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, 1997
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.)
Main at Water Street
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 13, 1997, 19,702,308 shares of Class A Common Stock, par
value $.01, and 10,944,476 shares of Class B Common Stock, par value $.01 per
share, of the registrant were outstanding.
<TABLE>
<CAPTION>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets - March 31, 1997 and June 30, 1997..........................................3
Condensed Consolidated Statements of Operations - Three Months Ended June 30, 1996
and 1997..................................................................................................4
Condensed Consolidated Statements of Cash Flows - Three Months Ended June 30, 1996
and 1997.....................................................................................................5
Notes to Condensed Consolidated Financial Statements..............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.....................................................................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................................21
Item 2. Changes in Securities..........................................................................................21
Item 3. Defaults Upon Senior Securities................................................................................21
Item 4. Submission of Matters to a Vote of Security Holders............................................................21
Item 5. Other Information..............................................................................................21
Item 6. Exhibits and Reports on Form 8-K...............................................................................21
SIGNATURES..............................................................................................................22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
March 31, June 30,
ASSETS: 1997 1997
------------ ------------
Cable television systems, at cost, net of accumulated depreciation and
amortization:
<S> <C> <C>
Property, plant and equipment $ 659,575 $ 688,027
Intangible assets 650,533 690,570
----------- -----------
Total 1,310,108 1,378,597
Cash and cash equivalents 61,539 25,010
Investments 117,996 139,077
Preferred equity investment in Managed Partnership 18,338 18,338
Subscriber receivables - net 24,692 27,413
Prepaid expenses and other assets - net 80,355 75,884
Related party receivables - net 30,798 44,476
----------- -----------
Total $ 1,643,826 $ 1,708,795
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Notes payable of subsidiaries to banks and institutions $ 1,159,500 $ 1,270,700
12 1/2% Senior Notes due 2002 277,385 277,385
10 1/4% Senior Notes due 2000 99,322 99,366
9 7/8% Senior Notes due 2007 347,274 347,316
11 7/8% Senior Debentures due 2004 124,539 124,548
9 7/8% Senior Debentures due 2005 128,255 128,291
9 1/2% Senior Pay-In-Kind Notes due 2004 197,897 177,897
13% Senior Discount Notes of Unrestricted Subsidiary due 2003 187,173 193,900
Other debt 22,694 18,493
Accounts payable 56,961 53,565
Subscriber advance payments and deposits 16,004 15,138
Accrued interest and other liabilities 127,938 120,096
Deferred income taxes 110,097 110,013
----------- -----------
Total liabilities 2,855,039 2,936,708
----------- -----------
Cumulative equity in loss in excess of investment in and amounts
due from Olympus 42,668 46,032
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity (deficiency):
Class A Common Stock, $.01 par value, 200,000,000 shares
authorized, 16,130,880 and 19,702,308 shares outstanding,
respectively 161 197
Class B Common Stock, $.01 par value, 25,000,000 shares
authorized and 10,944,476 shares outstanding 109 109
Additional paid-in capital 219,408 241,669
Accumulated deficit (1,473,559) (1,515,920)
----------- -----------
Total stockholders' equity (deficiency) (1,253,881) (1,273,945)
----------- -----------
Total $ 1,643,826 $ 1,708,795
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Revenues $ 111,011 $ 122,644
--------- ---------
Operating expenses:
Direct operating and programming 33,597 39,673
Selling, general and administrative 18,638 22,259
Depreciation and amortization 28,477 33,733
--------- ---------
Total 80,712 95,665
--------- ---------
Operating income 30,299 26,979
--------- ---------
Other income (expense):
Interest income from affiliates 2,049 2,151
Priority investment income from Olympus 9,817 11,765
Interest expense (60,496) (63,888)
Equity in loss of Olympus and other joint ventures (13,011) (19,198)
Equity in loss of Hyperion nonconsolidated joint ventures (1,636) (2,540)
Gain on sale of investment 8,405 --
--------- ---------
Total (54,872) (71,710)
--------- ---------
Loss before income taxes and extraordinary (loss) gain (24,573) (44,731)
Income tax (expense) benefit (166) 70
--------- ---------
Loss before extraordinary (loss) gain (24,739) (44,661)
Extraordinary (loss) gain on early retirement of debt (2,079) 2,300
--------- ---------
Net loss $ (26,818) $ (42,361)
========= =========
Loss per weighted average share of common stock
before extraordinary (loss) gain $ (0.94) $ (1.62)
Extraordinary (loss) gain per weighted average share
on early retirement of debt (0.08) 0.08
--------- ---------
Net loss per weighted average share
of common stock $ (1.02) $ (1.54)
========= =========
Weighted average shares of
common stock outstanding (in thousands) 26,308 27,468
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended June 30,
---------------------------
1996 1997
----------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (26,818) $ (42,361)
Adjustments to reconcile net loss to net cash (used for)
provided by operating activities:
Depreciation 18,144 20,842
Amortization 10,333 12,891
Noncash interest expense 4,996 6,858
Equity in loss of Olympus and other joint ventures 13,011 19,198
Equity in loss of Hyperion non-consolidated joint
ventures 1,636 2,540
Gain on sale of investment (8,405) --
Extraordinary loss (gain) on early retirement of debt 2,079 (2,300)
Decrease in deferred income taxes,
net of effect of acquisitions -- (84)
Change in operating assets and liabilities, net of effects
of acquisitions:
Subscriber receivables (1,181) (2,721)
Prepaid expenses and other assets (4,714) 1,110
Accounts payable (11,758) (3,396)
Subscriber advance payments and deposits (1,299) (866)
Accrued interest and other liabilities 2,136 (8,177)
--------- ---------
Net cash (used for) provided by operating activities (1,840) 3,534
--------- ---------
Cash flows used for investing activities:
Cable television systems acquired (84,267) (29,509)
Expenditures for property, plant and equipment (24,944) (43,534)
Investments in Hyperion nonconsolidated joint ventures (4,750) (18,031)
Investments in other joint ventures (9,379) (10,828)
Amounts invested in and advanced from (to)
Olympus and related parties - net 17,854 (26,872)
Proceeds from sale of investment 11,618 --
--------- ---------
Net cash used for investing activities (93,868) (128,774)
--------- ---------
Cash flows from financing activities:
Proceeds from debt 741,771 115,400
Repayments of debt (512,957) (26,689)
Costs associated with debt financing (14,702) --
Proceeds from subsidiary's issuance of warrants 11,087 --
--------- ---------
Net cash provided by financing activities 225,199 88,711
--------- ---------
Increase (decrease) in cash and cash equivalents 129,491 (36,529)
Cash and cash equivalents, beginning of period 10,809 61,539
--------- ---------
Cash and cash equivalents, end of period $ 140,300 $ 25,010
========= =========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
The accompanying unaudited condensed consolidated 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 for a fair presentation of the financial
position of Adelphia at June 30, 1997, and the results of operations for the
three months ended June 30, 1996 and 1997, have been included. These condensed
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, 1997 ("Annual Report"). The results of
operations for the three months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the year ending March 31, 1998.
Certain prior period balances have been reclassified to conform with the June
30, 1997 presentation.
1. Significant Events Subsequent to the Annual Report:
On July 7, 1997, Adelphia announced the sale of $150,000 in 10 1/2%
Senior Notes due 2004 (the "Notes") to institutional investors and 13% Series A
Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock")
with an aggregate liquidation preference of $150,000 of which $95,000 was sold
to institutional investors and the remainder was sold to an affiliate of the
family of John Rigas, Chairman of Adelphia. These offerings were accomplished in
reliance on Rule 144A of the Securities Act of 1933, as amended. The terms of
the Notes are similar to those of Adelphia's existing publicly held senior debt.
Interest on the Notes is payable semi-annually commencing January 15, 1998. The
Exchangeable Preferred Stock will accrue dividends from the date of issuance at
a rate per annum of 13% of the liquidation preference per share and are payable
semi-annually in arrears, commencing January 15, 1998. The shares of
Exchangeable Preferred Stock are redeemable at the option of the Company, on or
after July 15, 2002. The Company is required, subject to certain conditions, to
redeem all of the Exchangeable Preferred Stock outstanding on July 15, 2009, at
a redemption price equal to 100% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of redemption.
On July 7, 1997, Adelphia also announced the sale of perpetual Series
C Convertible Preferred Stock with an aggregate liquidation preference of
$100,000 in a private placement of which $80,000 was sold to a Rigas family
affiliate and the remainder was sold to Telesat Cablevision, Inc., a wholly
owned subsidiary of FPL Group, Inc., a New York Stock Exchange company and a 50%
partner of Olympus Communications, L.P. ("Olympus"). The Series C Convertible
Preferred Stock will accrue dividends at the rate of 8 1/8% of the liquidation
preference per annum, and is convertible at $8.48 per share into an aggregate of
11,792,450 shares of Class A Common Stock of Adelphia. The Series C Convertible
Preferred Stock is redeemable at the option of Adelphia after three years from
the date of issuance at a premium declining to par.
On June 20, 1997, Adelphia acquired cable systems from Booth
Communications Company. These systems served approximately 25,800 subscribers at
the date of acquisition in the Virginia cities of Blacksburg and Salem and were
purchased for an aggregate price of $54,500 comprised of 3,571,428 shares of
Adelphia's Class A Common Stock and $29,500 cash. The acquisition was accounted
for under the purchase method of accounting. Accordingly, the financial results
of the acquired systems are included in the consolidated results of Adelphia
effective with the date acquired.
<PAGE>
2. Notes Payable of Subsidiaries to Banks and Institutions:
The following updates to June 30, 1997 certain disclosures included
in Note 3 to Adelphia's consolidated financial statements contained in the
Annual Report:
Commitments for additional borrowings $95,654
Weighted average interest rate payable by
subsidiaries under credit agreements with banks 7.51%
Percentage of subsidiary debt that bears
interest at fixed rates for at least one year 39.82%
3. Investments:
<TABLE>
<CAPTION>
Adelphia's nonconsolidated investments are as follows:
March 31, June 30,
1997 1997
----------- ----------
Investments accounted for using the equity method:
Gross investment:
<S> <C> <C>
Hyperion investment in joint ventures $ 57,497 $ 74,726
Page Call, Inc. 14,990 15,536
Mobile Communications 2,470 11,448
Other 1,751 2,053
--------- ---------
Total 76,708 103,763
--------- ---------
Investments accounted for using the cost method:
Niagara Frontier Hockey, L.P. 35,270 36,511
SuperCable ALK International 3,172 3,172
Programming ventures 2,945 2,960
Mobile Communications 1,832 2,329
Other 763 813
--------- ---------
Total 43,982 45,785
--------- ---------
Available for sale investments recorded at fair market value:
Republic Industries, Inc. 9,315 6,613
--------- ---------
Total investments before cumulative equity in net losses 130,005 156,161
Cumulative equity in net losses (12,009) (17,084)
--------- ---------
Total investments $ 117,996 $ 139,077
========= =========
</TABLE>
At June 30, 1997, the Company recorded, as a component of additional
paid-in capital, an unrealized holding loss on its investment in Republic
Industries, Inc. common stock in the amount of $2,703.
4. Related Party Investments and Receivables:
Related party receivables - net represent advances to managed
partnerships, the Rigas Family (principal shareholders and officers of Adelphia)
and Rigas Family controlled entities. No related party advances are
collateralized.
Cumulative equity in loss in excess of investment in and amounts due
from Olympus is comprised of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1997
---------- ----------
<S> <C> <C>
Cumulative equity in loss over investment in Olympus $ (95,771) $ (98,914)
Amounts due from Olympus 53,103 52,882
--------- ---------
$ (42,668) $ (46,032)
========= =========
</TABLE>
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,
-----------------------
1996 1997
--------- ---------
Revenues $ 78,422 $ 83,584
Net loss (5,534) (9,931)
Net loss of general partners after
priority return requirements (38,306) (46,410)
5. Income Taxes:
Income tax benefit for the three months ended June 30, 1997 was
$70, which is comprised of current tax expense of $14 and deferred tax
benefit of $84.
6. Supplemental Cash Flow Information:
Cash payments for interest were $50,804 and $44,212 for the three
months ended June 30, 1996 and 1997, 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.
<PAGE>
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
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,
government and regulatory policies, the pricing and availability of equipment,
materials inventories and programming, technological developments and changes in
the competitive environment in which the Company operates. Unless otherwise
stated, the information contained in this Form 10-Q is as of and for the three
months ended June 30, 1997.
Adelphia Communications Corporation and its subsidiaries ("Adelphia"
or the "Company") earned substantially all of its revenues in the three months
ended June 30, 1996 and 1997 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, 1997 compared to the same period of the prior year, were primarily the
result of acquisitions, rate increases, and expanding existing cable television
operations.
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 Olympus, 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
at the dates indicated for Company Owned, Olympus and Managed Systems. The
"Olympus Systems" are systems currently owned by Olympus. The "Managed Systems"
are affiliated systems managed by Adelphia.
<PAGE>
June 30, Percent
----------------------- Increase
1996 1997 (Decrease)
----------- ----------- --------
Homes Passed by Cable
Company Owned Systems 1,488,447 1,610,384 8.2%
Olympus Systems 637,154 670,712 5.3%
Managed Systems 427,559 426,529 (0.2%)
--------- --------- ---
Total Systems 2,553,160 2,707,625 6.0%
========= ========= ===
Basic Subscribers
Company Owned Systems 1,090,181 1,176,846 7.9%
Olympus Systems 400,718 427,441 6.7%
Managed Systems 305,366 303,428 (0.6%)
--------- --------- ---
Total Systems 1,796,265 1,907,715 6.2%
========= ========= ===
Managed Systems' data, as of June 30, 1997, reflects the sale of a
system consisting of approximately 7,900 homes passed and approximately 5,800
basic subscribers.
Exclusive of acquisitions and dispositions, basic subscribers grew
2.1%, 3.9% and 1.3% for Company Owned, Olympus and Managed Systems,
respectively, during the twelve months ended June 30, 1997.
<PAGE>
The following table is derived from Adelphia's Condensed Consolidated
Financial Statements that are included in this Form 10-Q 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,
--------------------
1996 1997
--------- ----------
Revenues 100.0% 100.0%
Operating expenses:
Direct operating and programming 30.3% 32.3%
Selling, general and administrative 16.8% 18.1%
Depreciation and amortization 25.7% 27.5%
------- -------
Operating income 27.2% 22.1%
======= =======
Revenues. The primary revenue sources reflected as a percentage of
total revenues were as follows:
Three Months Ended
June 30,
-----------------------
1996 1997
----------- -----------
Regulated service and equipment fees 74% 75%
Premium programming fees 12% 12%
Advertising sales and other services 14% 13%
Revenues increased approximately 10.5% for the quarter ended June 30,
1997 compared with the quarter ended June 30, 1996. The increase was
attributable to the following:
Acquisitions 29%
Basic subscriber growth 7%
Rate increases 56%
Other 8%
Effective August 1, 1996, 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, 1997. 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, 1997.
Direct Operating and Programming Expenses. Direct operating and
programming expenses, which are mainly basic and premium programming costs and
technical expenses, increased 18.1% for the quarter ended June 30, 1997 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, 1997 have increased at a greater magnitude than corresponding
revenue increases. As a result of recent FCC regulatory rulemaking decisions,
the Company is implementing 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, 1997.
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 19.4% for the
quarter ended June 30, 1997 compared with the same quarter of the prior year.
The increase was primarily due to incremental costs associated with
acquisitions, subscriber growth and Hyperion Corporate and Network Operating and
Control Center cost increases to accommodate the growth in the number of
operating companies managed and monitored. Such expenses increased as a
percentage of revenues compared to the quarter ended June 30, 1996 primarily due
to acquisitions and Hyperion overhead increases.
Depreciation and Amortization. Depreciation and amortization was
higher for the quarter ended June 30, 1997 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, 1996 and 1997 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, 1997 due
to increased payments by Olympus.
EBITDA. EBITDA (earnings before interest expense, income taxes,
depreciation and amortization, equity in loss of joint ventures and other
noncash charges) amounted to $74,628 during the quarter ended June 30, 1997
compared with $70,642 for the same quarter of the prior year. The increase of
5.6% is primarily due to the impact of the acquisition of cable systems,
subscriber rate increases, and increased priority investment income from
Olympus. The impact of acquisitions increased revenues and operating expenses
for the quarter ended June 30, 1997 compared with the same quarter of the prior
year. While EBITDA is not an alternative to operating income or an alternative
to cash flows from operating activities as a measure of liquidity, as defined by
generally accepted accounting principles, and, while EBITDA may not be
comparable to other similarly titled measures of other companies, management
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 5.6% for the quarter
ended June 30, 1997 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 quarter ended June 30, 1997
compared with the quarter ended June 30, 1996. Approximately 45.9% of the
increase in interest expense in the quarter ended June 30, 1997 as compared with
the same quarter of the prior year was attributable to incremental debt related
to acquisitions. Interest expense includes noncash accretion of original issue
discount and noncash interest expense totaling $4,996 and $6,858 for the
quarters ended June 30, 1996 and 1997, respectively. The increase in noncash
interest for the quarter ended June 30, 1997 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,
1997, 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.
Gain on Sale of Investment. The gain on sale of investment for the
three months ended June 30, 1996 was due to the sale of Hyperion's 15.7%
partnership interest in TCG of South Florida to Teleport Communications Group,
Inc. on May 16, 1996 for an aggregate sale price of $11,618. This sale resulted
in a gain of $8,405. There were no such similar transactions in the three months
ended June 30, 1997.
Extraordinary (Loss) Gain on Early Retirement of Debt. During the
quarter ended June 30, 1996, certain 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. During the quarter ended June 30, 1997, $20,000 of 9 1/2% Senior
Pay-In-Kind Notes due 2004 were reacquired through open market purchases. As a
result, Adelphia recognized an extraordinary gain of $2,300, which represents
the excess of the net carrying value of the debt over the reacquisition cost.
Net Loss. The Company reported net losses of $26,818 and $42,361 for
the quarters ended June 30, 1996 and 1997, respectively. The increase in net
loss was due to decreased operating income, increased interest expense and
equity in loss of joint ventures combined with no gain on sale of investment,
partially offset by an increase in priority investment income from Olympus.
Hyperion Telecommunications, Inc.
An 88% 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. For further information regarding Hyperion, which
also files reports pursuant to the Securities Exchange Act of 1934, see
Hyperion's Form 10-Q for the quarterly period ended June 30, 1997.
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Summarized unaudited financial information of Adelphia, Hyperion and
Adelphia excluding Hyperion is as follows:
Adelphia Adelphia
excluding excluding
Adelphia Hyperion Hyperion Adelphia Hyperion Hyperion
------------------------------------------ --------------------------------------------
As of and for the Three Months Ended June 30,
---------------------------------------------
1996 1997
------------------------------------------ --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments before cumulative
equity in net loss (b) $ 84,399 $ 27,923 $ 56,476 $ 156,161 $ 74,726 $ 81,435
Cumulative equity in net loss (b) (6,935) (6,935) -- (17,084) (14,574) (2,510)
Total investments (b) $ 77,464 $ 20,988 $ 56,476 $ 139,077 $ 60,152 $ 78,925
Total debt $ 2,409,456 $ 194,475 $ 2,214,981 $ 2,637,896 $ 222,251 $ 2,415,645
Revenues $ 111,011 $ 1,102 $ 109,909 $ 122,644 $ 1,520 $ 121,124
Operating expenses:
Direct operating and programming 33,597 859 32,738 39,673 1,180 38,493
Selling, general and administrative 18,638 1,027 17,611 22,259 2,380 19,879
Affiliate interest and priority
investment income 11,866 -- 11,866 13,916 -- 13,916
EBITDA (a) $ 70,642 $ (784) $ 71,426 $ 74,628 $ (2,040) $ 76,668
Interest expense (60,496) (6,169) (54,327) (63,888) (8,077) (55,811)
Capital expenditures (24,944) (1,818) (23,126) (43,534) (18,766) (24,768)
Cash paid for acquisitions (84,267) -- (84,267) (29,509) -- (29,509)
Cash used for investments (14,129) (4,750) (9,379) (28,859) (18,031) (10,828)
<FN>
(a) Earnings before interest expense, income taxes, depreciation and
amortization, equity in loss of joint ventures and other non-cash charges
("EBITDA"). While EBITDA is not an alternative indicator of operating
performance to operating income or an alternative to cash flows from
operating activities as a measure of liquidity, as defined by generally
accepted accounting principles, and, while EBITDA may not be comparable to
other similarly titled measures of other companies, 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.
(b) Excluding Adelphia's investment in Olympus.
</FN>
</TABLE>
<PAGE>
Liquidity and Capital Resources
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 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 Adelphia without Hyperion for the quarters
ended June 30, 1996 and 1997 were $23,126 and $24,768, respectively. Capital
expenditures, including Hyperion, for the quarters ended June 30, 1996 and 1997
were $24,944 and $43,534, respectively. Capital expenditures for Hyperion for
the quarter ended June 30, 1997 compared with the quarter ended June 30, 1996,
increased primarily due to the commencement of switching services. The Company
expects capital expenditures without Hyperion for fiscal 1998 to be
approximately the same as fiscal 1997. Hyperion expects that it will continue to
have substantial capital expenditures for fiscal 1998.
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 and Hyperion public debt. 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 or equity 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 generally 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, 1997, the Company's total outstanding debt aggregated
$2,637,896, which included $1,154,803 of parent debt, $196,396 of Hyperion debt
and $1,286,697 of other subsidiary debt. At June 30, 1997, Adelphia's
subsidiaries had an aggregate of $95,654 in unused credit lines with banks,
which includes $23,000 also available to Olympus and the Managed Partnerships,
part of which is subject to achieving certain levels of operating performance.
In addition, the Company had an aggregate $25,010 in cash and cash equivalents
at June 30, 1997, which combined with the Company's unused credit lines with
banks, aggregated $120,664. Additionally, subsequently to June 30, 1997, the
Company issued debt and equity with aggregate net proceeds totaling
approximately $393,500.
At June 30, 1997, the Company's unused credit lines were provided by
reducing revolving credit facilities whose revolver periods expire September 30,
2004. The Company's weighted average interest rate on notes payable to banks and
institutions was approximately 8.59% at June 30, 1996 compared to 8.39% at June
30, 1997. At June 30, 1997, approximately 40% 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.
The following table sets forth the mandatory reductions in principal
under all debt agreements for each of the next four years and nine months based
on amounts outstanding at June 30, 1997:
Nine months ending March 31, 1998 $168,176
Year ending March 31, 1999 163,791
Year ending March 31, 2000 129,483
Year ending March 31, 2001 243,881
Year ending March 31, 2002 195,314
On July 7, 1997, Adelphia announced the sale of $150,000 in 10 1/2%
Senior Notes due 2004 (the "Notes") to institutional investors and 13% Series A
Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock")
with an aggregate liquidation preference of $150,000 of which $95,000 was sold
to institutional investors and the remainder was sold to an affiliate of the
family of John Rigas, Chairman of Adelphia. These offerings were accomplished in
reliance on Rule 144A of the Securities Act of 1933, as amended. The terms of
the Notes are similar to those of Adelphia's existing publicly held senior debt.
Interest on the Notes is payable semi-annually commencing January 15, 1998. The
Exchangeable Preferred Stock will accrue dividends from the date of issuance at
a rate per annum of 13% of the liquidation preference per share and are payable
semi-annually in arrears, commencing January 15, 1998. The shares of
Exchangeable Preferred Stock are redeemable at the option of the Company, on or
after July 15, 2002. The Company is required, subject to certain conditions, to
redeem all of the Exchangeable Preferred Stock outstanding on July 15, 2009, at
a redemption price equal to 100% of the liquidation preference thereof, plus
accumulated and unpaid dividends and liquidated damages, if any, to the date of
redemption.
On July 7, 1997, Adelphia also announced the sale of perpetual Series
C Convertible Preferred Stock with an aggregate liquidation preference of
$100,000 in a private placement of which $80,000 was sold to a Rigas family
affiliate and the remainder was sold to Telesat Cablevision, Inc., a wholly
owned subsidiary of FPL Group, Inc., a New York Stock Exchange company and a 50%
partner of Olympus. The Series C Convertible Preferred Stock will accrue
dividends at the rate of 8 1/8% of the liquidation preference per annum, and is
convertible at $8.48 per share into an aggregate of 11,792,450 shares of Class A
Common Stock of Adelphia. The Series C Convertible Preferred Stock is redeemable
at the option of Adelphia after three years from the date of issuance at a
premium declining to par.
The proceeds from the sale of the Exchangeable Preferred Stock, the
Notes and from the Series C Convertible Preferred Stock were used to repay
subsidiaries' senior notes and revolving credit facilities.
On June 20, 1997, Adelphia acquired cable systems from Booth
Communications Company. These systems served approximately 25,800 subscribers at
the date of acquisition in the Virginia cities of Blacksburg and Salem and were
purchased for an aggregate price of $54,500 comprised of 3,571,428 shares of
Adelphia's Class A Common Stock and $29,500 cash. The acquisition was accounted
for under the purchase method of accounting. Accordingly, the financial results
of the acquired systems are included in the consolidated results of Adelphia
effective with the date acquired.
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, continues to be 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, no assurances can be given as to whether any such transaction may be
consummated or, if so, when.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" have been issued and are effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 defines
comprehensive income and outlines certain reporting and disclosure requirements
related to comprehensive income. SFAS No. 131 requires certain disclosures about
business segments of an enterprise, if applicable. The adoption of SFAS No. 130
and SFAS No. 131 is not expected to have a material impact on the Company's
financial statements or disclosures.
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") ends FCC regulation of cable
programming service tier rates on March 31, 1999.
Rates for basic and cable programming 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 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 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. 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 has allowed cable operators to increase rates by as
much as $1.40 plus programming costs, over a three year period ending December
31, 1997 to reflect the addition of up to seven 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. Adelphia cannot predict the effect of 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 were 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 elected to customize their channel lineup, Adelphia provided,
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 were also implemented in all systems managed by Adelphia.
Adelphia believes CableSelect provided increased programming choices to its
subscribers while providing flexibility to Adelphia to respond to future changes
in areas such as customer demand and programming. Adelphia no longer offers the
CableSelect program in any of its systems.
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 appealed this decision to the full Commission which affirmed
the Cable Service Bureau's 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.
In fiscal 1996, Adelphia recorded a $5,300 charge representing
management's estimate of the total costs to be incurred to resolve all of their
rate complaints with the FCC. On May 1, 1997, Adelphia reached a settlement of
all rate complaints before the FCC on terms and conditions consistent with
certain other cable television companies that utilized a la carte packages that
have reached settlement/resolution with the FCC on this issue. At June 30, 1997,
$3,171 of the $5,300 charge remained in accrued interest and other liabilities,
which management believes is adequate to cover the settlement. 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 Adelphia. Adelphia 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
their 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 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 FCC has promulgated
rules to implement the OVS concept, and New Jersey Bell has been granted
permission to convert its video dialtone authorization to an OVS authorization.
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.
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. At this time, any impact of DBS competition on the Company's future
results is not known or estimable.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
-------------------------------------------------
<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 May 1, June 12, July 11 and July 24, 1997,
each of which reported information under items 5 and 7 thereof. No
financial statements were filed with any of 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.
ADELPHIA COMMUNICATIONS CORPORATION
(Registrant)
Date: August 14, 1997 By: /s/ Timothy J. Rigas
---------------------
Timothy J. Rigas
Executive Vice President
(authorizedofficer),
Chief Financial Officer,
Chief Accounting Officer
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for Adelphia Communications Corp. for the three
months ended June 30, 1997.
</LEGEND>
<CIK> 0000796486
<NAME> ADLEPHIA COMMUNICATIONS CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 25,010
<SECURITIES> 0
<RECEIVABLES> 27,413<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,378,597<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 1,708,795
<CURRENT-LIABILITIES> 0
<BONDS> 2,637,896
0
0
<COMMON> 306
<OTHER-SE> (1,274,251)
<TOTAL-LIABILITY-AND-EQUITY> 1,708,795
<SALES> 0
<TOTAL-REVENUES> 122,644
<CGS> 0
<TOTAL-COSTS> 95,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,888
<INCOME-PRETAX> (44,731)
<INCOME-TAX> (70)
<INCOME-CONTINUING> (44,661)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,300
<CHANGES> 0
<NET-INCOME> (42,361)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> (1.54)
<FN>
<F1>Receivables netted with Allowance
<F2>PP&E netted with Depreciation
</FN>
</TABLE>
