SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1996
____ 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: 0-16014
ADELPHIA COMMUNICATIONS
CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2417713 (State or other jurisdiction of
(I.R.S. Employer incorporation or organization) Identification
No.)
5 West Third Street
P.O. Box 472
Coudersport, PA 16915
(Address of principal (Zip code)
executive offices)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 14, 1996, 15,364,009 shares of Class A Common Stock, par value $0.01,
and 10,944,476 shares of Class B Common Stock, par value $0.01 per share, of the
registrant were outstanding.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets - March 31, 1996 and June 30, 1996...................................................3
Consolidated Statements of Operations - Three Months Ended June 30, 1995
and 1996.................................................................................................4
Consolidated Statements of Cash Flows - Three Months Ended June 30, 1995 and 1996................................5
Notes to Interim Consolidated Financial Statements...............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................................20
Item 2. Changes in Securities..........................................................................................20
Item 3. Defaults Upon Senior Securities..............................................................................20
Item 4. Submission of Matters to a Vote of Security Holders..........................................................20
Item 5. Other Information............................................................................................20
Item 6. Exhibits and Reports on Form 8-K...............................................................................20
SIGNATURES..............................................................................................................21
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
March 31, June 30,
ASSETS: 1996 1996
------------ ------------
Cable television systems, at cost, net of accumulated depreciation and
amortization:
<S> <C> <C>
Property, plant and equipment $ 560,376 $ 594,561
Intangible assets 568,898 618,134
------------ ------------
Total 1,129,274 1,212,695
Cash and cash equivalents 10,809 140,300
Investments 68,147 77,464
Preferred equity investment in Managed Partnership 18,338 18,338
Subscriber receivables - net 23,803 24,984
Prepaid expenses and other assets - net 52,658 67,494
Related party investments and receivables - net 30,894 177
------------ ------------
Total $ 1,333,923 $ 1,541,452
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Notes payable of subsidiaries to banks and institutions $ 1,224,675 $ 1,291,300
12 1/2% Senior Notes due 2002 400,000 400,000
10 1/4% Senior Notes due 2000 99,158 99,198
11 7/8% Senior Debentures due 2004 124,502 124,511
9 7/8% Senior Debentures due 2005 128,118 128,150
9 1/2% Senior Pay-In-Kind Notes due 2004 180,357 180,357
13% Senior Discount Notes of Unrestricted Subsidiary due 2003 -- 168,620
Other debt 18,663 17,320
Accounts payable 66,668 54,910
Subscriber advance payments and deposits 14,706 13,407
Accrued interest and other liabilities 99,106 112,527
Deferred income taxes 106,209 106,209
------------ ------------
Total liabilities 2,462,162 2,696,509
------------ ------------
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency):
Class A Common Stock, $.01 par value, 200,000,000 shares
authorized and 15,364,009 shares outstanding 154 154
Class B Common Stock, $.01 par value, 25,000,000 shares
authorized and 10,944,476 shares outstanding 109 109
Additional paid-in capital 214,415 214,415
Accumulated deficit (1,342,917) (1,369,735)
------------ ------------
Total stockholders' equity (deficiency) (1,128,239) (1,155,057)
------------ ------------
Total $ 1,333,923 $ 1,541,452
============ ============
</TABLE>
See notes to interim consolidated financial statements.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,
1995 1996
---------- -----------
Revenues $ 96,921 $ 111,011
---------- -----------
Operating expenses:
Direct operating and programming 28,522 33,597
Selling, general and administrative 16,870 18,638
Depreciation and amortization 27,624 28,477
---------- -----------
Total 73,016 80,712
---------- -----------
Operating income 23,905 30,299
---------- -----------
Other income (expense):
Interest income from affiliates 3,410 2,049
Priority investment income from
Olympus 5,575 9,817
Interest expense (53,124) (60,496)
Equity in loss of joint ventures (11,054) (14,647)
Gain on sale of investment -- 8,405
---------- -----------
Total (55,193) (54,872)
---------- -----------
Loss before income taxes and extraordinary loss (31,288) (24,573)
Income tax benefit (expense) 1,044 (166)
---------- -----------
Loss before extraordinary loss (30,244) (24,739)
Extraordinary loss on early retirement of debt -- (2,079)
---------- -----------
Net loss $ (30,244) $ (26,818)
========== ===========
Loss per weighted average share of common stock
before extraordinary loss $ (1.15) $ (0.94)
Extraordinary loss on early retirement of debt -- (0.08)
---------- -----------
Net loss per weighed average share
of common stock $ (1.15) $ (1.02)
========== ===========
Weighted average shares of
common stock outstanding (in thousands) 26,294 26,308
========== ===========
See notes to interim consolidated financial statements.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended June 30,
1995 1996
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net loss ......................................................... $ (30,244) $ (26,818)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation ..................................................... 17,557 18,144
Amortization ..................................................... 10,067 10,333
Noncash interest expense ......................................... 73 4,996
Equity in loss of joint ventures ................................. 11,054 14,647
Gain on sale of investment ....................................... -- (8,405)
Extraordinary loss on early retirement of debt ................... -- 2,079
Decrease in deferred income taxes,
net of effect of acquisitions .................................... (1,181) --
Change in operating assets and liabilities, net of effects
of acquisitions:
Subscriber receivables ........................................... (550) (1,181)
Prepaid expenses and other assets ................................ (9,080) (4,714)
Accounts payable ................................................. (2,594) (11,758)
Subscriber advance payments and deposits ......................... (2,210) (1,299)
Accrued interest and other liabilities ........................... 4,223 2,136
--------- ---------
Net cash used for operating activities ........................... (2,885) (1,840)
--------- ---------
Cash flows from investing activities:
Cable television systems acquired ................................ (17,846) (84,267)
Expenditures for property, plant and equipment ................... (26,377) (24,944)
Amounts invested in and advanced (to) from
Olympus and related parties ...................................... (18,593) 17,854
Investments in other joint ventures .............................. (4,211) (14,129)
Proceeds from sale of investment ................................. -- 11,618
--------- ---------
Net cash used for investing activities ........................... (67,027) (93,868)
--------- ---------
Cash flows from financing activities:
Proceeds from debt ............................................... 102,006 741,771
Repayments of debt ............................................... (23,621) (512,957)
Costs associated with debt financing ............................. -- (14,702)
Proceeds from subsidiary's issuance of warrants .................. -- 11,087
--------- ---------
Net cash provided by financing activities ........................ 78,385 225,199
--------- ---------
Increase in cash and cash equivalents ............................ 8,473 129,491
Cash and cash equivalents, beginning of period ................... 5,045 10,809
--------- ---------
Cash and cash equivalents, end of period ......................... $ 13,518 $ 140,300
========= =========
</TABLE>
See notes to interim consolidated financial statements.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
===============================================================================
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
The accompanying unaudited interim financial statements of Adelphia
Communications Corporation and its majority owned subsidiaries ("Adelphia" or
the "Company") have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission.
In the opinion of management, all adjustments, consisting of only
normal recurring accruals necessary to present fairly the unaudited results of
operations for the three months ended June 30, 1995 and 1996, have been
included. These interim consolidated financial statements should be read in
conjunction with Adelphia's consolidated financial statements included in its
Annual Report on Form 10-K for the fiscal year ended March 31, 1996 ("Annual
Report").
1. Significant Events Subsequent to the 1996 Annual Report:
On April 1, 1996, Adelphia purchased the cable television operations
of Cable TV Fund 11-B, Ltd. This CATV system was acquired for $84,267 and served
approximately 39,700 subscribers at the acquisition date in the New York
counties of Erie and Niagara. The acquisition was financed through a combination
of debt proceeds from a $200,000 credit facility in which an Adelphia subsidiary
is a co-borrower with an affiliated entity and funds received through the
repayment of amounts previously advanced to related entities. These amounts may
be reborrowed by the related entities in future periods. The acquisition has
been accounted for using the purchase method. Accordingly, the financial results
of the acquired operations have been included in the consolidated results of
Adelphia effective from the date acquired.
On April 12, 1996, certain subsidiaries of the Company (collectively,
the "Borrowers") entered into a $690,000 financing arrangement consisting of a
$540,000 revolving credit facility maturing December 31, 2003 and a $150,000
term loan facility maturing December 31, 2004. Initial borrowings during April
1996 of $483,000 were used primarily to repay existing indebtedness. Interest
rates charged are based upon one or more of the following rates at the option of
the Borrowers: Eurodollar rate or the greater of the prime rate and the Federal
funds rate plus 1/2 of 1% plus a margin of from 0% to 2% depending upon the
Borrower's senior funded debt ratio. Interest on outstanding borrowings is
generally payable on a quarterly basis. The maximum available under the
revolving credit facility is reduced, in increasing quarterly amounts, beginning
June 30, 1998 through December 31, 2003. The Borrowers pay a commitment fee of
either .375% or .250% per annum (depending upon the Borrower's senior funded
debt ratio) of the unused revolving credit facility commitments during the term
of the agreement. Borrowings under the term loan facility are payable in
installments, in increasing quarterly amounts, commencing June 30, 1998 and
ending on December 31, 2004
On April 15, 1996, an 89% owned subsidiary of the Adelphia, Hyperion
Telecommunications, Inc. ("Hyperion"), realized gross proceeds of $175,265 upon
issuance of $329,000 aggregate principal amount of 13% Senior Discount Notes
(the "Senior Notes") due April 15, 2003 and 329,000 warrants to purchase an
aggregate of 613,427 shares of common stock of Hyperion expiring April 1, 2001.
Proceeds of $11,087 were allocated to the value of the warrants. If all warrants
were exercised, the warrants would represent approximately 5.78% of the common
stock of Hyperion on a fully diluted basis. Proceeds, net of discounts,
commissions, and other transaction costs were used to repay certain indebtedness
to Adelphia, to make loans to certain key Hyperion officers and will be used to
fund Hyperion's expansion of its existing markets, to complete construction of
new networks and to enter additional markets including related capital
expenditures, working capital requirements, operating losses and its investments
in joint ventures.
On May 16, 1996, Hyperion completed the sale of its 15.7% partnership
interest in TCG South Florida to Teleport Communications Group Inc. for an
aggregate sales price of $11,618 resulting in a pre-tax gain of $8,405. As part
of the transaction, Hyperion was released from its covenant not to compete with
respect to the South Florida market. Hyperion plans to use the proceeds from the
sale to continue to expand and develop its existing markets, complete new
networks under construction and enter additional markets.
On July 12, 1996, Adelphia acquired all of the cable systems of First
Carolina Cable TV, L.P. These systems served approximately 34,000 subscribers at
the date of acquisition primarily located in Vermont and were purchased for an
aggregate price of $48,500. The acquisition will be accounted for using the
purchase method. Accordingly, the financial results of the acquired systems will
be included in the consolidated results of Adelphia effective with the date
acquired.
2. Notes Payable of Subsidiaries to Banks and Institutions:
The following updates to June 30, 1996 certain disclosures included
in Note 3 to Adelphia's consolidated financial statements contained in the
Annual Report:
Commitments for additional borrowings $172,000
Weighted average interest rate 8.59%
Percentage of principal balance that bears interest at fixed
rates for at least one year 45%
3. Investments:
Adelphia's nonconsolidated investments are as follows:
March 31, June 30,
1996 1996
---------- ----------
Investments accounted for using the equity method:
Gross investment:
CLEC ventures $ 28,754 $ 30,175
Page Call, Inc. 11,187 12,345
Other 800 980
Cumulative equity in net losses (6,814) (6,935)
---------- ----------
Total 33,927 36,565
---------- ----------
Investments accounted for using the cost method:
Niagara Frontier Hockey, L.P. 22,681 28,100
Commonwealth Security, Inc. 4,200 4,200
SuperCable 3,171 3,171
Programming ventures 2,806 2,891
Mobile Communications 680 1,800
Other 682 737
---------- ----------
Total 34,220 40,899
---------- ----------
Total investments $ 68,147 $ 77,464
========== ==========
4. Investments and Related Party Receivables:
The following table summarizes the investments in and receivables from
Olympus and related parties:
March 31, June 30,
1996 1996
---------- ----------
Investment in Olympus $ (93,563) $ (94,959)
Amounts due from Olympus 59,907 58,706
Amounts due from other related parties - net 64,550 36,430
---------- ----------
$ 30,894 $ 177
========== ==========
The investment in Olympus represents a 50% voting interest in such
partnership and is being accounted for using the equity method. Summarized
unaudited results of operations of Olympus are as follows:
Six Months Ended
June 30,
1995 1996
------- --------
Revenues $ 54,212 $ 78,422
Net loss (12,403) (6,823)
Net loss of general partners
after priority return requirements (57,432) (39,595)
5. Income Taxes:
Income tax expense for the three months ended June 30, 1996 was $166,
which is comprised entirely of current tax expense.
6. Supplemental Cash Flow Information:
Cash payments for interest were $48,661 and $50,804 for the three
months ended June 30, 1995 and 1996, respectively.
7. Commitments and Contingencies:
Reference is made to Management's Discussion and Analysis of
Financial Condition and Results of Operations for a discussion of material
commitments and contingencies.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
(Dollars in thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Unless otherwise stated, the information contained in this Form 10-Q
is as of and for the three months ended June 30, 1996. This Form 10-Q, including
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains certain statements of a forward looking nature relating to
future events or the future financial performance of the Company which are of a
forward looking nature relating to future events or the future financial
performance of the Company which are forward looking statements under Section
21E of the Securities Exchange Act of 1934. Persons reading this Form 10-Q are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, readers should
specifically consider the various factors identified in this Form 10-Q, which
could cause actual events or results to differ materially from those indicated
by such forward looking statements.
Adelphia Communications Corporation and its subsidiaries ("Adelphia"
or the "Company") earned substantially all of its revenues in the three months
ended June 30, 1995 and 1996 from monthly subscriber fees for basic, satellite,
premium and ancillary services (such as installations and equipment rentals),
local and national advertising sales, pay-per-view programming, home shopping
networks and competitive local exchange carrier ("CLEC") telecommunications
services.
The changes in Adelphia's operating results for the quarter ended
June 30, 1996 compared to the same period of the prior year, were primarily the
result of acquisitions, expanding existing cable television operations and the
impact of an increase in subscriber rates which became effective October 1,
1995.
The high level of depreciation and amortization associated with the
significant number of acquisitions in recent years, the recent upgrading and
expansion of systems and interest costs associated with financing activities
will continue to have a negative impact on the reported results of operations.
Also, significant charges for depreciation, amortization and interest are
expected to be incurred in the future by the Olympus joint venture, which will
also adversely impact Adelphia's future results of operations. Adelphia expects
to report net losses for the next several years.
The following tables set forth certain cable television system data
for the periods indicated for Company Owned, Olympus and Managed Systems. The
"Olympus Systems" are systems currently owned by the Olympus joint venture. The
"Managed Systems" are affiliated systems managed by Adelphia.
June 30, Percent
1995 1996 Increase
Homes Passed by Cable
Company Owned Systems 1,355,405 1,488,447 9.8%
Olympus Systems 561,506 637,154 13.5%
Managed Systems 415,734 427,559 2.8%
Total Systems 2,332,645 2,553,160 9.5%
Basic Subscribers
Company Owned Systems 995,054 1,090,181 9.6%
Olympus Systems 336,863 400,718 19.0%
Managed Systems 297,933 305,366 2.5%
Total Systems 1,629,850 1,796,265 10.2%
Exclusive of acquisitions, basic subscribers grew 3.1%, 4.2% and 2.5% for
Company Owned, Olympus and Managed Systems, respectively, during the twelve
months ended June 30, 1996.
The following table is derived from Adelphia's Consolidated Interim
Financial Statements that are included in this interim report and sets forth the
historical percentage relationship to revenues of the components of operating
income contained in such financial statements for the periods indicated.
Three Months Ended
June 30,
1995 1996
------ ------
Revenues 100.0% 100.0%
Operating expenses:
Direct operating and programming 29.4% 30.3%
Selling, general and administrative 17.4% 16.8%
Operating income before depreciation
and amortization 53.2% 52.9%
Depreciation and amortization 28.5% 25.7%
Operating income 24.7% 27.2%
<PAGE>
Revenues. Revenues increased approximately 14.5% for the quarter
ended June 30, 1996 compared with the quarter ended June 30, 1995.
The increase was attributable to the following:
Acquisitions 40%
Basic subscriber growth 12%
Rate increases 32%
Other 16%
Effective October 1, 1995, certain rate increases related to
regulated cable services were implemented in substantially all of the Company's
Systems. Other non-cable revenues including strategic service offerings such as
paging and CLEC services also had a positive impact on revenues for the quarter
ended June 30, 1996. Future rate increases related to certain regulated cable
services will become effective in substantially all of the Company's Systems
during the quarter ending September 30, 1996.
Direct Operating and Programming Expenses. Direct operating and
programming expenses, which are mainly basic and premium programming costs and
technical expenses, increased 17.8% for the quarter ended June 30, 1996 compared
with the same quarter of the prior year. Such increase was primarily due to
increased operating expenses from acquired systems, increased programming costs
and incremental costs associated with increased subscribers. Because of
regulatory limitations on the timing and extent to which cost increases may be
passed on to customers, operating and programming expenses during the quarter
ended June 30, 1996 have increased at a greater magnitude than corresponding
revenue increases. As a result of recent FCC regulatory rulemaking decisions,
the Company intends to implement a systematic program of rate increases to
reverse this trend. Consistent with such a program, the Company will increase
rates in most markets, in accordance with FCC guidelines, during the quarter
ending September 30, 1996.
Selling, General and Administrative Expenses. These expenses, which
are mainly comprised of costs related to system offices, customer service
representatives, and sales and administrative employees, increased 10.5% for the
quarter ended June 30, 1996 compared with the same quarter of the prior year.
The increase was primarily due to incremental costs associated with acquisitions
and subscriber growth. Such expenses decreased as a percentage of revenues
compared to the quarter ended June 30, 1995 primarily due to the favorable
impact on revenues of the above mentioned October 1, 1995 rate increases.
Operating Income Before Depreciation and Amortization. Operating
income before depreciation and amortization for the quarter ended June 30, 1996
was $58,776 compared to $51,529 for the same quarter of the prior year. The
increase is attributable to a combination of acquisitions, an increase in
subscriber rates, internal subscriber growth and the expansion of other
non-cable revenues, partially offset by increased programming, general and
administrative costs.
Depreciation and Amortization. Depreciation and amortization was
higher for the quarter ended June 30, 1996 compared with the same quarter of the
prior year primarily due to increased depreciation and amortization related to
acquisitions consummated during the years ended March 31, 1995 and 1996 as well
as increased capital expenditures made during the past several years.
Priority Investment Income. Priority investment income is comprised
of payments received from Olympus of accrued priority return on the Company's
investment in 16.5% preferred limited partner ("PLP") interests in Olympus.
Priority investment income increased during the quarter ended June 30, 1996 as
compared with the same quarter of the prior year as a result of payment by
Olympus of the entire amount of priority return accrued during the quarter ended
June 30, 1996.
EBITDA. EBITDA (earnings before interest, income taxes, depreciation
and amortization, equity in loss of joint ventures and other non-cash charges)
amounted to $70,642 during the quarter ended June 30, 1996 compared with $60,514
for the same quarter of the prior year. The increase of 16.7% is primarily due
to the impact of the acquisition of cable systems and increased priority
investment income from Olympus. The impact of acquisitions increased revenues
and operating expenses for the quarter ended June 30, 1996 compared with the
same quarter of the prior year. While EBITDA is not an alternative to operating
income as defined by generally accepted accounting principles, the Company's
management believes EBITDA is a meaningful measure of performance as
substantially all of the Company's financing agreements contain financial
covenants based on EBITDA.
Interest Expense. Interest expense increased 13.9% for the quarter
ended June 30, 1996 compared with the same quarter of the prior year. Interest
expense increased due to incremental debt outstanding during the current period
and accretion of original issue discount, partially offset by a decrease in the
average interest rate on outstanding debt during the current quarter compared
with the quarter ended June 30, 1995. Approximately 34% of the increase in
interest expense in the quarter ended June 30, 1996 as compared with the same
quarter of the prior year was attributable to incremental debt related to
acquisitions. Interest expense includes non-cash accretion of original issue
discount and non-cash interest expense totaling $73 and $4,996 for the quarters
ended June 30, 1995 and 1996, respectively. The increase in non-cash interest
for quarter ended June 30, 1996 compared with the same quarter of the prior year
is primarily due to the accretion of the original issue discount related to the
Hyperion 13% Senior Discount Notes which were issued April 15, 1996 (see
"Liquidity and Capital Resources").
Equity in Loss of Joint Ventures. The equity in loss of joint
ventures represents primarily (i) the Company's pro rata share of Olympus'
losses and the accretion requirements of Olympus' PLP interests, and (ii)
Hyperion's pro-rata share of its less than majority owned partnerships'
operating losses. The increase in the loss during the quarter ended June 30,
1996, compared with the same quarter of the prior year, is due to an increase in
the Olympus priority return payment and an increase in the losses of certain
investments in the CLEC business in which the Company is a less than majority
partner partially offset by improved operating performance in the Olympus
partnership.
Gain on Sale of Investment. On May 16, 1996, Hyperion completed the
sale of its 15.7% partnership interest in TCG South Florida to Teleport
Communications Group Inc. for an aggregate sales price of $11,618 resulting in a
pre-tax gain of $8,405. As part of the transaction, Hyperion was released from
its covenant not to compete with respect to the South Florida market. Hyperion
plans to use the proceeds from the sale to continue to expand and develop its
existing markets, complete new networks under construction and enter additional
markets.
Extraordinary Loss on Early Retirement of Debt. During the quarter
ended June 30, 1996, certain existing indebtedness was repaid resulting in an
extraordinary loss on retirement of debt of $2,079 which primarily represents
the write-off of the remaining deferred debt financing costs associated with the
debt retired.
Net Loss. The Company reported net losses of $30,244 and $26,818 for
the quarters ended June 30, 1995 and 1996, respectively. The decrease in net
loss was due primarily to increased operating income, increased priority
investment income from Olympus and the impact of a gain on sale of an equity
investment partially offset by an increase in interest expense and an
extraordinary loss on early retirement of debt recognized during the current
quarter.
Hyperion Telecommunications, Inc.
An 89% owned unrestricted subsidiary of the Company, Hyperion,
together with its subsidiaries owns certain investments in CLEC joint ventures
and manages those ventures. Hyperion is an unrestricted subsidiary for purposes
of the Company's indentures. On April 15, 1996, Hyperion realized gross proceeds
of $175,265 upon issuance of notes and warrants (see "Liquidity and Capital
Resources"). Summarized unaudited financial information of Adelphia, Hyperion
and Adelphia excluding Hyperion is as follows:
<TABLE>
<CAPTION>
Adelphia Adelphia
excluding excluding
Adelphia Hyperion Hyperion Adelphia Hyperion Hyperion
As of June 30, 1995 As of June 30, 1996
----------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total debt $2,100,068 $ 41,124 $2,058,944 $2,409,456 $ 194,475 $2,214,981
Three Months Ended June 30, 1995 Three Months Ended June 30, 1996
------------------------------------ ------------------------------------
Revenues $ 96,921 $ 686 $ 96,235 $ 111,011 $ 1,102 $ 109,909
Operating expenses:
Direct operating
and programming 28,522 628 27,894 33,597 859 32,738
Selling, general and
administrative 16,870 831 16,039 18,638 1,027 17,611
Operating income
(loss) before
depreciation and
amortization 51,529 (773) 52,302 58,776 (784) 59,560
Affiliate interest
and priority
investment income 8,985 -- 8,985 11,866 -- 11,866
EBITDA (a) 60,514 (773) 61,287 70,642 (784) 71,426
</TABLE>
(a) Earnings before interest, income taxes, depreciation and amortization,
equity in loss of joint ventures and other non-cash charges ("EBITDA").
While EBITDA is not an alternative to operating income as defined by
generally accepted accounting principles, the Company's management
believes EBITDA is a meaningful measure of performance as substantially
all of the Company's financing agreements contain financial covenants
based on EBITDA.
<PAGE>
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 systems. The Company historically has
committed significant capital resources for these purposes and for investments
in Olympus and other affiliates and entities. These expenditures were funded
through long-term borrowings and, to a lesser extent, internally generated
funds. The Company's ability to generate cash to meet its future needs will
depend generally on its results of operations and the continued availability of
external financing.
In most of its recent upgrades, the Company has utilized a Modified
Passive Network Architecture ("MPNA") which utilizes fiber optic cable as an
alternative to the coaxial cable that historically has been used to distribute
cable signals to the subscriber's home. The MPNA design deploys on average one
fiber node for every two miles of fiber optic cable, or approximately one fiber
node for every 180 homes passed. The Company believes this compares favorably
with current industry averages. This deep penetration of fiber optic cable into
the Systems' networks has the advantages of providing increased reliability to
customers, improved bandwidth and easier implementation of the return path plant
capabilities. This will position the Company to offer additional video
programming services, to utilize the expanded bandwidth potential of digital
compression technology and to meet the anticipated transmission requirements for
high-definition television, digital television, high-speed data and telephone
services.
Capital expenditures for the quarters ended June 30, 1995 and 1996,
were $26,377 and $24,944, respectively. Management expects capital expenditures
for the fiscal year ending March 31, 1997 to be somewhat higher than the prior
fiscal year due to the further expansion of cable plant rebuilds and due to
further expansion by Hyperion.
The Company generally has funded its working capital requirements,
capital expenditures and investments in Olympus and other affiliates and
entities through long-term borrowings, primarily from banks and insurance
companies, short-term borrowings, internally generated funds and the issuance of
parent company public debt and equity. The Company generally has funded the
principal and interest obligations on its long-term borrowings from banks and
insurance companies by refinancing the principal with new loans or through the
issuance of parent company debt securities, and by paying the interest out of
internally generated funds. Adelphia has funded the interest obligations on its
public borrowings from internally generated funds.
The Company's financing strategy has been to maintain its public
long-term debt at the parent holding company level while the Company's
consolidated subsidiaries have their own senior and subordinated credit
arrangements with banks and insurance companies. The Company's public indentures
and subsidiary credit agreements contain covenants that, among other things,
require the maintenance of certain financial ratios (including compliance with
certain debt to cash flow ratios in order to incur additional indebtedness);
place limitations on borrowings, investments, affiliate transactions, dividends
and distributions; and contain certain cross default provisions relating to
Adelphia or its subsidiaries.
At June 30, 1996, the Company's total outstanding debt aggregated
$2,409,456, which included $949,536 of parent debt, $168,620 of Hyperion debt
and $1,291,300 of other subsidiary debt. At June 30, 1996, the Company had an
aggregate of $140,300 in cash and cash equivalents, of which approximately
$132,000 represents the remaining proceeds of the Hyperion debt to be used in
Hyperion's CLEC activities, and $172,000 in unused credit lines with banks, part
of which is subject to achieving certain levels of operating performance.
At June 30, 1996, the Company's unused credit lines were provided by
reducing revolving credit facilities whose revolver periods expire December 31,
2004. The Company's weighted average interest rate on notes payable to banks and
institutions was approximately 9.04% at June 30, 1995 compared to 8.59% at June
30, 1996. At June 30, 1996, approximately 45% of such debt was subject to fixed
interest rates for at least one year under the terms of such debt or applicable
interest rate swap agreements.
Maturities of debt for the four years and nine months after June 30,
1996 are as follows:
Nine months ended March 31, 1997 $ 119,361
Year ended March 31, 1998 177,486
Year ended March 31, 1999 165,641
Year ended March 31, 2000 88,183
Year ended March 31, 2001 196,906
On April 1, 1996, Adelphia purchased the cable television operations
of Cable TV Fund 11-B, Ltd. This CATV system was acquired for $84,267 and served
approximately 39,700 subscribers at the acquisition date in the New York
counties of Erie and Niagara. The acquisition was financed through a combination
of debt proceeds from a $200,000 credit facility in which an Adelphia subsidiary
is a co-borrower with an affiliated entity and funds received through the
repayment of amounts previously advanced to related entities. These amounts may
be reborrowed by the related entities in future periods.
On April 12, 1996, certain subsidiaries of the Company (collectively,
the "Borrowers") entered into a $690,000 financing arrangement consisting of a
$540,000 revolving credit facility maturing December 31, 2003 and a $150,000
term loan facility maturing December 31, 2004. Initial borrowings during April
1996 of $483,000 were used primarily to repay existing indebtedness. Interest
rates charged are based upon one or more of the following rates at the option of
the Borrowers: Eurodollar rate or the greater of the prime rate and the Federal
funds rate plus 1/2 of 1% plus a margin of from 0% to 2% depending upon the
Borrower's senior funded debt ratio. Interest on outstanding borrowings is
generally payable on a quarterly basis. The maximum available under the
revolving credit facility is reduced, in increasing quarterly amounts, beginning
June 30, 1998 through December 31, 2003. The Borrowers pay a commitment fee of
either .375% or .250% per annum (depending upon the Borrower's senior funded
debt ratio) of the unused revolving credit facility commitments during the term
of the agreement. Borrowings under the term loan facility are payable in
installments, in increasing quarterly amounts, commencing June 30, 1998 and
ending on December 31, 2004.
On April 15, 1996, Hyperion realized gross proceeds of $175,265 upon
issuance of $329,000 aggregate principal amount of 13% Senior Discount Notes
(the "Senior Notes") due April 15, 2003 and 329,000 warrants to purchase an
aggregate of 613,427 shares of common stock of Hyperion expiring April 1, 2001.
Proceeds of $11,087 were allocated to the value of the warrants. If all warrants
were exercised, the warrants would represent approximately 5.78% of the common
stock of Hyperion on a fully diluted basis. Proceeds, net of discounts,
commissions, and other transaction costs were used to repay certain indebtedness
to Adelphia, to make loans to certain key Hyperion officers and will be used to
fund Hyperion's expansion of its existing markets, to complete construction of
new networks and to enter additional markets including related capital
expenditures, working capital requirements, operating losses and its investments
in joint ventures.
On July 12, 1996, Adelphia acquired all of the cable systems of First
Carolina Cable TV, L.P. These systems served approximately 34,000 subscribers at
the date of acquisition primarily located in Vermont and were purchased for an
aggregate price of $48,500.
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 Adelphia, 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 Adelphia's indentures and its
subsidiaries' 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 the 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, is in a period of consolidation
characterized by mergers, joint ventures, acquisitions, sales of all or part of
cable 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, except as otherwise stated herein, the Company has not reached any
agreements, in principal or otherwise, with respect to any material transaction
and no assurances can be given as to whether any such transaction may be
consummated or, if so, when.
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 1996
Act ends FCC regulation of cable programming service tier rates on March 31,
1999.
The rates generally require a reduction of up to 17 percent from the
rates for regulated services in force as of September 30, 1992, adjusted forward
for inflation and certain other factors. Rate reductions are not required to the
extent that a cable operator at its option elects to use an alternative
cost-of-service methodology and shows that rates for basic and cable programming
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 will also limit future 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. On November 10, 1994, the FCC adopted an alternative
method for adjusting the rates charged for a cable programming services tier
when new services are added. This will allow cable operators to increase rates
by as much as $1.50 over a two year period to reflect the addition of up to six
new channels of service on cable programming service tiers. In addition, a new
programming tier can be created, the rate for which would not be regulated as
long as certain conditions are met, such as not moving services from existing
tiers to the new one. 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 1996 Act deregulates the rates for cable
programming services on March 31, 1999. Adelphia cannot predict the effect if
the 1996 Act on future rulemaking proceedings or changes to the rate
regulations.
Effective September 1, 1993, as a result of the 1992 Cable Act,
Adelphia repackaged certain existing cable services by adjusting rates for basic
service and introducing a new method of offering certain cable services.
Adelphia adjusted the basic service rates and related equipment and installation
rates in all of its systems in order for such rates to be in compliance with the
applicable benchmark or equipment and installation cost levels. Adelphia also
implemented a program in all of its systems called "CableSelect" under which
most of Adelphia's satellite-delivered programming services are now offered
individually on a per channel basis, or as a group at a price of approximately
15% to 20% below the sum of the per channel prices of all such services. For
subscribers who elect to customize their channel lineup, Adelphia will provide,
for a monthly rental fee, an electronic device located on the cable line outside
the home, enabling a subscriber's television to receive only those channels
selected by the subscriber. These basic service rate adjustments and the
CableSelect program have also been implemented in all systems managed by
Adelphia. Adelphia believes CableSelect provides increased programming choices
to its subscribers while providing flexibility to Adelphia to respond to future
changes in areas such as customer demand and programming.
A letter of inquiry was received by an Olympus system regarding the
implementation of this new method of offering services. Olympus responded in
writing to the FCC's inquiry. On November 18, 1994, the Cable Services Bureau of
the FCC issued a decision holding that the "CableSelect" program was an evasion
of the rate regulations and ordered this package to be treated as a regulated
tier. This decision, and all other letters of inquiry decisions, were
principally decided on the number of programming services moved from regulated
tiers to "a la carte" packages. Adelphia has appealed this decision to the full
Commission which affirmed the Cable Service Bureau's decision. Adelphia has
sought reconsideration of the decision. On November 18, 1994, the FCC released
amended rules under which, on a prospective basis, any a la carte package will
be treated as a regulated tier, except for packages involving premium services.
An appeal of this decision to the U.S. Court of Appeals for the D.C. Circuit was
unsuccessful.
Certain other cable television companies that utilized a la carte
packages have recently reached settlement/resolution with the FCC on this issue.
Adelphia believes that in view of this experience with other operators,
resolution of these differences is possible, consistent with the terms and
conditions of those earlier resolutions. Accordingly, results of operations for
the fiscal year ended March 31, 1996 included a $5,300 charge representing
management's estimate of the total costs associated with the resolution of this
matter. Such costs included, (i) an estimate of credits to be extended to
customers in future periods of up to $2,700, (ii) legal and other costs incurred
during the fiscal year ended March 31, 1996, and (iii) an estimate of legal and
other costs to be incurred associated with the ultimate resolution of this
matter. At June 30, 1996, $3,765 of the charge to earnings remained in accrued
interest and other liabilities. While Adelphia cannot predict the ultimate
outcome or effect of this matter, management of Adelphia does not expect the
ultimate outcome of this matter to have a material adverse effect on Adelphia's
financial position and results of operations. Also, 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. The Company is currently unable
to predict the effect that the amended regulations, future FCC treatment of "a
la carte" packages or other future FCC rulemaking proceedings will have on its
business and results of operations in future periods.
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.
FCC rules heretofore permitted local telephone companies to offer
"video dialtone" service for video programmers, including channel capacity for
the carriage of video programming and certain non-common carrier activities such
as video processing, billing and collection and joint marketing agreements. New
Jersey Bell Telephone Company received authorization on July 18, 1994 to operate
a "video dialtone" service in portions of Dover County, New Jersey, in which the
Company serves approximately 20,000 subscribers.
The 1996 Act repealed the prohibition on local exchange telephone
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 LEC.
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 will have to convert its video dialtone authorization to an OVS
authorization, obtain a cable franchise, or operate as a common carrier.
The Company believes that the provision of video programming 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.
Direct broadcast satellite ("DBS") service became available to
consumers during 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 nation-wide basis. The extent to which DBS will be
competitive with cable systems will depend on the continued availability of
reception equipment and programming at reasonable prices to the consumer.
<PAGE>
- -------------------------------------------------------------------------------
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.01 Financial Data Schedule (supplied for the information
of the Commission).
(b) Reports on Form 8-K:
Form 8-Ks were filed on April 17, June 3 and June 19, 1996, each of which
reported information under items 5 and 7 thereof. No financial statements were
filed with any of such Form 8-Ks.
<PAGE>
- -------------------------------------------------------------------------------
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADELPHIA COMMUNICATIONS CORPORATION
(Registrant)
Date: August 14, 1996 By: /s/ Timothy J. Rigas
Timothy J. Rigas
Executive Vice President (authorized
officer), Chief Financial Officer and
Treasurer
Date: August 14, 1996 By: /s/ Edward E. Babcock, Jr.
Chief Accounting Officer
<PAGE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Statement for Adelphia Communications Corp.
for the three months ended June 30, 1996
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 140,300
<SECURITIES> 0
<RECEIVABLES> 24,984
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,212,695
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,541,452
<CURRENT-LIABILITIES> 0
<BONDS> 2,409,456
0
0
<COMMON> 263
<OTHER-SE> (1,155,320)
<TOTAL-LIABILITY-AND-EQUITY> 1,541,452
<SALES> 0
<TOTAL-REVENUES> 111,011
<CGS> 0
<TOTAL-COSTS> 30,299
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,496
<INCOME-PRETAX> (24,573)
<INCOME-TAX> 166
<INCOME-CONTINUING> (24,739)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,079)
<CHANGES> 0
<NET-INCOME> (26,818)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
