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 November 30, 1999
____ 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 January 13, 2000.
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets - May 31, 1999 and November 30, 1999............................... 3
Condensed Consolidated Statements of Operations - Six Months Ended November 30, 1998,
Four Months Ended September 30, 1999 and Two Months Ended November 30, 1999........................... 4
Condensed Consolidated Statements of Operations - Three Months Ended November 30, 1998,
One Month Ended September 30, 1999 and Two Months Ended November 30, 1999............................. 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended November 30, 1998,
Four Months Ended September 30, 1999 and Two Months Ended November 30, 1999.......................... 6
Notes to Condensed Consolidated Financial Statements..................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 23
Item 2. Changes in Securities and Use of Proceeds............................................................ 23
Item 3. Defaults Upon Senior Securities...................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 23
Item 5. Other Information.................................................................................... 24
Item 6. Exhibits and Reports on Form 8-K..................................................................... 24
SIGNATURES.................................................................................................... 25
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
Old Arahova New Arahova
------------ ------------
May 31, November 30,
1999 1999
------------ ------------
ASSETS
Cable systems, at cost, net of accumulated depreciation and
amortization:
<S> <C> <C>
Property, plant and equipment $ 585,980 $ 780,604
Intangible assets 459,833 5,792,230
----------- -----------
Total 1,045,813 6,572,834
Cash and cash equivalents 626,155 215,659
Investments 74,899 119,021
Subscriber receivables - net 24,798 29,625
Prepaid expenses and other assets - net 31,934 45,172
----------- -----------
Total $ 1,803,599 $ 6,982,311
=========== ===========
LIABILITIES AND COMMON STOCKHOLDERS'
EQUITY (DEFICIENCY)
Parent debt $ 1,873,640 $ 1,892,147
Subsidiary debt 169,050 1,002,882
Accounts payable 44,096 61,789
Subscriber advance payments and deposits 25,747 35,718
Accrued interest and other liabilities 76,180 192,347
Deferred income taxes 5,290 1,641,567
----------- -----------
Total liabilities 2,194,003 4,826,450
Parent's interest in subsidiary and other minority interests 74,915 167,386
Commitments and contingencies (See Note 7)
Common stockholders' equity (deficiency):
Common stock, par value $.01 per share:
New Arahova, 1,000 shares authorized,
issued and outstanding -- --
Old Arahova Class A, 400,000,000 shares authorized,
67,232,335 shares issued and 33,423,167 shares outstanding 672 --
Old Arahova Class B, 300,000,000 shares authorized,
42,322,059 shares issued and outstanding 423 --
Additional paid-in-capital 191,234 3,082,437
Related party receivables - net -- (1,086,306)
Other, including 33,809,168 treasury shares (143,818) --
Accumulated deficit (513,830) (7,656)
----------- -----------
Total common stockholders' equity (deficiency) (465,319) 1,988,475
----------- -----------
Total $ 1,803,599 $ 6,982,311
=========== ===========
See notes to condensed consolidated financial statements.
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Old Arahova New Arahova
---------------------------------- ----------------
Six Months Four Months Two Months
Ended Ended Ended
November 30, September 30, November 30,
1998 1999 1999
---------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues $ 321,158 $ 231,230 $ 117,633
Operating expenses:
Direct operating and programming 121,964 92,455 37,712
Selling, general and administrative 63,617 47,610 20,087
Depreciation and amortization 82,574 59,665 32,383
Stock compensation 621 26,232 --
Merger and intergration costs -- 174,153 3,140
---------------- ----------------- ----------------
Total 268,776 400,115 93,322
---------------- ----------------- ----------------
Operating income (loss) 52,382 (168,885) 24,311
Other (expense) income:
Interest expense - net (88,589) (53,929) (27,689)
Gain on sale of assets 5,225 -- --
Parent's and other minority interests in income
of subsidiaries (6,464) (4,911) (5,874)
Other -- 337 --
---------------- ----------------- ----------------
Total (89,828) (58,503) (33,563)
Loss before income taxes (37,446) (227,388) (9,252)
Income tax benefit (expense) (8,517) (5,837) 1,596
---------------- ----------------- ----------------
Net loss $ (45,963) $ (233,225) $ (7,656)
================ ================= ================
Basic and diluted net loss per weighted average
share of common stock $ (0.61) $ (3.07)
================ =================
Weighted average shares of common stock
outstanding (in thousands) 74,892 75,921
================ =================
See notes to condensed consolidated financial statements.
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Old Arahova New Arahova
--------------------------------- -----------------
Three Months One Month Two Months
Ended Ended Ended
November 30, September 30, November 30,
1998 1999 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues $ 162,754 $ 60,461 $ 117,633
Operating expenses:
Direct operating and programming 62,096 25,441 37,712
Selling, general and administrative 32,238 14,899 20,087
Depreciation and amortization 42,965 19,837 32,383
Stock compensation -- 26,232 --
Merger and integration costs -- 742 3,140
---------------- ---------------- -----------------
Total 137,299 87,151 93,322
---------------- ---------------- -----------------
Operating income (loss) 25,455 (26,690) 24,311
Other (expense) income:
Interest expense - net (44,559) (13,842) (27,689)
Loss on sale of assets (317) -- --
Parent's and other minority interests in income
of subsidiaries (1,972) (828) (5,874)
Other -- 96 --
---------------- ---------------- -----------------
Total (46,848) (14,574) (33,563)
Loss before income taxes (21,393) (41,264) (9,252)
Income tax benefit (expense) (3,732) (1,827) 1,596
---------------- ---------------- -----------------
Net loss $ (25,125) $ (43,091) $ (7,656)
================ ================ =================
Basic and diluted net loss per weighted average
share of common stock $ (0.33) $ (0.57)
================ ================
Weighted average shares of common stock
outstanding (in thousands) 75,010 76,023
================ ================
See notes to condensed consolidated financial statements.
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Old Arahova New Arahova
--------------------------------- -----------------
Six Months Four Months Two Months
Ended Ended Ended
November 30, September 30, November 30,
1998 1999 1999
---------------- ---------------- -----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (45,963) $ (233,225) $ (7,656)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 82,574 59,665 32,383
Parent's and other minority interests in income of subsidiaries 6,464 4,911 5,874
Increase(decrease) in deferred taxes -- 202 (1,596)
Gain on sale of assets and other (5,950) -- --
Amortization of restricted stock -- 6,504 --
Write-off of employee receivables -- 1,437 --
Acceleration of stock options -- 11,669 --
Noncash interest expense 28,140 19,647 9,132
Stock compensation 621 26,232 --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Subscriber receivables (14,506) 2,240 (3,204)
Prepaid expenses and other assets (3,110) (5,403) (1,897)
Accounts payable and accrued liabilities 6,818 3,641 45,269
---------------- ---------------- -----------------
Net cash provided by (used for) operating activities 55,088 (102,480) 78,305
---------------- ---------------- -----------------
Cash flows used for investing activities:
Capital expenditures (51,546) (52,630) (23,964)
Acquisition of other assets (1,982) (14,303) --
Proceeds from sale of radio stations 11,538 -- --
Amounts invested in and advanced to related parties -- -- (1,086,298)
---------------- ---------------- -----------------
Net cash used for investing activities (41,990) (66,933) (1,110,262)
---------------- ---------------- -----------------
Cash flows (used for) provided by financing activities:
Proceeds from debt -- 880,000 --
Repayments of debt (27,050) (1,000) (49,801)
Issuance of common stock 4,133 5,468 --
Purchase of treasury stock (1,506) (7,891) --
---------------- ---------------- -----------------
Net cash (used for) provided by financing activities (24,423) 876,577 (49,801)
---------------- ---------------- -----------------
(Decrease) increase in cash and cash equivalents -
continuing operations (11,325) 707,164 (1,081,758)
Cash flow of discontinued operations - net 4,765 -- --
Cash and cash equivalents, beginning of period 285,498 626,155 1,297,417
---------------- ---------------- -----------------
Cash and cash equivalents, end of period $ 278,938 $ 1,333,319 $ 215,659
================ ================ =================
See notes to condensed consolidated financial statements.
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ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation, Interim Financial Statements and Merger:
The accompanying unaudited condensed consolidated financial statements of
Arahova Communications, Inc. and subsidiaries ("Arahova" or "the Company") have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. 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 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 with New Arahova's presentation.
In the opinion of management, all adjustments, consisting of only normal
recurring accruals necessary for a fair presentation of the financial position
of Arahova at November 30, 1999 and the results of operations for the three and
six months ended November 30, 1998, the one and four months ended September 30,
1999, and the two months ended November 30, 1999 have been included. These
condensed consolidated financial statements should be read in conjunction with
Century's consolidated financial statements and notes thereto included in its
Annual Report on Form 10-K for the year ended May 31, 1999. Certain
reclassifications have been made to prior period balances to conform with the
current period's presentation. The results of operations for the periods ended
September 30, 1999 and November 30, 1999 listed above are not necessarily
indicative of the results to be expected for the period ending May 31, 2000.
Pursuant to the terms of the Merger Agreement, and subject to the
limitations set forth below, each issued and outstanding share of Class A common
stock, par value $.01 per share, of Century ("Century Class A common stock") was
converted, at the option of the holder, into the right to receive either (1)
$44.14 in cash, or (2) 0.77269147 shares of Class A common stock, par value $.01
per share of Adelphia ("Adelphia Class A common stock "). Subject to the
limitations set forth below, each issued and outstanding share of Class B common
stock, par value $.01 per share, of Century ("Century Class B common stock ")
was converted, at the option of the holder, into the right to receive either (1)
$48.14 in cash, or (2) 0.84271335 shares of Adelphia Class A common stock.
The aggregate number of shares of Century's Class A common stock converted
into the right to receive cash in the Merger was limited to 20.76% of the number
of shares of Century's Class A common stock outstanding immediately prior to the
effective time of the Merger. The aggregate number of shares of the Century's
Class A common stock converted into the right to receive shares of Adelphia
Class A common stock in the Merger was limited to 79.24% of the number of such
shares of Century's Class A common stock outstanding immediately prior to the
effective time of the Merger. The aggregate number of shares of Century's Class
B common stock converted into the right to receive cash in the Merger was
limited to 24.54% of the number of shares of Century's Class B common stock
outstanding immediately prior to the effective time of the Merger. The aggregate
number of shares of Century's Class B common stock converted into the right to
receive shares of Adelphia Class A common stock in the Merger was limited to
75.46% of the number of shares of Century's Class B common stock outstanding
immediately prior to the effective time of the Merger.
Century Class A common stockholders made stock elections for an amount of
Adelphia Class A common stock exceeding the amount available to such holders. As
a result, holders of Century Class A common stock who elected to receive
Adelphia Class A common stock received 86.42% of their consideration in Adelphia
Class A common stock, or approximately 0.6678 of a share of Adelphia Class A
common stock, and 13.58% of their consideration in cash, or approximately $5.99,
for each share of Century Class A common stock, without interest. Holders of
Century Class A common stock who elected to receive cash received $44.14 per
share, without interest.
Century Class B common stockholders made stock elections for amounts of cash
and Adelphia Class A common stock equal to the amounts available to such
holders. As a result, holders of Century Class B common stock who elected to
receive Adelphia Class A common stock received 0.84271335 of a share of Adelphia
Class A common stock for each share of Century Class B common stock, and holders
of Century Class B common stock who elected to receive cash received $48.14 per
share, without interest.
Also pursuant to the terms of the Merger Agreement, each outstanding option
to purchase shares of Century Class A common stock granted under Century's 1993
Non-Employee Directors' Stock Option Plan, the 1994 Stock Option Plan, and all
other similar plans or arrangements (collectively "Option Plans"), whether or
not previously exercisable or vested, became fully exercisable and vested.
Option holders were given the option to exercise immediately prior to the Merger
or to rollover their options into options to acquire Adelphia Class A common
stock. Furthermore, all restricted shares of Century Class A common stock issued
pursuant to the 1992 Management Equity Incentive Plan became fully vested and
ceased to be restricted.
On or about March 10, 1999, a lawsuit was commenced by the filing of a class
action complaint (the "Complaint") by one of Century's Class A common
stockholders on behalf of himself and all others similarly situated naming
Century's Class B common stockholders and all of Century's Directors as
defendants for alleged breaches of fiduciary duty in connection with approval of
the Merger consideration. Century and Adelphia were also named as defendants for
allegedly aiding and abetting in the foregoing breaches of fiduciary duty. The
Complaint seeks damages in an unspecified amount and such other relief as may be
appropriate. On July 21, 1999, the court granted Century's and the other
defendants' motion for extension of time to answer or otherwise respond to the
complaint to the earlier of November 15, 1999 or twenty days after the effective
date of the Merger. On October 21, 1999, Adelphia and Century filed motions to
strike the Complaint, and several of the individual defendants moved to dismiss
all counts in the Complaint against them for lack of personal jurisdiction over
each of them. On January 3, 2000, the court dismissed all counts in the
Complaint as to two of the individual defendants and took the defendants'
motions to strike and certain defendants' motions to dismiss under
consideration.
At the effective time of the Merger, Adelphia purchased Citizens Utilities
Company's ("Citizens") 50% interest in the Century/Citizens Cable Television
Joint Venture ("CCJV"), one of Century's 50% owned joint ventures, for a
purchase price of approximately $131,900, comprised of approximately $27,700 in
cash, approximately 1,850,000 shares of Adelphia Class A common stock. This
joint venture serves approximately 92,300 basic subscribers in California and
was jointly owned by Century and Citizens Cable Company, a subsidiary of
Citizens. At November 30, 1999, parent's (Adelphia) interest in CCJV was
approximately $133,400 and is included in parent's interest in subsidiary and
other minoity interest.
In addition, Century sold its shares of Class A common stock of Citizens to
Dr. Leonard Tow, former Chairman and Chief Executive Officer of Century, at the
effective time of the Merger at fair market value, based on the closing market
price of such shares on the date the Merger Agreement was signed. Based on that
closing price, the aggregate sales price was approximately $39,800.
The Merger has been accounted for using the purchase method of accounting.
Accordingly, the preliminary allocation of Adelphia's purchase price to acquire
Old Arahova has been reflected in New Arahova's condensed consolidated financial
statements as of October 1, 1999. A final allocation of the purchase price will
be made upon resolution of pre-acquisition contingencies and completion of final
appraisals. The approximate $4,793,388 aggregate purchase price was comprised of
the following:
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<S> <C>
Issuance of Adelphia Class A common stock $ 2,705,000
Assumption of debt and working capital 1,711,000
Deferred tax asset realized by Adelphia (434,612)
Cash 812,000
---------------------
$ 4,793,388
=====================
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The value assigned to the Adelphia Class A common stock was based on the
average closing price of Adelphia Class A common stock a few days before and
after the Merger was agreed to and announced on March 5, 1999.
The following table reflects the opening condensed consolidated balance
sheet of New Arahova which includes the effects of the preliminary purchase
accounting adjustments resulting from the allocation of Adelphia's purchase
prices to acquire Old Arahova and Citizen's 50% interest in CCJV.
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<CAPTION>
New Arahova
--------------------
October 1, 1999
--------------------
ASSETS
Cable systems:
<S> <C>
Property, plant and equipment $ 769,766
Intangible assets 5,809,876
--------------------
Total 6,579,642
Cash and cash equivalents 1,297,417
Investments 105,328
Subscriber receivables - net 26,422
Prepaid expenses and other assets - net 46,772
--------------------
Total $ 8,055,581
====================
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Parent debt $ 1,884,020
Subsidiary debt 1,052,955
Accounts payable 32,022
Subscriber advance payments and deposits 33,248
Accrued interest and other liabilities 166,224
Deferred income taxes 1,643,163
--------------------
Total liabilities 4,811,632
Parent's interest in subsidiary and other minority interests 161,512
Common stockholders' equity:
Common stock, par value $.01 per share:
New Arahova, 1,000 shares authorized, issued and outstanding --
Additional paid-in-capital 3,082,437
Other --
Accumulated deficit --
--------------------
Total common stockholders' equity 3,082,437
--------------------
Total $ 8,055,581
====================
</TABLE>
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As a result of the application of purchase accounting, New Arahova has
recorded its assets and liabilities at their preliminary fair values on October
1, 1999. As of November 30, 1999, the allocation of Adelphia's purchase price to
acquire Old Arahova had not been finalized. Accordingly, the Company may make
additional refinements to the preliminary allocation of Adelphia's purchase
prices to acquire Old Arahova and Citizen's interest in CCJV in future periods.
Certain of the more significant effects of purchase accounting are described
below.
The $769,766 assigned to New Arahova's property, plant and equipment will be
depreciated over useful lives ranging primarily from 5 to 20 years. The
$5,809,876 assigned to New Arahova's intangible assets, which are primarily
comprised of franchise costs, and will be amortized over useful lives, of
primarily 40 years.
2. Significant Events Subsequent to May 31, 1999:
On December 7, 1999, Arahova acquired cable systems that served
approximately 19,000 basic subscribers at the date of acquisition in Moreno
Valley and Riverside County, California and were purchased for an aggregate
price of approximately $32,000. 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.
On December 7, 1999, subsidiaries of Arahova consummated a transaction
with AT&T to form a joint venture limited partnership in the Los Angeles, CA
area. Pursuant to this agreement, the Company, Adelphia and AT&T contributed
cable systems that served approximately 800,000 basic subscribers. Arahova and
Adelphia hold a combined interest of 75% and AT&T holds a 25% interest in the
partnership. As part of this transaction, the Company and AT&T exchanged cable
systems owned by the Company in certain communities in northern California for
certain cable systems owned by AT&T in southern California, allowing each of
them to unify operations in existing service areas. AT&T exchanged its East San
Fernando Valley cable system serving approximately 103,500 basic subscribers for
the Company's northern California cable systems (San Pablo, Benecia, Fairfield
and Rohnert Park, California), serving approximately 96,500 basic subscribers.
The financial results of the partnership will be included in the consolidated
results of operations of Arahova effective from December 7, 1999. Adelphia, the
parent of Arahova, will manage the joint venture.
On December 7, 1999, in connection with the closing of the above described
joint venture, a subsidiary of Arahova closed on a $1,000,000 credit facility.
The credit facility consists of a $500,000, 8 year reducing revolving credit
loan and a $500,000, 8 year term loan. Proceeds from the initial borrowings were
used to pay existing indebtedness.
<PAGE>
3. Debt:
The aggregate fair value assigned in purchase accounting to New Arahova's
debt and related interest rate swap was less than the aggregate recorded value
at the date of the merger by $2,558. The fair value of the Company's debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. Such excess will be amortized over the respective remaining 1 to 8
year lives of the underlying debt obligations.
Debt is summarized as follows:
Parent Debt:
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<CAPTION>
Old Arahova New Arahova
---------------- ----------------
May 31, November 30,
1999 1999
---------------- ----------------
<S> <C> <C>
9 1/2% Senior Notes due 2000 $ 150,000 $ 153,682
9 3/4% Senior Notes due 2002 200,000 207,448
Senior Discount Notes due 2003 316,618 329,076
9 1/2% Senior Notes due 2005 250,000 258,485
8 7/8% Senior Notes due 2007 250,000 248,778
8 3/4% Senior Notes due 2007 225,000 221,695
8 3/8% Senior Notes due 2017 100,000 96,532
8 3/8% Senior Notes due 2007 100,000 96,571
Senior Discount Notes due 2008 282,022 279,880
---------------- ----------------
Total parent debt $ 1,873,640 $ 1,892,147
================ ================
</TABLE>
Subsidiary Debt:
<TABLE>
<CAPTION>
Old Arahova New Arahova
---------------- ----------------
May 31, November 30,
1999 1999
---------------- ----------------
<S> <C> <C>
Notes to banks $ 89,000 $ 938,250
9.47% Senior Secured Notes due 2002 80,000 64,632
Other debt 50 --
---------------- ----------------
Total subsidiary debt $ 169,050 $ 1,002,882
================ ================
</TABLE>
Certain subsidiaries of the Company had credit facilities with $959,750 of
available borrowings of which $938,250 was outstanding at November 30, 1999. On
December 7, 1999, a subsidiary of the Company entered into a $1,000,000 credit
facility. Refer to Note 2 for information regarding this transaction.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks.
4. Stock Compensation:
During the one month ended September 30, 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. This
resulted in stock compensation expense of $26,232 during the one month ended
September 30, 1999. As discussed in Note 1, any remaining options outstanding at
the date of the Merger rolled over into options to acquire Adelphia Class A
common stock. New Arahova does not have its own stock compensation plan.
5. Net Loss Per Weighted Average Share of Common Stock:
For the three and six months ended November 30, 1998 and the one and four
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 the periods
presented. 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.
6. Supplemental Financial Information:
Cash payments for interest were $68,269, $48,331 and $14,866 for the six
months ended November 30, 1998, the four months ended September 30, 1999 and the
two months ended November 30, 1999, respectively. Accumulated depreciation of
property, plant and equipment amounted to $520,127 and $12,395 at May 31, 1999
and November 30, 1999, respectively. Accumulated amortization of intangible
assets amounted to $395,268 and $18,284 at May 31, 1999 and November 30, 1999,
respectively. Interest expense - net includes interest income of $3,526, $6,409
and $10,221 for the three months ended November 30, 1998, the one month ended
September 30, 1999 and the two months ended November 30, 1999, respectively, and
$7,425, $14,679 and $10,221 for the six months ended November 30, 1998, the four
months ended September 30, 1999 and the two months ended November 30, 1999,
respectively. Interest income includes interest income from affiliates on
related party receivable balances.
7. Commitments and Contingencies:
Reference is made to Note 2 and 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," establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either 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 SFAS No. 133 on the Company's consolidated 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.
9. Reclassifications:
Certain prior period amounts have been reclassified to conform with the
current period presentation.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
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.
Pursuant to the terms of the Merger Agreement, and subject to the
limitations set forth below, each issued and outstanding share of Class A common
stock, par value $.01 per share, of Century ("Century Class A common stock") was
converted, at the option of the holder, into the right to receive either (1)
$44.14 in cash, or (2) 0.77269147 shares of Class A common stock, par value $.01
per share of Adelphia ("Adelphia Class A common stock "). Subject to the
limitations set forth below, each issued and outstanding share of Class B common
stock, par value $.01 per share, of Century ("Century Class B common stock ")
was converted, at the option of the holder, into the right to receive either (1)
$48.14 in cash, or (2) 0.84271335 shares of Adelphia Class A common stock.
The aggregate number of shares of Century's Class A common stock converted
into the right to receive cash in the Merger was limited to 20.76% of the number
of shares of Century's Class A common stock outstanding immediately prior to the
effective time of the Merger. The aggregate number of shares of the Century's
Class A common stock converted into the right to receive shares of Adelphia
Class A common stock in the Merger was limited to 79.24% of the number of such
shares of Century's Class A common stock outstanding immediately prior to the
effective time of the Merger. The aggregate number of shares of Century's Class
B common stock converted into the right to receive cash in the Merger was
limited to 24.54% of the number of shares of Century's Class B common stock
outstanding immediately prior to the effective time of the Merger. The aggregate
number of shares of Century's Class B common stock converted into the right to
receive shares of Adelphia Class A common stock in the Merger was limited to
75.46% of the number of shares of Century's Class B common stock outstanding
immediately prior to the effective time of the Merger.
Century Class A common stockholders made stock elections for an amount of
Adelphia Class A common stock exceeding the amount available to such holders. As
a result, holders of Century Class A common stock who elected to receive
Adelphia Class A common stock received 86.42% of their consideration in Adelphia
Class A common stock, or approximately 0.6678 of a share of Adelphia Class A
common stock, and 13.58% of their consideration in cash, or approximately $5.99,
for each share of Century Class A common stock, without interest. Holders of
Century Class A common stock who elected to receive cash received $44.14 per
share, without interest.
Century Class B common stockholders made stock elections for amounts of cash
and Adelphia Class A common stock equal to the amounts available to such
holders. As a result, holders of Century Class B common stock who elected to
receive Adelphia Class A common stock received 0.84271335 of a share of
<PAGE>
ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share amounts)
Adelphia Class A common stock for each share of Century Class B common stock,
and holders of Century Class B common stock who elected to receive cash received
$48.14 per share, without interest.
Also pursuant to the terms of the Merger Agreement, each outstanding option
to purchase shares of Century Class A common stock granted under Century's 1993
Non-Employee Directors' Stock Option Plan, the 1994 Stock Option Plan, and all
other similar plans or arrangements (collectively "Option Plans"), whether or
not previously exercisable or vested, became fully exercisable and vested.
Option holders were given the option to exercise immediately prior to the Merger
or to rollover their options into options to acquire Adelphia Class A common
stock. Furthermore, all restricted shares of Century Class A common stock issued
pursuant to the 1992 Management Equity Incentive Plan became fully vested and
ceased to be restricted.
On or about March 10, 1999, a lawsuit was commenced by the filing of a class
action complaint (the "Complaint") by one of Century's Class A common
stockholders on behalf of himself and all others similarly situated naming
Century's Class B common stockholders and all of Century's Directors as
defendants for alleged breaches of fiduciary duty in connection with approval of
the Merger consideration. Century and Adelphia were also named as defendants for
allegedly aiding and abetting in the foregoing breaches of fiduciary duty. The
Complaint seeks damages in an unspecified amount and such other relief as may be
appropriate. On July 21, 1999, the court granted Century's and the other
defendants' motion for extension of time to answer or otherwise respond to the
complaint to the earlier of November 15, 1999 or twenty days after the effective
date of the Merger. See Part II Item 1. Legal Proceedings. On October 21, 1999,
Adelphia and Century filed motions to strike the Complaint, and several of the
individual defendants moved to dismiss all counts in the Complaint against them
for lack of personal jurisdiction over each of them. On January 3, 2000, the
court dismissed all counts in the Complaint as to two of the individual
defendants and took the defendants' motions to strike and certain defendants'
motions to dismiss under consideration.
At the effective time of the Merger, Adelphia purchased Citizens Utilities
Company's ("Citizens") 50% interest in the Century/Citizens Joint Venture, one
of Century's 50% owned joint ventures, for a purchase price of approximately
$131,900, comprised of approximately $27,700 in cash, approximately 1,850,000
shares of Adelphia Class A common stock and the assumption of indebtedness. This
joint venture serves approximately 92,300 basic subscribers in California and
was jointly owned by Century and Citizens Cable Company, a subsidiary of
Citizens.
In addition, Century sold its shares of Class A common stock of Citizens
Utilities Company to Dr. Leonard Tow, former Chairman and Chief Executive
Officer of Century, at the effective time of the Merger at fair market value,
based on the closing market price of such shares on the date the Merger
Agreement was signed. Based on that closing price, the aggregate sales price was
approximately $39,800.
Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information 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
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 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, technological developments, year 2000 issues, 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. 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. For further information regarding those risks and uncertainties and
their potential impact on the Company, see the prospectus and most recent
prospectus supplement filed under Registration Statement No. 333-78027, under
the caption "Risk Factors."
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, high
speed data services and pay-per-view programming. At November 30, 1998 and 1999,
after giving effect to the December 7, 1999 transactions to form a joint
venture limited partnership in Los Angelas, CA with AT&T and acquire cable
systems serving Moreno Valley and Riverside County, CA, the Company's cable
systems served approximately 1,598,503 and 1,624,816 basic subscribers,
respectively. Certain of the Company's cable systems are owned 50% by the
Company and 50% by unaffiliated entities. At November 30, 1999, these 50%-owned
systems served approximately 336,850 basic subscribers in the aggregate.
Adjusted Arahova Three and Six Months Ended November 30, 1998 and 1999
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.
Due to the consummation of the Merger, the Company's November 30, 1999
condensed consolidated statement of operations for the three and six months
ended November 30, 1999 includes information reflecting the two month period
ended November 30, 1999 and the one and four month periods ended September 30,
1999.
For purposes of the following table and discussion, the operating results of
Old Arahova have been combined with the operating results of New Arahova (this
combination will be referred to herein as Adjusted Arahova) in order to provide
a more meaningful basis for comparing the three and six months ended November
30, 1998 and 1999. Depreciation, amortization and certain other line items
included in the operating results of Adjusted Arahova are not necessarily
comparable between periods as the two month successor period ended November 30,
1999 includes the effect of the preliminary purchase accounting adjustments
related to the Merger. The combining of predecessor and successor accounting
periods is not in accordance with generally accepted accounting principles.
See Note 1 to the accompanying condensed consolidated financial statements. The
results of Adjusted Arahova for the three and six months ended November 30, 1999
are not necessarily indicative of the results to be expected for Arahova for the
period ending May 31, 2000.
<PAGE>
<TABLE>
<CAPTION>
The unaudited results of operations for Adjusted Arahova are as follows:
Adjusted Arahova
-----------------------------------------------------------------------
Three Months Ended November 30, Six Months Ended November 30,
------------------------------------ ---------------------------------
1998 1999 1998 1999
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 162,754 $ 178,094 $ 321,158 $ 348,863
Operating expenses:
Direct operating and programming 62,096 63,153 121,964 130,167
Selling, general and administrative 32,238 34,986 63,617 67,697
Depreciation and amortization 42,965 52,220 82,574 92,048
Stock compensation -- 26,232 621 26,232
Merger and integration costs -- 3,882 -- 177,293
----------------- ----------------- ---------------- ---------------
Total 137,299 180,473 268,776 493,437
----------------- ----------------- ---------------- ---------------
Operating income (loss) 25,455 (2,379) 52,382 (144,574)
Other (expense) income:
Interest expense - net (44,559) (41,531) (88,589) (81,618)
(Loss) gain on sale of assets (317) -- 5,225 --
Parent's and other minority interests in
income of subsidiaries (1,972) (6,702) (6,464) (10,785)
Other -- 96 -- 337
----------------- ----------------- ---------------- ---------------
Total (46,848) (48,137) (89,828) (92,066)
Loss before income taxes (21,393) (50,516) (37,446) (236,640)
Income tax expense (3,732) (231) (8,517) (4,241)
----------------- ----------------- ---------------- ---------------
Net loss $ (25,125) $ (50,747) $ (45,963) $ (241,881)
================= ================= ================ ===============
</TABLE>
The following table is derived from the unaudited results of operations for
Adjusted Arahova shown above and sets forth the historical percentage
relationship to revenues of the components of operating income for the periods
indicated.
<TABLE>
<CAPTION>
Adjusted Arahova
---------------------------------------------
Three Months Ended Six Months Ended
November 30, November 30,
--------------------- ---------------------
1998 1999 1998 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Direct operating and programming 38.2% 35.5% 38.0% 37.3%
Selling, general and administrative 19.8% 19.6% 19.8% 19.4%
Depreciation and amortization 26.4% 29.3% 25.7% 26.4%
Stock compensation -- 14.7% 0.2% 7.5%
Merger costs -- 2.2% -- 50.8%
---------- --------- --------- ---------
Operating income (loss) 15.6% (1.3%) 16.3% (41.4%)
========== ========= ========= =========
</TABLE>
<PAGE>
Adjusted Arahova Revenues. Revenues increased approximately 9.4% and 8.6%
for the three and six months ended November 30, 1999 compared with the same
periods of 1998. The increases are attributable to acquisitions, basic
subscriber growth, and cable rate increases.
Adjusted Arahova Direct Operating and Programming. These expenses, which are
mainly basic and premium programming costs and technical expenses increased 1.7%
and 6.7% for the three and six months ended November 30, 1999 compared with the
same periods of 1998. The increases are primarily due to increased programming
costs and incremental costs associated with increased subscribers.
Adjusted Arahova 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 8.5% and
6.4% for the three and six months ended November 30, 1999 compared with the
same periods of 1998. The increases were due primarily to incremental costs
associated with subscriber growth and transition costs associated with the
Merger.
Adjusted Arahova 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. For further information, see
Note 4 to the accompanying condensed consolidated financial statements.
Adjusted Arahova Merger 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.
Adjusted Arahova Interest Expense - Net. Adjusted Arahova interest expense -
net decreased 6.8% and 7.9% for the three and six months ended November 30, 1999
compared with the same periods of 1998. The decreases are primarily due to
increased interest income from affiliate borrowings partially offset by
incremental debt related to the acquisitions and an increase in the average debt
outstanding.
Adjusted Arahova Gain on Sale of Assets. The gain on sale of assets is due
primarily to the following transaction. In June, 1998, the Company sold
substantially all of the assets of its two radio stations resulting in a pre-tax
gain of $5,506.
Liquidity and Capital Resources
The Company's internally-generated cash, along with third party financings,
primarily the issuance of debt securities to the public, 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 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.
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.
At November 30, 1999, the Company's total outstanding debt aggregated
$2,895,029, which included $1,892,147 of parent debt and $1,002,882 of
subsidiary debt. As of November 30, 1999, the Company had an aggregate of
$237,158 in unused credit lines and cash and cash equivalents.
The following table sets forth the mandatory reductions in principal under
all debt agreements for each of the next four years and six months based on
amounts outstanding at November 30, 1999:
<TABLE>
<S> <C>
Six months ending May 31, 2000 $ 59,500
Year ending May 31, 2001 328,295
Year ending May 31, 2002 415,303
Year ending May 31, 2003 689,768
Year ending May 31, 2004 235,064
</TABLE>
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 debt and
the negotiation of new or amended credit facilities.
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well defined interest rate risks.
The cable television and other telecommunication businesses are capital
intensive and typically require 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 plans to deploy fiber optic cable and to upgrade the
technical capabilities of its broadband networks in order to increase network
capacity, digital capability, two-way communication and network reliability. The
upgraded system will be completely addressable and provide two-way communication
capability. The additional bandwidth will enable the Company to offer additional
video programming and data services. A portion of the bandwidth will be
allocated to new service offerings such as two-way data, telephony and
video-on-demand.
Capital expenditures for Adjusted Arahova for the six months ended November
30, 1998 and 1999 were $51,546 and $76,594, respectively. The Company estimates
that capital expenditures will be in the range of approximately $86,000 to
$96,000 from December 1, 1999 through May 31, 2000.
Strategic Partnership
On December 7, 1999, subsidiaries of Arahova consummated its transaction
with AT&T to form a joint venture limited partnership in the Los Angeles, CA
area. Pursuant to this agreement, the Company, Adelphia and AT&T contributed
cable systems that served approximately 800,000 basic subscribers. Arahova and
Adelphia hold a combined interest of 75% and AT&T holds a 25% interest in the
partnership. As part of this transaction, the Company and AT&T exchanged cable
systems owned by the Company in certain communities in northern California for
certain cable systems owned by AT&T in southern California, allowing each of
them to unify operations in existing service areas. AT&T exchanged its East San
Fernando Valley cable system serving approximately 103,500 basic subscribers for
the Company's northern California cable systems (San Pablo, Benecia, Fairfield
and Rohnert Park, California), serving approximately 96,500 basic subscribers.
The financial results of the partnership will be included in the consolidated
results of operations of Arahova effective from December 7, 1999. Adelphia, the
parent of Arahova, will manage the joint venture. In connection with the closing
of the joint venture, a subsidiary of Arahova closed on a $1,000,000 credit
facility. The credit facility consists of a $500,000, 8 year reducing revolving
credit loan and a $500,000, 8 year term loan. Proceeds from initial borrowings
were used to pay existing indebtedness.
Merger Related Costs
The Company had employment agreements primarily with four executive officers
including Dr. Leonard Tow, former Chairman and Chief Executive Officer of
Century. For purposes of these employment agreements, a "threatened change of
control" occurred and such employees had the right to terminate these employment
agreements. During the quarter ended August 31, 1999, each of these executive
officers exercised his right to terminate his employment agreement but continued
working for the Company through the closing of the Merger. Pursuant to the
employment agreement, upon such termination, each executive officer was entitled
to receive his base salary through the end of the term of his employment
agreement, an annual cash bonus for the remainder of the term equal to his most
recently awarded cash bonus, continuation of medical, dental, life and
disability insurance for the remainder of the term on the same basis as provided
while the agreement was in effect and the use of office space for one year. In
addition, upon termination, all of his Company stock options vest and became
exercisable and the restrictions on all of his shares of restricted stock of the
Company lapsed. The total cost to the Company of the termination of the
executive employment agreements was approximately $227,400. Approximately
$167,200 of these costs were recorded by the Company during the four months
ended September 30, 1999 and the remaining $60,200 of these costs, which
resulted from the completion of the Merger, were recorded upon completion of the
Merger.
The Company incurred certain other costs upon completion of the Merger.
Approximately $77,000 of these costs relate primarily to investment banking,
legal and accounting services incurred in relation to the completion of the
Merger. The Company also incurred employee severance related costs related to
the Merger and the continuance of the employment of key personnel through a
period of time after the completion of the Merger. The total cost to the Company
of these employee severance related costs was approximately $10,400.
The Company incurred total incremental compensation, legal and consulting
costs of $174,153 during the four months ended September 30, 1999 in connection
with the Merger. These costs include approximately $167,200 of costs noted above
which were recorded during the four months ended September 30, 1999 in relation
to the termination of the executive employment agreements.
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.
The 1996 Act repealed the prohibition on CLECs 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
CLECs to operate "open video systems" ("OVS") without obtaining a local cable
franchise, although CLECs 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 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 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 several service providers.
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.
Year 2000
As of the date of this filing, the Company has not experienced any
significant year 2000 problems with its internal systems or equipment, nor has
the Company detected any significant year 2000 problems affecting its customers
or suppliers.
The Company used a multi-step approach in conducting its year 2000 project.
These steps were all completed prior to December 31, 1999. The steps included
inventory, assessment, remediation and testing and contingency planning. The
Company also had formal communications with the suppliers with which it has
active contracts ("Trading Partners") to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
year 200 issues.
Year 2000 Costs
The Company completed the Year 2000 Project in October 1999. The Company
spent approximately $3,000 in connection with the Year 2000 Project. The costs
of the project and the date on which the Company completed the Year 2000
modifications were based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third parties' Year 2000 readiness and other
factors.
Risks
The failure to address a material Year 2000 issue could result in an
interruption in, or a failure of, certain normal business activities or
operations. Due to the decentralized nature of the Company's operations, there
are few systems the failure of which would have a material adverse effect on the
Company as a whole. Nonetheless, the Company relies upon an external billing
service, utility companies, satellite program service providers, satellite
delivery systems, an external payroll service, the United States postal service,
the financial service industry and other suppliers outside of its control and
there can be no assurance that such suppliers or other third parties will not
suffer a Year 2000 business disruption. The most reasonably likely worse case
scenario would involve a failure of the nation's satellite delivery systems
and/or widespread prolonged utility outages. If such a scenario occurred and it
affected a large portion of the United States for a period exceeding 30 days,
the Company's operating results would be negatively impacted. Failures in other
systems would not be expected to have an adverse effect on the Company's
consolidated financial position. In addition, the Company is in the process of
upgrading or replacing certain of its software to comply with Year 2000
readiness. Although the implementation of software may be accompanied with risks
of incompatibilities, the Company believes that the risks associated with these
incompatibilities will not have a material effect on the Company's operations.
Due to the general uncertainty inherent in the Year 2000 issue, resulting in
part from the uncertainty of the Year 2000 readiness of its Trading Partners and
its Trading Partners' customers, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's consolidated financial condition or results of operations. The
Year 2000 Project is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 issue and, in particular, about the Year 2000
compliance and readiness of its material Trading Partners. The Company believes
that, with the implementation of new business systems and completion of the Year
2000 Project as scheduled, the possibility of significant interruptions of
normal operations should be greatly reduced.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred during the six months ended November 30,
1999 for interest rate swaps. Principal outstanding on variable rate debt
increased approximately $849,250 and the fair market value of fixed rate debt
over carrying cost declined approximately $6,100 during the six months ended
November 30, 1999 compared to May 31, 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On or about March 10, 1999, Robert Lowinger, on behalf of himself and all
others similarly situated (the "Plaintiff") commenced an action by filing a
Class Action Complaint (the "Complaint") in the Superior Court of Connecticut,
Judicial District of Stamford/Norwalk against Century, all of its directors, and
Adelphia Communications Corporation ("Adelphia"). The Plaintiff, claiming that
he owns shares of Class A Common Stock of Century alleges that in connection
with the proposed merger of Century with Adelphia, holders of Class B Common
Stock of Century (which has superior voting rights to the Class A Common Stock
of Century) will receive consideration for their shares that exceeds by $4.00
per share the consideration to be paid to Century's Class A shareholders
resulting in the Century's Class B shareholders receiving approximately $170,000
more than if they held the equivalent number of the Century's Class A shares.
The Plaintiff claims that the individual defendants breached their fiduciary
duties of loyalty, good faith, and due care to Century's Class A shareholders by
approving the higher payment to Century's Class B shareholders and that Century
and Adelphia aided and abetted these alleged breaches of fiduciary duty. The
Plaintiff seeks certification of a class of Century's Class A shareholders and
seeks recovery on behalf of himself and the class of unspecified damages,
profits, and special benefits alleged to have been wrongfully obtained by the
defendants, as well as all costs, expenses and attorney's fees. On October 21,
1999, Adelphia and Century filed motions to strike the Complaint, and several of
the individual defendants moved to dismiss all counts in the Complaint against
them for lack of personal jurisdiction over each of them. On January 3, 2000,
the court dismissed all counts in the Complaint as to two of the individual
defendants and took the defendants' motions to strike and certain defendants'
motions to dismiss under consideration.
The Company is also subject to various legal proceedings and claims that
arise in the ordinary course of business. Management currently believes that
resolving these matters will not have a material adverse impact on the Company's
financial position or its results of operations.
Item 2. Changes in Securities
See Item 4 below, Note 1 to the Condensed Consolidated FinancialStatements
under Item 1, Part I above, and Management's Discussion andAnalysis -
Introduction under Item 2, Part I above, for discussions relating to the merger
with Adelphia consummated on October 1, 1999, all of which discussions are
incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the stockholders of Century Communications Corp. was
held on Friday, October 1, 1999. At the meeting the stockholders considered and
voted upon a proposal to approve the Agreement and Plan of Merger, dated as of
March 5, 1999, as amended, among Century, Adelphia Communications Corporation
and a wholly owned subsidiary of Adelphia that provides for, among other things,
a merger that resulted in Century becoming a wholly owned subsidiary of Adelphia
and Century's stockholders receiving, at their election, but subject to
proration, cash, Adelphia Class A common stock or a combination of cash and
Adelphia Class A common stock in exchange for their Century common stock.
<PAGE>
<TABLE>
<CAPTION>
The results of the vote were:
Class A Stock:
<S> <C> <C> <C>
For: 24,364,881 Against: 19,498 Abstain: 3,891
Class B Stock:
For: 423,220,590 Against: 0 Abstain: 0
</TABLE>
Item 5. Other Information -
None
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
Form 8-K's were filed for events dated October 1, 1999 and December
7, 1999, which reported information under items 1, 2 and/or 7
thereof. No financial statements were filed with such Form 8-Ks.
<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: January 14, 2000 By: /s/ Timothy J. Rigas
----------------------
Timothy J. Rigas
Executive Vice President
(authorized officer), Chief
Financial Officer, Chief
Accounting Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for Arahova Communications, Inc. for the six months
ended November 30, 1999.
</LEGEND>
<CIK> 0000785080
<NAME> ARAHOVA COMMUNICATIONS, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> NOV-30-1999
<CASH> 215,659
<SECURITIES> 0
<RECEIVABLES> 29,625 <F1>
<ALLOWANCES> 0 <F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,572,834 <F2>
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 6,982,311
<CURRENT-LIABILITIES> 0
<BONDS> 2,895,029
0
0
<COMMON> 0
<OTHER-SE> 1,988,475
<TOTAL-LIABILITY-AND-EQUITY> 6,982,311
<SALES> 0
<TOTAL-REVENUES> 348,863
<CGS> 0
<TOTAL-COSTS> 493,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,618
<INCOME-PRETAX> (236,640)
<INCOME-TAX> 4,241
<INCOME-CONTINUING> (241,881)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (241,881)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables net of Allowance
<F2>PP&E net of Depreciation
</FN>
</TABLE>
