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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 33-96804
LENFEST COMMUNICATIONS, INC.
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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)
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
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of November 13, 1998: 158,896 shares of common
stock, $0.01 par value per share. All shares of the registrant's common stock
are privately held, and there is no market price or bid and asked price for said
common stock.
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LENFEST COMMUNICATIONS, INC.
Index
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Part I. Financial Information Page
Item 1. Financial Statements
Report on Review by Independent Certified Public Accountants 4
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and as of December 31, 1997 5
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three months and nine months ended September 30, 1998 (unaudited) and
September 30, 1997 (unaudited) 8
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 (unaudited) and September 30, 1997 (unaudited) 9
Notes to Condensed Consolidated Financial Statements (unaudited) 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 25
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
Substantially all of the Company's revenues are earned from customer
fees for cable television programming services, the sale of advertising,
commissions for products sold through home shopping networks and ancillary
services (such as rental of converters, remote control devices and
installations). Federal law and regulations, including the regulation of certain
aspects of the cable television industry, have affected adversely the Company's
ability to increase or restructure its rates for certain services. These
regulations are intended to limit future rate increases. See "Legislation and
Regulation" in the Company's Form 10-K, filed March 27, 1998, as amended.
As used herein, Adjusted EBITDA represents EBITDA (earnings before
interest expense, income taxes, depreciation and amortization) adjusted to
include cash distributions received from unconsolidated and unrestricted
affiliates. Adjusted EBITDA corresponds to the definition of "EBITDA" contained
in the Company's publicly held debt securities. Consequently, Adjusted EBITDA
and Adjusted EBITDA margin are presented for the convenience of the holders of
the Company's public debt securities and industry analysts. Adjusted 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
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
CONSOLIDATED RESULTS
Revenues increased $6.7 million, or 5.9%, to $119.0 million for the
quarter ended September 30, 1998 as compared to the corresponding 1997 period.
The increase was primarily due to internal customer growth and the rate
increases implemented within the past year associated with the Company's Core
Cable Television Operations.
Service Expenses increased 41.1% to $11.5 million for the quarter ended
September 30, 1998 compared to the corresponding 1997 period. The increase was
due to costs associated with the Company's Core Cable Television Operations.
Programming Expenses increased 18.4% to $26.6 million for the quarter
ended September 30, 1998 compared to the corresponding 1997 period. The increase
was due to increases in programming costs associated with the Company's Core
Cable Television Operations.
Selling, General and Administrative Expense decreased $2.2 million, or
8.0%, to $24.7 million for the quarter ended September 30, 1998 compared to the
corresponding 1997 period. The decrease was primarily due to decreases in costs
associated with the Company's Core Television Operations.
Direct Costs Non-Cable decreased 1.4% to $5.0 million for the quarter
ended September 30, 1998 compared to the corresponding 1997 period. The decrease
was primarily due to the elimination of certain activities conducted by the
Company's Non-Cable Operations.
Depreciation and Amortization Expense increased 1.2% to $32.6 million
for the quarter ended September 30, 1998 compared to the corresponding 1997
period. This increase is primarily associated with the Company's Non-Cable
Operations.
Adjusted EBITDA increased 2.0% to $52.1 million for the quarter ended
September 30, 1998 compared to the corresponding 1997 period. The Adjusted
EBITDA margin decreased to 43.8% in the 1998 period compared to 45.4% for 1997
period. These changes were primarily related to the Company's Core Cable
Television Operations.
Interest Expense decreased 3.4% to $29.9 million due to a decrease in
average indebtedness to $1,306.5 million for the quarter ended September 30,
1998 from $1,372.5 million for the corresponding 1997 period.
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Loss from continuing operations before income tax decreased 81.8% to
$8.6 million. The decrease was attributable to the 1997 recognition of a loss on
Australis Media securities.
The Company has recorded a net deferred tax asset of $80.3 million, net
of a valuation allowance of $10.0 million, reflecting the estimated benefit of
approximately $342 million in loss carryforwards, which expire in varying
amounts between the years 2000 - 2012. Realization depends on generating
sufficient taxable income before expiration of the loss carryforwards. Although
realization is not assured, the Company believes that commencing in 2000, it
will begin to generate taxable income as a result of increasing revenues, the
anticipated elections of slower tax depreciation methods and anticipated
declines in amortization deductions. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. See Note 18
of the Company's Consolidated Financial Statements included in the Company's
Form 10-K, dated March 27, 1998, as amended, for the minimum amounts of taxable
income required each year for the Company to fully utilize its net operating
losses for such year until such losses expire.
CORE CABLE TELEVISION OPERATIONS
Revenues increased 3.6% to $108.0 million for the quarter ended
September 30, 1998 compared to the corresponding 1997 period. The Company
experienced internal basic customer growth of 2.5% for the twelve-month period
ended September 30, 1998. Revenues for basic and CPS tiers, customer equipment,
and installation ("regulated services") increased 12.3% or $9.5 million compared
to the corresponding 1997 period. This increase was primarily attributable to
rate increases for regulated services. Non-regulated service revenue decreased
21.8% or $5.8 million for the quarter ended September 30, 1998 compared to the
corresponding 1997 period. This decrease was primarily a result of the
discontinuation of the Prism regional sports network service which occurred as
of October 1, 1997.
Service Expenses increased 41.1% to $11.5 million for the quarter ended
September 30, 1998 compared to the corresponding 1997 period. These expenses are
related to technical salaries and general operating expenses. The increase was
primarily associated with customer installation, plant maintenance costs and the
continuing expense related to the consolidation efforts of the Company.
Programming Expenses increased 18.4% to $26.6 million for the quarter
ended September 30, 1998 compared to the corresponding 1997 period. The
programming expense increase was due to increased network programming costs and
increased number of customers associated with the basic and CPS tier services.
Selling, General and Administrative Expense decreased $5.2 million, or
23.2%, to $17.2 million for the quarter ended September 30, 1998 compared to the
corresponding 1997 period. The decrease was primarily due to decreases
associated with professional and consulting fees related to the consolidation
efforts of the Company.
Depreciation and Amortization Expense increased 0.2% to $31.3 million
for the quarter ended September 30, 1998 compared to the corresponding 1997
period.
Adjusted EBITDA increased 0.8% to $53.5 million for the quarter ended
September 30, 1998 compared to the corresponding 1997 period. The Adjusted
EBITDA margin decreased to 49.5% in the 1998 period compared to 50.9% for 1997
period. The decrease was primarily attributable to increased service and
programming expenses.
NON-CABLE INVESTMENTS
Radius Communications
Revenues, prior to payment of affiliate fees, increased 16.8% to $9.3
million for the quarter ended September 30, 1998 compared to the corresponding
1997 period.
Operating Expenses increased 28.1% to $4.7 million for the quarter
ended September 30, 1998 compared to the corresponding 1997 period. The increase
was due to increased selling expenses. Affiliate fees increased 7.5% to $3.8
million of which $2.6 million was paid to the Company. Affiliate fees paid to
the Company are eliminated in consolidation.
Adjusted EBITDA was $0.8 million for both of the quarters ended
September 30, 1998 and 1997.
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Depreciation and Amortization Expense increased by 17.4% to $0.7
million for the quarter ended September 30, 1998 compared to the corresponding
1997 period. The increase was due to the continued deployment of digital
advertising insertion equipment used for operations and the expansion of sales
offices.
Operating Loss was $0.1 million for both of the quarters ended
September 30, 1998 and 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
CONSOLIDATED RESULTS
Revenues increased $14.9 million, or 4.5%, to $347.0 million for the
nine-month period ended September 30, 1998 as compared to the corresponding 1997
period. The increase was primarily due to internal customer growth and the rate
increases implemented within the past year associated with the Company's Core
Cable Television Operations.
Service Expenses increased 32.1% to $34.4 million for the nine-month
period ended September 30, 1998 compared to the corresponding 1997 period. The
increase was due to costs associated with the Company's Core Cable Television
Operations.
Programming Expenses increased 11.6% to $76.9 million for the
nine-month period ended September 30, 1998 compared to the corresponding 1997
period. The increase was due to increases in programming costs associated with
the Company's Core Cable Television Operations.
Selling, General and Administrative Expense decreased $1.4 million, or
1.8%, to $74.2 million for the nine-month period ended September 30, 1998
compared to the corresponding 1997 period. The decrease was primarily related to
decreases in costs associated with the Company's Core Cable Television
Operations.
Direct Costs Non-Cable decreased 13.5% to $13.5 million for the
nine-month period ended September 30, 1998 compared to the corresponding 1997
period. The decrease was primarily due to the elimination of certain activities
conducted by the Company's Non-Cable Operations.
Depreciation and Amortization Expense increased 5.0% to $101.0 million
for the nine-month period ended September 30, 1998 compared to the corresponding
1997 period. This increase is primarily associated with increased capital
expenditures related to the Company's Core Cable Television Operations.
Adjusted EBITDA increased 1.6% to $151.0 million for the nine-month
period ended September 30, 1998 compared to the corresponding 1997 period. The
Adjusted EBITDA margin decreased to 43.5% in the 1998 period compared to 44.7%
for 1997 period. These changes were primarily related to the Company's Core
Cable Television Operations.
Interest Expense decreased 1.2% to $90.7 million due to a decrease in
average indebtedness to $1,307.5 million for the nine-month ended September 30,
1998 from $1,386.5 million for the corresponding 1997 period.
Loss from continuing operations before income tax decreased 63.0% to
$27.9 million. The decrease was attributable to the 1997 recognition of a loss
on Australis Media securities.
CORE CABLE TELEVISION OPERATIONS
Revenues increased 3.1% to $318.1 million for the nine-month period
ended September 30, 1998 compared to the corresponding 1997 period. The Company
experienced internal basic customer growth of 2.5% for the twelve-month period
ended September 30, 1998. Revenues for basic and CPS tiers, customer equipment,
and installation ("regulated services") increased 11.4% or $25.9 million
compared to the corresponding 1997 period. This increase was primarily
attributable to rate increases for regulated services. Non-regulated service
revenue decreased 20.4% or $16.5 million for the nine-month period ended
September 30, 1998 compared to the corresponding 1997 period. This decrease was
primarily a result of the discontinuation of the Prism regional sports network
service which occurred as of October 1, 1997.
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Service Expenses increased 32.1% to $34.4 million for the nine-month
period ended September 30, 1998 compared to the corresponding 1997 period. These
expenses are related to technical salaries and general operating expenses. The
increase was primarily associated with customer installation, plant maintenance
costs and the continuing expense related to the consolidation efforts of the
Company.
Programming Expenses increased 11.6% to $76.9 million for the
nine-month period ended September 30, 1998 compared to the corresponding 1997
period. The programming expense increase was primarily due to increased network
programming costs and increased number of customers associated with the basic
and CPS tier services.
Selling, General and Administrative Expense decreased 14.2% to $53.1
million for the nine-month period ended September 30, 1998 compared to the
corresponding 1997 period. These expenses are associated with salaries,
facility, and marketing costs. The decrease was primarily due to decreases
associated with professional and consulting fees related to the consolidation
efforts of the Company.
Depreciation and Amortization Expense increased 5.5% to $97.8 million
for the nine-month period ended September 30, 1998 compared to the corresponding
1997 period.
Adjusted EBITDA of $156.6 million was unchanged for the nine-month
period ended September 30, 1998 compared to the corresponding 1997 period. The
Adjusted EBITDA margin decreased to 49.2% in the 1998 period compared to 50.7%
for 1997 period. The decrease was primarily attributable to increased service
and programming expenses.
NON-CABLE INVESTMENTS
Radius Communications
Revenues, prior to payment of affiliate fees, increased 14.9% to $27.8
million for the nine months ended September 30, 1998 compared to the
corresponding 1997 period.
Operating Expenses increased 20.3% to $13.2 million for the nine months
ended September 30, 1998 compared to the corresponding 1997 period. The increase
was due to increased selling expenses. Affiliate fees increased 5.9% to $11.2
million of which $5.9 million was paid to the Company. Affiliate fees paid to
the Company are eliminated in consolidation.
Adjusted EBITDA was $3.3 million for the nine months ended September
30, 1998 compared to $2.6 million for the corresponding 1997 period.
Depreciation and Amortization Expense increased by 12.7% to $2.1
million for the nine months ended September 30, 1998 compared to the
corresponding 1997 period. The increase was due to the continued deployment of
digital advertising insertion equipment used for operations.
Operating Income was $1.2 million for the nine months ended September
30, 1998 compared to $0.4 million for the corresponding 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's businesses require cash for operations, debt service,
capital expenditures and acquisitions. To date, cash requirements have been
funded by cash flow from operations and borrowings.
Financing Activities. At September 30, 1998, the Company had aggregate
total indebtedness of approximately $1,281.3 million. The Company's senior
indebtedness of $839.0 million consisted of: (i) $836.3 million of Senior Notes;
and (ii) obligations under capital leases of approximately $2.7 million. At
September 30, 1998, the Company had approximately $442.3 million of Senior
Subordinated Notes. The Senior Subordinated Notes are general unsecured
obligations of the Company subordinate in right of payment to all present and
future senior indebtedness of the Company.
On August 4, 1998, the Company amended and restated its existing bank
credit facility (as amended and restated, the "Bank Credit Facility"). The Bank
Credit Facility establishes an unsecured revolving credit facility under
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which the Company may borrow up to $300 million, which can be increased to $550
million under certain conditions. The Company intends to use the availability
under the Bank Credit Facility for operations, capital expenditures, general
corporate purposes and possibly for future acquisitions of cable systems. The
commitments under the Bank Credit Facility expire on March 31, 2006. As of
September 30, 1998, no amounts were outstanding under the Bank Credit Facility.
Loans outstanding under the Bank Credit Facility bear interest at
floating rates. The Bank Credit Facility contains customary covenants, including
restrictive covenants, which impose certain limitations on the Company and its
wholly-owned cable operating subsidiaries, including, among other things,
incurring additional indebtedness, the payment of dividends, the repurchase of
stock, the making of certain payments and purchases, the making of acquisitions
and investments, the creation of certain liens, disposing or acquiring assets,
sale-leaseback transactions, and transactions with affiliates. The Bank Credit
Facility also includes financial covenants requiring the Company to maintain
certain financial ratios at specified levels. The Bank Credit Facility also
contains customary default provisions, including nonpayment of principal,
interest, fees and other amounts when due, violation of covenants, failure of
representations and warranties to be true and correct in all material respects
when made, cross defaults and cross acceleration to other debt obligations,
bankruptcy events, unsatisfied judgments in excess of specified amounts and
change of control.
Operations. Cash flow generated from continuing operations, excluding
changes in operating assets and liabilities that result from timing issues and
considering only adjustments for non-cash charges, was approximately $57.7
million for the nine month period ended September 30, 1998 compared to
approximately $56.3 million for the nine month period ended September 30, 1997.
During the nine month period ended September 30, 1998, the Company was required
to make interest payments of approximately $67.2 million on outstanding debt
obligations, whereas in the same period in the prior year, the Company was
required under its then existing debt obligations to make interest payments of
$68.0 million.
Future minimum lease payments under all capital leases and
non-cancelable operating leases for each of the years 1998 through 2001 are
$5.7million, $5.2 million, $4.7 million and $3.0 million, respectively.
On September 30, 1998, the Company purchased from H. F. Lenfest and
Marguerite Lenfest the three properties owned by them which had been leased to
subsidiaries of the Company. Suburban Cable TV Co. Inc. purchased two of the
properties for an aggregate price of approximately $1.5 million, and Starnet,
Inc. purchased the third property for a price of approximately $4.5 million. The
purchase price for each of the properties was determined as a result of an
independent appraisal done for the Company by Cushman & Wakefield of
Pennsylvania, Inc.
The Company has recorded a net deferred tax asset of $80.3 million, net
of a valuation allowance of $10.0 million, reflecting the estimated benefit of
approximately $342 million in loss carryforwards, which expire in varying
amounts between the years 2000 - 2012. Realization depends on generating
sufficient taxable income before expiration of the loss carryforwards. Although
realization is not assured, the Company believes that commencing in 2000, it
will begin to generate taxable income as a result of increasing revenues, the
anticipated elections of slower tax depreciation methods and anticipated
declines in amortization deductions. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced. See Note 18
of the Company's Consolidated Financial Statements included in the Company's
Form 10-K, dated March 27, 1998, as amended, for the minimum amounts of taxable
income required each year for the Company to fully utilize its net operating
losses for such year until such losses expire.
In November 1994, H.F. Lenfest and TCI International, Inc. jointly and
severally guaranteed $67.0 million in program license obligations of the
distributor of movie programming for Australis Media Ltd. ("Australis"). As of
September 30, 1998, the Company believes the amount subject to the guarantee
under the license agreements was approximately $32.2 million. The Company has
agreed to indemnify Mr. Lenfest against loss from such guaranty to the fullest
extent permitted under the Company's debt obligations. Under the terms of the
Bank Credit Facility, however, Mr. Lenfest's claims for indemnification are
limited to $33.5 million. Effective March 6, 1997, as subsequently amended, Mr.
Lenfest released the parent Company and its cable operating subsidiaries from
their indemnity obligation until the last to occur of January 1, 1999 and the
last day of any fiscal quarter during which the Company could incur the
indemnity obligation without violating the terms of the Bank Credit Facility.
Certain of the Company's non-cable subsidiaries have agreed to indemnify Mr.
Lenfest for his obligations under the guarantee. As a result, the Company will
remain indirectly liable under the non-cable subsidiaries' indemnity.
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As disclosed in the Company's report filed on Form 10-Q for the period ended
June 30, 1998, the Company believes that Mr. Lenfest's guarantee will not be
called, and, consequently, the Company's non-cable subsidiaries will not be
required to pay any amounts to Mr. Lenfest pursuant to the indemnification. As
of the date hereof, there has been no demand for payment under the guarantee of
the program license obligations.
Capital Expenditures. During 1998, the Company expects to make
approximately $100 million of capital expenditures, of which approximately $90.0
million will be spent for capital expenditures for its Core Cable Television
Operations. These capital expenditures will be for the upgrading of certain of
its cable television systems, including wide deployment of fiber optics,
maintenance including plant extensions, installations, and other fixed assets as
well as other capital projects associated with implementing the Company's
clustering strategy. The amount of such capital expenditures for years
subsequent to 1998 will depend on numerous factors, many of which are beyond the
Company's control, including responding to competition and increasing capacity
to handle new product offerings in affected cable television systems. The
Company anticipates that capital expenditures for years subsequent to 1998 will
continue to be significant.
Resources. Management believes, based on its current business plans,
that the Company has sufficient funds available from operating cash flow and
from borrowing capacity under the Bank Credit Facility to fund its operations,
capital expenditure plans and debt service. To the extent the Company seeks
additional acquisitions, it may need to obtain additional financing. However,
the Company's ability to borrow funds under the Bank Credit Facility requires
that the Company be in compliance with certain financial ratios at specified
levels or obtain the consent of the lenders thereunder to a waiver or amendment
of the applicable financial ratios. As of September 30, 1998, Management
believes that the Company was in compliance with such financial ratios.
Year 2000
During fiscal 1998, the Company began a review of its equipment, computer
systems, headend distribution systems and related software to identify those
which might malfunction due to a misidentification of the Year 2000. A committee
consisting of members of senior management from various disciplines within the
Company has been formed and is meeting regularly to discuss the steps that must
be taken to deal with any potential Year 2000 issues. The Company is utilizing
internal resources to identify, correct or reprogram, and test systems for Year
2000 readiness.
Most of the Company's equipment, customer-related computer systems and data
bases are purchased, or licensed from third parties. The Company has requested
those third parties to advise the Company as to whether they anticipate
difficulties in addressing Year 2000 problems and, if so, the nature of such
difficulties. The Company is also working with others in the industry using the
same or similar equipment, systems, or software to determine the appropriate
steps necessary to address anticipated difficulties.
The Company has completed an inventory of all equipment, hardware and software
used in the enterprise including the equipment used in the transmission and
reception of all signals and is in the process of identifying items that need to
be upgraded or replaced. The Company is also monitoring industry-wide efforts
with respect to signal delivery to its cable distribution plant and is working
with others in the industry to address potential solutions.
Management of the Company has not finally determined the cost associated with
its Year 2000 readiness efforts and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material. There can be no assurance that the Company's systems or systems of
other companies on which the Company relies will be converted in time or that
any such failure to convert by the Company or another company will not have an
adverse effect on the Company's financial condition or position.
After evaluating its internal compliance efforts as well as the compliance of
third parties as described above by the end of calendar year 1998, the Company
will develop during 1999 appropriate contingency plans to address the situations
in which various systems of the Company, or of third parties with which the
Company does business, are not Year 2000 compliant. In addition, the Company is
currently participating in an industry wide effort to address Year 2000 issues
with similarly situated companies, the goal of which is to develop contingency
plans which address not only the Company's issues but that of the industry as a
whole.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130") establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. In accordance with the provisions of SFAS No. 130, the
Company has adopted the pronouncement, effective January 1, 1998, by reporting
net consolidated comprehensive income (loss) in the Consolidated Statements of
Operations and Comprehensive Income (Loss). Prior periods have been restated for
comparative purposes as required.
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The FASB has also recently issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 established standards for the way that public business enterprises report
information about operating segments in interim financial reports issued to
stockholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt SFAS 131 by December 31, 1998. The adoption of SFAS No. 131 will not have
a significant impact on the Company's Consolidated Financial Statements and the
related footnotes.
The FASB has also recently issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post Retirement Benefits" ("SFAS No. 132"). SFAS No.
132 establishes standards for the way businesses disclose pension and other post
retirement benefit plans. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997. The Company adopted SFAS No. 132 effective January 1,
1998. Financial statement disclosures for prior periods do not require
restatement since the adoption of SFAS No. 132 does not have a significant
impact on the Company's financial statement disclosures.
The FASB has also recently issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for fiscal quarters of fiscal
years beginning after June 15, 1999. The Company has not yet adopted SFAS No.
133.
The American Institute of Certified Public Accountants ("AICPA")
recently issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
defines which costs of computer software developed or obtained for internal use
are capital and which costs are expenses. SOP 98-1 is effective for fiscal years
beginning after December 15, 1998. Earlier application is encouraged. The
Company has not yet adopted SOP 98-1.
The AICPA recently issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that entities
expense start-up costs and organization costs as they are incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged. The Company has adopted SOP 98-1 effective January 1,
1998. The adoption of SOP 98-5 does not have a significant impact on the
Company's Consolidated Financial Statements and the related footnotes.
Inflation
The net impact of inflation on operations has not been material in the
last three years due to the relatively low rates of inflation during this
period. If the rate of inflation increases the Company may increase customer
rates to keep pace with the increase in inflation, although there may be timing
delays.
Part II. Other Information
Item 5. Other Information
On October 28, 1998, the previously disclosed insider trading suit by
the Securities and Exchange Commission against H. F. Lenfest and Marguerite
Lenfest in the United States Court for the Eastern District of Pennsylvania was
dismissed by the trial judge.
Item 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits.
Exhibit
Number Title or Description
The following Exhibits are furnished as part of this Report:
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*2.1 Amended and Restated Asset Exchange Agreement, dated September 8, 1995, between LenComm, Inc. and Lenfest West,
Inc. and Heritage Cablevision of Delaware, Inc.
*++++2.2 Asset Purchase Agreement, dated as of May 9, 1995, by and between TCI Communications Inc. and Sammons
Communications of New Jersey, Inc., Oxford Valley Cablevision, Inc., Sammons Communications of Pennsylvania,
Inc., NTV Realty, Inc., Capital Telecommunications, Inc. and AC Communications, Inc.
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*2.3 Assignment and Assumption Agreement, dated as of June 1, 1995, among TCI Communications, Inc., TKR Cable Company
and the Company.
*2.4 Asset Purchase Agreement, dated as of September 7, 1995, by and between Lenfest Atlantic, Inc. and Tri-County
Cable Television Company.
*2.5 Letter Agreement, dated July 13, 1995, between Suburban Cable TV Co., Inc., and Service Electric Cable TV, Inc.
*2.6 Letter Agreement, dated August 11, 1995, between Suburban Cable TV Co., Inc., and Service Electric Cablevision,
Inc.
***2.7 Assignment and Assumption Agreement, dated as of February 16, 1996, by and between Heritage Cablevision of
Delaware, Inc. and Lenfest New Castle County, a Delaware general partnership.
***2.8 Bill of Sale, Assignment and Assumption and Release, dated as of February 16, 1996, by and among Lenfest
New Castle County, Heritage Cablevision of Delaware, Inc. and The World Company.
+2.9 Asset Purchase Agreement, dated March 28, 1996, between Cable TV Fund 14-A, Ltd. and Lenfest Atlantic, Inc.
+++3.1 Restated Certificate of Incorporation of the Company.
+++3.2 Amended and Restated Bylaws of the Company.
*4.1 Form of $700,000,000 8 3/8% Senior Note due 2005.
**4.2 Indenture between the Company and The Bank of New York, dated as of November 1, 1995.
+++4.3 Indenture, dated as of June 15, 1996, between the Company and The Bank of New York.
+++4.4 Form of Certificated Note, dated June 27, 1996, between the Company and Salomon Brothers Inc. (In accordance with
Item 601 of Regulation S-K similar Notes between the Company and Salomon Brothers Inc. have not been filed because
they are identical in all material respects to the filed exhibit.)
+++4.5 Form of 10 1/2% Senior Subordinated Note, dated June 27, 1996, in the principal sum of $296,700,000.
+++4.6 Registration Agreement, dated as of June 20, 1996, between the Company and Salomon Brothers Inc., Toronto
Dominion Securities (USA) Inc., CIBC Wood Gundy Securities Corp. and NationsBanc Capital Markets, Inc.
####4.7 Registration Agreement, dated January 30, 1998, between the Company, Salomon Brothers Inc. and NationsBanc
Montgomery Securities LLC.
####4.8 Indenture, dated as of February 5, 1998, between the Company and The Bank of New York relating to the $150,000,000
7 5/8% Senior Notes due 2008.
####4.9 Form of $150,000,000 7 5/8% Senior Notes due 2008. (In accordance with Item 601 of Regulation S-K similar notes
between the same parties, which reference CUSIP No. 526055 AF 5 and CUSIP No. U52547 AA 1 have not been filed
because they are identical in all material respects to the filed exhibit.)
####4.10 Indenture, dated as of February 5, 1998, between the Company and The Bank of New York relating to the $150,000,000
8 1/4% Senior Subordinated Notes due 2008.
####4.11 Form of $150,000,000 8 1/4% Senior Subordinated Notes due 2008. (In accordance with Item 601 of Regulation S-K
similar notes between the same parties which reference CUSIP No. U52547 AB 9 and CUSIP No. 526055 AH 1 have not
been filed because they are identical in all material respects to the filed exhibit.)
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
* ++++10.1 Programming Supply Agreement, effective as of September 30, 1986, between Satellite Services, Inc. and the
Company.
*10.2 Supplemental Agreement, dated December 15, 1981, by and between TCI Growth, Inc., H.F. Lenfest, Marguerite Lenfest
and the Company and Joinder Agreement executed by LMC Lenfest, Inc.
*10.3 Amendment to Supplemental Agreement, dated May 4, 1984 between the Company and TCI Growth, Inc.
*10.4 Agreement, dated July 1, 1990, between H.F. Lenfest, Marguerite B. Lenfest, Diane A. Lenfest, H. Chase Lenfest,
Brook J. Lenfest and the Lenfest Foundation, Tele-Communications, Inc. and Liberty Media Corporation.
*10.5 Agreement and Consent, dated as of November 1, 1990, by and among TCI Development Corporation, TCI Holdings, Inc.,
TCI Liberty, Inc., Liberty Cable, Inc., H.F. Lenfest, Marguerite B. Lenfest, H. Chase Lenfest, Brook J. Lenfest,
Diane A. Lenfest and the Company.
*10.6 Letter Agreement, dated as of December 18, 1991, among Liberty Media Corporation, the Company, Marguerite B.
Lenfest, Diane A. Lenfest, H. Chase Lenfest, Brook J. Lenfest and the Lenfest Foundation.
*10.7 Irrevocable Proxies of H. Chase Lenfest, Diane A. Lenfest and Brook J. Lenfest, each dated March 30, 1990.
*10.8 Partnership Agreement of L-TCI Associates, dated April 1993, between Lenfest International, Inc. and UA-France,
Inc.
*10.9 Stock Pledge Agreement, dated May 28, 1993, between Lenfest York, Inc. and CoreStates Bank, N.A., as Collateral
Agent.
*10.10 Pledge Agreement, dated July 29, 1994, between Lenfest Raystay Holdings, Inc. and Farmers Trust Company as
Collateral Agent.
*++++10.11 Agreement, dated September 30, 1986, between the Company and Tele-Communications, Inc.
*10.12 Agreement for the Sale of Advertising on Cable Television Stations, dated as of November 25, 1991 between Suburban
Cable TV Co. Inc. and Cable AdNet Partners.
+10.13 Agreement, dated as of February 29, 1996, in favor of the Company by H.F. Lenfest.
+10.14 Sublease Agreement, dated March 21, 1996, between Suburban Cable TV Co. Inc. and Surgical Laser Technologies, Inc.
##10.15 Letter, dated March 6, 1997, from H. F. Lenfest to the Company.
###10.16 Agreements, dated as of June 5, 1997, between H. F. Lenfest and Lenfest Jersey, Inc., Lenfest York, Inc., Lenfest
Raystay, Inc. and Lenfest MCN, Inc. (formerly, MicroNet, Inc.).
####10.17 Letter, dated March 26, 1998 (effective September 30, 1997), from H. F. Lenfest to the Company.
!10.18 Form of Second Amendment, dated as of January 27, 1998, to Credit Agreement, dated as of June 27, 1996, by and
among the Company, The Toronto-Dominion Bank, PNC Bank, National Association and NationsBank of Texas, N.A.,
as Arranging Agents, the Lenders and Toronto Dominion (Texas), Inc. as Administrative Agent.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
!10.19 Amended and Restated Loan Agreement, dated as August 4, 1998, among Lenfest Communications, Inc., a certain Lead
Arranger, certain Arranging Agents, a certain Documentation Agent, a certain Syndication Agent, the Lenders, and a
certain Administrative Agent.
27. Financial Data Schedule.
- - --------------
* Incorporated by reference to the Company's Registration Statement on Form S-1, No. 33-96804, declared effective by
the Securities and Exchange Commission on November 8, 1995.
** Incorporated by reference to the Company's Report on Form 10-Q, dated December 22, 1995, for the quarter ended
September 30, 1995.
*** Incorporated by reference to the Company's Report on Form 8-K, dated February 26, 1996.
+ Incorporated by reference to the Company's Report on Form 10-K, dated March 29, 1996, for the year ended December
31, 1995.
+++ Incorporated by reference to the Company's Registration Statement on Form S-4, No. 333-09631, dated August
6, 1996.
++++ Confidential portions have been omitted pursuant to Rule 406 and filed separately with the Commission.
## Incorporated by reference to the Company's Report on Form 10-K, dated March 22, 1997, for the year ended December
31, 1996.
### Incorporated by reference to the Company's Report on Form 10-Q, dated August 14, 1997, for the quarter ended June
30, 1997.
#### Incorporated by reference to the Company's Report on Form 10-K, dated March 27, 1998, for the year ended December
31, 1997.
! Incorporated by reference to the Company's Registration Statement on Form S-4, as amended, No. 333-51589, dated
May 1, 1998.
</TABLE>
(b) Reports on Form 8-K.
None.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LENFEST COMMUNICATIONS, INC.
DATE: November 13, 1998 By: /s/ Maryann V. Bryla
--------------------
Maryann V. Bryla
Senior Vice President and Treasurer (authorized
officer and Principal Financial Officer)
<PAGE>
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Lenfest Communications, Inc. and Subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of
Lenfest Communications, Inc. and subsidiaries as of September 30, 1998, and the
related consolidated statements of operations and comprehensive income (loss)
for the three month and nine month periods ended September 30, 1998 and 1997,
and the consolidated statements of cash flows for the nine months ended
September 30, 1998 and 1997, included in the accompanying Securities and
Exchange Commission Form 10-Q for the period ended September 30, 1998. These
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the condensed consolidated financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year then ended (not presented herein). In our report
dated March 4, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ Pressman Ciocca Smith LLP
- - -----------------------------
Pressman Ciocca Smith LLP
Hatboro, Pennsylvania
November 2, 1998
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
-------------- -------------
(Unaudited) (*)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,039 $ 15,623
Marketable securities 7,721 14,452
Accounts receivable, trade and other, less allowance for
doubtful accounts of $3,007 in 1998 and $2,923 in 1997 22,079 23,206
Inventories 1,553 2,153
Prepaid expenses 4,143 2,960
Property and equipment, net of accumulated depreciation
of $417,554 in 1998 and $359,125 in 1997 423,178 413,787
Investments, principally in affiliates, and related receivables 54,182 56,881
Goodwill, net of amortization of $31,409 in 1998 and
$28,594 in 1997 70,320 73,136
Deferred franchise costs, net of amortization of $218,166 in
1998 and $186,027 in 1997 474,949 507,023
Other intangible assets, net of amortization of $14,342 in 1998
and $16,668 in 1997 20,176 28,341
Deferred Federal tax asset, net 80,336 74,251
Net assets of discontinued operations - 2,660
Other assets 5,883 5,247
------------- -------------
$ 1,181,559 $ 1,219,720
============= =============
</TABLE>
(*) Condensed from audited financial statements.
See independent certified public accountants' review report and accompanying
notes.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
------------- --------------
(Unaudited) (*)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Notes payable and obligations under capital leases $ 1,281,365 $ 1,295,306
Accounts payable and accrued expenses - unrelated parties 81,869 50,867
Accounts payable - affiliate 22,075 26,304
Customer service prepayments and deposits 6,635 6,984
Deferred interest 6,658 7,063
Deferred state tax liability (net) 9,405 9,580
Investment in Garden State Cablevision, L.P. 76,189 77,880
------------- -------------
TOTAL LIABILITIES 1,484,196 1,473,984
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 158,896 shares authorized,
issued and outstanding 2 2
Additional paid-in capital 50,747 50,747
Accumulated deficit (338,017) (305,512)
Accumulated other comprehensive income (loss) arising from unrealized net
gains (losses) on marketable securities,
net of deferred taxes of $109 in 1998 and $269 in 1997 (15,369) 499
------------- -------------
(302,637) (254,264)
-------------- -------------
$ 1,181,559 $ 1,219,720
============== =============
</TABLE>
(*) Condensed from audited financial statements.
See independent certified public accountants' review report and accompanying
notes.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES $ 119,018 $ 112,351 $ 347,009 $ 332,136
OPERATING EXPENSES
Service 11,502 8,151 34,413 26,057
Programming - from affiliate 17,652 15,767 52,360 47,048
Programming - other cable 8,963 6,718 24,520 21,837
Selling, general and administrative 24,701 26,857 74,153 75,510
Direct costs - non-cable 4,983 5,052 13,504 15,617
Depreciation 21,265 19,710 63,714 57,828
Amortization 11,300 12,461 37,332 38,410
----------- ------------ ------------ -------------
100,366 94,716 299,996 282,307
----------- ------------ ------------ -------------
OPERATING INCOME 18,652 17,635 47,013 49,829
OTHER INCOME (EXPENSE)
Interest expense (29,895) (30,956) (90,706) (91,820)
Equity in net income (losses) of unconsolidated
affiliates 1,726 (2,503) 1,686 (3,321)
Gain on disposition of partnership interest - - 11,489 -
(Loss) on Australis Media Ltd. securities - (32,457) - (32,457)
Other income and expense (net) 895 878 2,593 2,236
----------- ------------ ------------ -------------
(27,274) (65,038) (74,938) (125,362)
----------- ------------ ------------ -------------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (8,622) (47,403) (27,925) (75,533)
INCOME TAX BENEFIT (EXPENSE) (NET) (675) 5,308 2,780 13,434
----------- ------------ ------------ -------------
(LOSS) FROM CONTINUING OPERATIONS (9,297) (42,095) (25,145) (62,099)
DISCONTINUED OPERATIONS - (117) - 1,153
----------- ------------ ------------ -------------
(LOSS) BEFORE EXTRAORDINARY LOSS (9,297) (42,212) (25,145) (60,946)
EXTRAORDINARY LOSS
Early extinguishments of debt, net of applicable
income taxes of $1,645 (4,299) - (7,360) -
----------- ------------ ------------ -------------
NET (LOSS) (13,596) (42,212) (32,505) (60,946)
OTHER COMPREHENSIVE INCOME, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
the period (13,760) (19,772) (13,486) (20,837)
Less: reclassification adjustment for (gains)
losses included in net loss - 32,189 (2,382) 32,222
----------- ------------ ------------ -------------
(13,760) 12,417 (15,868) 11,385
----------- ------------ ------------ -------------
COMPREHENSIVE (LOSS) $ (27,356) $ (29,795) $ (48,373) $ (49,561)
=========== ============ ============ =============
</TABLE>
See independent certified public accountants' review report and accompanying
notes.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1998 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (32,505) $ (60,946)
(Income) from discontinued operations - (1,153)
Extraordinary loss 7,360 -
------------- -------------
Loss from continuing operations (25,145) (62,099)
Adjustments to reconcile net (loss) to net cash provided
by operating activities
Depreciation and amortization 101,046 96,238
Accretion of debt discount 1,404 1,389
Accretion of deferred interest (405) -
Accretion of discount on marketable securities (net) - (477)
Net (gains) losses on sales of marketable securities (3,664) (361)
Loss on Australis Media Ltd. securities - 32,457
(Gain) on disposition of partnership interest (11,489) -
Deferred income tax (benefit) (4,455) (13,250)
Net (gains) losses on sale/disposal of property and equipment 2,078 (28)
Equity in net (income) losses of unconsolidated affiliates (1,686) 3,321
Minority interest - (880)
Changes in operating assets and liabilities, net of effects
from acquisitions
Accounts receivable 1,127 (4,982)
Inventories 600 (824)
Prepaid expenses (1,183) (1,574)
Other assets (636) 2,281
Accounts payable and accrued expenses:
Unrelated parties 31,002 28,871
Affiliate (4,229) 34
Customer service prepayments and deposits (831) (1,213)
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 83,534 78,903
------------- -------------
</TABLE>
See independent certified public accountants' review report and accompanying
notes.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1998 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of cable systems $ - $ (84,500)
Purchases of property and equipment (74,110) (69,124)
Purchases of marketable securities (1,323) (1,700)
Proceeds from sales of property and equipment 177 199
Proceeds from sales of marketable securities 7,878 43,665
Discontinued operations 2,660 4,239
Investments in unconsolidated affiliates (282) (6,637)
Distributions from unconsolidated affiliates 675 475
(Increase) in other intangible assets - investing (369) (3,103)
Loans and advances to unconsolidated affiliates (2,172) (1,350)
Loans and advances from unconsolidated affiliates 3,006 2,804
------------- ------------
NET CASH (USED IN)
INVESTING ACTIVITIES (63,860) (115,032)
CASH FLOWS FROM FINANCING ACTIVITIES
Increases in debt 296,386 105,000
Early extinguishments of debt (67,375) -
Other debt reduction:
Notes (241,470) (77,000)
Obligations under capital leases (4,606) (1,245)
(Increase) in other intangible assets - financing (1,193) (347)
------------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (18,258) 26,408
------------- ------------
NET INCREASE (DECREASE) IN CASH 1,416 (9,721)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 15,623 19,162
------------- ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 17,039 $ 9,441
============= ============
</TABLE>
See independent certified public accountants' review report and accompanying
notes.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
Condensed Financial Information and Results of Operations
- - ---------------------------------------------------------
In the opinion of the management of Lenfest Communications, Inc. and
subsidiaries (the "Company"), the accompanying condensed unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and with the regulations of the Securities and Exchange
Commission and contain all adjustments (consisting of only normal recurring
adjustments) necessary to make the condensed consolidated financial statements
not misleading and to present fairly the consolidated financial condition as of
September 30, 1998, the consolidated results of operations and comprehensive
income (loss) for the three and nine months ended September 30, 1998 and 1997,
and consolidated cash flows for the nine months ended September 30, 1998 and
1997.
Certain information and note disclosures normally included in the Company's
annual consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K dated March 27, 1998, as amended. The results of operations for the
periods ended September 30, 1998 and 1997, are not necessarily indicative of
operating results for the full year.
NOTE 2 - SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
--------------------------------
1998 1997
------ ------
(Dollars in thousands)
Cash paid during the period for
Interest $ 67,217 $ 68,049
=========== ===========
Income taxes $ 120 $ 1,522
=========== ===========
Supplemental Schedule Relating to Acquisitions
1998 1997
------ ------
(Dollars in thousands)
Property and equipment $ - $ 27,965
Deferred franchise costs - 53,797
Goodwill and other intangible assets - 2,738
----------- -----------
$ - $ 84,500
=========== ===========
Noncash Investing and Financing Activities
On February 12, 1998, the Company exchanged a partnership interest for a warrant
to acquire Class A common stock in Hyperion Telecommunication, Inc. (See Note
3).
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 3 - GAIN FROM EXCHANGE OF PARTNERSHIP INTEREST
On February 12, 1998, the Company's wholly owned subsidiary, Lenfest Telephony,
Inc., exchanged its 50% general partnership interest in Hyperion
Telecommunications of Harrisburg ("HTH") for a warrant to acquire 731,624 shares
(the effective number of shares after a stock split) or approximately 2% of
Class A common stock of Hyperion Telecommunications, Inc. ("Hyperion"), the
other 50% general partner in HTH. No exercise price is payable with the exercise
of the warrant. The value of the warrant was estimated to be $11.7 million,
based on the initial public offering of the Class A common stock of Hyperion in
May 1998. The Company believes that this value approximated fair market value of
the warrant on February 12, 1998. A gain of $11.5 million, which represents the
excess of the market value of the partnership interest over its book value, has
been included in the accompanying consolidated statement of operations and
comprehensive income (loss).
NOTE 4 - MARKETABLE SECURITIES
The aggregate cost basis and market values of marketable securities at September
30, 1998 and December 31, 1997 are as follows:
September December
30, 1998 31, 1997
-------------- --------------
(Dollars in thousands)
Aggregate cost basis $ 22,981 $ 13,684
Unrealized gain (loss) (15,260) 768
------------- -------------
Fair value $ 7,721 $ 14,452
============= =============
All of the Company's securities are considered to be available for sale. Net
realized gains from the sale of marketable securities, in the amount of
$3,664,000 and $361,000 are included in the accompanying consolidated statements
of operations and comprehensive income (loss) for 1998 and 1997, respectively.
The specific identification method is used to determine the cost of each
security at the time of sale.
NOTE 5 - INVESTMENTS, PRINCIPALLY IN AFFILIATES
The Company, through several subsidiaries, owns non-controlling interests in
several general partnerships and corporations. Under the equity method, the
initial investments are recorded at cost. Subsequently, the carrying amount of
the investments are adjusted to reflect the Company's share of net income or
loss of the affiliates as they occur. Losses in excess of amounts recorded as
investments on the Company's books have been offset against loans and advances
to these unconsolidated affiliates to the extent they exist.
The Company, through its subsidiary, Lenfest Jersey, Inc., owns a 10.005%
general partnership interest and a 39.995% limited partnership interest in
Garden State Cablevision L.P. ("Garden State"), a cable company serving
approximately 210,000 customers in southern New Jersey at September 30, 1998.
The Company accounts for its investment in Garden State under the equity method.
The Company is allocated a total of 50% of Garden State's losses. In addition,
the Company is required to make up its partner capital deficits upon termination
or liquidation of the Garden State partnership. Because of the requirement to
make up capital deficits, the accompanying financial statements reflect equity
in accumulated losses, net of related receivables, in excess of the investments
in Garden State in the amount of $76,189,000 and $77,880,000 at September 30,
1998 and December 31, 1997, respectively.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 5 - INVESTMENTS, PRINCIPALLY IN AFFILIATES, (continued)
Summarized statements of operations of Garden State, accounted for under the
equity method for the nine months ended September 30, 1998 and 1997, are as
follows:
1998 1997
-------------- --------------
(Dollars in thousands)
Results of Operations
Revenues $ 84,853 $ 81,754
Operating expenses (34,437) (34,240)
Management and consulting fees (5,091) (4,905)
Depreciation and amortization (22,515) (33,853)
------------- -------------
OPERATING INCOME 22,810 8,756
Interest expense (16,725) (17,049)
------------- -------------
NET INCOME (LOSS) $ 6,085 $ (8,293)
============= =============
NOTE 6 - LONG-TERM DEBT
Notes payable and obligations under capital leases consisted of the following at
September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
8-3/8% senior notes due November 1, 2005 $ 687,979 $ 687,082
10-1/2% senior subordinated notes due September 15, 2006 294,137 293,781
7-5/8% senior notes due February 15, 2008 (a) 148,347 -
8-1/4% senior subordinated notes due February 15, 2008 (b) 148,190 -
Bank credit facility (c) - 240,000
11.30% senior promissory notes due September 1, 2000 - 45,000
11.84% senior promissory notes due May 15, 1998 - 10,500
9.93% senior promissory notes due September 30, 2001 - 11,625
Obligations under capital leases 2,712 7,318
------------- -------------
$ 1,281,365 $ 1,295,306
============= =============
</TABLE>
(a) These notes, which are stated net of unamortized discount of $1.7 million at
September 30, 1998, were issued through a private placement in February
1998. The notes require semi-annual interest payments. The notes are not
redeemable at the option of the Company prior to maturity. Upon a Change of
Control Triggering Event, holders of the notes may require the Company to
purchase all or a portion of the notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest. The net
proceeds, together with the proceeds from the 8-1/4% senior subordinated
notes discussed below, were used to provide funds for the early
extinguishment of debt and to pay down the bank credit facility.
(b) These notes, which are stated net of unamortized discount of $1.8 million at
September 30, 1998, were issued through a private placement in February
1998. The notes require semi-annual interest payments. The notes are general
unsecured obligations of the Company subordinate in right of payment to all
present and future senior indebtedness of the Company. The Company may, at
its option, prepay the notes beginning in 2003. The net proceeds were used
as discussed in (a) above.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 6 - LONG-TERM DEBT, (continued)
(c) On August 4, 1998, the Company amended and restated its existing bank credit
facility. The new facility establishes unsecured revolving credit facility
commitments under which the Company may borrow up to $300 million, which can
be increased to $550 million under certain conditions. The Company intends
to use the availability under this facility for operations, capital
expenditures, general corporate purposes and possibly for future
acquisitions of cable systems. The commitments under this facility expire on
March 31, 2006. As of September 30, 1998, no amounts were outstanding under
this facility.
NOTE 7 - DISCONTINUED OPERATIONS
Effective October 31, 1997, Lenfest MCN, Inc. (formerly MicroNet, Inc.) and
Lenfest MCN Delmarva Associates LP (formerly MicroNet Delmarva Associates LP),
collectively "MCN", each a wholly owned subsidiary of the Company, sold
substantially all of their assets and Suburban Cable TV Co. Inc., Lenfest
Atlantic, Inc. and Lenfest New Castle County sold certain of their towers. The
purchase price was approximately $70.3 million, subject to adjustments. The sale
represents the disposition of the major segment of the Company's tower rental,
microwave service, video, voice and data service business. The assets sold were
not material to the cable television operations of the Company. The net assets
of MCN have been separately classified in the accompanying condensed
consolidated balance sheet under the caption "Net assets of discontinued
operations" and consist of the following at September 30, 1998 and December 31,
1997:
September December
30, 1998 31, 1997
-------------- --------------
(Dollars in thousands)
Accounts receivable $ - $ 2,660
============= =============
Operating results of MCN for the three month and nine month periods ended
September 30, 1997 is shown separately in the accompanying consolidated
statements of operations under the caption Discontinued Operations and consist
of the following:
Three Nine
Months Months
Ended Ended
September 30, September 30,
1997 1997
-------------- --------------
(Dollars in thousands)
Revenues $ 4,457 $ 13,853
Operating expenses (3,524) (9,028)
Depreciation and amortization (951) (2,727)
------------- ------------
OPERATING INCOME (LOSS) (18) 2,098
Interest expense (176) (526)
Other income - 30
Income tax (expense) 77 (449)
------------- ------------
NET INCOME (LOSS) $ (117) $ 1,153
============= ============
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 8 - CORPORATE INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
in accordance with Financial Accounting Standards Board Statement (SFAS) No.
109, "Accounting for Income Taxes". SFAS 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the financial statement or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Differences between financial reporting
and tax bases arise most frequently from differences in timing of income and
expense recognition. Deferred income tax expense is measured by the change in
the net deferred income tax asset or liability during the period.
The net income tax benefit differs from amounts expected by applying the U.S.
Federal income tax rate of 35% to loss before income taxes primarily from
nondeductible amortization on goodwill and certain other intangibles, change in
valuation allowance for deferred tax asset and provision for state income taxes.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
In November 1994, Mr. Lenfest and TCI International, Inc., an affiliate of TCI,
jointly and severally guaranteed $67 million in program license obligations of
the distributor of Australis' movie programming. As of September 30, 1998, the
Company estimates that the guarantee under the license agreements was
approximately $32.2 million. The Company has agreed to indemnify Mr. Lenfest
against loss from such guaranty to the fullest extent permitted under the
Company's debt obligations. Under the terms of its bank credit facility,
however, Mr. Lenfest's claims for indemnification are limited to $33.5 million.
Effective March 6, 1997, as subsequently amended, Mr. Lenfest released the
parent Company and its cable operating subsidiaries from their indemnity
obligation until the last to occur of January 1, 1999, and the last day of any
fiscal quarter during which the Company could incur the indemnity obligation
without violating the terms of its bank credit facility. Certain of the
Company's non-cable subsidiaries have agreed to indemnify Mr. Lenfest for his
obligations under the guarantee. As a result, the Company will remain indirectly
liable under the non-cable subsidiary indemnity.
As disclosed in the Company's report filed on Form 10-Q for the period ended
June 30, 1998, the Company believes that Mr. Lenfest's guarantee will not be
called; and so the Company's non-cable subsidiaries will not be required to pay
any amounts to Mr. Lenfest pursuant to the indemnification. As of the date
hereof, there has been no demand for payment under the guarantee of the program
license obligations.
<PAGE>
LENFEST COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, (continued)
(Unaudited)
NOTE 9 - COMMITMENTS AND CONTINGENCIES, (continued)
On January 20, 1995, an individual (the "Plaintiff") filed suit in the Federal
Court of Australia, New South Wales District Registry against the Company and
several other entities and individuals (the "Defendants") including Mr. Lenfest,
involved in the acquisition of a company owned by the Plaintiff, the assets of
which included the right to acquire Satellite License B from the Australian
government. The Plaintiff alleges that the Defendants defrauded him by making
certain representations to him in connection with the acquisition of his company
and claims total damages of $718 million (approximately U.S. $426 million as of
September 30, 1998). The Plaintiff also alleges that Australis and Mr. Lenfest
owed to him a fiduciary duty and that both parties breached this duty. The
Defendants have denied all claims made against them by the Plaintiff and stated
their belief that the Plaintiff's allegations are without merit. They are
defending this action vigorously. The trial in this action began on February 2,
1998, and ended on September 30, 1998. The Company expects a decision in the
first quarter of 1999. Neither it nor its counsel can predict the outcome of the
trial.
The Company has also been named as a defendant in various legal proceedings
arising in the ordinary course of business. In the opinion of management, the
ultimate amount of liability with respect to the above actions will not
materially affect the financial position or the results of operations of the
Company.
<PAGE>
LENFEST COMMUNICATIONS AND SUBSIDIARIES
STATEMENT BY MANAGEMENT CONCERNING REVIEW OF
INTERIM FINANCIAL INFORMATION BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1998 and 1997 condensed consolidated financial statements
included in this filing on Form 10-Q have been reviewed by Pressman Ciocca Smith
LLP, Independent Certified Public Accountants, in accordance with established
professional standards and procedures for such a review.
The review report of Pressman Ciocca Smith LLP is included in Part I, Item 1.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,039
<SECURITIES> 7,721
<RECEIVABLES> 25,086
<ALLOWANCES> 3,007
<INVENTORY> 1,553
<CURRENT-ASSETS> 0
<PP&E> 840,732
<DEPRECIATION> 417,554
<TOTAL-ASSETS> 1,181,559
<CURRENT-LIABILITIES> 0
<BONDS> 1,281,365
0
0
<COMMON> 2
<OTHER-SE> (302,639)
<TOTAL-LIABILITY-AND-EQUITY> 1,181,559
<SALES> 347,009
<TOTAL-REVENUES> 347,009
<CGS> 0
<TOTAL-COSTS> 299,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,796
<INTEREST-EXPENSE> 90,706
<INCOME-PRETAX> (27,925)
<INCOME-TAX> 2,780
<INCOME-CONTINUING> (25,145)
<DISCONTINUED> 0
<EXTRAORDINARY> (7,360)
<CHANGES> 0
<NET-INCOME> (32,505)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
