SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange
------- Act of 1934
For the quarterly period ended June 30, 2000
Transition report pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934 For the transition period
from _____________ to _____________
Commission File Number: 000-21605
ADELPHIA BUSINESS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1669404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One North Main Street
Coudersport, PA 16915-1141
(Address of principal (Zip code)
executive offices)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 8, 2000, 35,652,554 shares of Class A Common Stock, par value
$0.01 per share, and 35,238,837 shares of Class B Common Stock, par
value $0.01 per share, of the registrant were outstanding.
<PAGE>
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets - December 31, 1999 and June 30, 2000......................3
Condensed Consolidated Statements of Operations - Three and Six Months Ended
June 30, 1999 and 2000.........................................................................4
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1999 and 2000.........................................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................26
Item 2. Changes in Securities..........................................................................26
Item 3. Defaults Upon Senior Securities...............................................................26
Item 4. Submission of Matters to a Vote of Security Holders...........................................26
Item 5. Other Information.............................................................................26
Item 6. Exhibits and Reports on Form 8-K...............................................................27
SIGNATURES..............................................................................................28
INDEX TO EXHIBITS.......................................................................................29
</TABLE>
<PAGE>
Item 1. Financial Statements
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
December 31, June 30,
1999 2000
---------------- -----------------
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,133 $ 720
Due from parent - net 392,629 ---
Due from affiliates - net 6,230 ---
Accounts receivable - net 68,075 99,358
Other current assets 9,852 9,955
---------------- -----------------
Total current assets 478,919 110,033
U.S. government securities - pledged 29,899 15,167
Restricted cash --- 75,785
Investments 44,066 50,739
Property, plant and equipment - net 943,756 1,200,803
Other assets - net 67,063 96,361
---------------- -----------------
Total $ 1,563,703 $ 1,548,888
================ =================
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND (DEFICIENCY):
OTHER STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 150,151 $ 100,018
Due to affiliates-net --- 15,320
Accrued interest and other current liabilities 27,595 34,376
--------------- -----------------
Total current liabilities 177,746 149,714
13% Senior discount notes due 2003 253,860 272,212
12 1/4% Senior secured notes due 2004 250,000 250,000
12% Senior subordinated notes due 2007 300,000 300,000
Note payable --- 96,082
Other debt 41,318 48,806
--------------- -----------------
Total liabilities 1,022,924 1,116,814
--------------- -----------------
12 7/8% Senior exchangeable redeemable preferred stock 260,848 278,393
--------------- -----------------
Commitments and contingencies (Note 3)
Common stock and other stockholders' equity:
Class A common stock, $0.01 par value, 800,000,000
shares authorized, 34,066,587 and 35,322,554 shares
outstanding, respectively 341 353
Class B common stock, $0.01 par value, 400,000,000
shares authorized, 35,371,458 and 35,238,837 shares
outstanding, respectively 354 352
Additional paid in capital 666,021 654,883
Class B common stock warrants 2,177 1,370
Unearned stock compensation (5,715) (4,892)
Accumulated deficit (383,247) (498,385)
--------------- -----------------
Total common stock and other stockholders' equity 279,931 153,681
--------------- -----------------
Total $ 1,563,703 $ 1,548,888
=============== =================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ----------------------------
1999 2000 1999 2000
------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues $ 34,215 $ 80,214 $ 55,653 $ 149,515
--------------- -------------- ------------- -------------
Operating expenses:
Network operations 11,671 41,661 20,175 75,393
Selling, general and administrative 32,637 63,348 53,646 122,194
Depreciation and amortization 13,586 26,689 27,121 46,127
--------------- -------------- ------------- -------------
Total 57,894 131,698 100,942 243,714
--------------- -------------- ------------- -------------
Operating loss (23,679) (51,484) (45,289) (94,199)
Other income (expense):
Interest income 14,780 1,020 16,778 1,424
Interest income-affiliate 2,779 1,259 5,607 6,282
Interest expense (21,805) (15,264) (37,338) (28,194)
--------------- -------------- ------------- -------------
Loss before income taxes and equity in net
loss of joint ventures (27,925) (64,469) (60,242) (114,687)
Income tax expense (4) --- (4) ---
---------------- ------------- ------------ --------------
Loss before equity in net loss of joint ventures (27,929) (64,469) (60,246) (114,687)
Equity in net loss of joint ventures (3,291) (346) (7,094) (451)
---------------- ------------- ------------ --------------
Net loss (31,220) (64,815) (67,340) (115,138)
Dividend requirements applicable to preferred stock (7,720) (8,771) (15,199) (17,268)
---------------- ------------- ------------ --------------
Net loss applicable to common stockholders $ (38,940) $ (73,586) $ (82,539) $ (132,406)
================ ============= ============ ==============
Basic and diluted net loss per weighted average
share of common stock $ (0.70) $ (1.06) $ (1.49) $ (1.91)
=============== ============== ============ ==============
Weighted average shares of
common stock outstanding 55,497 69,503 55,497 69,417
=============== ============== ============ ==============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
Six Months
Ended June 30,
--------------------------------
1999 2000
--------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (67,340) $ (115,138)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 23,846 43,587
Amortization 3,275 2,540
Noncash interest expense 15,961 18,352
Equity in net loss of joint ventures 7,094 451
Non-cash stock compensation --- 1,225
Change in operating assets and liabilities net of effects of acquisitions:
Other assets - net (20,463) (48,794)
Accounts payable (477) (50,133)
Accrued interest and other liabilities 7,023 6,379
--------------- ---------------
Net cash used in operating activities (31,081) (141,531)
--------------- ---------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (131,831) (290,900)
Investments (24,672) (7,125)
Net cash used for acquisitions (126,268) ---
Investment in restricted cash --- (75,785)
Sale of U.S. government securities - pledged 15,322 15,312
Repayment of senior secured note 20,000 ---
--------------- ---------------
Net cash used in investing activities (247,449) (358,498)
--------------- ---------------
Cash flows from financing activities:
Repayments of debt (1,246) (2,246)
Repayments from related parties 4,066 414,178
Proceeds from exercise of warrant --- 5,611
Proceeds from debt 300,000 96,082
Costs associated with financing (5,400) (15,009)
--------------- ---------------
Net cash provided by financing activities 297,420 498,616
--------------- ---------------
Increase (decrease) in cash and cash equivalents 18,890 (1,413)
Cash and cash equivalents, beginning of period 242,570 2,133
--------------- ---------------
Cash and cash equivalents, end of period $ 261,460 $ 720
=============== ===============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Adelphia Business Solutions, Inc. is a majority owned subsidiary of
Adelphia Communications Corporation ("Adelphia"). The accompanying unaudited
condensed consolidated financial statements of Adelphia Business Solutions, Inc.
and its majority owned subsidiaries ("Adelphia Business Solutions" or the
"Company") have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission.
These condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements included in its
Annual Report on Form 10-K for the year ended December 31, 1999.
In the opinion of management, all adjustments, consisting of only
normal recurring adjustments necessary for a fair presentation of the financial
position of Adelphia Business Solutions at June 30, 2000, and the unaudited
results of operations for the three and six months ended June 30, 1999 and 2000,
have been included. The results of operations for the three and six months ended
June 30, 2000 are not necessarily indicative of the results to be expected for
the year ending December 31, 2000.
1. Significant Events Subsequent to December 31, 1999:
On January 7, 2000, the Company entered into an agreement with
Allegheny Communications Connect, Inc. ("Allegheny") to purchase an indefeasible
right of use ("IRU") for a total of approximately 600 long-haul and metro route
miles from western Pennsylvania through West Virginia, and in Maryland and
Virginia.
On January 10, 2000, the Company entered into an agreement with
Williams Communications, Inc. ("Williams") to purchase an IRU for a total of
4,543 route miles of fiber in the western United States at a cost of
approximately $23 million.
During January 2000, the Company entered into an IRU agreement with
Level 3 Communications ("Level 3") for approximately 3,100 long-haul route miles
throughout much of the western United States. In addition, the Company entered
into an agreement with Level 3 to acquire access to approximately 750 miles of
metro duct in the following central business districts: Chicago, Cincinnati,
Dallas, Denver, Detroit, Los Angeles, Orlando, Phoenix, San Diego, San
Francisco, San Jose and Seattle. The total cost of the agreement is
approximately $54.6 million.
During January 2000, the Company entered into an agreement with
Metromedia Fiber Network ("Metromedia") which allows the Company to acquire
access to fiber strand miles across any of Metromedia's North American markets.
During April 2000, the Company was the successful bidder, in the
Federal Communications Commission ("FCC") auction, for 177 licenses covering the
39 Ghz spectrum for approximately 164 million POPS. The Company has deposited
$15,000 of the total $77,605 purchase price with the remaining balance due at
the time the licenses are granted. On July 31, 2000, a petition to deny was
filed against the Company. This petition does not seek to deny the grant of the
licenses to the Company but, instead, seeks only to make such grant subject to
petitioners' previously dismissed applications seeking the spectrum covered by
the Company's licenses. The Company believes the petition is without merit and
intends to vigorously oppose it and the Company currently believes its licenses
will be granted during the third or fourth quarter of 2000.
<PAGE>
During April 2000, the Company and Bell Atlantic (now known as Verizon
Communications) reached a settlement for outstanding amounts due to the Company
from Bell Atlantic. As a result of the settlement, the Company wrote off $6,981
of accounts receivable during the quarter ended March 31, 2000.
On May 3, 2000, the Company entered into a contract to build an
advanced information technology infrastructure and to provide communication
services to the Commonwealth of Pennsylvania state government. As part of the
contract, the Company was required to place $75,785 into a restricted account to
be used for the completion of the technology infrastructure.
The Company and certain of Adelphia's subsidiaries and affiliates are
parties to a joint bank credit facility. As part of this facility, the Company
and its subsidiaries have the ability to borrow up to an aggregate of $500,000,
which would be guaranteed by other members of the borrowing group, subject to
compliance by the entire borrowing group with certain covenants and financial
tests. As of June 30, 2000, a subsidiary of the Company had borrowed $96,082
under this new credit facility. In addition, the Company has agreed to pay a
subsidiary of Adelphia approximately $15,000 as a fee for placing the credit
facility.
On July 13, 2000, Adelphia exercised a warrant to purchase 913,380
shares of Class A common stock of the Company at a price of $6.15 per share.
Adelphia purchased the warrant in May 1998 from MCI Worldcom in connection with
the Company's IPO. Total proceeds to the Company were $5,611.
During July 2000, the Company consummated a purchase agreement with
Allegheny to acquire interests in a jointly owned network located in State
College, Pennsylvania. Consideration paid to Allegheny was 330,000 shares of the
Company's Class A common stock. This purchase increased the Company's ownership
in this network to 100%. The acquisition will be accounted for under the
purchase method of accounting. Accordingly, the financial results of the
acquired network will be included in the consolidated results of Adelphia
Business Solutions effective from the date acquired.
During the six months ended June 30, 2000, the Company made demand
advances to Adelphia which, as of June 30, 2000, had been repaid. The Company
received interest on the advances at a rate of 6.33%.
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures in which the Company holds less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its joint ventures. Dividends or other distributions are recorded as a
reduction of the Company's investment. Investments in joint ventures accounted
for using the equity method reflect the Company's equity in their underlying net
assets.
<PAGE>
<TABLE>
The Company's non-consolidated investments are as follows:
Ownership December 31, June 30,
Percentage 1999 2000
-------------- ------------------ ------------------
Investments accounted for using the equity method:
<S> <C> <C> <C>
PECO-Hyperion (Philadelphia) 50.0% $ 42,475 $ 44,975
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading) 50.0 7,425 9,550
Hyperion of York 50.0 6,525 6,525
Allegheny Hyperion Telecommunications (1) 50.0 4,975 4,975
------------------ ------------------
61,400 66,025
Cumulative equity in net loss (17,334) (17,786)
------------------ ------------------
Subtotal 44,066 48,239
Investments accounted for using the cost method --- 2,500
------------------ ------------------
Total $ 44,066 $ 50,739
================== ==================
(1) As discussed in Note 1, during July 2000, the Company consummated an
agreement to increase its ownership to 100% in this market.
</TABLE>
Summarized combined unaudited financial information for the Company's
investments being accounted for using the equity method of accounting follows:
December 31, June 30,
1999 2000
-------------- --------------
Current assets $ 21,645 $ 24,050
Property, plant and equipment - net 112,210 115,050
Other non-current assets 55 49
Current liabilities 10,175 8,172
Non current liabilities 35,104 34,294
Six Months Ended June 30,
1999 2000
-------------- --------------
Revenues $ 14,349 $ 28,552
Net loss (4,712) (1,200)
3. Commitments and Contingencies:
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations for a discussion of material commitments and
contingencies.
4. Net Loss Per Weighted Average Share of Common Stock:
Net loss per weighted average share of common stock is computed based on
the weighted average number of common shares outstanding after giving effect to
dividend requirements on the Company's preferred stock. Diluted net loss per
common share is equal to basic net loss per common share because additional
warrants outstanding had an anti-dilutive effect for the periods presented;
however, these warrants could have a dilutive effect on earnings per share in
the future.
<PAGE>
5. Supplemental Financial Information:
For the six months ended June 30, 1999 and 2000, the Company paid
interest of $21,222 and $33,312, respectively.
Accumulated depreciation of property, plant and equipment amounted to
$97,518 and $141,105 December 31, 1999 and June 30, 2000, respectively.
-------------------------------------------------
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Company's unaudited Condensed Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Form 10-Q and the Company's audited
Consolidated Financial Statements and Notes thereto included in its Form 10-K
for the year ended December 31, 1999.
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information or statements
included in this Form 10-Q, including Management's Discussion and Analysis of
Financial Condition and Results of Operations is forward-looking, such as
information relating to future growth, expansion of operations or the effect of
future regulation or competition. These "forward-looking statements" include
statements regarding the intent, belief and current expectations of Adelphia
Business Solutions and its directors and officers, and can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "intends" or anticipates" or the negative thereof or other variations
thereon or comparable terminology or by discussions of strategy that involve
risks and uncertainties. Any such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future from those expressed in any forward-looking statements made by, or on
behalf of, the Company.
These risks and uncertainties include, but are not limited to,
uncertainties relating to our ability to successfully market our services to
current and new customers, access markets on a nondiscriminatory basis,
identify, design and construct fiber optic networks, install cable and
facilities (including switching electronics) and obtain rights of way, access
rights to buildings and any required governmental authorizations, franchises and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions, as well as risks and uncertainties relating to general economic
conditions, the availability and cost of capital, acquisitions and divestitures,
government and regulatory policies, the pricing and availability of equipment,
materials and inventories, reliance on vendors, dependence on customers and
their spending patterns, technological developments, the costs and other effects
of rapid growth and changes in the competitive environment in which the Company
operates. Readers of this Form 10-Q are cautioned that such statements are only
predictions, that no assurance can be given that any particular future results
will be achieved, and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors which could cause actual events or results to differ materially from
those indicated by such forward looking statements. Unless otherwise stated, the
information contained in this Form 10-Q is as of and for the three and six
months ended June 30, 1999 and 2000. Additional information regarding factors
that may affect the business and financial results of Adelphia Business
Solutions can be found in the Company's filings with the Securities and Exchange
Commission, including the prospectus and most recent prospectus supplement under
Registration Statement 333-11142 (formerly No. 333-88927), under the caption
"Risk Factors." The Company does not undertake to update any forward looking
statements in this report or with respect to matters described herein.
The "Company" or "Adelphia Business Solutions" means Adelphia Business
Solutions, Inc. together with its majority-owned subsidiaries, except where the
context otherwise requires. Unless the context otherwise requires, references
herein to the networks mean (i) the 22 telecommunications networks in operation
or under construction as of May 8, 1998, the date of the Company's initial
public offering (the "Original Markets"), which are wholly and majority owned
subsidiaries or are joint venture partnerships, limited liability companies or
corporations managed by the Company and in which the Company holds a
<PAGE>
50% equity interest with one or more other partners, and (ii) the additional
networks operational or under development subsequent to May 8, 1998 (the "New
Markets").
Adelphia Business Solutions is a leading national provider of
facilities-based integrated communications services to customers that include
businesses, governmental and educational end users and other communications
services providers throughout the United States. The Company currently offers a
full range of communications services in 62 markets and expects by the end of
the year 2000 to be offering services in approximately 80 to 100 markets
nationwide, including substantially all of the top 40 metropolitan statistical
areas in the United States. To serve the Company's customers' broad and
expanding communications needs, the Company has assembled a diverse collection
of high-bandwidth, local and national network assets. The Company intends to
integrate these assets with advanced communications technologies and services in
order to provide comprehensive end-to-end communications services over its
national network. The Company provides customers with communications services
such as local switch dial tone (also known as local phone service), long
distance service, high-speed data transmission, and Internet connectivity. The
customers have a choice of receiving these services separately or as bundled
packages which are typically priced at discount when compared to the price of
the separate services.
In order to take advantage of the improved economic returns and better
customer service from providing services "on-net," or over the Company's own
network, the Company is in the process of further expanding the reach of its
network system nationwide. The Company's Original Markets are principally
located in the eastern half of the United States; however, due to the Company's
success in operating and expanding these markets the Company is pursuing an
aggressive nationwide growth plan. The Company intends to serve 150 to 200 total
markets nationwide by the end of the year 2001, leveraging the Company's
existing and planned switching platforms and inter-city fiber networks. The
Company believes the full buildout of this nationwide footprint will position it
to address approximately 65% of the 60 million business access lines nationwide,
which currently represent approximately $75 billion in annual revenues. This
network system expansion includes the purchase, lease or construction of local
fiber optic network facilities and the interconnection of all of the Company's
existing and new markets with its own fiber optic facilities. The Company will
also implement various technologies including Dense Wave Division Multiplexing
to provide greater bandwidth capacity on its local and long-haul network system.
Once fully installed, the 33,000 route mile fiber optic backbone will connect
each of the Company's local markets. This fully redundant network system will
support the Company's full line of communication service offerings.
The Company has sold approximately 509,405 business access lines as of
June 30, 2000, of which approximately 493,632 lines were installed at such date.
This represents an addition of 76,628 access lines sold and 81,460 access lines
installed during the quarter ended June 30, 2000. As of June 30, 2000,
approximately 51% of these access lines are provisioned on Company owned
switches.
Recent Developments
On January 7, 2000, the Company entered into an agreement with
Allegheny Communications Connect, Inc. ("Allegheny") to purchase an indefeasible
right of use ("IRU") for a total of approximately 600 long-haul and metro route
miles from western Pennsylvania through West Virginia, and in Maryland and
Virginia.
On January 10, 2000, the Company entered into an agreement with
Williams Communications, Inc. ("Williams") to purchase an IRU for a total of
4,543 route miles of fiber in the western United States at a cost of
approximately $23 million.
<PAGE>
During January 2000, the Company entered into an IRU agreement with
Level 3 Communications ("Level 3") for approximately 3,100 long-haul route miles
throughout much of the western United States. In addition, the Company entered
into an agreement with Level 3 to acquire access to approximately 750 miles of
metro duct in the following central business districts: Chicago, Cincinnati,
Dallas, Denver, Detroit, Los Angeles, Orlando, Phoenix, San Diego, San
Francisco, San Jose and Seattle. The total cost of the agreement is
approximately $54.6 million.
During January 2000, the Company entered into an agreement with
Metromedia Fiber Network ("Metromedia") which allows the Company to acquire
access to fiber strand miles across any of Metromedia's North American markets.
During April, 2000, the Company was the successful bidder, in the
Federal Communications Commission ("FCC") auction, for 177 licenses covering the
39 Ghz spectrum for approximately 164 million POPS. The Company has deposited
$15,000 of the total $77,605 purchase price with the remaining balance due at
the time the licenses are granted. On July 31, 2000 a petition to deny was filed
against the Company. This petition does not seek to deny the grant of the
licenses to the Company but, instead, seeks only to make such grant subject to
petitioners' previously dismissed applications seeking the spectrum covered by
the Company's licenses. The Company believes the petition is without merit and
intends to vigorously oppose it and the Company currently believes its licenses
will be granted be during the third or fourth quarter of 2000.
During April 2000, the Company and Bell Atlantic reached a settlement
for outstanding amounts due to the Company from Bell Atlantic. As a result of
the settlement, the Company wrote off $6,981 of accounts receivable during the
quarter ended March 31, 2000.
On May 3, 2000, the Company entered into a contract to build an
advanced information technology infrastructure and to provide communication
services to the Commonwealth of Pennsylvania state government. As part of the
contract, the Company was required to place $75,785 into a restricted account to
be used for the completion of the technology infrastructure.
The Company and certain of Adelphia's subsidiaries and affiliates are
parties to a joint bank credit facility. As part of this facility, the Company
and its subsidiaries have the ability to borrow up to an aggregate of $500,000,
which would be guaranteed by other members of the borrowing group, subject to
compliance by the entire borrowing group with certain covenants and financial
tests. As of June 30, 2000, a subsidiary of the Company had borrowed $96,082
under this new credit facility. In addition, the Company has agreed to pay a
subsidiary of Adelphia approximately $15,000 as a fee for placing the credit
facility.
On July 13, 2000, Adelphia exercised a warrant to purchase 913,380
shares of Class A common stock of the Company at a price of $6.15 per share.
Adelphia purchased the warrant in May 1998 from MCI Worldcom in connection with
the Company's IPO. Total proceeds to the Company were $5,611.
During July 2000, the Company consummated a purchase agreement with
Allegheny to acquire interests in a jointly owned network located in State
College, Pennsylvania. Consideration paid to Allegheny was 330,000 shares of the
Company's Class A common stock. The agreement increased the Company's ownership
in this network to 100%. The acquisition will be accounted for under the
purchase method of accounting. Accordingly, the financial results of the
acquired network will be included in the consolidated results of Adelphia
Business Solutions effective from the date acquired.
During the six months ended June 30, 2000, the Company made demand
advances to Adelphia which, as of June 30, 2000, had been repaid. The Company
received interest on the advances at a rate of 6.33%.
<PAGE>
Results of Operations
Three Months Ended June 30, 2000 in Comparison with Three Months Ended June 30,
1999
Revenues increased 134% to $80,214 for the three months ended June 30,
2000, from $34,215 for the same quarter in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 27,198
Acquisition of local partner interests 4,225
New Markets 14,471
Management fees 105
The primary sources of revenues, reflected as a percentage of total
revenue were as follows:
Three Months
Ended
June 30,
1999 2000
---------- -----------
Local service 68.0% 70.9%
Dedicated access 27.7% 9.9%
Management fees 3.0% 1.4%
Enhanced services 1.0% 9.7%
Long distance and other 0.3% 8.1%
Network operations expense increased 257% to $41,661 for the three
months ended June 30, 2000 from $11,671 for the same quarter in the prior year.
Amounts
The increase is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 9,801
Acquisition of local partner interests 2,550
New Markets 17,548
Network Operations Control Center ("NOCC") 91
The increase in network operations expense was due to start up costs in
the Company's New Markets as regional switches and network rings were activated,
combined with start up costs in the Company's Original Markets associated with
the Company data and internet access products. The increased number and size of
the operations of the networks resulted in increased employee related costs,
equipment maintenance costs and expansion costs.
Selling, general and administrative expense increased 94% to $63,348
for the three months ended June 30, 2000 from $32,637 for the same quarter in
the prior year, primarily reflecting the expansion of the Original and New
Markets.
<PAGE>
Amounts
The increase is attributable to the following: (in thousands)
--------------
Growth in Original Markets $12,635
Acquisition of local partner interests 1,819
New Markets 9,570
Sales and marketing activities 460
Corporate overhead charges 5,801
Non-cash stock compensation 426
Depreciation and amortization expense increased 96% to $26,689 during
the three months ended June 30, 2000 from $13,586 for the same quarter in the
prior year primarily as a result of increased depreciation resulting from the
higher depreciable asset base at the NOCC and the networks, amortization of
deferred financing costs and the acquisition of local partner interests.
Interest income for the three months ended June 30, 2000 decreased 93%
to $1,020 from $14,780 for the same quarter in the prior year as a result of
decreases in interest income from lower amounts of cash and cash equivalents and
U.S. Government securities.
Interest income-affiliate for the three months ended June 30, 2000
decreased to $1,259 from $2,779 for the same quarter in the prior year as a
result of a decrease in the amount of demand advances outstanding to Adelphia
during the period.
Interest expense decreased 30% to $15,264 during the three months ended
June 30, 2000 from $21,805 for the same period in the prior year. The decrease
was primarily attributable to an increase in the amount of interest capitalized
as a result of the Company's network expansion.
Equity in net loss of joint ventures for the three months ended June
30, 2000 decreased 90% to $346 as compared to a net loss of $3,291 for the same
quarter in the prior year as a result of the consolidation of several joint
ventures resulting from the purchase of the local partners' interests, and the
maturing of the remaining joint venture networks.
The number of joint ventures paying management fees to the Company
decreased from seven at June 30, 1999 to four at June 30, 2000 due to the
Company's increased ownership in several joint ventures. These non-consolidated
joint ventures and networks under construction paid management and monitoring
fees to the Company, which are included in revenues, aggregating approximately
$1,136 for the three months ended June 30, 2000, as compared with $1,032 for the
same quarter in the prior fiscal year. The nonconsolidated joint ventures' net
losses, including networks under construction, for the three months ended June
30, 1999 and 2000, aggregated approximately $2,491 and $564, respectively.
Preferred stock dividends increased by 14% to $8,771 for the three
months ended June 30, 2000 from $7,720 for the same period in the prior year.
The increase was due to a higher outstanding preferred stock base resulting from
the payments of dividends in additional shares of preferred stock.
<PAGE>
Six Months Ended June 30, 2000 in Comparison with Six Months Ended June 30, 1999
Revenues increased 169% to $149,515 for the six months ended June 30,
2000, from $55,653 for the same period in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 52,366
Acquisition of local partner interests 17,280
New Markets 24,589
Management fees (373)
The primary sources of revenues, reflected as a percentage of total
revenue were as follows:
Six Months
Ended
June 30,
1999 2000
---------- -----------
Local service 66.5% 72.2%
Dedicated access 26.0% 11.2%
Management fees 4.7% 1.5%
Enhanced services 0.6% 7.6%
Long distance and other 2.2% 7.5%
Network operations expense increased 274% to $75,393 for the six months
ended June 30, 2000 from $20,175 for the same period in the prior year.
Amounts
The increase is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 15,274
Acquisition of local partner interests 7,498
New Markets 30,741
Network Operations Control Center 1,705
The increase in network operations expense was due to start up costs in
the Company's New Markets as regional switches and network rings were activated,
combined with higher start up costs in the Company's Original Markets associated
with the Company data and internet access products. The increased number and
size of the operations of the networks resulted in increased employee related
costs, equipment maintenance costs and expansion costs.
<PAGE>
Selling, general and administrative expense increased 128% to $122,194
for the six months ended June 30, 2000 from $53,646 for the same period in the
prior year, primarily reflecting the expansion activity of the Original and New
Markets and the acquisition of local partner interests.
Amounts
The increase is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 16,308
Acquisition of local partner interests 7,891
New Markets 21,171
Sales and marketing activities 4,242
Corporate overhead charges 10,730
Bell Atlantic settlement charges 6,981
Non-cash stock compensation 1,225
Depreciation and amortization expense increased 70% to $46,127 during
the six months ended June 30, 2000 from $27,121 for the same period in the prior
year primarily as a result of increased depreciation resulting from the higher
depreciable asset base at the NOCC and the networks, amortization of deferred
financing costs and the acquisition of local partner interests.
Interest income for the six months ended June 30, 2000 decreased 92% to
$1,424 from $16,778 for the same period in the prior year as a result of
decreases in interest income from lower amounts of cash and cash equivalents and
U.S. Government securities.
Interest income-affiliate for the six months ended June 30, 2000
increased to $6,282 from $5,607 for the same period in the prior year, as a
result of an increase in the amount of demand advances outstanding to Adelphia
during the period.
Interest expense decreased 25% to $28,194 during the six months ended
June 30, 2000 from $37,338 for the same period in the prior year. The decrease
was primarily attributable to an increase in the amount of interest capitalized
as a result of the Company's network expansion.
Equity in net loss of joint ventures for the six months ended June 30,
2000 decreased 94% to $451 as compared to a loss of $7,094 for the same period
in the prior year as a result of the consolidation of several joint ventures
resulting from the purchase of the local partners' interests, and the maturing
of the remaining joint venture networks.
The number of joint ventures paying management fees to the Company
decreased from seven at June 30, 1999 to four at June 30, 2000 due to the
Company's increased ownership in several joint ventures. These non-consolidated
joint ventures and networks under construction paid management and monitoring
fees to the Company, which are included in revenues, aggregating approximately
$2,236 for the six months ended June 30, 2000, as compared with $2,609 for the
same period in the prior fiscal year. The nonconsolidated joint ventures' net
losses, including networks under construction, for the six months ended June 30,
1999 and 2000, aggregated approximately $4,712 and $1,200, respectively.
Preferred stock dividends increased by 14% to $17,268 for the six
months ended June 30, 2000 from $15,199 for the same period in the prior year.
The increase was due to a higher outstanding preferred stock base resulting from
the payments of dividends in additional shares of preferred stock.
<PAGE>
Supplementary Network Financial Analysis
At June 30, 2000, the Company had joint ventures covering four networks
with Local Partners where the Company owns 50% of each joint venture. As a
result of the Company's historic ownership position in these and other joint
ventures, a substantial portion of the networks' historic results has been
reported by the Company on the equity method of accounting for investments which
only reflects the Company's pro rata share of net income or loss of the
networks. Because of the recently completed partner roll-ups, management of the
Company believes this historical presentation of the assets, liabilities and
results of operations of the Company does not represent a complete measure of
the financial position, growth or operations of the Company.
In order to provide an additional measure of the financial position,
growth and performance of the Company and its networks, management of the
Company analyzes financial information of the consolidated networks and the
nonconsolidated joint venture networks on a combined basis. This combined
financial presentation in the table below reflects Adelphia Business Solutions'
consolidated financial position and results of operations adjusted for the
inclusion of certain networks (Richmond, Jacksonville and Wichita) which were
purchased in March 1999 (the "Adjusted Consolidated Operating Results") combined
with these non-consolidated joint ventures' results of operations. All combined
results of operations in the table below are presented as if Adelphia Business
Solutions consolidated all networks which were involved in the partnership
roll-ups during the entire period presented. This financial information,
however, is not indicative of the Company's overall historical financial
position or results of operations.
<PAGE>
<TABLE>
Quarter ended June 30, 1999 Quarter ended June 30, 2000
--------------------------------------- ---------------------------------------
(dollars in thousands) (dollars in thousands)
Adjusted Adjusted Joint
Consolidated Joint Venture Combined Consolidated Venture Combined
Operating Operating Operating Operating Operating Operating
Results Results Results Results Results Results
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $34,215 $9,742 $43,957 $80,214 $15,777 $95,991
Direct Operating Expenses 11,671 3,565 15,236 41,661 4,112 45,773
--------------------------------------- ---------------------------------------
Gross Margin 22,544 6,177 28,721 38,553 11,665 50,218
Gross Margin Percentage 65.9% 63.4% 65.3% 48.1% 73.9% 52.3%
Selling, General and Administrative Expenses 32,637 5,875 38,512 62,922 7,122 70,044
(a)
--------------------------------------- ---------------------------------------
EBITDA (b) (10,093) 302 (9,791) (24,369) 4,543 (19,826)
--------------------------------------- ---------------------------------------
EBITDA Percentage of Revenues (29.5%) 3.1% (22.3%) (30.4%) 28.8% (20.7%)
</TABLE>
<TABLE>
June 2000 Quarter vs.
June 1999 Quarter
---------------------------------------------------
% Change Comparison Consolidated Joint Venture Combined
Operating Operating Operating
Results Results Results
---------------------------------------------------
<S> <C> <C> <C>
Revenues 134.4% 61.9% 118.4%
Direct Operating Expenses 257.0% 15.3% 200.4%
---------------------------------------------------
Gross Margin 71.0% 88.8% 74.8%
Selling, General and Administrative Expenses (a) 92.8% 21.2% 81.9%
---------------------------------------------------
EBITDA (b) (141.4%) NM(c) 102.5%
---------------------------------------------------
<FN>
(a) Excludes non-cash stock compensation
(b) Earnings before interest, income taxes, depreciation and amortization,
non-cash stock compensation and other income/expense ("EBITDA") and similar
measures of cash flow are commonly used in the telecommunications industry
to analyze and compare telecommunications companies on the basis of
operating performance, leverage, and liquidity. While EBITDA is not an
alternative to operating income as an indicator of operating performance or
an alternative to cash flows from operating activities as a measure of
liquidity as defined by generally accepted accounting principles, and while
EBITDA may not be comparable to other similarly titled measures of other
companies, management of Adelphia Business Solutions believes that EBITDA
is a meaningful measure of performance.
(c) Not meaningful
</FN>
</TABLE>
Liquidity and Capital Resources
The development of the Company's business and the installation and
expansion of the networks, as well as the development of new markets, combined
with the construction and expansion of the Company's NOCC, have resulted in
substantial capital expenditures and investments during the past several years.
Capital expenditures by the Company were $131,831 and $290,900 for the six
months ended June 30, 1999 and 2000, respectively. Further, investments made by
the Company in nonconsolidated joint ventures were $24,672 and $4,625 for the
six months ended June 30, 1999 and 2000, respectively. The increase in capital
expenditures for the six months ended June 30, 2000 as compared with the same
period in the prior fiscal year is largely attributable to the capital
expenditures necessary to develop the Original Markets and the New Markets as
well as the fiber purchases and electronics to interconnect the networks. The
Company expects that it will continue to incur substantial capital expenditures
in this development effort. The Company also expects to continue to fund
operating losses as the Company develops and grows its business. For information
regarding recent transactions affecting the Company's liquidity and capital
resources, see "Recent Developments."
<PAGE>
The Company has experienced negative operating and investing cash flow
since its inception. A combination of operating losses, substantial capital
investments required to build the Company's networks and NOCC, and incremental
investments in the joint ventures has resulted in substantial negative cash
flow.
Expansion of the Company's Original Markets and services and the
development of New Markets and additional networks and services will require
significant capital expenditures. The Company's operations have required and
will continue to require substantial capital investment for (i) the installation
of electronics for voice and data services in the Company's networks, (ii) the
expansion and improvement of the Company's NOCC and Original Markets, (iii) the
design, construction and development of the New Markets and (iv) the acquisition
of additional ownership interests in the Original Markets. The Company has made
substantial capital investments and investments in joint ventures in connection
with the installation of 5ESS switches or remote switching modules in all of its
Original Markets and plans to install regional 5ESS switches in certain key New
Markets when such New Markets are operational. To date, the Company has
installed switches in all of its Original Markets and plans to provide such
services in all of its New Markets on a standard switching platform based on
Lucent 5 switch technology. In addition, the Company intends to continue to
increase spending on marketing and sales significantly in the foreseeable future
in connection with the expansion of its sales force and marketing efforts
generally. The Company also plans to continue to purchase its partners'
interests in the joint ventures when it can do so on attractive economic terms.
The Company estimates that, in addition to the cash and cash equivalents on hand
and the U.S. government securities pledged as of June 30, 2000, a total of
approximately $800,000 will be required to fund the Company's capital
expenditures, working capital requirements, operating losses and pro rata
investments in the joint ventures from July 1, 2000 through the quarter ending
June 30, 2001. This amount includes the $62,605 due on the 177 39 Ghz licenses
which the Company believes will be paid during the third or fourth quarter of
2000.
The Company will need substantial additional funds to fully fund its
business plan. During the June 2000 quarter, the Company funded a portion of its
free cash flow deficit with draws of approximately $96,082 under the previously
mentioned $500,000 bank credit commitment. The Company expects to fund its
projected future deficits through early 2002 through a combination of additional
draws under the credit facility, additional bank or institutional indebtedness,
capital contributions from minority partners (including potential Adelphia
contributions of up to approximately $300,000) relating to the potential
creation of new partnerships for the development of certain new markets, and the
potential issuance of public equity or equity linked securities of approximately
$300,000 of which Adelphia could potentially purchase approximately $150,000.
There can be no assurances, however, that the Company will be successful in
generating sufficient cash flow or in raising sufficient additional capital on
terms that it will consider acceptable, or at all.
There can be no assurance (i) that the Company's future cash
requirements will not vary significantly from those presently planned due to a
variety of factors including acquisition of additional networks, continued
acquisition of increased ownership in its networks, material variance from
expected capital expenditure requirements for the Original Markets and the New
Markets and development of the LMDS or the 39 Ghz spectrum or (ii) that
anticipated financings, Local Partner investments and other sources of capital
will become available to the Company on economically attractive terms or at all.
In addition, it is possible that expansion of the Company's networks may include
the geographic expansion of the Company's existing clusters and the development
or acquisition of other new networks not currently planned.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
<PAGE>
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Management of the Company has not completed its
evaluation of the impact of the impact of SFAS No. 133 on the Company's
financial statements. In July 1999, SFAS No. 137 was issued to delay the
effective date of SFAS No. 133 to fiscal quarters of fiscal years beginning
after June 15, 2000.
Competition
The Company faces competition from many competitors with significantly
greater financial resources, well-established brand names and large, existing
installed customer bases. Moreover, we expect the level of competition to
intensify in the future.
In each of the markets served by the Company's networks, the services
offered by the Company compete principally with the services offered by the
incumbent local exchange carrier ("ILEC") serving that area. ILECs have
long-standing relationships with their customers, have the potential to
subsidize competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act of 1996 (the "Telecommunications Act"), federal and state
regulatory initiatives provide increased business opportunities to competitive
local exchange carriers ("CLECs") such as the Company, but regulators may
provide ILECs with increased pricing flexibility for their services as
competition increases. Further, if a Regional Bell Operating Company ("RBOC") is
authorized to provide long distance service originating in one or more states by
fulfilling the market opening provisions of the Telecommunications Act, the RBOC
may be able to offer "one stop shopping" that would be competitive with the
Company's offerings. To date, the only RBOCs to gain such approval from the FCC
are Bell Atlantic, for New York State, and Southwestern Bell, for Texas.
Additional entry by the RBOCs into long distance markets could result in
decreased market share for the major IXCs, which are among the operating
companies' significant customers. Any of these results could have an adverse
effect on the Company.
There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market, including the completed
mergers of Ameritech and SBC, Bell Atlantic and GTE, and Qwest and U.S. West,
whose combined territories cover a substantial portion of the Company's markets.
Other combinations have occurred in the industry, which may have an effect on
the Company. The effects of these combinations are unknown at this time. The
Company believes that combinations of RBOCs and others will pose a greater
competitive threat to the Company's strategy of originating and terminating a
significant proportion of its customers' communications traffic over its own
networks, rather than relying on the network of the ILEC.
The Company also faces, and will continue to face, competition from
other current and potential market entrants, including other CLECs and
data-centric local providers, incumbent LECs which are not subject to RBOC
restrictions on long distance, AT&T, MCIWorldCom, Sprint and other IXCs, cable
television companies, electric utilities, microwave carriers, wireless
telecommunications providers and private networks built by large end users. In
addition, new carriers, such as Global Crossing, Williams, Qwest and Level 3 are
building and managing nationwide networks which, in some cases, are designed to
provide local services. Further, AT&T's acquisition of various cable companies
will exploit ubiquitous local cable infrastructure for telecommunications and
other services provided by the operating companies. Finally, although the
Company has generally good relationships with the other existing IXCs, there are
no assurances that any of these IXCs will not build their own facilities,
purchase other carriers or their facilities, or resell the services of other
carriers rather than use the Company's services when entering the market for
local exchange services.
<PAGE>
Regulation
Government Overview
A significant portion of the services provided by the Company and its
networks are subject to regulation by federal, state and local government
agencies. Future federal or state regulations and legislation may be less
favorable to the Company than current regulation and legislation and therefore
may have a material and adverse impact on its business and financial prospects.
In addition, the Company may expend significant financial and managerial
resources to participate in proceedings setting rules at either the federal or
state level, without achieving a favorable result.
Federal Legislation and Regulation
The Telecommunications Act enacted in 1996 establishes local exchange
competition as a national policy. This act removes state regulatory barriers to
competition, and imposes numerous requirements to facilitate the provision of
local telecommunications services by multiple providers. For instance, carriers
must provide to each other services for resale, number portability, dialing
parity, access to rights of way, and compensation for traffic they exchange.
ILECs must also provide competitors with network interconnection, access to
unbundled network elements, and collocation at ILEC premises, among other
things. Finally, the FCC is responsible for implementing and presiding over
rules relating to these requirements as well as universal service subsidies,
charges for access to long distance carriers, access to buildings, customer
privacy, and services for the disabled.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any entity from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers. The Company
has successfully challenged states' attempts to limit competition in certain
rural areas, and is continuing such challenges in other states. Some of these
challenges are subject to further administrative and court appeals; if the
states succeed in delaying competitive entry into rural areas, the Company's
expansion plans may be adversely affected.
The FCC is charged with the broad responsibility of implementing the
local competition provisions of the Telecommunications Act. It has done so by
promulgating rules which encourage increased local competition. In 1997, a
federal appeals court for the Eighth Circuit vacated some of these rules. In
January 1999, the United States Supreme Court reversed the majority of the
Eighth Circuit's ruling, finding that the FCC has broad authority to interpret
the Telecommunications Act and issue rules for its implementation. Specifically,
the Court stated that the FCC has authority to set pricing guidelines for
unbundled network elements, to prevent ILECs from dismantling existing
combinations of network elements, and to establish rules allowing competitors to
"pick and choose" among provisions of existing interconnection agreements.
However, the Court vacated the FCC's rules that identified the unbundled network
elements that ILECs must provide to CLECs, and the FCC issued an order
explaining which unbundled network elements ILECs must provide. On July 18,
2000, the United States Court of Appeals for the Eighth Circuit issued a
decision vacating certain rules of the FCC regarding the pricing of unbundled
network elements provided by the ILECs to CLECs. Either the Court of Appeals or
the Supreme Court may be asked to review this decision further. If the decision
is not further reviewed, the FCC will be required to revise its pricing rules,
which may result in changes in the prices paid by the Company to ILECs for use
of their telephone lines and other facilities. Until the FCC actually issues new
rules and they are implemented by the state regulatory commission, it is
impossible to predict how this development may affect the Company's costs.
<PAGE>
Many new carriers have experienced difficulties in working with the
ILECs, with respect to provisioning, interconnection, rights-of-way, collocation
and implementing the systems used by these new carriers to order and receive
unbundled network elements and wholesale service from the ILECs. Coordination
with ILECs is necessary for new carriers such as the Company to provide local
service to customers on a timely and competitive basis. The Telecommunications
Act created incentives for RBOCs to cooperate with new carriers, allowing the
RBOCs to offer long distance services originating in their region, if the RBOC
satisfies statutory conditions designed to open their local markets to
competition. The Company cannot be assured that RBOCs will be accommodating to
the Company's networks once they are permitted to offer long distance service.
If the Company's networks are unable to obtain the cooperation of an RBOC in a
region, whether or not such RBOC has been authorized to offer long distance
service, the Company's networks' ability to offer local services in such region
on a timely and cost effective basis would be adversely affected.
On December 9, 1999 the FCC released an order requiring the incumbent
carriers to offer "line sharing" arrangements that will permit CLECs to offer
DSL service and other advanced services over the same copper wires used by
incumbent local exchange carriers to provide voice service. The specific prices
and terms of these arrangements will be determined by future decisions of state
utility commissions, and cannot be predicted at this time. The FCCs ruling may
also be challenged in court. We expect that this order, if implemented, will
allow CLECs to offer DSL services at a significantly lower cost than is now
possible.
On March 17, 2000, the U.S. Court of Appeals for the District of
Columbia Circuit (the "DC Circuit Court") vacated certain FCC rules relating to
collocation of competitors' equipment in ILEC central offices. This decision
requires the FCC to limit collocation to equipment that is "necessary" for
interconnection with the ILEC or access to the ILECs unbundled network elements.
Any disputes over the "necessary" status of particular items of equipment may
have to be resolved by the FCC or by state commissions, and such disputes could
result in delays or changes to the Company's collocation plans.
A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to Internet service providers ("ISPs"). The ILECs
claim that this traffic is interstate in nature and therefore should be exempt
from compensation arrangements applicable to local, intrastate calls. Most
states have required ILECs to pay ISPs reciprocal compensation. In addition, on
March 24, 2000, the DC Circuit Court vacated the FCC's ruling in which the FCC
determined that calls to ISPs are interstate in nature. The FCC ruling, however,
was not in any case intended to dislodge previous state decision interpreting
interconnection agreements between ILECs and CLECs to require reciprocal
compensation between local tow carriers jointly delivering dial-up traffic to
ISPs. Although the FCC does not intend to require ISPs to pay access charges or
contribute to universal service funds, the FCC's order and subsequent state
rulings could affect the costs incurred by ISPs and the demand for their
offerings. An unfavorable outcome could materially affect the Company's
potential future revenues.
Several ILECs have filed petitions at the FCC and have initiated
legislative efforts to effect a waiver of certain obligations imposed on ILECs
in the Telecommunications Act with respect to RBOC-provisioned high-speed data
services, including, among other things, the obligation to unbundle and offer
for resale such services. In addition, the ILECs are seeking to provide
high-speed data services on an interLATA basis without complying with the market
opening provisions of the competitive checklist set forth in the
Telecommunications Act, which would be otherwise required of them. The FCC has
determined that such services are subject to interstate jurisdiction and to the
<PAGE>
resale and unbundling obligation of the Telecommunications Act. In addition,
there are numerous bills being considered by Congress which would deregulate
advanced services. These outcomes could have a material adverse effect on the
Company.
Any of the regulatory changes discussed above could require
renegotiation of relevant portions of existing interconnection agreements, or
subject them to additional court and regulatory proceedings. It remains to be
seen whether the networks can continue to obtain and maintain interconnection
agreements on terms acceptable to them in every state, though most states have
already adopted pricing rules, if not interim prices, which are for the most
part consistent with the FCC's related pricing provisions.
The FCC also manages universal service subsidies for rural, high-cost,
and low-income markets, qualifying schools and libraries and services provided
to rural health care providers. It currently assesses the Company's networks for
such payments and other subsidies on the basis of certain revenue for the
previous year. Various states also implement their own universal service
programs to which the Company is subject.
To the extent that the Company's networks provide interexchange
telecommunications service, access charges are required to be paid to ILECs when
the facilities of those companies are used to originate or terminate
interexchange calls. Also, as CLECs, the Company's networks provide access
service to other interexchange service providers. The interstate access charges
of ILECs are subject to extensive regulation by the FCC, while those of CLECs
are subject to a lesser degree of FCC regulation but remain subject to the
requirement that all charges be just, reasonable, and not unreasonably
discriminatory. In recent months, AT&T and Sprint have sent letters to virtually
every nondominant provider asserting that the nondominant provider's terminating
access rates are unreasonable, and demanding a reduction in rates to a
"competitive" level. AT&T has also asserted that it has no obligation to
purchase switched access services from nondominant providers if it is not
satisfied with their rates, and has refused to pay some carriers' invoices for
these services. The FCC is also considering whether it should take steps to
limit the access charges of nondominant providers. Adverse decisions by the FCC
or the courts could significantly reduce the Company's revenues from the access
charges.
On May 31, 2000, the FCC adopted an industry proposal for further
reform of access charges. This has resulted in substantial reductions in the
per-minute access charges of the major ILECs, which we expect will result in
further downward competitive pressure on long-distance prices. This plan also
resulted in some price increases for the ILEC's local services for business
customers, which will make the Company's services more competitive in some
markets.
In an exercise of its "forbearance authority," the FCC has ruled that
following a transition period non-dominant IXCs will no longer be able to file
tariffs with the FCC concerning their interexchange long distance services (the
"IXC Detariffing Order"). Tariffs set forth the terms and conditions under which
the operating companies provide services. This would deprive the Company of the
advantages of being able to rely on terms and conditions contained in a filed
tariff, requiring instead reliance on individual contracts. The FCC's transition
period will expire on January 31, 2001, by which date the Company will have to
cancel its interexchange service tariffs. It is also likely that the FCC may
impose a similar detariffing requirement on interstate access services, which
could make it more difficult for the Company to obtain payment of its access
charges from interexchange providers.
The FCC also presides over ongoing proceedings addressing a variety of
other matters, including number portability, Internet, telephony, slamming,
rights of way, building access, pole attachments, customer privacy, and services
to the disabled. The outcome of any such proceedings may adversely affect the
Company and its ability to offer service in competition with LECs.
<PAGE>
State Regulation
Most State Public Utility Commissions ("PUCs") require companies that
wish to provide intrastate common carrier services to be certified to provide
such services. These certifications generally require a showing that the carrier
has adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. The certificates or
other authorizations held by the Company permit it to provide a full range of
local telecommunications services, including basic local exchange service. In
certain states, each of the Company, its subsidiaries and the Company's networks
may be subject to additional state regulatory requirements, including tariff
filing requirements, to begin offering the telecommunications services for which
such entities have been certificated. In some states, the Company network tariff
lists a rate range or sets prices on an individual case basis. Many states also
may have additional regulatory requirements such as reporting and customer
service and quality requirements, Y2K compliance, unbundling and universal
service contributions all of which are subject to change and may adversely
affect the Company. In addition, in virtually every state, the Company's
certificate or other authorization is subject to the outcome of proceedings by
the state commission that address regulation of LECs and CLECs, competition,
geographic build-out, mandatory detariffing, service requirements, and universal
service issues.
In addition to obtaining certification, a Company network must
negotiate terms of interconnection with the ILEC before it can begin providing
switched services. To date, the Company's networks have negotiated
interconnection agreements with one or more of the ILECs, in each state in which
they are currently operating. Agreements are subject to State PUC approval.
The Company is subject to requirements in some states to obtain prior
approval for, or notify the commission of any transfers of control, sales of
assets, corporate reorganizations, issuance of stock or debt instruments, name
changes and other transactions that may effect a change in the way that the
Company does business. Although the Company believes such authorization could be
obtained, there can be no assurance that the state commissions would grant the
Company authority to complete any transactions.
Local Government Authorizations
A Company network may be required to obtain from municipal authorities
street opening and construction permits, or operating franchises, to install and
expand its fiber optic networks in certain cities. In some cities, the Local
Partners or subcontractors may already possess the requisite authorizations to
construct or expand the Company's networks. A Company network or its Local
Partners also may be required to obtain a license to attach facilities to
utility poles in order to build and expand facilities. Because utilities that
are owned by a cooperative or municipality are not subject to federal pole
attachment regulation, there are no assurances that a Company network or its
Local Partners will be able to obtain pole attachments from these utilities at
reasonable rates, terms and conditions.
In some of the areas where the Company's networks provide service,
their Local Partners pay license or franchise fees based on a percent of fiber
lease payment revenues. In addition, in areas where the Company does not use
facilities constructed by a Local Partner, the Company's networks may be
required to pay such fees. There are no assurances that certain municipalities
<PAGE>
that do not currently impose fees will not seek to impose fees in the future,
nor is there any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In addition, some
municipalities may seek to impose requirements or fees on users of transmission
facilities, even though they do not own such facilities.
In many markets, other companies providing local telecommunications
services, particularly the ILECs, currently are excused from paying license or
franchise fees or pay fees that are materially lower than those required to be
paid by the Company network or Local Partner. The Telecommunications Act
requires municipalities to charge nondiscriminatory fees to all
telecommunications providers, but it is uncertain how quickly this requirement
will be implemented by particular municipalities in which the Company operates
or plans to operate or whether it will be implemented without a legal challenge
initiated by the Company or another CLEC.
If any of the existing local partner agreements or fiber lease
agreements held by a Local Partner or a Company network for a particular market
were terminated prior to its expiration date, such termination could have a
material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company uses fixed rate debt and redeemable preferred stock to fund
its working capital requirements, capital expenditures and acquisitions. These
financing arrangements expose the Company to market risk related to changes in
interest rates. The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes. The table
below summarizes the fair values and contract terms of the Company's financial
instruments subject to interest rate risk as of June 30, 2000.
<TABLE>
Expected Maturity
----------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
--------- --------- ---------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt and
Redeemable Preferred Stock: --- --- --- $303,840 $250,000 $578,393 $1,132,233 $1,054,970
Average Interest Rate 12.53% 12.53% 12.53% 12.42% 12.61% 12.61% --- ---
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The attached Exhibit 99.01 provides certain financial and business
information of the Company for the three months ended June 30, 2000, pursuant to
Section 4.03(a)(iii) of the Indenture dated April 15, 1996 with respect to the
13% Senior Discount Notes.
The attached Exhibit 99.02 provides certain financial and business
information of the Company for the three months ended June 30, 2000, pursuant to
Section 4.03(a)(iii) of the Indenture dated August 27, 1997 with respect to the
12 1/4% Senior Secured Notes.
The attached Exhibit 99.03 provides certain financial and business
information of the Company for the three and six months ended June 30, 2000.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.01 Financial Data Schedule (supplied for the
information of the Commission).
Exhibit 99.01 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.02 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.03 Press Release dated August 9, 2000
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
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.
ADELPHIA BUSINESS SOLUTIONS, INC.
(Registrant)
Date: August 14, 2000 By: /s/ Timothy J. Rigas
----------------------
Timothy J. Rigas
Vice Chairman, Chief Financial Officer
(authorized officer), Chief Accounting Officer
and Treasurer
<PAGE>
Index of Exhibits
Exhibit 27.01 Financial Data Schedule (supplied for the
information of the Commission).
Exhibit 99.01 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.02 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.03 Press Release dated August 9, 2000
<PAGE>
<TABLE>
Exhibit 99.01
SCHEDULE E
Adelphia Business Solutions, Inc.
Form of Financial Information and Operating Data
Of the Subsidiaries and the Joint Ventures Presented by Cluster
Data presented for the quarter ended: 6/30/00
***
Unaudited Other
North East Mid-Atlantic Mid-South Markets Total
FINANCIAL DATA (dollars in thousands):
<S> <C> <C> <C> <C> <C>
Total Revenue $ 18,835.2 $ 44,472.9 $ 18,440.3 $ 13,106.4 $ 94,854.8
Total Capital Expenditures $ 8,039.4 $ 50,361.9 $ 16,977.6 $ 62,323.1 $ 137,702.0
Total EBITDA $ (1,356.6) $ 3,756.5 $ (3,771.9) $ (3,586.1) $ (4,958.1)
Gross PP&E $ 148,705.5 $ 669,886.0 $ 236,231.5 $ 434,413.0 $ 1,489,236.0
Proportional Revenue* $ 18,835.2 $ 36,584.4 $ 18,440.3 $ 13,106.4 $ 86,966.3
Proportional Capital Expenditures* $ 8,039.4 $ 47,902.3 $ 16,977.6 $ 62,323.1 $ 135,242.4
Proportional EBITDA* $ (1,356.6) $ 1,515.1 $ (3,758.0) $ (3,586.0) $ (7,185.5)
Proportional Gross PP&E $ 148,705.5 $ 596,222.1 $ 236,231.5 $ 434,413.0 $ 1,415,572.1
STATISTICAL DATA
Increase for June 30, 2000:
Markets in Operation 2 1 1 --- 4
Route Miles 195 153 50 312 710
Fiber Miles 8,030 3,528 2,378 14,520 28,456
Buildings connected 298 35 36 22 391
Buildings with Customers 608 555 1,560 951 3,674
LEC-Cos collocated** 6 14 1 21 42
Voice Grade Equivalent Circuits 57,792 127,680 53,760 145,152 384,384
As of March 31, 2000:
Markets in Operation*** 10 27 13 8 58
Route Miles 3,370 4,761 3,984 4,295 16,410
Fiber Miles 101,570 172,855 84,842 64,442 423,709
Buildings connected 502 908 762 494 2,666
Buildings with Customers 2,258 8,713 7,930 4,276 23,177
LEC-Cos collocated** 16 87 52 37 192
Voice Grade Equivalent Circuits 338,016 1,245,888 654,528 352,128 2,590,560
As of June 30, 2000:
Markets in Operation 12 28 14 8 62
Route Miles 3,565 4,914 4,034 4,607 17,120
Fiber Miles 109,600 176,383 87,220 78,962 452,165
Buildings connected 800 943 798 516 3,057
Buildings with Customers 2,866 9,268 9,490 5,227 26,851
LEC-Cos collocated** 22 101 53 58 234
Voice Grade Equivalent Circuits 395,808 1,373,568 708,288 497,280 2,974,944
Access Lines Sold 69,032 250,146 110,837 79,390 509,405
Access Lines Installed 66,951 240,881 108,500 77,300 493,632
<FN>
* Represents portion attributable to the Company.
** Local Exchange Carrier's central office
*** Other Markets amounts include, among other things, Network Control Centers and Corporate Capital Expenditures
and Gross Property, Plant and Equipment
</FN>
</TABLE>
<PAGE>
Exhibit 99.02
SCHEDULE F
Adelphia Business Solutions, Inc.
Form of Financial Information and Operating Data
of the Pledged Subsidiaries and the Joint Ventures
Data presented for the quarter ended: 6/30/00
Unaudited
Total
FINANCIAL DATA (dollars in thousands)(a):
Total Revenue $ 30,034.2
Total Capital Expenditures $ 12,723.4
Total EBITDA $ 558.3
Gross Property, Plant & Equipment $ 332,607.4
STATISTICAL DATA(b):
As of June 30, 2000:
Markets in Operation 7
Route Miles 3,672
Fiber Miles 168,523
Buildings connected 1,654
LEC-COs collocated 63
Voice Grade Equivalent Circuits 1,120,224
Access Lines Sold 131,358
Access Lines Installed 127,860
(a) Financial Data represents 100% of the operations of all entities except
Adelphia Business Solutions of Florida, which is reflected at its ownership
in the Jacksonville network, which is 20%.
(b) Statistical Data represents 100% of operating data for all entities.
