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, 1998
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from ______________ to _____________
Commission File Number: 000-16014
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 16915-1141
(Address of principal executive offices) (Zip code)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
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, 1998, 20,093,528 shares of Class A Common Stock, par value $.01
per share, and 10,944,476 shares of Class B Common Stock, par value $.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
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Condensed Consolidated Balance Sheets - March 31, 1998 and
June 30, 1998.................................................................................. 3
Condensed Consolidated Statements of Operations - Three Months Ended
June 30, 1997 and 1998......................................................................... 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
June 30, 1997 and 1998......................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 22
Item 2. Changes in Securities and Use of Proceeds..................................................... 22
Item 3. Defaults Upon Senior Securities.............................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 22
Item 5. Other Information............................................................................ 22
Item 6. Exhibits and Reports on Form 8-K.............................................................. 22
SIGNATURES............................................................................................. 23
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
March 31, June 30,
ASSETS: 1998 1998
- -------
------------- ------------
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Property, plant and equipment - net $918,637 $971,776
Intangible assets - net 695,104 720,375
Cash and cash equivalents 276,895 454,676
U.S. government securities - pledged 70,535 71,535
Investments 127,827 132,697
Preferred equity investment in Managed Partnership 18,338 18,338
Subscriber receivables - net 30,551 35,060
Prepaid expenses and other assets - net 114,526 110,576
Related party receivables - net 52,258 47,930
----------- -----------
Total $2,304,671 $2,562,963
=========== ===========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
Subsidiary debt $1,329,471 $1,486,225
Parent debt 1,580,274 1,510,596
Accounts payable 65,019 79,719
Subscriber advance payments and deposits 17,129 17,812
Accrued interest and other liabilities 98,087 122,824
Deferred income taxes 116,351 110,747
----------- -----------
Total liabilities 3,206,331 3,327,923
----------- -----------
Minority interests 27,737 67,348
----------- -----------
Cumulative equity in loss in excess of investment in and amounts
due from Olympus 31,202 22,931
----------- -----------
Hyperion Redeemable Exchangeable Preferred Stock 207,204 214,085
----------- -----------
Series A Cumulative Redeemable Exchangeable Preferred Stock 148,062 148,105
----------- -----------
Commitments and contingencies (Note 9)
Convertible preferred stock, common stock and
other stockholders' equity (deficiency):
8 1/8% Series C Convertible Preferred Stock ($100,000
liquidation preference) 1 1
Class A Common Stock, $.01 par value, 200,000,000
shares authorized, 20,043,528 shares outstanding 200 200
Class B Common Stock, $.01 par value, 25,000,000 shares
authorized and 10,944,476 shares outstanding 109 109
Additional paid-in capital 331,263 471,078
Accumulated deficit (1,647,438) (1,688,817)
----------- -----------
Convertible preferred stock, common stock and
other stockholders' equity (deficiency) (1,315,865) (1,217,429)
----------- -----------
Total $2,304,671 $2,562,963
=========== ===========
See notes to condensed consolidated financial
statements.
</TABLE>
<PAGE>
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenues $122,644 $144,756
----------- -----------
Operating expenses:
Direct operating and programming 39,673 48,738
Selling, general and administrative 22,259 29,111
Depreciation and amortization 33,733 38,559
----------- -----------
Total 95,665 116,408
----------- -----------
Operating income 26,979 28,348
----------- -----------
Other income (expense):
Priority investment income from Olympus 11,765 12,000
Other income -- 1,000
Interest expense - net (61,737) (62,745)
Equity in loss of Olympus and other joint ventures (19,198) (18,316)
Equity in loss of Hyperion joint ventures (2,540) (3,190)
Minority interest in losses of subsidiaries -- 5,460
Hyperion preferred stock dividends -- (6,946)
----------- -----------
Total (71,710) (72,737)
----------- -----------
Loss before income taxes and extraordinary gain (loss) (44,731) (44,389)
Income tax benefit 70 5,614
----------- -----------
Loss before extraordinary gain (loss) (44,661) (38,775)
Extraordinary gain (loss) on early retirement of debt 2,300 (2,604)
----------- -----------
Net loss (42,361) (41,379)
Dividend requirements applicable to preferred stock -- (6,906)
----------- -----------
Net loss applicable to common stockholders $(42,361) $(48,285)
=========== ===========
Basic and diluted loss per weighted average share of common
stock before extraordinary gain (loss) $(1.62) $(1.48)
Basic and diluted extraordinary gain (loss) per weighted
average share on early retirement of debt 0.08 (0.08)
----------- -----------
Basic and diluted net loss per weighted average share of common stock $(1.54) $(1.56)
=========== ===========
Weighted average shares of common stock outstanding (in thousands) 27,468 30,988
=========== ===========
See notes to condensed consolidated financial
statements.
</TABLE>
<PAGE>
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended June 30,
----------------------------
1997 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (42,361) $ (41,379)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 33,733 38,559
Noncash interest expense 6,858 7,895
Noncash dividends -- 6,946
Equity in loss of Olympus and other joint ventures 19,198 18,316
Equity in loss of Hyperion joint ventures 2,540 3,190
Minority interest in losses of subsidiaries -- (5,460)
Extraordinary (gain) loss on early retirement of debt (2,300) 2,604
Decrease in deferred income taxes, net of effect of acquisitions (84) (5,604)
Changes in operating assets and liabilities, net of effect of acquisitions:
Subscriber receivables (2,721) (4,509)
Prepaid expenses and other assets 1,110 208
Accounts payable (3,396) 14,700
Subscriber advance payments and deposits (866) 683
Accrued interest and other liabilities (8,177) 19,994
----------- -----------
Net cash provided by operating activities 3,534 56,143
----------- -----------
Cash flows used for investing activities:
Acquisitions (29,509) (22,769)
Expenditures for property, plant and equipment (43,534) (74,255)
Investments in Hyperion nonconsolidated joint ventures (18,031) (2,905)
Investments in other joint ventures (10,828) (7,061)
Purchase of minority interest in Hyperion -- (15,580)
Amounts invested in and advanced to
Olympus and related parties (26,872) (20,854)
----------- -----------
Net cash used for investing activities (128,774) (143,424)
----------- -----------
Cash flows provided by financing activities:
Proceeds from debt 115,400 155,625
Repayments of debt (26,689) (78,119)
Premium paid on early retirement of debt -- (2,095)
Issuance of Hyperion Class A common stock -- 205,599
Costs associated with issuance of Hyperion Class A common stock -- (13,917)
Preferred stock dividends paid -- (2,031)
----------- -----------
Net cash provided by financing activities 88,711 265,062
----------- -----------
(Decrease) increase in cash and cash equivalents (36,529) 177,781
Cash and cash equivalents, beginning of period 61,539 276,895
----------- -----------
Cash and cash equivalents, end of period $ 25,010 $ 454,676
=========== ===========
See notes to condensed consolidated financial
statements.
</TABLE>
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per share amounts)
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, 1998, and the results of operations for the
three months ended June 30, 1997 and 1998, 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, 1998 ("Annual Report"). The results of
operations for the three months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the year ending March 31, 1999.
1. Significant Events Subsequent to the Annual Report:
On April 1, 1998, the Company completed an exchange of cable systems
with Time Warner. The Company exchanged its interests in Mansfield, Ohio area
systems, which served approximately 64,400 subscribers, and approximately
$11,000 cash for interests in systems adjacent to systems owned or managed by
Adelphia in Virginia, New England and New York, which served approximately
70,200 subscribers. No gain or loss was recognized in connection with this
transaction.
On May 8, 1998, Hyperion Telecommunications, Inc. ("Hyperion")
completed an initial public offering ("IPO") of its Class A Common Stock
("Hyperion Stock"). As part of the offering, Adelphia purchased an incremental
3,324,001 shares of Hyperion Stock for $49,900 and converted indebtedness owed
to the Company by Hyperion into 3,642,666 shares of Hyperion Stock. In addition,
Adelphia purchased warrants issued by Hyperion to MCI Metro Access Transmission
Services, Inc., and purchased shares of Hyperion Class B common stock from
certain executive officers of Hyperion for a total purchase price of
approximately $12,580 and $3,000, respectively. Adelphia owns approximately 66%
of the Hyperion common stock on a fully diluted basis and 85% of the total
voting power. Additional net proceeds of $191,685 to Hyperion were received as a
result of the sale of Hyperion Stock to the public. As a result of the IPO,
Adelphia's additional paid-in capital increased approximately $147,000 and
minority interests increased approximately $45,000.
On May 15, 1998, Adelphia redeemed $69,838 aggregate principal amount
of 12 1/2% Senior Notes due 2002 at 103% of principal. As a result of this
transaction, Adelphia recognized an extraordinary loss of $2,604.
On June 5, 1998, Adelphia acquired cable systems from Cablevision
Systems. These systems served approximately 11,250 subscribers at the date of
acquisition in southern New York and were purchased for an aggregate price of
$11,500. 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.
Since April 1, 1998, Hyperion entered into a series of agreements,
totaling $107,000 with Qwest Communications, Williams Communications and several
other fiber optic network providers. These agreements will provide Hyperion with
ownership or an indefeasible right of use to over 8,100 route miles of fiber
optic cable, which will significantly increase its presence in the eastern half
of the United States.
On July 2, 1998, Adelphia issued $150,000 of 8 1/8% Senior Notes due
2003 (the "Senior Notes"). Net proceeds of approximately $147,300, after payment
of transaction costs, were used to repay debt of subsidiaries. The terms of the
Senior Notes are similar to those of Adelphia's existing publicly held senior
debt.
On August 3, 1998, Adelphia announced that it closed its transaction
with Tele-Communications, Inc.("TCI") to form a joint venture limited
partnership in the Western New York region. Pursuant to this agreement, Adelphia
contributed its Western New York and Lorain, Ohio systems, totaling
approximately 298,000 subscribers and certain programming assets and $440,000 in
debt. Subsidiaries of TCI contributed their cable systems in Buffalo, New York;
Erie, Pennsylvania; and Ashtabula and Lake County, Ohio, totaling approximately
171,000 subscribers and $228,000 in debt. Adelphia and TCI hold a 66.7% and
33.3% interest, respectively, in the partnership. Adelphia will manage the
partnership and will consolidate the partnership's results of operations for
financial reporting purposes beginning on the acquisition date. As part of this
transaction, the joint venture became a party to one of Adelphia's subsidiaries'
revolving credit facilities and repaid the TCI contributed debt with the
borrowings under that revolving credit facility.
On August 13, 1998, Adelphia announced agreements with several
underwriters and the Rigas family to sell 8,190,315 shares of its Class A Common
Stock. Of this total, 4,100,000 shares will be sold to the public at a price of
$32.00 per share, with an underwriting discount of $1.44 per share. The
remaining 4,090,315 shares will be sold to entities controlled by the Rigas
Family at the public offering price less the underwriting discount. Net proceeds
to Adelphia after offering expenses are expected to be approximately $250,000.
The sale of stock is expected to be consummated on August 18, 1998.
2. Debt:
Debt is summarized as follows:
Subsidiary Debt: March 31, June 30,
1998 1998
---------- -----------
Notes to banks and institutions $ 827,725 $ 976,950
13% Senior Discount Notes of Hyperion due 2003 215,213 222,949
12 1/4% Senior Secured Notes of Hyperion due 2004 250,000 250,000
Other subsidiary debt 36,533 36,326
---------- ----------
Total Subsidiary debt $1,329,471 $1,486,225
========== ==========
Adelphia has committed to repay certain subsidiary debt of
approximately $52,000 by September 15, 1998.
The following information updates to June 30, 1998 certain disclosures
included in Note 3 to Adelphia's consolidated financial statements contained in
the Annual Report:
Commitments available for additional borrowings $ 80,120
Weighted average interest rate payable by subsidiaries
under credit agreements with banks and institutions 7.32%
Percentage of subsidiary debt to banks and institutions that
bears interest at fixed rates for at least one year 11.07%
<PAGE>
Parent Debt:
March 31, June 30,
1998 1998
-----------------------
12 1/2% Senior Notes due 2002 $ 69,838 $ --
10 1/4% Senior Notes due 2000 99,504 99,553
9 7/8% Senior Notes due 2007 347,446 347,492
9 1/4% Senior Notes due 2002 325,000 325,000
10 1/2% Senior Notes due 2004 150,000 150,000
8 3/8% Senior Notes due 2008 149,153 149,167
11 7/8% Senior Debentures due 2004 124,579 124,590
9 7/8% Senior Debentures due 2005 128,407 128,447
9 1/2% Pay-In-Kind Notes due 2004 186,347 186,347
---------- ----------
Total Parent debt $1,580,274 $1,510,596
========== ==========
3. Investments:
Adelphia's nonconsolidated investments are as follows:
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March 31, June 30,
1998 1998
----------- ------------
Investments accounted for using the equity method:
Gross investment:
<S> <C> <C>
Hyperion investments in joint ventures $ 66,647 $ 69,554
Page Call, Inc./Benbow PCS Ventures, Inc. 15,539 17,150
Mobile communications 15,387 16,435
Other 4,706 7,775
----------- -----------
Total 102,279 110,914
----------- -----------
Investments accounted for using the cost method:
Niagara Frontier Hockey, L.P. 40,497 41,646
SuperCable ALK International 3,190 3,190
Programming ventures 1,427 1,427
Mobile communications 2,582 2,691
Other 812 445
----------- -----------
Total 48,508 49,399
----------- -----------
Total investments before cumulative equity in net losses 150,787 160,313
Cumulative equity in net losses (22,960) (27,616)
----------- -----------
Total investments $ 127,827 $ 132,697
=========== ===========
</TABLE>
During the quarter ended June 30, 1998, Adelphia sold its interest in
Page Call, Inc. for approximately $17,150, payable in Series A Convertible
Preferred Stock of Benbow PCS Ventures, Inc.
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 over investment in and amounts due from
Olympus is comprised of the following:
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<CAPTION>
March 31, June 30,
1998 1998
------------ ------------
<S> <C> <C>
Cumulative equity in loss over investment in Olympus $ (94,833) $ (98,094)
Amounts due from Olympus 63,631 75,163
------------ -------------
$ (31,202) $ (22,931)
============ =============
</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,
----------------------------
1997 1998
----------- ------------
Revenues $ 83,584 $ 102,116
Net loss (9,931) (8,908)
Net loss of general partners
after priority return (46,410) (51,623)
5. Net Loss Per Weighted Average Share of Common Stock:
Basic net loss per weighted average share of common stock is computed
based on the weighted average number of common shares outstanding after giving
effect to dividend requirements on the Company's preferred stock. Diluted net
loss per common share is equal to basic net loss per common share because the
Company's Convertible Preferred Stock had an antidilutive effect for the periods
presented; however, the Convertible Preferred Stock could have a dilutive effect
on earnings per share in future periods.
6. Supplemental Financial Information:
Cash payments for interest were $44,212 and $35,262 for the three
months ended June 30, 1997 and 1998, respectively. Accumulated depreciation of
property, plant and equipment amounted to $649,527 and $675,798 at March 31,
1998 and June 30, 1998, respectively. Accumulated amortization of intangible
assets amounted to $211,967 and $221,203 at March 31, 1998 and June 30, 1998,
respectively. Interest expense - net includes interest income of $2,444 and
$8,080 for the three months ended June 30, 1997 and 1998, respectively. Interest
income includes interest income from affiliates on long term loans and for
reimbursement of interest expense on revolving credit agreements related to
short term borrowings by such affiliates.
7. Income Taxes:
Income tax benefit for the three months ended June 30, 1998 was $5,614,
which is substantially comprised of a deferred tax benefit.
8. Recent Accounting Pronouncements:
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," issued by the Financial Accounting Standards
Board in June 1997 is effective for the interim period ended June 30, 1998, with
reclassification of comparative financial statements. SFAS No. 130 defines
comprehensive income and outlines certain reporting and disclosure requirements
related to comprehensive income. The Company has no items of other comprehensive
income for either the three months ended June 30, 1997 or 1998.
9. 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.
10. Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
<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, product acceptance, technological
developments and changes in the competitive environment in which the Company
operates.
Adelphia Communications Corporation and its subsidiaries ("Adelphia" or
the "Company") operates primarily in two lines of business within the
telecommunications industry: cable television and related investments
("Adelphia, excluding Hyperion") and competitive local exchange carrier ("CLEC")
telephony ("Hyperion"). The balance sheet data as of March 31, 1998 and June 30,
1998 and the other data for the three months ended June 30, 1997 and 1998 of
Hyperion presented below have been derived from the consolidated financial
statements of Hyperion not included herein.
A majority owned unrestricted subsidiary of the Company, Hyperion,
together with its subsidiaries owns CLEC networks and investments in CLEC joint
ventures and manages those networks and joint 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, 1998.
Summarized unaudited financial information of Adelphia, Hyperion and
Adelphia, excluding Hyperion is as follows:
Balance Sheet Data:
March 31, June 30,
Adelphia Consolidated 1998 1998
----------- -----------
Total assets $ 2,304,671 $2,562,963
Total debt 2,909,745 2,996,821
Investments (a) 150,787 160,313
Redeemable preferred stock 355,266 362,190
Convertible preferred stock (liquidation preference) 100,000 100,000
Hyperion
Total assets $ 634,893 $ 897,385
Total debt 528,776 500,177
Investments (a) 66,648 69,554
Redeemable preferred stock 207,204 214,085
Adelphia, excluding Hyperion
Total assets $ 1,669,778 $1,665,578
Total debt 2,380,969 2,496,644
Investments (a) 84,139 90,759
Redeemable preferred stock 148,062 148,105
Convertible preferred stock (liquidation preference) 100,000 100,000
<PAGE>
Three Months Ended
June 30,
---------------------------
1997 1998
---------------------------
Other Data:
Adelphia Consolidated
Revenues $ 122,644 $ 144,756
Priority income 11,765 12,000
Operating expenses (b) 61,932 77,849
Depreciation and amortization expense 33,733 38,559
Operating income 26,979 28,348
Interest expense - net (61,737) (62,745)
Preferred stock dividends -- (13,852)
Capital expenditures 43,534 74,255
Cash paid for acquisitions 29,509 22,769
Cash used for investments 28,859 9,966
Hyperion
Revenues $ 1,520 $ 7,635
Operating expenses (b) 3,560 13,421
Depreciation and amortization expense 1,372 6,120
Operating loss (3,412) (11,906)
Interest expense - net (7,314) (7,645)
Preferred stock dividends -- (6,946)
Capital expenditures 18,766 43,464
Cash paid for acquisitions -- --
Cash used for investments 18,031 2,905
Adelphia, excluding Hyperion
Revenues $ 121,124 $ 137,121
Priority income 11,765 12,000
Operating expenses (b) 58,372 64,428
Depreciation and amortization expense 32,361 32,439
Operating income 30,391 40,254
Interest expense - net (54,423) (55,100)
Preferred stock dividends -- (6,906)
Capital expenditures 24,768 30,791
Cash paid for acquisitions 29,509 22,769
Cash used for investments 10,828 7,061
(a) Represents total investments before cumulative equity in net losses.
(b) Amount excludes depreciation and amortization.
<PAGE>
Adelphia earned substantially all of its revenues in the three months
ended June 30, 1997 and 1998 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 and CLEC
telecommunications services.
The changes in Adelphia's operating results for the three months ended
June 30, 1998 compared to the same period of the prior year, were primarily the
result of acquisitions, rate increases and expansion of existing operations.
The high level of depreciation and amortization associated with the
significant number of acquisitions in recent years, the continued upgrade 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 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
1997 1998 (Decrease)
---------- ----------- -----------
Homes Passed by Cable
Company Owned Systems 1,610,384 1,696,294 5.3%
Olympus Systems 670,712 752,012 12.1%
Managed Systems 426,529 348,441 (18.3%)
--------- ----------- ----------
Total Systems 2,707,625 2,796,747 3.3%
--------- =========== ==========
Basic Subscribers
Company Owned Systems 1,176,846 1,244,310 5.7%
Olympus Systems 427,441 493,258 15.4%
Managed Systems 303,428 260,843 (14.0%)
--------- ----------- ----------
Total Systems 1,907,715 1,998,411 4.8%
--------- =========== ==========
Managed Systems' data as of June 30, 1998, reflect the sales of systems
consisting of approximately 79,900 homes passed and approximately 63,400 basic
subscribers to Olympus.
Exclusive of acquisitions and dispositions, basic subscribers grew
0.9%, 3.6% and 2.6% for Company Owned, Olympus and Managed Systems,
respectively, during the twelve months ended June 30, 1998.
<PAGE>
The following table is derived from Adelphia's Condensed Consolidated
Statements of Operations 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,
-------------------
1997 1998
-------- --------
Revenues 100.0% 100.0%
Operating expenses:
Direct operating and programming 32.3% 33.7%
Selling, general and administrative 18.1% 20.1%
Depreciation and amortization 27.5% 26.6%
------- -------
Operating income 22.1% 19.6%
======= =======
Revenues. The primary revenue sources reflected as a percentage of
total revenues were as follows:
Three Months Ended
June 30,
--------------------
1997 1998
-------- --------
Regulated service and equipment fees 75% 73%
Premium programming fees 12% 9%
Advertising sales and other services 13% 18%
Revenues increased approximately 18.0% for the quarter ended June 30,
1998 compared with the quarter ended June 30, 1997. The increase was
attributable to the following:
Acquisitions 55%
Basic subscriber growth 5%
Rate increases 32%
Premium programming fees (10%)
Advertising sales and other services 18%
Effective August 1, 1997, certain rate increases related to regulated
cable services were implemented in substantially all of the Company's Systems.
Advertising revenues and revenues derived from other strategic service offerings
such as paging, high-speed data services, long distance and CLEC services also
had a positive impact on revenues for the quarter ended June 30, 1998. The
Company expects to implement rate increases related to certain regulated cable
services in substantially all of the Company's systems during the quarter ending
September 30, 1998.
Direct Operating and Programming Expenses. Direct operating and
programming expenses, which are mainly basic and premium programming costs and
technical expenses, increased 22.8% for the quarter ended June 30, 1998 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. Additionally,
Hyperion expenses increased due to expansion of operations at its network
control center, as well as an increase in the number and size of its networks,
which resulted in increased employee related costs and equipment maintenance.
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 30.8% for the
quarter ended June 30, 1998 compared with the same quarter of the prior year.
The increase was primarily due to incremental costs associated with
acquisitions, subscriber growth and Hyperion overhead and network operating and
control center cost increases to accommodate the growth in the number of
networks managed and monitored.
Depreciation and Amortization. Depreciation and amortization was higher
for the quarter ended June 30, 1998 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, 1997 and 1998, 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, 1998 due
to increased payments by Olympus.
Interest Expense - Net. Interest expense - net, excluding Hyperion,
increased 1.2% for the quarter ended June 30, 1998 compared with the same
quarter of the prior year. Interest expense - net, including Hyperion, for the
quarter ended June 30, 1998, increased 1.6% as compared with the same quarter of
the prior year. Interest expense increased primarily due to incremental debt
related to acquisitions and the issuance of the Hyperion 12 1/4% Senior Secured
Notes. These increases were offset by Hyperion's interest income on cash
balances. Interest expense includes noncash accretion of original issue
discount on the Hyperion 13% Senior Discount Notes and noncash interest expense
totaling $7,895 for the quarter ended June 30, 1998 compared with $6,858 for the
same quarter of the prior year.
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.
Minority Interest in Losses of Subsidiaries. As a result of Hyperion's
IPO, a portion of Hyperion's net loss applicable to common stockholders is
attributable to minority interests.
Hyperion Preferred Stock Dividends. During the quarter ended June 30,
1998, Hyperion incurred $6,946 of expense relating to its 12 7/8% Senior
Exchangeable Redeemable Preferred Stock issued in October 1997.
Extraordinary Loss on Early Retirement of Debt. During the quarter
ended June 30, 1998, $69,838 of 12 1/2% Senior Notes due 2002 were redeemed at
103% of principal. As a result of this transaction Adelphia recognized an
extraordinary loss on early retirement of debt of $2,604.
Income Tax Benefit. Income tax benefit for the quarter ended June 30,
1998 is primarily due to the impact of a change in the tax law which extends the
number of years the company can utilize its net operating loss carryforward
generated in the current fiscal year.
<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.
The Company has made a substantial commitment to the technological
development of the Systems and is aggressively investing in the upgrade of the
technical capabilities of its cable plant in a cost efficient manner. Over 50%
of Adelphia's networks have bandwidth capacity of 550 Mhz or greater. The
Company continues to deploy fiber optic cable and to upgrade the technical
capabilities of its broadband networks in order to increase network capacity,
digital capability, two-way communication and network reliability.
The design of the current System upgrade, when completed, will deploy
on average one fiber optic node for every two system plant miles or
approximately one fiber node for every 180 homes passed compared to the industry
norm of 500 to 1000 homes passed per fiber optic node. Approximately 75% of the
System will be upgraded to 750 Mhz. Approximately 25% of the plant will remain
at 550 Mhz. The upgraded system will be completely addressable and provide
two-way communication capability. The additional bandwidth will enable the
Company to offer additional video programming services. A portion of the
bandwidth will be allocated to new service offerings such as two-way data,
telephony and video-on-demand. By the end of fiscal 1999, approximately 50% of
customers will be served by two way cable plant.
Capital expenditures for Adelphia excluding Hyperion for the quarters
ended June 30, 1997 and 1998 were $24,768 and $30,791, respectively. Capital
expenditures, including Hyperion, for the quarters ended June 30, 1997 and 1998
were $43,534 and $74,255, respectively. Capital expenditures for Hyperion for
the quarter ended June 30, 1998 compared with the quarter ended June 30, 1997,
increased primarily due to the upgrade of plant in markets in which Hyperion
purchased its local partners' interests and the commencement of switching
services. The Company expects that capital expenditures excluding Hyperion for
fiscal 1999 will be in the range of approximately $150,000 to $170,000. Hyperion
estimates that it will require approximately $215,000 to fund anticipated
capital expenditures, working capital requirements, operating losses and
investments in its existing and its planned new networks through the end of
fiscal 1999.
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 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 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 or, for Hyperion, its own public
debt and equity. 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, 1998, the Company's total outstanding debt aggregated
$2,996,821, which included $1,510,596 of parent debt, $500,177 of Hyperion debt
and $986,048 of other subsidiary debt. At June 30, 1998, Adelphia's subsidiaries
had an aggregate of $80,120 in unused credit lines with banks and institutions.
In addition, the Company had an aggregate $454,676 in cash and cash equivalents
at June 30, 1998, which combined with the Company's unused credit lines with
banks, aggregated $534,796.
At June 30, 1998, 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 8.39% at June 30, 1997 compared to 7.32% at June
30, 1998. At June 30, 1998, approximately 11% 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, 1998:
Nine months ending March 31, 1999 $ 143,637
Year ending March 31, 2000 117,269
Year ending March 31, 2001 235,588
Year ending March 31, 2002 158,740
Year ending March 31, 2003 503,253
Reference is made to Note 1 of the condensed consolidated financial
statements for discussion of significant events and financings subsequent to
March 31, 1998, which is incorporated by reference herein.
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 or telephone companies or their assets, and other
partnering and investment transactions of various structures and sizes involving
cable or other telecommunications companies. The Company continues to evaluate
new opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity to
its existing regional markets or in locations that can serve as a basis for new
market areas. The Company, like other cable television companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore potential
transactions of various types with other cable and telecommunications companies.
However, no assurances can be given as to whether any such transaction may be
consummated or, if so, when, or that additional competition from this industry
consolidation will not have an adverse effect on the Company..
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. 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
or future legislative or rulemaking proceedings or changes to the rate
regulations. No assurance can be given as to what other future actions Congress,
the FCC or other regulatory authorities may take or the effects thereof on
Adelphia.
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
Because such franchises are generally non-exclusive, there is a potential for
competition with the systems from other operators of cable television systems,
including public systems operated by municipal franchising authorities
themselves, and from other distribution systems capable of delivering television
programming to homes. The 1992 Cable Act and the 1996 Act contain provisions
which encourage competition from such other sources. The Company cannot predict
the extent to which competition will materialize from other cable television
operators, local telephone companies, other distribution systems for delivering
television programming to the home, or other potential competitors, or, if such
competition materializes, the extent of its effect on the Company.
The 1996 Act repealed the prohibition on CLECs from providing video
programming directly to customers within their local exchange areas other than
in rural areas or by specific waiver of FCC rules. The 1996 Act also authorized
CLECs to operate "open video systems" ("OVS") without obtaining a local cable
franchise, although CLECs operating such a system can be required to make
payments to local governmental bodies in lieu of cable franchise fees. Where
demand exceeds capacity, up to two-thirds of the channels on an OVS must be
available to programmers unaffiliated with the CLEC. The statute states that the
OVS scheme supplants the FCC's "video dialtone" rules. The FCC has promulgated
rules to implement the OVS concept, and New Jersey Bell Telephone Company has
been granted permission to convert its video dialtone authorization in Dover
Township, New Jersey to an OVS authorization.
The Company believes that the provision of video programming or other
services by telephone companies in competition with the Company's existing
operations could have an adverse effect on the Company's financial condition and
results of operations. At this time, the impact of any such effect is not known
or estimable.
The Company also competes with DBS service providers. DBS has been
available to consumers since 1994. A single DBS satellite can provide more than
100 channels of programming. DBS service can be received virtually anywhere in
the United States through the installation of a small outdoor antenna. DBS
service is being heavily marketed on a nationwide basis by several service
providers. Although the impact to date has not been material, any future impact
of DBS competition on the Company's future results is not known or estimable.
Year 2000 Issues
The year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has recently completed the planning stage of a project that
addresses the year 2000 data processing issues relating to modifications of its
mainframe computer applications. Internal and external resources are being used
to make the required modifications and perform the necessary tests, all of which
is expected to be completed by June 1999. The financial impact of these
modifications is not expected to be significant to the Company's financial
statements.
In addition, the Company has begun communicating with others with whom
it does significant business to determine their year 2000 compliance readiness
and the extent to which the Company is vulnerable to any third party year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
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 and Use of Proceeds
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:
4.01 Indenture, dated as of July 23, 1998, with respect to the
Registrant's 8-1/8% Senior Notes due 2003, between the
Registrant and the Bank of Montreal Trust Company
(Incorporated herein by reference is exhibit 4.01 from
the Registrant's Current Report on Form 8-K for the event
dated July 2, 1998.) (File Number 0-16014)
4.02 Registration Rights Agreement between Adelphia
Communications Corporation and the Initial Purchaser,
dated July 2, 1998, regarding the Registrant's 8-1/8%
Senior Notes due 2003 (Incorporated herein by reference
is exhibit 4.02 from the Registrant's Current Report on
Form 8-K, dated July 23, 1998)
4.03 Form of 8-1/8% Senior Note due 2003 (contained in
Exhibit 4.01)
10.01 Purchase Agreement among Adelphia Communications
Corporation and Barclays Capital, Inc. (the "Initial
Purchaser") dated June 29, 1998 (Incorporated herein by
reference is exhibit 10.01 from the Registrant's Current
Report on Form 8-K, dated July 23, 1998)
27.01 Financial Data Schedule (supplied for the information of
the Commission).
99.01 Press release dated August 13, 1998 regarding the
Registrant's pricing of 4,100,000 shares of Class A
Common Stock at $32 per share. (Filed herewith)
(b) Reports on Form 8-K:
Form 8-Ks were filed on May 6, 1998, July 6, 1998, July 23, 1998
and August 10, 1998, which reported information under items 5 and 7 thereof. No
financial statements were filed with such Form 8-Ks.
-------------------------------------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADELPHIA COMMUNICATIONS CORPORATION
(Registrant)
Date: August 14, 1998 By: /s/ Timothy J. Rigas
--------------------
Timothy J. Rigas
Executive Vice President
(authorized officer), Chief
Financial Officer, Chief
Accounting Officer and
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR ADELPHIA COMMUNICATIONS CORP. FOR THE
THREE MONTHS ENDED JUNE 30, 1998
</LEGEND>
<CIK> 0000796486
<NAME> ADELPHIA COMMUNICATIONS CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 454,676
<SECURITIES> 0
<RECEIVABLES> 35,060<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,692,151<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 2,562,963
<CURRENT-LIABILITIES> 0
<BONDS> 2,996,821
0
0
<COMMON> 309
<OTHER-SE> (1,217,429)
<TOTAL-LIABILITY-AND-EQUITY> 2,562,963
<SALES> 0
<TOTAL-REVENUES> 144,756
<CGS> 0
<TOTAL-COSTS> 116,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,745
<INCOME-PRETAX> (44,389)
<INCOME-TAX> (5,614)
<INCOME-CONTINUING> (38,775)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,604)
<CHANGES> 0
<NET-INCOME> (41,379)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
<FN>
<F1>RECCEIVABLES NET OF ALLOWANCE
<F2>PP&E NET OF DEPRECIATION
</FN>
</TABLE>
EXHIBIT 99.01
ADELPHIA ANNOUNCES PUBLIC STOCK OFFERING
Coudersport, PA, August 13, 1998 -- Adelphia Communications Corporation
(NASDAQ-NNM: ADLAC) announced today the pricing terms of its previously
announced public offering of Class A Common Stock. The final prospectus
supplement for the transaction provides for a public offering by Adelphia of
4,100,000 shares of Adelphia's Class A Common Stock at a public offering price
of $32.00 per share, prior to the exercise of any underwriters' over-allotment
option. Salomon Smith Barney acted as lead-manager of this offering and Goldman
Sachs & Co., NationsBanc Montgomery Securities LLC, Credit Suisse First Boston,
Lehman Brothers and Toronto-Dominion Securities served as co-managing
underwriters.
In addition to the 4,100,000 shares of Class A Common Stock to be sold by
Adelphia to the public, members of the family of John J. Rigas, Chairman of
Adelphia, have entered into an agreement to purchase at the closing of the
public offering $125,000,000 or 4,090,315 shares of Class A Common Stock at a
price per share equal to the public offering price less the underwriting
discount.
Adelphia Communications Corporation is the seventh largest cable television
operator in the United States and currently owns or manages cable television
systems serving approximately 2 million subscribers in 12 states.
This press release shall not constitute an offer to sell or the solicitation of
an offer to buy nor shall there be any sale of the Class A Common Stock in any
State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
Contact: Timothy J. Rigas, Executive Vice President and Chief Financial Officer
of Adelphia, (814) 274-9830.
