tax asset 8,730 550
Other assets, net 44,806 62,000
-------------- --------------
TOTAL ASSETS $ 257,047 $ 326,929
============== ==============
</TABLE>
-23
<PAGE>
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE CABLEVISION
L.P. - (continued)
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Financial Position - (continued)
Liabilities to the Company $ 2,375 $ 4,435
Accounts payable and accrued expenses 47,202 44,131
Debt 135,086 136,089
Deferred tax liability 11,943 12,343
Payable to related party (not the Company) 67,136 90,991
Other liabilities 9,195 29,985
Equity (deficit) (15,890) 8,955
-------------- --------------
TOTAL LIABILITIES
AND EQUITY $ 257,047 $ 326,929
============== ==============
1995 1996 1997
--------------- --------------- ---------------
(Dollars in thousands)
Results of Operations
Revenues $ 124,171 $ 125,534 $ 156,405
Operating expenses (84,615) (96,909) (120,782)
Depreciation and amortization (15,876) (25,755) (32,357)
-------------- -------------- --------------
OPERATING INCOME 23,680 2,870 3,266
Interest expense (8,988) (16,964) (18,284)
Other income and expense (net) (2,548) 1,054 9,565
-------------- -------------- --------------
NET INCOME (LOSS) $ 12,144 $ (13,040) $ (5,453)
============== ============== ==============
Cash Flows
Cash flows from operating activities $ 18,146 $ 6,070 $ 35,378
Cash flows from investing activities (24,598) (57,436) (74,331)
Cash flows from financing activities 4,289 46,450 34,153
-------------- -------------- --------------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (2,163) $ (4,916) $ (4,800)
============== ============== ==============
</TABLE>
-24-
<PAGE>
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, 1997, and the carrying amount, including
related receivables, as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
December 31, 1997
Ownership
Percentage 1996 1997
------------------ --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Susquehanna Cable Co. Subsidiaries ("SCC Subs")(Note 9) 30% $ 10,880 $ 10,671
The Box Worldwide, Inc. ("Box") (Note 5) - 4,161 -
Raystay Co. ("Raystay") (Note 5) 45% 6,981 11,807
Videopole (Note 5) 29% 9,015 11,117
MetroNet Communications and GlobeNet ("MetroNet") 50% 1,674 1,086
Hyperion Telecommunications of Harrisburg ("Hyperion") 50% 1,043 217
Sneak Prevue, L.L.C. ("Sneak Prevue") (Note 5) 28% 3,091 2,512
Clearview Partners ("Clearview") (Note 5) 30% 1,825 1,825
Cable Adcom ("Adcom") 50% 1,481 1,533
Philadelphia Interconnect ("Interconnect") (Note 5) 72% - 3,843
Others 1,182 1,860
--------------- --------------
$ 41,333 $ 46,471
=============== ==============
</TABLE>
The carrying amounts of Garden State, SCC Subs and Raystay at December
31, 1997 include excess purchase accounting adjustments of $14,252,000,
$24,732,000 and $12,023,000, 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, 1997 have quoted market
prices available.
Lenfest York, Inc., a subsidiary of the Company, owns a 30% equity
interest in five subsidiaries of Susquehanna Cable Co. Suburban Cable
TV Co. Inc., a wholly owned subsidiary of the Company, owns a 50%
general partnership interest in Cable Adcom. Cable Adcom is a cable
advertising interconnect that serves the Harrisburg, Pennsylvania, Area
of Dominant Influence ("ADI"). The Company's indirect, wholly owned
subsidiary, LenNet, Inc., owns a 50% general partnership interest in
MetroNet Communications, a company that provides microwave
transmissions of voice and data between two points of presence for its
customers located throughout the United States and a 50% general
partnership interest in GlobeNet, a company that provides international
call back telephone service for its customers located in foreign
countries. The Company's wholly owned subsidiary, Lenfest Telephony,
Inc., owned a 50% partnership interest in Hyperion Telecommunications
of Harrisburg (See Note 26).
-25-
<PAGE>
NOTE 8 - INVESTMENTS IN AFFILIATES INCLUDING GARDEN STATE CABLEVISION
L.P. - (continued)
The following table reflects the Company's share of earnings or losses
of Garden State and each of the aforementioned affiliates:
<TABLE>
<CAPTION>
1995 1996 1997
--------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Garden State $ (8,527) $ (5,068) $ (3,340)
SCC Subs (1,263) (1,010) (208)
Box 132 (2,671) (1,414)
Raystay (886) (1,575) 4,826
Videopole (2,644) (7,408) (7,200)
BCA 1,711 50 -
MetroNet 190 (92) 81
Hyperion - (734) (826)
Sneak Prevue - (326) (426)
Clearview - (100) -
Adcom 530 1,070 851
Interconnect - - 359
Other 75 (6) (37)
-------- --------- ---------
$(10,682) $ (17,870) $ (7,334)
======== ========= =========
</TABLE>
CAH, Inc., a subsidiary of the Company, owned a 41.67% general
partnership interest in Bay Area Interconnect d/b/a By Cable
Advertising ("BCA"), a cable advertising interconnect serving the San
Francisco, California, ADI (See Note 5).
-26-
<PAGE>
NOTE 12 - MARKETABLE SECURITIES
The Company's investment in the securities of Australis Media Limited
("Australis") consists of 77,982,000 shares of voting common stock and
269,427,000 non-voting convertible debentures. The debentures are
classified as equity securities by Australis as the debentures are
unsecured non-voting securities that have interest entitlements
equivalent in both timing and amount to the dividend entitlements
attaching to common stock and will be subordinated to all creditors
other than common stock shareholders upon any liquidation or winding
up. The convertible debentures will not be redeemable for cash but will
be convertible into ordinary shares on a one-for-one basis providing
that certain conditions are met.
The aggregate cost and market values of the securities at December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross
Aggregate Unrealized Fair
Cost Gain (Loss) Value
-------------- ----------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
December 31, 1996
Australis Media Limited convertible debentures $ 33,687 $ (7,952) $ 25,735
Australis Media Limited common stock 10,885 (2,505) 8,380
Australis Media Limited discount notes 41,026 - 41,026
Other marketable equity securities 3,781 908 4,689
-------------- -------------- --------------
$ 89,379 $ (9,549) $ 79,830
============== ============== ==============
December 31, 1997
Other marketable equity securities $ 6,366 $ 8,086 $ 14,452
============== ============== ==============
</TABLE>
In December 1993, the Company acquired 11,000,000 shares of the voting
stock and 173,000,000 non-voting debentures of Australis for
$90,972,000. As of August 12, 1996, the Australis securities held by
the Company had a market value of approximately $24.0 million. Due to
uncertainty regarding the long-term financing of Australis, the Company
determined that the decline in market value was other than temporary
and, accordingly, the Company recognized a loss of $66.9 million, as of
June 30, 1996, resulting from a write-down of the Australis investment
from cost in the accompanying consolidated statement of operations. The
write-down established a new cost basis in the Australis investment.
On October 31, 1996, the Company purchased senior subordinated discount
notes of Australis Holding Pty Limited, with a face value of
$71,339,000, and 71,339 warrants for an aggregate of $40 million. These
discount notes and warrants were sold in May 1997, for $41.5 million.
In connection with the long-term financing, the Company purchased
43,482,000 shares of voting stock and 49,188,779 non-voting debentures
for an aggregate of $40 million. At the time of the transaction, these
securities had a fair value of $13.6 million, and the Company
recognized a loss of $26.4 million in the accompanying statement of
operations.
On December 23, 1996, the Company received 18,000,000 shares of voting
stock and 52,238,547 non-voting debentures of Australis in connection
with the termination of a technical services agreement with Australis
and also received 500,000 shares of voting stock for late repayment of
a loan to the Company by Australis. The securities were recorded at the
fair value when received, which was $7.0 million and the income
recognized has been offset against the
-27-
<PAGE>
NOTE 12 - MARKETABLE SECURITIES - (continued)
recognized losses on the decline in market value. On December 23, 1996,
the Company converted 5,000,000 non-voting debentures of Australis into
5,000,000 shares of voting stock.
At December 31, 1997, the Australis securities were no longer listed on
the Australian Stock Exchange and were considered to be worthless. The
Company determined that the decline in market value was other than
temporary and, accordingly, recognized a loss of $44.6 million,
resulting from a write-down of the Australis investment. On May 5,
1998, the Trustee for the holders of Australis' bond indebtedness
appointed receivers in order to wind up the affairs of Australis.
Subsequent thereto, Australis' assets were liquidated and it has ceased
to conduct business.
In accordance with the Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities", all of the Company's securities are considered to be
available for sale. Net realized gains from the sale of marketable
securities, in the amount of $13,517,000, $342,000 and $468,000 are
included in other income and expense (net) in 1995, 1996 and 1997,
respectively. The 1995 net realized gains includes a net gain of
approximately $13,100,0000 from the sale of its QVC, Inc. stock
holdings. The specific identification method is used to determine the
cost of each security at the time of sale.
NOTE 20 - COMMITMENTS AND CONTINGENCIES
Mr. Lenfest, on behalf of the Company, and TCI have jointly and
severally guaranteed an aggregate of $67 million obligation of
Australis incurred in connection with the purchase of program licenses
in April 1995. The terms of the guarantees provide that the amount of
the guarantees will be reduced on a dollar-for-dollar basis with
payments made by Australis under the licenses. The Company has agreed
to indemnify Mr. Lenfest against loss from such guaranty to the fullest
extent permitted under the Company's debt obligations. Under the terms
of its bank credit facility, however, Mr. Lenfest's claims for
indemnification are limited to $33.5 million. Effective March 6, 1997,
as subsequently amended, Mr. Lenfest released the parent Company and
its cable operating subsidiaries from their indemnity obligation until
the last to occur of January 1, 1999 and the last day of any fiscal
quarter during which the Company could incur the indemnity obligation
without violating the terms of its bank credit facility. Certain of the
Company's non-cable subsidiaries have agreed to indemnify Mr. Lenfest
for his obligations under the guarantee. As a result, the Company will
remain indirectly liable under the non-cable subsidiaries' indemnity.
At December 31, 1997, the amount subject to guarantee under the license
agreements was approximately $47.5 million.
On January 20, 1995, an individual (the "Plaintiff") filed suit in the
Federal Court of Australia, New South Wales District Registry against
the Company and several other entities and individuals (the
"Defendants") including Mr. Lenfest, involved in the acquisition of a
company owned by the Plaintiff, the assets of which included the right
to acquire Satellite License B from the Australian government. The
Plaintiff alleges that the Defendants defrauded him by making certain
representations to him in connection with the acquisition of his
company and claims total damages of A$718 million (approximately U.S.
$467 million as of December 31, 1997). The Plaintiff also alleges that
Australis and Mr. Lenfest owed to him a fiduciary duty and that both
parties breached this duty. The Defendants have denied all claims made
against them by the Plaintiff and stated their belief that the
Plaintiff's allegations are without merit. They are defending this
action vigorously. The trial in this action began on February 2, 1998,
and is expected to last until sometime in the third quarter of 1998.
-28-
<PAGE>
NOTE 22 - SEGMENT INFORMATION
The Company operates primarily in the cable television industry.
Certain subsidiaries of the Company operate in other industries which
provide promotional, cable advertising traffic and billing services.
Information concerning continuing operations by industry segment as of
and for each of the three years ended December 31, was as follows:
<TABLE>
<CAPTION>
Cable Other Total
--------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Year Ended December 31, 1995
Revenues $ 232,155 $ 22,070 $ 254,225
============== ============== ==============
Operating income (loss) $ 44,199 $ (9,359) $ 34,840
============== ============== ==============
Depreciation and amortization $ 71,054 $ 3,218 $ 74,272
============== ============== ==============
Equity in net income (losses) of
unconsolidated affiliates $ (13,320) $ 2,638 $ (10,682)
============== ============== ==============
Capital expenditures, including
acquisitions $ 47,658 $ 5,324 $ 52,982
============== ============== ==============
Identifiable assets $ 740,063 $ 91,382 $ 831,445
============== ============== ==============
Cable Other Total
--------------- --------------- ---------------
(Dollars in thousands)
Year Ended December 31, 1996
Revenues $ 354,561 $ 27,249 $ 381,810
============== ============== ==============
Operating income (loss) $ 70,135 $ (15,543) $ 54,592
============== ============== ==============
Depreciation and amortization $ 107,115 $ 4,162 $ 111,277
============== ============== ==============
Equity in net (losses) of
unconsolidated affiliates $ (15,161) $ (2,709) $ (17,870)
============== ============== ==============
Capital expenditures, including
acquisitions $ 655,735 $ 11,294 $ 667,029
============== ============== ==============
Identifiable assets $ 1,116,214 $ 84,603 $ 1,200,817
============== ============== ==============
</TABLE>
-29-
<PAGE>
NOTE 22 - SEGMENT INFORMATION - (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
<S> <C> <C> <C>
Revenues $ 413,792 $ 33,598 $ 447,390
============== ============== ==============
Operating income (loss) $ 75,577 $ (12,793) $ 62,784
============== ============== ==============
Depreciation and amortization $ 124,973 $ 4,966 $ 129,939
============== ============== ==============
Equity in net (losses) of unconsolidated
affiliates $ (5,922) $ (1,412) $ (7,334)
============== ============== ==============
Capital expenditures, including
acquisitions $ 172,010 $ 7,009 $ 179,019
============== ============== ==============
Identifiable assets $ 1,173,358 $ 43,702 $ 1,217,060
============== ============== ==============
</TABLE>
-30-
<PAGE>
11. The Financial Statements have been amended to include the following
Financial Statements of Garden State Cablevision L.P.:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Garden State Cablevision L.P.:
We have audited the accompanying balance sheet of Garden State Cablevision L.P.
(a Delaware Limited Partnership) as of December 31, 1996 and 1997, and the
related statements of operations, cash flows and partners' deficit for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Garden State Cablevision L.P.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
January 28, 1998
-31-
<PAGE>
GARDEN STATE CABLEVISION L.P.
BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1996 1997
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,858 $ 5,271
Accounts receivable, less allowance for doubtful
accounts of $682 and $629 2,683 3,551
Other current assets 916 666
------------- ------------
Total current assets 8,457 9,488
PREPAID INTEREST 117
PROPERTY, PLANT AND EQUIPMENT, net 75,920 83,863
DEFERRED CHARGES, net 85,204 55,938
------------- ------------
$ 169,698 $ 149,289
============= ============
LIABILITIES AND PARTNERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 15,698 $ 14,394
Accrued interest 500 1,315
Subscribers' advance payments and deposits 947 875
------------- ------------
Total current liabilities 17,145 16,584
LONG-TERM DEBT 333,000 324,000
OTHER LIABILITIES 1,562 1,523
DEFERRED MANAGEMENT AND CONSULTING FEES 258 258
PARTNERS' DEFICIT (182,267) (193,076)
------------- ------------
$ 169,698 $ 149,289
============= ============
</TABLE>
See notes to financial statements.
-32-
<PAGE>
GARDEN STATE CABLEVISION L.P.
STATEMENT OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
SERVICE INCOME $ 91,771 $ 100,756 $ 109,126
COSTS AND EXPENSES
Operating 28,818 31,633 33,117
Selling, general and administrative 11,777 11,975 12,785
Depreciation and amortization 46,976 48,524 44,698
------------ ----------- -----------
OPERATING INCOME 4,200 8,624 18,526
OTHER EXPENSES
Management and consulting fees 5,590 6,045 6,548
Interest expense, net of interest income
of $247, $296 and $404 19,166 16,405 22,787
------------ ----------- -----------
NET LOSS $ (20,556) $ (13,826) $ (10,809)
============ =========== ===========
</TABLE>
See notes to financial statements.
-33-
<PAGE>
GARDEN STATE CABLEVISION L.P.
STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (20,556) $ (13,826) $ (10,809)
Noncash items included in net loss
Depreciation and amortization 46,976 48,524 44,698
Amortization of prepaid interest 295 261 160
Deferred management and consulting fees 2,742 258
Losses on disposal of property, plant and equipment 323 118
(Decrease) increase in other liabilities 62 134 (39)
(Increase) decrease in accounts receivable and other
current assets (707) 14 (634)
(Decrease) increase in current liabilities 1,317 4,732 (561)
Payment of deferred management and consulting fees (14,083)
---------- ---------- ----------
Net cash provided by operating activities 30,452 26,132 32,815
---------- ---------- ----------
INVESTING ACTIVITIES
Capital expenditures (14,652) (22,715) (23,286)
Additions to deferred charges (142) (44) (22)
---------- ---------- ----------
Net cash used in investing activities (14,794) (22,759) (23,308)
---------- ---------- ----------
FINANCING ACTIVITIES
Repayments of debt (17,000) (12,000) (9,000)
Proceeds from borrowing 100,000
Distributions to partners (88,716)
Debt acquisition costs (9) (796) (67)
Prepaid interest (262) (27)
---------- ---------- ----------
Net cash used in financing activities (17,009) (1,774) (9,094)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,351) 1,599 413
CASH AND CASH EQUIVALENTS, beginning of year 4,610 3,259 4,858
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 3,259 $ 4,858 $ 5,271
========== ========== ==========
</TABLE>
See notes to financial statements.
-34-
<PAGE>
GARDEN STATE CABLEVISION L.P.
STATEMENT OF PARTNERS' DEFICIT
(Dollars in thousands)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- -----
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 23,161 $ (82,330) $ (59,169)
Net loss (206) (20,350) (20,556)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 22,955 (102,680) (79,725)
Distributions to partners (17,757) (70,959) (88,716)
Net loss (138) (13,688) (13,826)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 5,060 (187,327) (182,267)
Net loss (108) (10,701) (10,809)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 4,952 $ (198,028) $ (193,076)
=========== =========== ===========
</TABLE>
See notes to financial statements.
-35-
<PAGE>
GARDEN STATE CABLEVISION L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND PARTNERS' INTERESTS
Formation and Business
Garden State Cablevision L.P. (the "Partnership"), a Delaware limited
partnership, was formed in 1989, to acquire, own, operate and maintain a cable
television system (the "System") servicing Camden, Burlington, Gloucester, Ocean
and Salem counties in New Jersey. As of December 31, 1997, the Partnership
served more than 208,000 subscribers and passed more than 297,000 homes.
The General Partners of the Partnership are Comcast Garden State, Inc., a wholly
owned subsidiary of Comcast Corporation ("Comcast"), and Lenfest Jersey, Inc.,
an affiliate of Lenfest Communications, Inc. ("Lenfest"). The Limited Partners
of the Partnership are AWACS Garden State, Inc., an indirect wholly owned
subsidiary of Comcast, and Lenfest Jersey, Inc.
Partners' Capital
Additional capital contributions may be requested from the partners in
proportion to each partner's percentage interest, if the General Partners
determine that the Partnership requires additional capital beyond the
Partnership's borrowing capacity.
Distribution Ratios
Net losses are allocated 1% to the General Partners and 99% to the Limited
Partners.
Partnership Agreement
Each Limited Partner may at any time, without the approval of any other partner,
transfer all of its Partnership interests to any of its affiliates, subject to
the maintenance of certain criteria. Remaining partners have the right of first
refusal to purchase the interests of a partner seeking to transfer ownership to
a third party.
-36-
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The estimated fair value amounts discussed in these notes to financial
statements have been determined by the Partnership using available market
information and appropriate methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value. The
estimates discussed herein are not necessarily indicative of the amounts that
the Partnership could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts. Such fair value estimates are based on
pertinent information available to management as of December 31, 1997 and 1996,
and have not been comprehensively reevaluated for purposes of these financial
statements since such dates.
The Partnership believes that the carrying value of all financial instruments,
including the aggregate carrying value of long-term debt, is a reasonable
estimate of fair value at December 31, 1996 and 1997. The fair value of
long-term debt was estimated using interest rates that would be currently
available to the Partnership for debt issuances of similar terms and remaining
maturities.
Cash Equivalents
Cash equivalents consist of bank commercial paper that is readily convertible to
cash and is recorded at cost, plus accrued interest, which approximates its
market value.
Prepaid Interest
The Partnership uses interest rate cap agreements to manage its exposure to
fluctuations in interest rates. Premiums associated with these instruments are
amortized to interest expense over their term.
The Partnership does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments. The credit risks
associated with the Partnership's derivative financial instruments are
controlled through the evaluation and monitoring of the creditworthiness of the
counterparties. Although the Partnership may be exposed to losses in the event
of nonperformance by the counterparties, the Partnership does not expect such
losses, if any, to be significant.
-37-
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are stated at cost (see note 4). Depreciation is
provided using the straight-line method over estimated useful lives, as follows:
Distribution plant and equipment 3 to 12 years
Converters 3 to 5 years
Other 3 to 20 years
Improvements that extend asset lives are capitalized; other repair and
maintenance charges are expensed as incurred. The cost and related accumulated
depreciation applicable to assets sold or retired are removed from the accounts
and the gain or loss on disposition is recognized in net loss.
Deferred Charges
Deferred charges consist principally of subscriber contracts, franchise
operating rights and fees, debt acquisition costs, organization costs and the
cost of the acquired business in excess of amounts allocated to specific assets
based on their fair values, and are being amortized on a straight-line basis
over their legal or estimated useful lives ranging from 8 to 40 years (see
note 5).
Valuation of Long-Lived Assets
The Partnership periodically evaluates the recoverability of its long-lived
assets, including property, plant and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on the
cash flows generated by the underlying assets or other determinants of fair
value.
Post Retirement Benefits Other Than Pensions
The Partnership accrues the estimated cost of retiree benefits earned during the
years the employee provides services. The Partnership continues to fund benefit
costs principally as incurred, with the retiree paying a portion of the costs.
The Partnership's liability for postretirement benefits is included in other
liabilities.
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed by
disconnecting services to customers who are delinquent.
Income Taxes
Income taxes have not been recorded in the accompanying financial statements as
they accrue directly to the partners.
-38-
<PAGE>
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to those classifications used in 1997.
3. SUPPLEMENTAL CASH FLOW DISCLOSURE
The Partnership made cash payments for interest of $19.8 million, $17.1 million
and $22.5 million in 1995, 1996 and 1997, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
------------
1996 1997
------------- -------------
<S> <C> <C>
Distribution plant and equipment $ 137,224 $ 141,954
Converters 33,402 34,042
Other 14,834 15,388
------------- -------------
185,460 191,384
Less accumulated depreciation (109,540) (107,521)
------------- -------------
$ 75,920 $ 83,863
============= =============
5. DEFERRED CHARGES
December 31,
------------
1996 1997
-------------- ------------
Subscriber contracts $ 148,712 $ 148,712
Franchise operating rights and fees 136,230 136,252
Other 14,566 14,633
------------- -------------
299,508 299,597
Less accumulated amortization (214,304) (243,659)
------------- -------------
$ 85,204 $ 55,938
============= =============
</TABLE>
6. LONG-TERM DEBT
On December 23, 1996, the Partnership amended its $300 million Credit Agreement
(the "1994 Credit Agreement") with various banks to a $360 million facility (the
"Amended Credit Agreement"). At that time, the Partnership borrowed additional
funds under the Amended Credit Agreement for the purpose of making cash
distributions, and the payment of deferred management and consulting fees to its
partners. Under the terms of the Amended Credit Agreement, scheduled principal
reductions are to commence on March 31, 1999 and extend through June 30, 2005.
-39-
<PAGE>
Interest rate options under the Amended Credit Agreement are periodically fixed
for defined terms based on one or more of the following rates, as agreed by the
Partnership and the banks:
Base rate (higher of federal funds rate plus 1/2% or prime) plus up to
1/2%.
Eurodollar Rate (Eurodollar Rate divided by a percentage equal to 1
minus the reserve requirement in effect) plus 1/2% to 1.625%.
The level of the preceding applicable margin is based upon the leverage ratio,
as defined. The Partnership also pays a commitment fee of 1/4% to 3/8% on the
unused principal which is based upon the leverage ratio, as defined. The loan is
secured by the ownership interests of the General Partners and the Limited
Partners in the assets of the Partnership. As of December 31, 1996 and 1997, all
borrowings under the Amended Credit Agreement were subject to the Eurodollar
Rate option resulting in weighted average interest rates of 7.10% and 7.15%,
respectively.
The Amended Credit Agreement requires 50% of the aggregate principal amount of
the loan outstanding to be hedged against interest rate risk for at least two
years. The Partnership currently maintains interest rate protection on $170
million of the loan which takes effect when the Base rate or Eurodollar interest
rate on the outstanding borrowings exceeds 7%. The total cost of the agreements
was capitalized and is being amortized over the two year terms of the
agreements.
The Amended Credit Agreement is subject to certain restrictive covenants, with
which the Partnership was in compliance as of December 31, 1997.
Based upon the outstanding borrowings as of December 31, 1997, maturities for
the four years after 1998 are as follows (dollars in thousands):
1999 $
2000 36,000
2001 45,000
2002 45,000
7. MANAGEMENT AND CONSULTING FEES
In connection with the Amended and Restated Agreement of Limited Partnership and
Amended Consulting Agreement, Comcast and Lenfest are each compensated for their
services as consultants at a fee equal to 3% of service income. Services include
providing the Partnership advice and consultation based on their industry
experience, knowledge and trained personnel. Payment of such fees is
subordinated to the prior payment of and provision for operating expenses and
capital requirements and pursuant to certain financial conditions as defined in
the Amended Credit Agreement.
In 1995, 1996 and 1997, the Partnership paid $2.7 million, $19.9 million and
$5.6 million of management and consulting fees to the Partners. The payments
made in 1996 include the payment of previously deferred management and
consulting fees. As of December 31, 1996 and 1997, accounts payable and accrued
expenses includes $750,000 and $1.6 million, respectively, of management and
consulting fees payable to the Partners.
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<PAGE>
8. 1992 CABLE ACT
On April 1, 1993, the Federal Communications Commission (the "FCC") adopted
regulations under the Cable Television Consumer Protection and Competition Act
of 1992 (the "1992 Cable Act") governing the rates charged to subscribers for
basic service and cable programming service, other than programming offered on a
per-channel or per-program basis. The FCC's rate regulations became effective on
September 1, 1993.
In June 1996, the FCC adopted an order approving a negotiated settlement of rate
complaints pending against the Partnership for cable programming service tiers
("CPSTs"), which provided approximately $1.6 million in refunds, plus interest,
being given in the form of bill credits, to approximately 198,000 of the
Partnership's cable subscribers. Approximately $1.9 million of bill credits for
such refunds, including interest, were issued through December 31, 1996, with
the balance of $74,000 issued during 1997. This FCC order resolved the
Partnership's cost-of-service cases for CPSTs covering the period September 1993
through December 1, 1995. As part of the negotiated settlement, the Partnership
agreed to forego certain inflation and external cost adjustments for systems
covered by its cost-of-service filing for CPSTs.
9. RELATED PARTY TRANSACTIONS
The Partnership has entered into agreements whereby affiliates of Lenfest and
Comcast provide certain cable television programming to the Partnership at rates
that are not more than the Partnership could obtain independently. For the years
ended December 31, 1995, 1996 and 1997, the Partnership charged to expense
approximately $12.3 million, $14.0 million, and $17.2 million, respectively,
under these agreements.
A subsidiary of Comcast provides the Partnership with the use of certain
computerized financial systems at a rate that may be more favorable than those
available from unrelated parties. The Partnership charged to expense $24,000 in
1995, 1996 and 1997 for such services.
In addition, the Partnership has acquired certain vendor services through
cooperative arrangements with affiliates of the Limited Partners. These services
include such items as legal services, insurance and association dues. The
amounts paid for these services are not more than the rates the Partnership
could obtain independently. Payments to affiliates of Lenfest Jersey, Inc.
totaled $88,000, $86,000 and $115,000 in 1995, 1996 and 1997, respectively.
Payments to affiliates of AWACS Garden State, Inc. were $234,000, $627,000 and
$415,000 in 1995, 1996 and 1997, respectively.
10. CONTINGENCIES
The Partnership is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or liquidity of the Partnership.
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<PAGE>
12. The Financial Statements Schedule is amended and restated in its entirety
as follows:
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries
We have audited in accordance with generally accepted auditing
standards, the consolidated balance sheets of Lenfest
Communications, Inc. and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash
flows for each of the years in the three-year period ended
December 31, 1997, and have issued our report thereon dated
March 4, 1998 (except as to the first paragraph of Note 20, as
to which the date is March 26, 1998), which is included in the
December 31, 1997, annual report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement
Schedule II. This financial statement schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statement taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
March 4, 1998
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<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Deductions - Balance
Beginning Costs and Bad Debts at End
of Year Expenses Written Off of Year
--------------- --------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET
ACCOUNTS:
Allowance for doubtful accounts
Year ended December 31, 1995 $ 775 $ 3,512 $ 3,347 $ 940
============== ============== ============== ==============
Year ended December 31, 1996 $ 940 $ 4,674 $ 3,629 $ 1,985
============== ============== ============== ==============
Year ended December 31, 1997 $ 1,985 $ 9,715 $ 8,777 $ 2,923
============== ============== ============== ==============
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
LENFEST COMMUNICATIONS, INC.
DATE: July 2, 1998 By: /s/ Maryann V. Bryla
----------------------------
Maryann V. Bryla
Treasurer (authorized officer
and Principal Financial Officer)
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