UNITED STATES
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 September 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: 0-16899
ARAHOVA COMMUNICATIONS, INC.
(Successor by Merger to Century Communications Corp.)
(Exact name of registrant as specified in its charter)
Delaware 25-1844576
(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 executive offices) (Zip code)
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 ______
---
Adelphia Communications Corporation is the holder of all shares of outstanding
common stock, par value $.01, of Arahova Communications, Inc. consisting of
1,000 shares as of November 14, 2000.
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<S> <C>
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1999 and
September 30, 2000............................................................................. 3
Condensed Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 1999 and 2000.................................................................... 4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 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.................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 16
Item 6. Exhibits and Reports on Form 8-K.............................................................. 17
SIGNATURES............................................................................................. 18
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SAFE HARBOR STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Statements included in this Form 10-Q,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are not historical facts are forward-looking
statements, such as information relating to the effect of future regulation,
future capital commitments and the effects of competition. 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 "forward
looking statements" can be identified by the use of forward looking terminology
such as "believes," "expects," "may," "will," "should," "intends," or
"anticipates" or the negative thereof and the variations thereon or comparable
terminology, or by discussions of strategy that involves risks or uncertainties.
These risks and uncertainties include, but are not limited to, uncertainties
relating to economic conditions, acquisitions and divestitures, the availability
and cost of capital, government and regulatory policies, the pricing and
availability of equipment, materials, inventories and programming, product
acceptance, the Company's ability to construct, expand and upgrade its networks,
reliance on vendors, technological developments, and changes in the competitive
environment in which the Company operates. Readers are cautioned that such
forward-looking 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. For further information regarding those risks and
uncertainties and their potential impact on the Company, see the Adelphia
prospectus and most recent prospectus supplement filed under Registration
Statement No. 333-78027, under the caption "Risk Factors." 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.
<PAGE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
December 31, September 30,
1999 2000
------------------ -----------------
<S> <C> <C>
ASSETS
Cable systems, at cost, net of accumulated depreciation and amortization:
Property, plant and equipment $ 948,583 $ 1,499,893
Intangible assets 6,511,329 7,728,597
------------------ -----------------
Total cable systems 7,459,912 9,228,490
Cash and cash equivalents 128,028 106,355
Investments 122,400 143,759
Subscriber receivables - net 38,675 48,871
Prepaid expenses and other assets - net 72,242 109,601
------------------ -----------------
Total $ 7,821,257 $ 9,637,076
================== =================
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Parent debt $ 1,832,939 $ 1,735,743
Subsidiary debt 581,496 1,483,629
Accounts payable 88,800 110,737
Subscriber advance payments and deposits 23,982 12,402
Accrued interest and other liabilities 145,009 240,115
Due to affiliates - net -- 639,003
Deferred income taxes 1,634,690 1,605,621
------------------ -----------------
Total liabilities 4,306,916 5,827,250
Minority interests 597,486 604,519
Commitments and contingencies (Note 7)
Common stockholders' equity
Common stock, par value $.01 per share:
1,000 shares authorized, issued and outstanding -- --
Additional paid-in-capital 3,372,538 3,312,351
Related party receivables - net (442,120) --
Accumulated other comprehensive loss (1,392) (37,770)
Accumulated deficit (12,171) (69,274)
------------------ -----------------
Total common stockholders' equity 2,916,855 3,205,307
------------------ -----------------
Total $ 7,821,257 $ 9,637,076
================== =================
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Old New Old New
Arahova Arahova Arahova Arahova
--------------- -------------- --------------- --------------
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 173,840 $ 286,715 $ 506,685 $ 773,256
Operating expenses:
Direct operating and programming 70,055 95,828 203,538 258,974
Selling, general and administrative 35,889 53,465 97,065 138,192
Depreciation and amortization 46,119 87,245 119,701 239,537
Stock compensation 26,232 -- 26,232 --
Merger and integration costs 173,935 -- 182,075 1,820
--------------- -------------- --------------- --------------
Total 352,230 236,538 628,611 638,523
--------------- -------------- --------------- --------------
Operating (loss) income (178,390) 50,177 (121,926) 134,733
Other (expense) income:
Interest expense - net (40,463) (78,234) (121,730) (196,440)
Minority interest in income of subsidiaries (4,630) (3,958) (9,764) (4,415)
Other 368 -- 828 --
--------------- -------------- --------------- --------------
Total (44,725) (82,192) (130,666) (200,855)
--------------- -------------- --------------- --------------
Loss before income taxes (223,115) (32,015) (252,592) (66,122)
Income tax (expense) benefit (4,869) 2,965 14,712 9,019
--------------- -------------- --------------- --------------
Net loss from continuing operations (227,984) (29,050) (237,880) (57,103)
Gain on sale of discontinued operations (less
applicable income taxes of $25,739) -- -- 314,295 --
--------------- -------------- --------------- --------------
Net (loss) income (227,984) (29,050) 76,415 (57,103)
Other comprehensive income (loss) - net of income taxes 10,247 (15,186) 17,627 (36,378)
--------------- -------------- --------------- --------------
Comprehensive (loss) income $ (217,737) $ (44,236) $ 94,042 $ (93,481)
=============== ============== =============== ==============
Basic and diluted net loss from continuing operations
per share $ (3.01) $ (3.16)
Basic and diluted gain on sale of discontinued operations
per share -- 4.17
--------------- ---------------
Basic and diluted net (loss) income per share $ (3.01) $ 1.01
=============== ===============
Basic and diluted weighted average shares of common
stock outstanding (in thousands) 75,832 75,289
=============== ===============
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Old Arahova New Arahova
---------------- ----------------
Nine Months Ended
September 30,
1999 2000
---------------- ----------------
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Cash flows from operating activities:
Net income (loss) $ 76,415 $ (57,103)
Adjustments to reconcile net income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization 119,701 239,537
Minority interest in income of subsidiaries 9,764 4,415
Deferred income taxes 322 (20,869)
Gain on sale of discontinued operations (340,034) --
Non-cash interest expense 48,900 51,534
Amortization of restricted stock 6,504 --
Write-off of employee receivables 1,437 --
Acceleration of stock options 11,669 --
Stock compensation 26,232 --
Changes in operating assets and liabilities, net of effects
of acquisitions:
Subscriber receivables 15,880 (457)
Prepaid expenses and other assets (9,165) (51,077)
Accounts payable and accrued liabilities (15,113) 1,572
---------------- ----------------
Net cash (used for) provided by operating activities (47,488) 167,552
---------------- ----------------
Cash flows from investing activities:
Acquisitions (18,306) (698,223)
Expenditures for property, plant and equipment (110,945) (250,754)
Proceeds from sale of discontinued operations 360,115 --
Amounts advanced from related parties -- 20,160
---------------- ----------------
Net cash provided by (used for) investing activities 230,864 (928,817)
---------------- ----------------
Cash flows from financing activities:
Proceeds from debt 880,000 2,434,999
Repayments of debt (11,000) (1,693,881)
Costs associated with financings -- (17,645)
Contribution of cash by parent -- 16,119
Issuance of common stock 9,897 --
Payments to acquire treasury stock (7,891) --
---------------- ----------------
Net cash provided by financing activities 871,006 739,592
---------------- ----------------
Increase (decrease) in cash and cash equivalents 1,054,382 (21,673)
Cash and cash equivalents, beginning of period 278,938 128,028
---------------- ----------------
Cash and cash equivalents, end of period $ 1,333,320 $ 106,355
================ ================
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
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<PAGE>
ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per share amounts)
1. Company and Basis of Presentation
On October 1, 1999, Adelphia Communications Corporation ("Adelphia") and
Century Communications Corp. ("Century") consummated a merger ("the Merger")
whereby Century was merged with and into Adelphia Acquisition Subsidiary, Inc.
("Merger Sub"), a wholly owned subsidiary of Adelphia, pursuant to an Agreement
and Plan of Merger ("the Merger Agreement"), dated as of March 5, 1999, as
amended as of July 12, 1999 and July 29, 1999 by and among Adelphia, Century and
Merger Sub. As a result of the Merger, Century has become a wholly owned
subsidiary of Adelphia. The Merger Sub is sometimes referred to herein as the
"Successor Corporation". The name of the Successor Corporation was changed to
Arahova Communications, Inc. and subsidiaries ("Arahova" or the "Company") on
October 1, 1999. As used herein, "the Company" refers to the predecessor
corporation as well as Arahova, as the successor to the predecessor corporation.
The entities for which condensed consolidated financial statements are presented
for periods prior to October 1, 1999 are referred to herein as "Old Arahova",
and the entities for which condensed consolidated financial statements are
presented for periods subsequent to September 30, 1999 are referred to herein as
"New Arahova". Due to the October 1, 1999 application of purchase accounting
resulting from the acquisition of Old Arahova by Adelphia, the predecessor
condensed consolidated financial statements of Old Arahova are not comparable to
the successor condensed consolidated financial statements of New Arahova. In
addition, Old Arahova previously presented classified balance sheets and
statements of cash flows under the direct method. These financial statements
have been reclassified to conform to New Arahova's presentation.
The Company is primarily engaged in the ownership and operation of cable
television systems in the United States and earns its revenues primarily from
subscriber fees for basic, satellite, premium and ancillary services (such as
installations and equipment rental), local and national advertising sales,
digital and high speed data services and pay-per-view programming.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions of Form 10-Q and Rule
10-01 of Regulation S-X. Such principles are applied on a basis consistent with
those reflected in the December 31, 1999 Transition Report on Form 10-K of the
Company filed with the Securities and Exchange Commission. The condensed
consolidated financial statements contained herein should be read in conjunction
with the consolidated financial statements and related notes contained in the
Company's 1999 Transition Report on Form 10-K. In the opinion of management, the
unaudited condensed consolidated financial statements contained herein include
all adjustments (consisting of only recurring adjustments) necessary for a fair
presentation of the results of operations for the interim periods presented.
These interim results of operations are not necessarily indicative of results
for future periods.
Certain reclassifications have been made to prior period balances to conform
to the current period's presentation.
<PAGE>
2. Significant Events Subsequent to December 31, 1999
On April 14, 2000, Adelphia closed on a $2,250,000 credit facility through
certain subsidiaries and affiliates. The credit facility consists of a
$1,500,000 8 3/4 year reducing revolving credit loan and a $750,000 9 year term
loan.
In connection with the closing of the April 14, 2000 credit facility,
Adelphia contributed cable systems serving approximately 460,000 subscribers to
Arahova. Financial results of the contributed systems are included in the
consolidated results of Arahova from the date of contribution.
Arahova recorded the contribution of these cable systems and related assets
and liabilities at historical cost as follows:
Cable systems, net $ 1,020,498
Other assets 31,947
Debt 3,408
Affiliate payables 1,063,781
Other liabilities 45,443
Net deficit 60,187
In July 2000, Adelphia closed its acquisition under which Prestige
Communications of NC, Inc. sold its cable systems in Virginia, North Carolina
and Maryland to a subsidiary of Arahova for approximately $700,000. These
systems serve approximately 118,250 basic subscribers. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the
financial results of the acquired systems have been included in the consolidated
results of Arahova effective from the date acquired.
On September 28, 2000, Adelphia closed on an incremental $500,000 9 1/4 year
term loan through certain subsidiaries and affiliates of Adelphia and Arahova.
The new term loan will form an additional tranche of the facility that closed on
April 14, 2000, bringing the total amount of that facility to $2,750,000. For
more information on financing transactions, refer to Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
In November 2000, Adelphia and Arahova acquired cable systems in the
Cleveland, Ohio area from Cablevision Systems Corp. These systems served
approximately 310,000 subscribers at the date of acquisition. In connection with
the acquisition, Adelphia issued 10,800,000 shares of its Class A common stock
and Arahova paid cash of approximately $990,000. Simultaneous with the
acquisition, Adelphia contributed the systems purchased with its common stock to
Arahova. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired systems will be
included in the consolidated results of Arahova effective from the date
acquired.
Arahova completed certain acquisitions during the three months ended
December 31, 1999. Reference is made to Note 1 to the consolidated financial
statements contained in the Transition Report on Form 10-K for the seven months
ended December 31, 1999 for additional information regarding these acquisitions.
<PAGE>
The following unaudited financial information assumes that the acquisitions
that were consummated during the three month period ended December 31, 1999 had
occurred on January 1, 1999.
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1999
----------------------------------
Revenues $ 209,725 $ 608,823
Net loss (234,683) (267,196)
The above financial information excludes the gain on the sale, net of income
taxes, of discontinued operations of Centennial Cellular and the Australian
operations of Old Arahova of approximately $314,000 during the nine months ended
September 30, 1999.
3. Debt
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Debt is summarized as follows:
Parent Debt:
December 31, September 30,
1999 2000
----------------- -----------------
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9 1/2% Senior Notes due 2000 $ 148,773 $ --
9 3/4% Senior Notes due 2002 201,172 201,218
Senior Discount Notes due 2003 318,235 345,334
9 1/2% Senior Notes due 2005 250,853 251,010
8 7/8% Senior Notes due 2007 242,542 243,544
8 3/4% Senior Notes due 2007 216,105 217,152
8 3/8% Senior Notes due 2017 94,048 94,336
8 3/8% Senior Notes due 2007 94,106 94,744
Senior Discount Notes due 2008 267,105 288,405
----------------- -----------------
Total parent debt $ 1,832,939 $ 1,735,743
================= =================
Subsidiary Debt:
December 31, September 30,
1999 2000
----------------- -----------------
Notes to banks $ 517,000 $ 1,409,000
9.47% Senior Secured Notes due 2002 64,496 63,225
Other debt -- 11,404
----------------- -----------------
Total subsidiary debt $ 581,496 $ 1,483,629
================= =================
</TABLE>
<PAGE>
4. Net Loss Per Weighted Average Share of Common Stock
For the nine months ended September 30, 1999, diluted net loss per common
share is equal to basic net loss per common share because Old Arahova's
outstanding options and other potential common shares had an anti-dilutive
effect for such periods. Subsequent to the Merger, all shares of New Arahova
common stock are held by Adelphia. As such, disclosure of net loss per weighted
average share of common stock is not required for periods subsequent to the
Merger.
5. Supplemental Financial Information
Cash payments for interest were $104,453 and $172,646 for the nine months
ended September 30, 1999 and 2000, respectively. Accumulated depreciation of
property, plant and equipment amounted to $17,971 and $288,933 at December 31,
1999 and September 30, 2000, respectively. Accumulated amortization of
intangible assets amounted to $38,941 and $255,485 at December 31, 1999 and
September 30, 2000, respectively. Adelphia's contribution of cable systems to
Arahova included accumulated depreciation of property, plant and equipment
totaling $174,551 and accumulated amortization of intangible assets totaling
$77,452.
Interest expense - net includes interest income of $12,251 and $7,833 for
the three months ended September 30, 1999 and 2000, respectively, and $26,716
and $36,221 for the nine months ended September 30, 1999 and 2000, respectively.
Interest income includes interest income from affiliates of $5,025 and $25,968
on related party receivables balances for the three and nine months ended
September 30, 2000, respectively.
6. Income Taxes
Income tax benefit for the three and nine months ended September 30, 2000
was primarily comprised of deferred tax. The Company sold Centennial Cellular
Corp. and its Australian operations in the quarter ended March 31, 1999,
resulting in a pre-tax gain of approximately $340,000. Consequently, in the nine
months ended September 30, 1999, the Company was able to recognize a tax benefit
from the losses incurred from continuing operations prior to the sale.
7. Commitments and Contingencies
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations and Legal Proceedings for a discussion of
material commitments and contingencies.
8. Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133", and SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" is effective for the
Company as of January 1, 2001. SFAS No. 133, as amended, establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value
with changes in fair value reflected in the statement of operations. In
conjunction with preparing for the implementation of this standard, the Company
has determined that our derivative instruments are primarily in the form of
interest rate protection instruments such as interest rate swaps, caps and
<PAGE>
collars and common stock purchase warrants. The Company does not expect adoption
of this statement to have a significant effect on its consolidated results of
operations or financial position.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands)
See Safe Harbor Statement following the table of contents, which section is
incorporated by reference herein.
Introduction
On October 1, 1999, Adelphia Communications Corporation ("Adelphia") and
Century Communications Corp. ("Century") consummated a merger (the "Merger")
whereby Century was merged with and into Adelphia Acquisition Subsidiary, Inc.
("Merger Sub"), a wholly owned subsidiary of Adelphia, pursuant to an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of March 5, 1999, as
amended as of July 12, 1999 and July 29, 1999, by and among Adelphia, Century
and Merger Sub. As a result of the Merger, Century has become a wholly owned
subsidiary of Adelphia. Merger Sub is sometimes referred to herein as the
"Successor Corporation." The name of the Successor Corporation was changed to
Arahova Communications, Inc. ("Arahova") on October 1, 1999. As used herein, the
"Company" refers to the predecessor corporation as well as Arahova, as the
successor to the predecessor corporation.
The Company is primarily engaged in the ownership and operation of cable
television systems in the United States and earns its revenues primarily from
subscriber fees for basic, satellite, premium and ancillary services (such as
installations and equipment rental), local and national advertising sales,
digital and high speed data services and pay-per-view programming. As of
September 30, 2000, the Company owned systems with broadband networks that
served approximately 2,192,000 basic subscribers.
In connection with the closing of the April 14, 2000 credit facility,
Adelphia contributed cable systems serving approximately 460,000 subscribers to
Arahova. Arahova has recorded the contribution of these cable systems and
related assets and liabilities at historical cost with the financial results
included in the consolidated results of Arahova from the date of contribution.
Results of Operations
Three and Nine Months Ended September 30, 1999 and 2000
As described in Note 1 to the accompanying condensed consolidated financial
statements, the Merger occurred on October 1, 1999. Accordingly, the entities
for which financial statements are presented for periods prior to October 1,
1999 are referred to herein as Old Arahova, and the entities for which financial
statements are presented for periods subsequent to September 30, 1999 are
referred to herein as New Arahova. Due to the October 1, 1999 application of the
preliminary purchase accounting in connection with the Merger, the predecessor
condensed consolidated financial statements of Old Arahova are not comparable to
the successor condensed consolidated financial statements of New Arahova.
For purposes of the following table and discussion, depreciation and
amortization and certain other line items included in the operating results of
New Arahova are not necessarily comparable to the operating results of Old
Arahova, due to the effect of the preliminary purchase accounting adjustments
related to the Merger.
<PAGE>
The following table is derived from the unaudited results of operations for
Arahova and sets forth the historical percentage relationship to revenues of the
components of operating income for the periods indicated.
<TABLE>
<CAPTION>
Old New Old New
Arahova Arahova Arahova Arahova
---------- ---------- ---------- ----------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Direct operating and programming 40.3% 33.4% 40.2% 33.5%
Selling, general and administrative 20.6% 18.6% 19.2% 17.9%
Depreciation and amortization 26.5% 30.5% 23.6% 31.0%
Stock compensation 15.1% -- 5.2% --
Merger and integration costs 100.1% -- 35.9% 0.2%
---------- ---------- ---------- ----------
Operating (loss) income (102.6)% 17.5% (24.1)% 17.4%
========== ========== ========== ==========
</TABLE>
Revenues
Revenues increased approximately 64.9% and 52.6% for the three and nine
months ended September 30, 2000 compared with the same periods of the prior
year, respectively. The increases are primarily attributable to the effects of
the contribution of cable systems by Adelphia, acquisitions and the roll-out of
new services.
Direct Operating and Programming
These expenses, which are mainly basic and premium programming costs and
technical expenses, increased 36.8% and 27.2% for the three and nine months
ended September 30, 2000 compared with the same periods of the prior year,
respectively. The increases are primarily due to the effects of the contribution
of cable systems by Adelphia, acquisitions and incremental costs associated with
increased subscribers, partially offset by lower programming rates and other
technical expenses.
Selling, General and Administrative
These expenses, which are mainly comprised of costs related to system
offices, customer service representatives and sales and administrative
employees, increased 49.0% and 42.4% for the three and nine months ended
September 30, 2000 compared with the same periods of the prior year,
respectively. The increases are due primarily to the effects of the contribution
of cable systems by Adelphia, acquisitions and the roll-out of new services.
Stock Compensation
In September 1999, certain employees of Old Arahova exercised options in a
manner that caused Old Arahova to recognize compensation expense for all options
outstanding under the option plans, which resulted in stock compensation expense
of $26,232.
Merger and Integration Costs
These expenses, which are comprised of compensation, legal and consulting
costs, were incurred in conjunction with the merger with Adelphia, which was
completed on October 1, 1999.
<PAGE>
Interest Expense - Net
Interest expense - net increased 93.3% and 61.4% for the three and nine
months ended September 30, 2000 compared with the same periods of the prior
year, respectively. The increase is primarily due to the effects of the
contribution of cable systems by Adelphia, incremental debt related to
acquisitions, the amortization of debt discount recorded as a result of the
Merger and an increase in the average debt outstanding.
Liquidity and Capital Resources
The cable television business is capital intensive and typically requires
continual financing for the construction, modernization, maintenance, expansion
and acquisition of cable and other telecommunication systems. The Company has
made a substantial commitment to the technological development of its systems
and is aggressively investing in the upgrade of the technical capabilities of
its cable plant in a cost efficient manner. The Company's internally-generated
cash, along with third party financings, have enabled it to fund its working
capital requirements, capital expenditures for property, plant and equipment,
acquisitions, investments and debt service. The Company has funded the principal
obligations on its long-term borrowings by refinancing the principal with the
issuance of new loans and debt securities in the public market and through
private institutions as well as internally generated cash flow and the sale of
certain business segments. The debt instruments to which the Company and its
subsidiaries are a party impose restrictions on the incurrence of additional
indebtedness.
Acquisitions
In July 2000, Adelphia closed its acquisition under which Prestige
Communications of NC, Inc. sold its cable systems in Virginia, North Carolina
and Maryland to a subsidiary of Arahova for approximately $700,000. These
systems serve approximately 118,250 basic subscribers. The acquisition was
accounted for under the purchase method of accounting. Accordingly, the
financial results of the acquired systems have been included in the consolidated
results of Arahova effective from the date acquired.
In November 2000, Adelphia and Arahova acquired cable systems in the
Cleveland, Ohio area from Cablevision Systems Corp. These systems served
approximately 310,000 subscribers at the date of acquisition. In connection with
the acquisition, Adelphia issued 10,800,000 shares of its Class A common stock
and Arahova paid cash of approximately $990,000. Simultaneous with the
acquisition, Adelphia contributed the systems purchased with its common stock to
Arahova. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired systems will be
included in the consolidated results of Arahova effective from the date
acquired.
Financing Activities
The subsidiaries' credit facilities and the Company's public debt
instruments, among other things, require the maintenance of certain financial
and operating covenants, restrict the use of proceeds from such borrowing, limit
the incurrence of additional indebtedness, restrict the purchase or redemption
of its capital stock and limit the ability to pay dividends and management fees
and make capital expenditures.
On April 14, 2000, Adelphia closed on a $2,250,000 credit facility through
certain subsidiaries and affiliates of Adelphia and Arahova. The credit facility
consists of a $1,500,000 8 3/4 year reducing revolving credit loan and a
$750,000 9 year term loan. In connection with the closing of this credit
facility, Adelphia contributed cable systems serving approximately 460,000
subscribers to Arahova.
<PAGE>
On September 28, 2000, Adelphia closed on a $500,000 9 1/4 year term loan
through certain subsidiaries and affiliates of Adelphia and Arahova. The new
term loan will form an additional tranche of the credit facility that closed on
April 14, 2000. This brings the total amount of that credit facility to
$2,750,000.
At September 30, 2000, the Company's total outstanding debt aggregated
$3,219,372, which included $1,735,743 of parent debt and $1,483,629 of
subsidiary debt. As of September 30, 2000, the Company had approximately
$1,406,000 in unused credit lines, cash and cash equivalents and receivables
from certain affiliates, all of which was also available to affiliates and part
of which is subject to achieving certain levels of operating performance. The
Company's weighted average interest rate on subsidiary debt was approximately
8.92% at September 30, 2000.
The following table sets forth the mandatory reductions in principal under
all debt agreements for each of the next four years and three months based on
amounts outstanding at September 30, 2000:
Three months ending December 31, 2000 $ 20,000
Year ending December 31, 2001 23,500
Year ending December 31, 2002 235,000
Year ending December 31, 2003 522,672
Year ending December 31, 2004 158,450
The Company plans to continue to explore and consider new commitments,
arrangements or transactions to refinance existing debt, increase the Company's
liquidity or decrease the Company's leverage. These could include, among other
things, the future issuance by Arahova, or its subsidiaries, of public or
private equity or debt and the negotiation of new or amended credit facilities.
These could also include entering into acquisitions, joint ventures or other
investment or financing activities, although no assurance can be given that any
such transactions will be consummated. The Company's ability to borrow under
current credit facilities and to enter into refinancings and new financings is
limited by covenants contained in Arahova's and its subsidiaries' indentures and
credit agreements, including covenants under which the ability to incur
indebtedness is, in part, a function of applicable ratios of total debt to cash
flow.
The Company believes that cash and cash equivalents, internally generated
funds, borrowings under existing credit facilities, and future financing sources
will be sufficient to meet its short-term and long-term liquidity and capital
requirements. Although in the past the Company has been able to refinance its
indebtedness or obtain new financing, there can be no assurance that the Company
will be able to do so in the future or that the terms of such financings would
be favorable.
Management believes that the telecommunications industry, including the
cable television and telephone industries, continues to be in a period of
consolidation characterized by mergers, joint ventures, acquisitions, sales of
all or part of cable or telephone companies or their assets, and other
partnering and investment transactions of various structures and sizes involving
cable or other telecommunications companies. The Company continues to evaluate
new opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity to
its existing regional markets or in locations that can serve as a basis for new
market areas. The Company, like other cable television companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore potential
transactions of various types with other cable and telecommunications companies.
However, no assurances can be given as to whether any such transaction may be
consummated or, if so, when, or that additional competition from this industry
consolidation will not have an adverse effect on the Company.
<PAGE>
Capital expenditures for the nine months ended September 30, 1999 and 2000
were $110,945 and $250,754 respectively. This increase was primarily due to
acquisitions and cable plant rebuilds and upgrades to expand services. The
Company expects that capital expenditures for the year ending December 31, 2000
will be in a range of approximately $360,000 to $400,000.
Regulatory and Competitive Matters
The cable television operations of the Company may be adversely affected by
changes and developments in governmental regulation, competitive forces and
technology. The cable television industry and the Company are subject to
extensive regulation at the federal, state and local levels. The 1992 Cable Act
significantly expanded the scope of regulation of certain subscriber rates and a
number of other matters in the cable industry, such as mandatory carriage of
local broadcast stations and retransmission consent, and increased the
administrative costs of complying with such regulations. The FCC has adopted
rate regulations that establish, on a system-by-system basis, maximum allowable
rates for (i) basic and cable programming services (other than programming
offered on a per-channel or per-program basis), based upon a benchmark
methodology, and (ii) associated equipment and installation services based upon
cost plus a reasonable profit. Under the FCC rules, franchising authorities are
authorized to regulate rates for basic services and associated equipment and
installation services, and the FCC will regulate rates for regulated cable
programming services in response to complaints filed with the agency. The
Telecommunications Act of 1996 (the "1996 Act") ended FCC regulation of cable
programming service tier rates on March 31, 1999.
Rates for basic services are set pursuant to a benchmark formula.
Alternatively, a cable operator may elect to use a cost-of-service methodology
to show that rates for basic services are reasonable. Refunds with interest will
be required to be paid by cable operators who are required to reduce regulated
rates. The FCC has reserved the right to reduce or increase the benchmarks it
has established. The rate regulations also limit increases in regulated rates to
an inflation indexed amount plus increases in certain costs such as taxes,
franchise fees, costs associated with specific franchise requirements and
increased programming costs. Cost-based adjustments to these capped rates can
also be made in the event a cable operator adds or deletes channels or completes
a significant system rebuild or upgrade. Because of the limitation on rate
increases for regulated services, future revenue growth from cable services will
rely to a much greater extent than has been true in the past on increased
revenues from unregulated services and new subscribers than from increases in
previously unregulated rates.
The FCC has adopted regulations implementing all of the requirements of the
1992 Cable Act. The FCC is also likely to continue to modify, clarify or refine
the rate regulations. The Company cannot predict the effect of the 1996 Act or
future legislative or rulemaking proceedings or changes to the rate regulations.
No assurance can be given as to what other future actions Congress, the FCC or
other regulatory authorities may take or the effects thereof on the Company.
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
Because such franchises are generally non-exclusive, there is a potential for
competition with the systems from other operators of cable television systems,
including public systems operated by municipal franchising authorities
themselves, and from other distribution systems capable of delivering television
programming to homes. The 1992 Cable Act and the 1996 Act contain provisions
which encourage competition from such other sources. The Company cannot predict
the extent to which competition will materialize from other cable television
operators, local telephone companies, other distribution systems for delivering
television programming to the home, or other potential competitors, or, if such
competition materializes, the extent of its effect on the Company.
<PAGE>
The 1996 Act repealed the prohibition on local telephone exchange companies
("LECs") from providing video programming directly to customers within their
local exchange areas other than in rural areas or by specific waiver of FCC
rules. The 1996 Act also authorized LECs to operate "open video systems" ("OVS")
without obtaining a local cable franchise, although LECs operating such a system
can be required to make payments to local governmental bodies in lieu of cable
franchise fees. Where demand exceeds capacity, up to two-thirds of the channels
on an OVS must be available to programmers unaffiliated with the CLEC. The
statute states that the OVS scheme supplants the FCC's "video dialtone" rules.
The FCC has promulgated rules to implement the OVS concept, and New Jersey Bell
Telephone Company ("NJBTC") was granted permission to convert its video dialtone
authorization in Dover Township, New Jersey to an OVS authorization. NJBTC
terminated its OVS operation in Dover Township, New Jersey at the end of 1998.
Recently, RCN Telecom Services, Inc. has been granted permission to convert its
video dialtone authorization in the Philadelphia region to an OVS authorization.
The Company believes that the provision of video programming or other
services by telephone companies in competition with the Company's existing
operations could have an adverse effect on the Company's financial condition and
results of operations. At this time, the impact of any such effect is not known
or estimable.
The Company also competes with direct broadcast satellites ("DBS") service
providers. DBS has been available to consumers since 1994. A single DBS
satellite can provide more than 100 channels of programming. DBS service can be
received virtually anywhere in the United States through the installation of a
small outdoor antenna. DBS service is being heavily marketed on a nationwide
basis by competing service providers. Congress passed the Satellite Home Viewer
Act in late 1999. The law allows DBS providers to begin offering local broadcast
channels. DBS companies have since added a limited number of local channels in
some regions, a trend that will continue, thus lessening the distinction between
cable television and DBS service. Although the impact to date has not been
material, any future impact of DBS competition on the Company's future results
is not known or estimable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(Dollars in thousands)
The Company uses fixed and variable rate debt to fund its working capital
requirements, capital expenditures and acquisitions. These debt arrangements
expose the Company to market risk related to changes in interest rates. The
Company has entered into a receive-fixed interest rate swap agreement to
effectively convert a portion of its fixed-rate debt to variable-rate debt to
reduce the risk of incurring higher interest costs in periods of falling
interest rates. The Company does not enter into any interest rate protection
agreements for trading purposes. The Company is exposed to market risk in the
event of non-performance by the counterparties. No such non-performance is
expected.
<PAGE>
The table below summarizes the fair values and contract terms of the Company's
financial instruments subject to interest rate risk as of September 30, 2000.
<TABLE>
<CAPTION>
Expected Maturity
-------------------------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---------- ---------- ---------- ----------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed Rate $ 20,000 $ 20,000 $ 220,000 $ 444,000 $ -- $ 1,530,000 $ 2,234,000 $ 1,715,550
Average Interest Rate 9.04% 9.04% 8.97% 8.97% -- 8.89% -- --
Variable Rate -- 3,500 15,000 78,672 158,450 1,153,378 1,409,000 1,409,000
Average Interest Rate -- 7.03% 7.09% 7.25% 7.32% 7.40% -- --
Interest Rate Swaps:
Fixed to Variable Swap $ -- $ -- $ 35,000 $ -- $ -- $ -- $ 35,000 $ (675)
Average Pay Rate -- -- 6.76% -- -- -- -- --
Average Receive Rate -- -- 6.70% -- -- -- -- --
</TABLE>
Interest rates on variable debt are estimated by using the average implied
forward London Interbank Offer Rate ("LIBOR") rates for the year of maturity
based on the yield curve in effect at September 30, 2000, plus the borrowing
margin in effect at September 30, 2000. The average pay rate on the fixed to
variable swap is estimated by using the average implied forward LIBOR rates for
the year of maturity based on the yield curve in effect at September 30, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In November 1999, Arahova was sued in a class-action case, Galley vs.
American Telephone & Telegraph Corp. et al., where the plaintiffs allege, that
by requiring customers to purchase the @Home service, rather than offering the
option of access alone, Arahova and the other defendant MSO's are illegally
"tying" internet content to internet access, thereby violating both the federal
antitrust laws and California unfair trade practice statutes. The plaintiffs
also allege that the defendants have entered into an illegal conspiracy to
require all MSO's providing, or desiring to provide, the @Home service to enter
into contracts precluding them from offering any competing internet service. The
plaintiffs have recently filed an amended complaint alleging that the violations
are national in scope (rather than merely local). The Company is vigorously
defending this case. Due to the preliminary nature of the litigation, the
outcome cannot be predicted.
Adelphia and certain subsidiaries, including Arahova, are defendants in
several putative subscriber class action suits in state courts in Pennsylvania
and Mississippi initiated during 1999. The suits all challenge the propriety of
late fees charged by the subsidiaries to customers who fail to pay for services
in a timely manner. The suits seek injunctive relief and various formulations of
damages under various claimed causes of action under various bodies of state
law. These actions are in various stages of defense and are being defended
vigorously. The outcome of these matters cannot be predicted at this time. In
May 2000, Adelphia settled similar litigation in the state courts of Vermont.
The settlement of this matter did not have a material adverse effect.
On or about March 24, 2000, ML Media Partners, L.P. ("ML Media")
commenced an action by filing a Verified Complaint (the "Complaint") in the
Supreme Court of the State of New York, New York County, against Arahova,
<PAGE>
Century Communications Corp., a Texas subsidiary of Arahova ("Century"), and
Adelphia. In the nine count Complaint, ML Media alleges that it entered into a
joint venture agreement (the "Agreement") with Century which, as subsequently
modified, governed the ownership, operation and disposition of cable television
systems in Puerto Rico (the "Joint Venture"). The Complaint alleges that
Adelphia and its affiliates took over Century's interest in the Joint Venture on
or around October 1, 1999, and have, according to the Complaint, breached their
fiduciary obligations to the Joint Venture and violated certain provisions of
the Agreement. The Complaint further alleges that ML Media gave Century notice
that ML Media was exercising its rights under the Agreement to require that
Century elect to (A) purchase ML Media's interest in the Joint Venture at an
appraised fair value, or (B) seek to sell the cable systems to one or more third
parties. Century, according to the Complaint, elected to pursue the sale of the
cable systems and indicated that it was evaluating whether it or an affiliate
thereof would make an offer for the cable systems. The Complaint alleges that
Century or its affiliates' potential participation in the sale process is
improper. The Complaint asks for, among other things, the dissolution of the
Joint Venture and the appointment of a receiver to effect a prompt sale of the
Joint Venture. The parties completed discovery in the action and each filed
motions for partial summary judgment. On July 10, 2000, Justice Gammerman
granted ML Media's motion for partial summary judgment on the fourth cause of
action and declared that neither Century nor any of its affiliates may bid on or
attempt to purchase the assets and business of the Joint Venture. Justice
Gammerman also dismissed the fourth count of the counterclaim and required
Century to proceed diligently with ML Media in locating one or more third
parties to complete the sale and prohibited any defendant from interfering with
the sale. On July 26, 2000, the Justice also ordered that the sale may be a sale
of either the assets of the Joint Venture or the partnership interests in the
Joint Venture. The Justice did not address other issues concerning the motion
for summary judgment and did not schedule a full hearing on the merits. On
August 7, 2000, Arahova and the other defendants filed a notice of appeal with
respect to the above described orders and judgment of the Court. We expect that
appeal to be considered by the appellate court in December 2000 or January 2001.
The management of Adelphia and Arahova intend to vigorously defend this action.
Management believes that this matter will not have a material adverse effect on
the Company.
There is no other material pending legal proceeding, other than routine
litigation incidental to the business, to which the Company is a party or any of
its property is subject.
Item 6. Exhibits and Reports on Form 8-K
Each exhibit identified below is filed as part of this report.
a) Exhibits
Exhibit No. Description
27.01 Financial Data Schedule (supplied for the information of the Commission)
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.
ARAHOVA COMMUNICATIONS, INC.
(Registrant)
Date: November 14, 2000 By: /s/ Timothy J. Rigas
---------------------------------
Timothy J. Rigas
Executive Vice President (authorized
officer), Chief Financial Officer, Chief
Accounting Officer and Treasurer
