<PAGE>
Filed
pursuant
to Rule
424b(5)
Registration
No. 333-
58749
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 9, 1998)
ADELPHIA
LOGO
4,100,000 Shares
Adelphia Communications Corporation
Class A Common Stock
-----------
All of the shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock") offered hereby are being sold by Adelphia
Communications Corporation ("Adelphia" or the "Company"). Of the total,
3,280,000 shares are being offered in the United States and Canada (the "U.S.
Offering") and 820,000 shares are being offered in a concurrent international
offering outside of the United States and Canada (the "International Offering"
and, together with the U.S. Offering, the "Public Offerings"). On August 12,
1998, the closing sale price for the Class A Common Stock as quoted on the
Nasdaq Stock Market was $33.125 per share. See "Price Range of the Company's
Common Equity and Dividend Policy."
Adelphia has entered into an agreement with the Rigas Family (as defined
herein) pursuant to which certain affiliates controlled by individual members
of the Rigas Family will purchase directly from Adelphia, and Adelphia will
sell directly to such affiliates, at a purchase price equal to the public
offering price less the underwriting discounts, 4,090,315 shares of Class A
Common Stock with an aggregate net purchase price of approximately $125.0
million (the "Direct Placement").
The Company's outstanding common stock consists of Class A Common Stock and
Class B Common Stock, par value $.01 per share (the "Class B Common Stock"
and, together with the Class A Common Stock, the "Common Stock"). The Class B
Common Stock is convertible into Class A Common Stock on a share-for-share
basis, and substantially all of such Class B Common Stock is owned by the
Rigas Family. The rights of holders of Class A Common Stock and Class B Common
Stock differ with respect to certain aspects of dividend, liquidation and
voting rights. The Class A Common Stock has certain preferential rights with
respect to cash dividends and distributions upon the liquidation of Adelphia.
Holders of Class B Common Stock are entitled to greater voting rights than the
holders of Class A Common Stock; however, the holders of Class A Common Stock,
voting as a separate class, are entitled to elect one of Adelphia's directors.
See "Description of Capital Stock" in the Prospectus attached hereto. After
giving effect to the Public Offerings and the Direct Placement, and assuming
no exercise of the Underwriters' over-allotment option, the Rigas Family will
hold approximately 86.8% of the combined voting power of both classes of
Common Stock.
PROSPECTIVE PURCHASERS OF CLASS A COMMON STOCK SHOULD CAREFULLY CONSIDER THE
MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE S-8.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLE- MENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC (1) AND COMMISSIONS (2) COMPANY (1)(3)
- -------------------------------------------------------------
<S> <C> <C> <C>
Per Share $32.00 $1.44 $30.56
- -------------------------------------------------------------
Total (4) $131,200,000 $5,904,000 $125,296,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The total Price to Public and Proceeds to Company excludes the Direct
Placement.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting public offering expenses payable by the Company,
estimated to be $296,000. The Company will also receive the net proceeds
from the issuance of shares of Class A Common Stock to the Rigas Family in
connection with the Direct Placement.
(4) Adelphia has granted the Underwriters an option for 30 days to purchase up
to an additional 615,000 shares of Class A Common Stock, at the public
offering price per share, less the underwriting discount, to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $150,880,000, $6,789,600 and $144,090,400, respectively. See
"Underwriting."
-----------
The shares of Class A Common Stock are being offered severally by the
Underwriters named herein, subject to prior sale when as and if accepted by
them and subject to certain other conditions. It is expected that certificates
for the shares of the Class A Common Stock offered hereby will be made
available for delivery on or about August 18, 1998, at the office of Smith
Barney Inc., 333 West 34th Street, New York, New York 10001.
-----------
Salomon Smith Barney
Goldman, Sachs & Co.
NationsBanc Montgomery Securities LLC
Credit Suisse First Boston Lehman Brothers TD Securities
The date of this Prospectus Supplement is August 12, 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE PUBLIC OFFERINGS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
CLASS A COMMON STOCK, INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS,
EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING OF SECURITIES PURSUANT TO THIS PROSPECTUS
SUPPLEMENT AND THE ATTACHED PROSPECTUS, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE SECURITIES ON THE NASDAQ STOCK MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE EXCHANGE ACT. SEE
"UNDERWRITING."
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included or
incorporated by reference in this Prospectus Supplement and the attached
Prospectus, including "Management's Discussion and Analysis of Financial
Condition and Results of Operations," is forward-looking, such as information
relating to the effects of future regulation, future capital commitments and
the effects of competition. Such forward-looking information involves
important risks and uncertainties that in the future could cause actual
results to differ significantly 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. Persons reading
this Prospectus Supplement and the attached Prospectus are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, readers should specifically
consider the various factors which could cause actual events or results to
differ materially from those indicated by such forward-looking statements.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements appearing in this Prospectus Supplement
and the attached Prospectus or incorporated by reference herein and therein.
Unless otherwise stated, the information contained in this Prospectus
Supplement and the attached Prospectus assumes no exercise of the Underwriters'
over-allotment option.
Prospective investors should carefully consider the factors set forth herein
and in the attached Prospectus under the caption "Risk Factors."
THE COMPANY
Adelphia owns, operates, develops and acquires cable television systems and,
based on the number of basic subscribers in its owned and managed systems as of
March 31, 1998, is the seventh largest cable system operator in the United
States. Pro forma for recent and pending acquisitions described in "Recent
Developments," the Company owns or manages cable systems which served 2,305,785
subscribers as of March 31, 1998. Adelphia founded and developed, and continues
to own a 66% interest in, Hyperion Telecommunications Inc. ("Hyperion"), one of
the largest domestic, independent, facilities-based competitive local exchange
carriers ("CLEC"), which currently operates 22 fiber optic networks serving 46
cities in the eastern half of the United States. The Company also has minority
ownership interests in certain other unconsolidated cable and programming
assets. John J. Rigas, the Chairman, President, Chief Executive Officer and
majority stockholder of Adelphia is a pioneer in the cable television industry,
having built his first system in 1952 in Coudersport, Pennsylvania.
CABLE TELEVISION OPERATIONS
The Company's owned and operated cable systems (the "Company Systems") passed
1,670,068 homes and served 1,215,040 subscribers as of March 31, 1998. The
Company Systems are located primarily in suburban areas of large and medium-
sized cities within the 50 largest television markets. The Company Systems are
organized and operate in seven regional clusters: Western New York, Virginia,
Western Pennsylvania, New England, Eastern Pennsylvania, Ohio and Coastal New
Jersey. On July 31, 1998, the Company established a joint venture partnership
with Tele-Communications Inc. ("TCI") in the Western New York area (the
"Western New York Joint Venture"). The Company will manage this joint venture
and owns a 67% interest. Pro forma for recent and pending acquisitions
described in "Recent Developments," and the Western New York Joint Venture, the
Company Systems served 1,477,395 subscribers as of March 31, 1998.
Adelphia is a joint venture partner in and is the managing general partner of
Olympus Communications, L.P. ("Olympus") which operates the largest contiguous
cable system in Florida (the "Olympus Systems") located in some of the nation's
fastest growing markets. As of March 31, 1998, the Olympus Systems passed
755,185 homes and served 501,722 basic subscribers. Olympus is a joint venture
limited partnership between the Company and subsidiaries of FPL Group Inc. (FPL
Group Inc., together with its subsidiaries, the "FPL Group"). FPL Group is one
of the largest public utility holding companies in the United States. The
Company owns a 50% voting interest and 67% of the outstanding non-voting
preferred limited partnership ("PLP") interests in Olympus. Olympus is
accounted for under the equity method of accounting.
The Company also provides, for a fee, management and consulting services to
certain cable television systems (the "Managed Systems") in which members of
the John J. Rigas family and entities controlled by them (collectively, the
"Rigas Family") have substantial ownership interests. As of March 31, 1998, the
Managed Systems passed 347,278 homes and served 259,409 basic subscribers.
S-1
<PAGE>
OPERATING AND GROWTH STRATEGY
The Company's cable television operations strategy is to construct and
operate a broadband network capable of offering a broad range of
telecommunications services and to provide superior customer service while
maximizing operating efficiencies. The Company has built on its expertise as a
cable television provider to expand its product offerings to include high-speed
internet access, long distance telephone service and paging services to its
residential subscriber base. Through Hyperion, the Company has expanded its
business to include the sale of communication services to business customers
within its cable franchise areas and also in other markets. The Company intends
to combine the expertise it has developed in the business telephony market with
its expertise in the consumer market to provide local exchange telephone
services to its residential customers. The Company intends to continue to
provide new advanced communication services when they become technically and
commercially feasible.
Key elements in Adelphia's operational and growth strategy for its cable
business include:
Consolidating and Expanding Regional System Clusters
By acquiring and developing systems in geographic proximity, the Company
realizes significant operating efficiencies through the consolidation of
managerial, administrative and technical functions. The Company has
consolidated virtually all administrative operations of its systems, including
customer service, service call dispatching, marketing, human resources,
advertising sales and government relations into regional offices. Regional
clustering of systems also facilitates a more uniform, cost-effective delivery
of customer service, with more advanced telecommunications equipment and
software available to customer service representatives than would otherwise be
economically feasible in smaller systems.
The Company also believes that its long operating history within its regional
clusters contributes to its consistency in operating margins, and capital
efficiency in spending on plant upgrades and enhances branding of its services.
Pro forma for recent and pending acquisitions described in "Recent
Developments," 89% of the subscribers for the owned and managed systems will be
located in the five largest regional clusters, each with a minimum of 240,000
subscribers per cluster.
Upgrading Cable Plant for New Digital Services
The Company considers technological innovation to be an important component
of the Company's service offerings and customer satisfaction. The Company's
upgrades incorporate an aggressive deployment of fiber to achieve an average of
180 homes passed per fiber node. This results in significant improvements in
system reliability and operating efficiency. This upgrade of its network
infrastructure will add channel capacity and increase digital transmission
capabilities. These improvements will enable the Company to continue its
introduction of additional services, such as digital video, high speed internet
access and impulse-ordered pay-per-view programming, all of which expand
customer choices and provide a potential for increased revenue per subscriber.
Management believes the Company is a leader in the cable industry in the
deployment of fiber optic cable, having one of the most advanced cable network
infrastructures.
Developing Superior Customer Service and Marketing Capabilities
The Company believes that maintaining high quality customer service standards
is a critical element to retaining and attracting new subscribers and is an
integral prerequisite to marketing new advanced communications services. The
Company has developed and implemented customer service policies and benchmarks
that exceed national standards proposed by the National Cable Television
Association and the Federal Communications Commission (the "FCC") and
systematically measures customer satisfaction levels to ensure that quality
standards are met.
COMPETITIVE LOCAL EXCHANGE SERVICE OPERATIONS
The Company is engaged in the facilities-based provision of local exchange
carrier ("LEC") services through Hyperion, its 66% owned, publicly-traded
subsidiary. Founded in 1991 by Adelphia, Hyperion currently
S-2
<PAGE>
operates 22 state-of-the-art fiber optic networks. These networks are located
in the eastern U.S. encompassing 46 cities and include 5,363 route miles of
fiber optic cable. Based on route miles of fiber constructed, Hyperion is among
the largest independent CLECs in the United States.
Growth Strategy
The principal elements of Hyperion's growth strategy include: (i) focusing on
medium and large businesses, governmental and educational end users, and other
telecommunications providers; (ii) increasing the size and scope of network
clusters through plans to complete development and construction over the next
eighteen months of 14 new networks serving 29 additional cities within the
current clusters, as sole owner/operator or through partnerships or long-term
fiber lease agreements; (iii) providing switched voice, enhanced services and
long distance access on its own fiber optic networks, which Hyperion believes
can better control the provisioning, delivery and monitoring of its services as
well as increase its operating margins; and (iv) providing a bundled package of
telecommunications services which Hyperion believes a significant portion of
business, governmental and educational customers prefer.
Services and Targeted Customers
Hyperion intends to offer a complete range of telecommunications services to
its customers in all of its markets. Hyperion's current service offerings
include local switched dialtone, long distance, dedicated access and
enhanced services such as frame relay, high speed internet access and video
conferencing. Hyperion plans to become an internet service provider ("ISP") in
all of its markets, and expects to provide such services in a majority of its
markets during 1998. Hyperion currently resells long distance services and
plans to begin selling facilities-based long distance services through the
regional interconnection of Hyperion's networks in the near future.
Hyperion's targeted customers include medium and large businesses,
governmental and educational end users, and other telecommunications service
providers, such as value added resellers ("VARs"), ISPs and interexchange
carriers ("IXCs"). Management believes that Hyperion's existing 22 networks
represent an addressable market opportunity of approximately 6.8 million
business lines or approximately $13.3 billion annually, substantially all of
which is currently serviced by LECs and IXCs. As of March 31, 1998, Hyperion
served customers through a dedicated sales force of approximately 128 highly
trained professionals focused on selling Hyperion's portfolio of service
offerings. Hyperion expects to increase its marketing efforts by doubling the
size of its current sales force during fiscal 1999. Management believes that a
significant competitive advantage over other CLECs is Hyperion's ability to
utilize its broad geographic networks and extensive network clusters to offer a
single source solution for all of its customers' telecommunications needs
principally over its own regional network clusters.
RECENT DEVELOPMENTS
On March 2, 1998, Adelphia entered into a definitive agreement to acquire
cable television systems serving approximately 62,000 subscribers in
Connecticut and Virginia from Marcus Cable, Inc. for approximately $150.0
million in cash. The Company expects this acquisition to close during fiscal
year 1999.
On April 1, 1998, Adelphia and its affiliates and Time Warner Entertainment
and an affiliate ("Time Warner") traded certain cable systems. Adelphia
exchanged systems serving 64,400 subscribers primarily in the Mansfield, Ohio
area for systems owned by Time Warner serving 70,200 subscribers adjacent to
systems owned or managed by Adelphia in Virginia, New England and New York.
On June 5, 1998, the Company acquired cable systems from Cablevision Systems.
As of the acquisition date, these systems served approximately 11,200
subscribers in Wellsville and Penn Yan, New York and were purchased for an
aggregate purchase price of approximately $11.5 million.
S-3
<PAGE>
On July 15, 1998, Olympus acquired cable systems from Jones Intercable, Inc.
serving approximately 46,000 subscribers in and around Ft. Myers, Florida for a
purchase price of approximately $110.0 million.
On July 31, 1998, Adelphia closed a transaction with TCI to form the Western
New York Joint Venture. Adelphia contributed its Western New York and Lorain,
Ohio systems, serving approximately 298,000 subscribers; its Empire Sports
Network ("Empire"); and $440.0 million in debt. Subsidiaries of TCI contributed
to the joint venture their cable systems in Buffalo, New York; Erie,
Pennsylvania; and Ashtabula and Lake County, Ohio, totaling approximately
171,000 subscribers and $228.0 million in debt. In exchange for the respective
contribution of assets, Adelphia and TCI hold approximately a 67% and 33%
interest, respectively, in the partnership. The joint venture became a party to
one of Adelphia's subsidiaries' revolving credit facilities and repaid the TCI
contributed debt with borrowings under that revolving credit facility. Adelphia
will manage the partnership and will consolidate the partnership's results of
operations for financial reporting purposes beginning on the acquisition date.
In addition, the Company and Olympus have signed agreements to acquire cable
systems serving approximately 10,000 and 20,000 subscribers, for a purchase
price of $18.0 million and $33.4 million, respectively.
The foregoing systems acquired or to be acquired, excluding the Western New
York Joint Venture, are collectively referred to as the "Recent and Pending
Acquisitions."
The Company will continue 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 market
areas or in locations that can serve as the basis for new market areas, either
directly or indirectly through joint ventures, where appropriate.
On May 8, 1998, Hyperion completed an initial public offering of 12,850,000
shares (including 350,000 shares subsequently issued pursuant to an over-
allotment option) of its Class A Common Stock (the "Hyperion Stock") for net
proceeds of approximately $192.0 million (the "Hyperion IPO"). The net proceeds
from the Hyperion IPO and related transactions will be used to fund Hyperion's
capital expenditures, working capital requirements, operating losses, and pro
rata investments in its operating companies which own its networks and for
general corporate purposes. As part of the Hyperion IPO, Adelphia purchased an
incremental 3,324,001 shares of Hyperion Stock for $49.9 million and converted
indebtedness owed to the Company by Hyperion into 3,642,666 shares of Hyperion
Stock. Adelphia currently owns approximately 66% (37,713,234 shares, including
warrants to purchase 1,621,501 shares) of the common stock of Hyperion on a
fully diluted basis and 85% of the total voting power.
Hyperion recently entered into a series of agreements with Qwest
Communications, Williams Communications and several other fiber optic network
providers that will allow the Company to significantly increase its presence in
the eastern half of the United States. These agreements, totalling $107.0
million to be paid by Hyperion over the next two years, provide Hyperion the
ownership or an indefeasible right of use (IRU) to over 8,100 route miles of
fiber optic cable. The Company believes this will allow Hyperion to expand its
business strategy to include on-net provisioning of regional long distance,
internet and data communications and to cost-effectively interconnect most of
its existing networks with each other and with approximately 50 additional
markets by the end of 2001.
S-4
<PAGE>
THE PUBLIC OFFERINGS
Class A Common Stock Offered in the
Public Offerings:
U.S. Offering.................... 3,280,000 shares
International Offering........... 820,000 shares
---------
Total........................... 4,100,000 shares
Class A Common Stock Offered in the
Direct Placement................... 4,090,315 shares
Common Stock to be Outstanding
after the Public Offerings and the
Direct Placement:
Class A Common Stock............. 28,283,843 shares (1)
Class B Common Stock ............ 10,944,476 shares
----------
Total .......................... 39,228,319 shares
----------
----------
Use of Proceeds..................... The net proceeds from the Public
Offerings and the Direct Placement
will be used to reduce outstanding
borrowings under certain subsidiary
credit facilities. See "Use of
Proceeds."
Rights of Holders of Class A Common
Stock and Class B Common Stock..... The rights of holders of Class A
Common Stock and Class B Common
Stock differ with respect to
certain aspects of dividend,
liquidation and voting rights. The
Class A Common Stock has certain
preferential rights with respect to
cash dividends and distributions
upon the liquidation of Adelphia.
Holders of Class B Common Stock are
entitled to 10 votes per share
while the holders of Class A Common
Stock are entitled to 1 vote per
share on all matters presented to
stockholders; however, the holders
of Class A Common Stock, voting as
a separate class, are entitled to
elect one of Adelphia's directors.
See "Description of Capital Stock"
in the attached Prospectus.
Nasdaq Stock Market Symbol.......... ADLAC
- --------
(1) Does not include 11,792,452 shares of Class A Common Stock into which
Series C Cumulative Convertible Preferred Stock can be converted. See
"Description of Capital Stock--Description of Convertible Preferred Stock"
in the attached Prospectus.
S-5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------
AS
ADJUSTED(A)
1994 1995 1996 1997 1998 1998
-------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $319,045 $361,505 $ 403,597 $472,778 $528,442 $ 603,721
Direct operating and
programming expense.... 90,547 106,993 124,116 148,982 167,288 195,204
Selling, general and
administrative expense. 52,801 63,487 68,357 81,763 95,731 107,137
Depreciation and
amortization expense... 89,402 97,602 111,031 124,066 145,041 161,777
Operating income ....... 86,295 93,423 94,793 117,967 120,382 139,603
Interest expense--net... (172,948) (184,586) (200,068) (232,325) (247,107) (263,067)
Equity in loss of joint
ventures............... (30,054) (44,349) (46,257) (59,169) (79,056) (79,056)
Net loss................ (187,860) (106,284) (119,894) (130,642) (173,879) (177,969)
Net loss applicable to
common stockholders.... (187,860) (106,284) (119,894) (130,642) (192,729) (196,819)
Basic and diluted loss
per weighted average
share of common stock
before extraordinary
loss and cumulative
effect of change in
accounting principle
(b).................... $ (5.66) $ (4.32) $ (4.56) $ (4.50) $ (6.07) $ (6.21)
Basic and diluted net
loss per weighted
average share of
common stock........... (10.91) (4.32) (4.56) (4.94) (6.45) (6.59)
Weighted average shares
of Common Stock
outstanding (in
thousands)............. 17,221 24,628 26,305 26,411 29,875 29,875
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
AS ADJUSTED
FOR THE AS FURTHER
ACTUAL TRANSACTIONS(C) ADJUSTED(D)
----------- --------------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Adelphia Consolidated
Total assets......................... $ 2,304,671 $2,498,162 $2,771,178
Total debt........................... 2,909,745 2,664,090 2,892,090
Total debt and redeemable preferred
stock............................... 3,265,011 3,019,356 3,247,356
Investments (e)...................... 150,787 150,787 150,787
Convertible preferred stock, common
stock and other stockholders' equity
(deficiency)........................ (1,315,865) (926,376) (926,376)
Hyperion(f)
Total assets......................... $ 634,893 $ 880,003 $ 880,003
Total debt........................... 528,776 484,515 484,515
Total debt and redeemable preferred
stock............................... 735,980 691,719 691,719
Investments (e)...................... 66,648 66,648 66,648
Common stock and other stockholders'
equity (deficiency)................. (118,991) 170,380 170,380
Adelphia, Excluding Hyperion(g)
Total assets......................... $ 1,669,778 $1,618,159 $1,891,175
Total debt........................... 2,380,969 2,179,575 2,407,575
Total debt and redeemable preferred
stock............................... 2,529,031 2,327,637 2,555,637
Investments (e)...................... 84,139 84,139 84,139
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------
AS
ADJUSTED(A)
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Adelphia, Excluding Hyperion (g)
Revenues................ $318,628 $359,776 $400,275 $467,690 $514,932 $590,211
Operating expenses (h).. 140,973 166,574 186,699 220,533 240,901 280,223
EBITDA(i)............... 177,655 193,202 213,576 247,157 274,031(j) 309,988(j)
Interest expense--net... (170,801) (181,304) (194,179) (209,924) (211,077) (227,037)
Capital expenditures.... 72,797 89,232 94,005 93,482 114,957 118,143
Cash paid for
acquisitions........... 21,681 70,256 60,804 138,372 80,578 80,578
</TABLE>
- --------
(footnotes included on next page)
S-6
<PAGE>
CABLE TELEVISION OPERATIONS SUBSCRIBER DATA
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------------------------
AS
ADJUSTED(K)
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
COMPANY SYSTEMS:
Homes Passed............ 1,207,425 1,340,808 1,422,077 1,569,953 1,670,068 2,078,512
Basic Subscribers(l).... 888,167 975,066 1,039,704 1,138,414 1,215,040 1,477,395
Premium Service Units... 451,992 521,110 549,084 552,693 543,915 673,868
Basic Penetration....... 73.6% 72.7% 73.1% 72.5% 72.8% 71.1%
Average Monthly Revenue $30.35 $32.11 $34.29 $35.46 $36.71 $36.27
per Basic
Subscriber(m)..........
OLYMPUS SYSTEMS:
Homes Passed............ 406,753 512,052 631,602 650,742 755,185 861,653
Basic Subscribers(l).... 239,357 306,317 403,901 416,760 501,722 568,981
Premium Service Units... 110,602 145,758 200,319 194,125 219,597 251,722
Basic Penetration....... 58.8% 59.8% 63.9% 64.0% 66.4% 66.0%
Average Monthly Revenue $30.24 $29.42 $32.70 $33.30 $33.96 $34.20
per Basic
Subscriber(m)..........
MANAGED SYSTEMS:
Homes Passed............ 265,828 415,641 425,741 432,727 347,278 347,278
Basic Subscribers(l).... 194,682 298,054 309,031 313,266 259,409 259,409
Premium Service Units... 94,749 127,756 133,405 132,336 108,799 108,799
Basic Penetration....... 73.2% 71.7% 72.6% 72.4% 74.7% 74.7%
TOTAL SYSTEMS:
Homes Passed............ 1,880,006 2,268,501 2,479,420 2,653,422 2,772,531 3,287,443
Basic Subscribers(l).... 1,322,206 1,579,437 1,752,636 1,868,440 1,976,171 2,305,785
Premium Service Units... 657,343 794,624 882,808 879,154 872,311 1,034,389
Basic Penetration....... 70.3% 69.6% 70.7% 70.4% 71.3% 70.1%
Average Monthly Revenue $30.33 $31.52 $33.85 $34.88 $35.91 $35.69
per Basic
Subscriber(m)(n).......
</TABLE>
- --------
(a) Gives effect to the Western New York Joint Venture as though it occured
April 1, 1997. Excludes 50,000 shares of Class A Common Stock issued to the
Rigas Family in connection with the Western New York Joint Venture.
(b) "Cumulative Effect of Change in Accounting Principle" refers to a change in
accounting principle for the Company. Effective April 1, 1993, the Company
adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." which requires an asset
and liability approach for financial accounting and reporting for income
taxes. The adoption of SFAS No. 109 resulted in the cumulative recognition
of an additional liability by the Company of $89,660 in the year ended
March 31, 1994.
(c) Gives effect to the application of (a) (i) the net proceeds from the
Hyperion IPO and related transactions, (ii) the $69,838 prepayment of the
12 1/2% Notes on May 15, 1998 including an extraordinary loss on early
retirement of debt of $2,604, and (iii) the net proceeds of approximately
$147,300 from the sale of the 8 1/8% Notes on July 2, 1998 (collectively,
the "Fiscal 1999 Transactions") and (b) the net proceeds of approximately
$250,000 from the Public Offerings and the Direct Placement, as described
in "Use of Proceeds," as if all of the foregoing transactions (the
"Transactions") had occurred on March 31, 1998.
(d) Gives effect to the Transactions and the Western New York Joint Venture, as
if they had occurred on March 31, 1998.
(e) Represents total investments before cumulative equity in net losses.
(f) Reflects selected consolidated financial data of Hyperion derived from
Hyperion's audited consolidated financial statements and related notes
thereto.
(g) Reflects selected financial data of Adelphia derived from Adelphia's
audited consolidated financial statements and notes thereto included
elsewhere in this Prospectus Supplement excluding the consolidated
financial data of Hyperion.
(h) Amount excludes depreciation and amortization expenses.
(i) EBITDA presented above is defined as operating income plus depreciation and
amortization and rate regulation charge. EBITDA and other similar
measurements of cash flow are commonly used in the telecommunications
industry to analyze and compare telecommunications companies on the basis
of operating performance, leverage and liquidity. While EBITDA is not an
alternative to operating income as an indicator of operating performance or
an alternative to cash flows from operating activities as a measure of
liquidity, all 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.
(j) For the three months ended March 31, 1998, actual EBITDA and As Adjusted
EBITDA were $70,463 and $79,913, respectively.
(k) Gives effect to the Western New York Joint Venture and the Recent and
Pending Acquisitions as if they occurred on March 31, 1998, except for the
Average Monthly Revenue per Basic Subscriber which assumes they occurred on
January 1, 1998.
(l) Total basic subscribers at end of period presented.
(m) Average total monthly revenue for last quarter in period presented, divided
by average number of basic subscribers for such quarter.
(n) Excludes Managed Systems.
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RISK FACTORS
In addition to the other information contained in this Prospectus
Supplement, the following risk factors should be carefully considered in
evaluating the Company and its business prior to making an investment
decision.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged and has incurred substantial indebtedness to
finance acquisitions and expansion of its businesses. At March 31, 1998, the
Company's total indebtedness aggregated approximately $2,909.7 million, which
included approximately $864.3 million of subsidiary bank, institutional and
other debt, approximately $465.2 million of Hyperion public debt and
approximately $1,580.3 million of indebtedness of the parent company. The
Company's total debt has varying maturities to 2008, including an aggregate of
approximately $1,078.6 million maturing on or prior to March 31, 2003. At
March 31, 1998, on an as adjusted basis after giving effect to the Fiscal 1999
Transactions, the Public Offerings, the Direct Placement and the Western New
York Joint Venture, the Company's total indebtedness aggregated approximately
$2,892.1 million. The Company has maintained its public long-term debt at the
holding company level and at Hyperion while borrowing in the private debt
markets (e.g., bank and insurance company debt) through the Company's wholly-
owned subsidiaries. The Company's subsidiary financings are effected through
separate borrowing groups, and substantially all of the indebtedness in these
borrowing groups is non-recourse to Adelphia. The subsidiary credit
arrangements have varied revolving credit and term loan periods and contain
separately negotiated covenants relating to, among other things, cross-
defaults and the incurrence of additional debt for each borrowing group. In
addition, Olympus has substantial leverage. The high level of the Company's
indebtedness will have important consequences to investors, including: (i) a
substantial portion of the Company's cash flow from operations must be
dedicated to debt service and will not be available for general corporate
purposes or for capital improvements; (ii) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures, acquisitions or for capital improvements may be limited; and
(iii) the Company's level of indebtedness could limit its flexibility in
reacting to changes in the industry and economic conditions generally. In
addition, at March 31, 1998, Adelphia had approximately $148.1 million and
Hyperion had approximately $207.2 million of redeemable exchangeable preferred
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
STOCKHOLDERS' EQUITY (DEFICIENCY)
The Total Convertible Preferred Stock, Common Stock and Other Stockholders'
Equity (Deficiency) at March 31, 1998 was approximately ($1,315.9) million.
The stockholders' deficiency generally has resulted from the Company's
reported net losses which have been caused primarily by high levels of
depreciation and amortization and interest expense. The Company reported net
losses applicable to common stockholders of approximately $119.9 million,
$130.6 million and $192.7 million for the years ended March 31, 1996, 1997 and
1998, respectively. The Company expects to continue to incur significant net
losses for the next several years. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
For the years ended March 31, 1997 and March 31, 1998, respectively, the
Company's earnings were insufficient to cover its combined fixed charges and
preferred stock dividends by approximately $61.8 million and $113.9 million,
respectively. However, such amounts reflect non-cash charges totalling
approximately $165.4 million and $182.5 million, respectively, consisting of
depreciation, amortization, and non-cash interest expense on certain
indebtedness of the Company. On an as adjusted basis after giving effect to
the Fiscal 1999 Transactions, the Public Offerings, the Direct Placement and
the Western New York Joint Venture, the Company's earnings were insufficient
to cover its combined fixed charges and preferred stock dividends by
approximately $110.2 million for the year ended March 31, 1998. Historically,
the Company's cash generated from operating activities and borrowings has been
sufficient to meet its requirements for debt service, working capital, capital
expenditures, and investments in and advances to affiliates, and the Company
has depended on the availability of additional borrowings to meet its
liquidity requirements. The Company believes it will
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continue to generate cash and obtain financing sufficient to meet such
requirements. However, the Company's ability to incur additional indebtedness
is limited by covenants in its indentures and its subsidiary credit
agreements. Although in the past the Company has been able both to refinance
its indebtedness and to obtain new financing, there can be no assurance that
the Company would be able to do so in the future or that, if the Company were
able to do so, the terms available would be favorable to the Company. In the
event that the Company were unable to refinance its indebtedness or obtain new
financing under these circumstances, the Company would likely have to consider
various options such as the sale of certain assets to meet its required debt
service, negotiation with its lenders to restructure applicable indebtedness
or other options available to it under applicable law. There can be no
assurance that any such options would yield net proceeds sufficient to repay
its indebtedness in full. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
VOTING CONTROL AND DISPARATE VOTING RIGHTS
As of March 31, 1998, the Rigas Family beneficially owned 10,846,544 shares,
or 99.1%, of Adelphia's Class B Common Stock and 6,888,804 shares, or 34.4%,
of Adelphia's outstanding Class A Common Stock. On a combined basis, these
shares represented 57.2% of the total number of outstanding shares of both
classes of Common Stock and 89.1% of the total voting power of both classes.
Assuming conversion of the Convertible Preferred Stock by the Rigas Family,
family members would hold 16,322,766 shares, or 55.4%, of Adelphia's Class A
Common Stock and would hold 67.2% of the total number of shares and 89.8% of
the total voting power of both classes of Common Stock. Upon consummation of
the Public Offerings, the Direct Placement and the Western New York Joint
Venture, the Rigas Family will hold 11,029,119 shares, or 39.0%, of Adelphia's
outstanding Class A Common Stock and, on a combined basis, 55.8% of the total
number of outstanding shares of both classes of Common Stock and 86.8% of the
total voting power of both classes. As a result of the stock ownership by the
Rigas Family and the Class B Stockholders' Agreement (described in "Principal
Stockholders"), John J. Rigas and members of his family have the power to
elect all seven directors subject to election by both classes on a combined
basis, which directors constitute seven of the eight members of the Board of
Directors of Adelphia (the holders of the Class A Common Stock are entitled,
as a separate class, to elect one of Adelphia's directors). Moreover, because
holders of Class B Common Stock are entitled to ten votes per share while
holders of Class A Common Stock are entitled to one vote per share, the Rigas
Family may control stockholder decisions on matters in which holders of Class
A Common Stock and Class B Common Stock vote together as a class. These
matters include the amendment of certain provisions of Adelphia's Certificate
of Incorporation and the approval of certain fundamental corporate
transactions, including mergers. See "Principal Stockholders" herein and
"Description of Capital Stock" in the attached Prospectus.
POTENTIAL CONFLICTS OF INTEREST
The Rigas Family holds substantially all of Adelphia's Class B Common Stock
and 89.1% of the combined voting power of both classes of Adelphia's
outstanding Common Stock (89.8% assuming the conversion of the Convertible
Preferred Stock owned by the Rigas Family) and has the power to elect seven of
eight members of Adelphia's Board of Directors. John J. Rigas and the other
executive officers of Adelphia (including other members of the Rigas Family)
hold direct and indirect ownership interests in the Managed Partnerships,
which are managed by the Company for a fee. Subject to the restrictions
contained in a business opportunity agreement regarding future acquisitions,
Rigas Family members and the executive officers are free to continue to own
these interests and acquire additional interests in cable television systems.
Such activities could present a conflict of interest with the Company in the
allocation of management time and resources of the executive officers. In
addition, there have been and will continue to be transactions between the
Company and the executive officers or other entities in which the executive
officers have ownership interests or with which they are affiliated. The
indentures under which the 8 1/8% Senior Notes due 2003 (the "8 1/8% Notes")
the 8 3/8% Senior Notes due 2008 (the "8 3/8% Notes"), the 9 1/4% Senior Notes
due 2002 (the "9 1/4% Notes"), the 9 7/8% Senior Notes due 2007 (the "9 7/8%
Notes"), the 10 1/2% Senior Notes due 2004 (the "10 1/2% Notes"), the 12 1/2%
Senior Notes due 2002 (the "12 1/2% Notes"), the 10 1/4% Senior Notes due 2000
(the "10 1/4% Notes"), the 9 1/2% Senior Pay-In-Kind Notes due 2004 (the "9
1/2% Notes"), the 11 7/8% Senior Debentures due 2004 (the "11 7/8%
Debentures")
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and the 9 7/8% Senior Debentures due 2005 (the "9 7/8% Debentures")
(collectively, "Adelphia's Public Debt") were issued contain covenants that
place certain restrictions on transactions between the Company and its
affiliates. See "Certain Relationships and Related Transactions" in Adelphia's
Form 10-K/A dated July 27, 1998 and Note 11 to Adelphia's consolidated
financial statements.
COMPETITION
The cable television systems owned by the Company compete with other
communications and entertainment media as well as other means of video
distribution including Direct Broadcast Satellite Systems ("DBS"). In
addition, some of the Regional Bell Operating Companies (the "RBOCs") and
other local telephone companies are in the process of entering the video-to-
home business and several have expressed their intention to enter the video-
to-home business. In addition, some RBOCs and local telephone companies have
in place facilities which are capable of delivering cable television service.
In addition, the Telecommunications Act of 1996 (the "1996 Act") has
repealed the cable/telephone cross-ownership plan, and telephone companies
will now be permitted to provide cable television service within their service
areas. Certain of such potential service providers have greater financial
resources than the Company, and in the case of local exchange carriers seeking
to provide cable service within their service areas, have installed plant and
switching capabilities, any of which could give them competitive advantages
with respect to cable television operators such as the Company. The Company
cannot predict either the extent to which competition will materialize or, if
such competition materializes, the extent of its effect on the Company. See
"Business--Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company also faces competition from other communications and
entertainment media, including conventional off-air television broadcasting
services, newspapers, movie theaters, live sporting events and home video
products. The Company cannot predict the extent to which competition may
affect the Company.
In each of the markets served by Hyperion's networks, the services offered
by Hyperion compete principally with the services offered by the incumbent
local exchange carrier ("LEC") serving that area. Incumbent LECs have long-
standing relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the 1996
Act, federal and state regulatory initiatives will provide increased business
opportunities to CLECs such as Hyperion, but regulators are likely to provide
incumbent LECs with increased pricing flexibility for their services as
competition increases. If incumbent LECs are allowed by regulators to lower
their rates substantially or selectively engage in excessive volume and term
discount pricing practices for their customers or charge CLECs excessive fees
for interconnection to the incumbent LECs' networks, the net income and cash
flow of CLECs, including Hyperion, could be materially and adversely affected.
The 1996 Act also establishes procedures under which the RBOCs can obtain
authority to provide long distance services if they comply with certain
interconnection requirements. To date, the FCC authority to provide in-region
interLATA service has been sought by Ameritech in Michigan, Southwestern Bell
in Oklahoma, and BellSouth in Louisiana and South Carolina. The Department of
Justice has opposed each request, and each request has been denied by the FCC.
BellSouth recently filed a second application requesting FCC authority to
provide in-region interLATA services in Louisiana, and that request currently
is pending. An approval could result in decreased market share for the major
IXCs, which are among Hyperion's significant customers. Such a result could
have an adverse effect on Hyperion.
There has been significant merger activity among the RBOCs in anticipation
of entry into the long distance market, including the merger of Bell Atlantic
and NYNEX, whose combined territory covers a substantial portion of Hyperion's
markets. If RBOCs are permitted to provide such services, they will ultimately
be in a position to offer single source service for local and long distance
communications and subsidize the price of their long distance prices with
charges on local service. Other combinations among IXCs and other
telecommunications companies are occurring in the industry, which may have a
material adverse effect on Hyperion. Hyperion also
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faces, and will continue to face, competition from other current and potential
market entrants, including other CLECs, incumbent LECs which are not subject
to RBOC restrictions on long distance, AT&T, MCI, Sprint and other IXCs, cable
television companies, electric utilities, microwave carriers, wireless
telecommunications providers and private networks built by large end users. In
addition, all of the major IXCs are expected to enter the market for local
telecommunications services. Both AT&T and MCI have announced that they have
begun to offer local telephone services in some areas of the country, and AT&T
recently announced a new wireless technology for providing local telephone
service. AT&T and TCI also recently announced that they will merge. Although
Hyperion has good relationships with the IXCs, there are no assurances that
any of these IXCs will not build their own facilities, purchase other carriers
or their facilities, or resell the services of other carriers rather than use
Hyperion's services when entering the market for local exchange services.
Many of Hyperion's current and potential competitors, particularly incumbent
LECs, have financial, personnel and other resources substantially greater than
those of Hyperion, as well as other competitive advantages over Hyperion. See
"Business--Competition," "Legislation and Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Regulatory and Competitive Matters."
NEED FOR ADDITIONAL FINANCING
The Company's business requires substantial investment on a continuing basis
to finance capital expenditures and related expenses for, among other things,
upgrade of the Company's plant (including the need to make cable system
upgrades mandated by franchise authorities), the offering of new services and
the servicing, repayment or refinancing of its indebtedness. The Company will
require significant additional financing, through debt and/or equity
issuances, to meet its capital expenditure plans and to pay its debt
obligations. There can be no assurance that Adelphia will be able to issue
additional debt or obtain additional equity capital on satisfactory terms, or
at all, to meet its future financing needs. See "Business--Cable Television
Operations--Technological Developments" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
REGULATION IN THE TELECOMMUNICATIONS INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, state and local levels, and many aspects of such regulation are
currently the subject of judicial proceedings and administrative or
legislative proposals. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") significantly expanded the
scope of cable television regulation. In particular, pursuant to the 1992
Cable Act, the FCC adopted regulations that limit the Company's ability to set
and increase rates for the Company's basic and cable programming service
("CPS") packages and for the provision of cable television-related equipment.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of rates paid in the previous twelve-month period determined to be in
excess of the permitted reasonable rates. It is possible that rate reductions
or refunds of previously collected fees may be required in the future.
The 1996 Act, which became law on February 8, 1996, materially alters
federal, state and local laws and regulations pertaining to cable television,
telecommunications and other related services and, in particular,
substantially amends the Communications Act of 1934 (the "Communications
Act"). Certain provisions of the 1996 Act could materially affect the growth
and operation of the cable television industry and the cable services provided
by the Company. Although the new legislation may substantially lessen certain
regulatory burdens, the cable television industry may be subject to additional
competition as a result. See "Business--Competition". There are numerous
rulemakings that have been and continue to be undertaken by the FCC which will
interpret and implement the provisions of the 1996 Act. In addition, certain
provisions of the new legislation (such as the deregulation of rates for CPS
packages) will not immediately be effective. Furthermore, certain provisions
of the 1996 Act have been, and likely will be, subject to judicial challenge.
The Company is unable at this time to predict the outcome of such rulemakings
or litigation or the short and long-term effect (financial or otherwise) of
the 1996 Act and FCC rulemakings on the Company.
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The cable television industry is subject to state and local regulations and
the Company must comply with rules of the local franchising authorities to
retain and renew its cable franchises, among other matters. There can be no
assurances that the franchising authorities will not impose new and more
restrictive requirements as a condition to franchise renewal.
Although the 1996 Act eliminates many legal barriers to entry (i.e.,
telephone companies entering the cable industry and cable companies entering
the telephone industry), the Company cannot assure that rules adopted by the
FCC or state regulators or other legislative or judicial initiatives relating
to the telecommunications industry will not have a material adverse effect on
the Company. In addition, the 1996 Act removes entry barriers for all
companies and could increase substantially the number of competitors offering
comparable services in the Company's potential markets. See "Legislation and
Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Regulatory and Competitive Matters."
NO DIVIDENDS PAID OR TO BE PAID
Adelphia has never declared or paid dividends on any of its Common Stock and
has no intention to pay cash dividends on such stock in the foreseeable
future. In addition, the indentures for Adelphia's Public Debt contain
covenants which limit Adelphia's ability to pay such dividends. See "Price
Range of the Company's Common Equity and Dividend Policy" and Note 3 to
Adelphia's consolidated financial statements.
IMPACT OF THE 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 data-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. 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. There can be no assurance that
the systems of other companies on which the Company's systems rely will be
timely converted into systems compatible with the Company systems or that the
Company will prevent the year 2000 issues from having a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1998, 20,043,528 shares of Class A Common Stock, 10,944,476
shares of Class B Common Stock, each share of which is presently convertible
into a share of Class A Common Stock, and 100,000 shares of Convertible
Preferred Stock, each share of which is presently convertible into
approximately 117.9245 shares of Class A Common Stock, were outstanding. As of
that date, the Rigas Family beneficially owned 10,846,544 shares of Class B
Common Stock, 6,888,804 shares of Class A Common Stock and 80,000 shares of
Convertible Preferred Stock. Pursuant to various registration rights
agreements, the Rigas Family has the right, subject to certain limitations, to
require Adelphia to register substantially all of these shares including Class
A Common Stock issuable upon conversion of the Class B Common Stock and the
Convertible Preferred Stock. Adelphia has registered approximately 10,954,000
shares beneficially owned by the Rigas Family (including shares acquired in
the Direct Placement) and 100,000 shares of Convertible Preferred Stock
(including the approximately 11,792,000 shares of Class A Common Stock into
which they may be converted) beneficially owned by the Rigas Family and
Telesat Cablevision, Inc. ("Telesat"), an affiliate of FPL Group. Telesat's
shares were registered pursuant to pre-existing registration rights. In its
registration rights agreements with Adelphia
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and the Rigas Family, Telesat has agreed, in connection with any registration
of the Company's securities for sale by the Company, that upon request of the
Company or the underwriters managing any underwritten offering of the
Company's securities, Telesat will not sell without the prior written consent
of the Company or such underwriters its shares of Convertible Preferred Stock
or Class A Common Stock issuable upon conversion thereof for such period of
time (not to exceed 120 days) from the effective date of such registration as
the Company or the underwriters may specify; provided that the Company does
not discriminate among the Rigas Family and Telesat in any lockup
arrangements. Adelphia has also registered 3,571,428 shares of Class A Common
Stock beneficially owned as of March 24, 1998 by the Booth American Company.
In its registration rights agreement with Adelphia, Booth American Company has
agreed, in connection with any registration of the Company's securities for
sale by the Company, that upon request of the Company or the underwriters
managing any underwritten offering of the Company's securities, Booth American
Company will not sell without the prior written consent of the Company or such
underwriters the 3,571,428 shares of Class A Common Stock issued by Adelphia
to Booth American Company for such period of time (not to exceed 90 days) from
the effective date of such registration as the Company or the underwriters may
specify; provided that the Rigas Family is being similarly restricted.
Although the Company and the Rigas Family have agreed that they will not,
directly or indirectly, offer, sell, contract to sell or otherwise dispose of
any Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock or grant any options or warrants to purchase shares of Common
Stock without the permission of Smith Barney Inc. for a period of 90 days
after the date of this Prospectus Supplement (except for certain permitted
exceptions), approximately 8,506,000 of the shares of Class A Common Stock and
up to 80,000 of the shares of Convertible Preferred Stock which has been
registered by the Rigas Family, have been pledged in connection with margin
loans to pledgees who are not subject to any restriction on their sale of any
shares of Class A Common Stock acquired upon a foreclosure or upon conversion
of Convertible Preferred Stock acquired upon a foreclosure. See
"Underwriting--Margin and Pledge Arrangements." Sales of a substantial number
of shares of Class A Common Stock or Class B Common Stock including sale by
any pledgees of such shares or the perception that such sales could occur
could adversely affect the market price of the Class A Common Stock and could
impair Adelphia's ability in the future to raise capital through an offering
of its equity securities.
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing Class A
Common Stock in the Public Offerings at the offering price on the cover page
of this Prospectus Supplement will therefore incur immediate and substantial
net tangible book value dilution of $76.95 per share of Class A Common Stock.
See "Dilution."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Class A Common Stock may be significantly
affected by factors such as actual or anticipated fluctuations in the
Company's operating results, new products or services or new contracts by the
Company or its competitors, legislative and regulatory developments,
conditions and trends in the telecommunications industry, general market
conditions and other factors beyond the Company's control. In addition, the
stock market has, from time to time, experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stock of telecommunications companies and that have often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may also adversely affect the market price of the Company's Class
A Common Stock.
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus Supplement that are not
historical facts are "forward looking statements" (as such term is defined in
the Private Securities Litigation Reform Act of 1995), which statements
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can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "intends" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties.
Certain information included or incorporated by reference in this Prospectus
Supplement and attached Prospectus, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, is forward-looking,
such as information relating to the effects of future regulation, future
capital commitments and the effects of competition. Such forward-looking
information involves important risks and uncertainties that could cause actual
results to differ significantly 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 (including, for example, whether the Company
will consummate the Western New York Joint Venture) 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. Persons reading
this Prospectus Supplement are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors which could cause actual events or results to differ materially from
those indicated by such forward-looking statements.
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USE OF PROCEEDS
Based on a price to the public of $32.00 per share, the net proceeds to
Adelphia from the Public Offerings and the Direct Placement will be
approximately $250.0 million (after deducting estimated underwriting discounts
and commissions and offering expenses). Such net proceeds will be advanced or
contributed to its subsidiaries which will apply such funds to repay revolving
credit facilities of such subsidiaries. Subject to compliance with the terms
of and to the maturity of the revolving credit facilities, the respective
subsidiaries will be able to reborrow and use such amounts for general
corporate purposes. See Note 3 to Adelphia's consolidated financial
statements. As of March 31, 1998, the average effective interest rate on such
credit facilities was approximately 6.44%.
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PRICE RANGE OF THE COMPANY'S COMMON EQUITY AND DIVIDEND POLICY
Adelphia's Class A Common Stock is listed on the Nasdaq National Market
under the symbol "ADLAC."
The following table sets forth the range of high and low closing sale prices
of the Class A Common Stock for the fiscal periods indicated, as reported by
the Nasdaq Stock Market.
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
------- --------
FISCAL 1997
<S> <C> <C>
First Quarter Ended 6/30/96............................ $ 7 7/8 $ 6 9/16
Second Quarter Ended 9/30/96........................... $11 $ 6 1/2
Third Quarter Ended 12/31/96........................... $10 1/4 $ 5 3/4
Fourth Quarter Ended 3/31/97........................... $ 7 1/8 $ 5 3/8
<CAPTION>
FISCAL 1998
<S> <C> <C>
First Quarter Ended 6/30/97............................ $ 7 3/4 $ 5
Second Quarter Ended 9/30/97........................... $12 1/8 $ 6 3/4
Third Quarter Ended 12/31/97........................... $18 3/4 $12
Fourth Quarter Ended 3/31/98........................... $30 3/8 $16 3/8
<CAPTION>
FISCAL 1999
<S> <C> <C>
First Quarter Ended 6/30/98............................ $37 1/8 $21 1/2
Second Quarter (through August 12, 1998)............... $43 3/4 $30 7/16
</TABLE>
As of June 24, 1998, there were approximately 162 holders of record of
Adelphia's Class A Common Stock. As of June 24, 1998, two record holders were
registered clearing agencies holding Class A Common Stock on behalf of
participants in such clearing agencies.
No established public trading market exists for Adelphia's Class B Common
Stock. As of the date hereof, the Class B Common Stock was held of record by
seven persons, principally members of the Rigas Family, including a
Pennsylvania general partnership all of whose partners are members of the
Rigas Family. The Class B Common Stock is convertible into shares of Class A
Common Stock on a one-to-one basis. As of March 31, 1998, the Rigas Family
owned 99.1% of the outstanding Class B Common Stock.
DIVIDEND POLICY
Adelphia has never paid a cash dividend on its common stock and anticipates
that for the foreseeable future any earnings will be retained for use in its
business. The ability of Adelphia to pay cash dividends on its common stock is
limited by the provisions of its indentures. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources" and Note 3 to Adelphia's consolidated financial
statements.
S-16
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE AMOUNTS)
The following table sets forth the cash and cash equivalents and
capitalization of the Company as of March 31, 1998, (i) on an actual basis,
(ii) as adjusted to reflect the Public Offerings, the Direct Placement and the
application of the proceeds therefrom as described in "Use of Proceeds," and
the Fiscal 1999 Transactions and (iii) as further adjusted to reflect the
Western New York Joint Venture. This table should be read in conjunction with
Adelphia's consolidated financial statements and related notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
AS ADJUSTED
FOR THE AS FURTHER
ACTUAL TRANSACTIONS(A) ADJUSTED(B)
----------- --------------- -----------
<S> <C> <C> <C>
Cash and cash equivalents............ $ 276,895 $ 453,145 $ 453,145
U.S. government securities--pledged.. 70,535 70,535 70,535
----------- ----------- -----------
Total cash, cash equivalents and
U.S. government securities--
pledged.......................... $ 347,430 $ 523,680 $ 523,680
=========== =========== ===========
Long-term debt including current
maturities (c):
Subsidiary debt.................... $ 1,329,471 $ 1,004,422 $ 1,232,422
Parent debt........................ 1,580,274 1,659,668 1,659,668
----------- ----------- -----------
Total long-term debt including
current maturities.............. 2,909,745 2,664,090 2,892,090
----------- ----------- -----------
Hyperion redeemable exchangeable
preferred stock..................... 207,204 207,204 207,204
----------- ----------- -----------
Redeemable exchangeable preferred
stock............................... 148,062 148,062 148,062
----------- ----------- -----------
Convertible preferred stock, common
stock and other stockholders' equity
(deficiency):
8 1/8% Series C convertible
preferred stock ($100,000
liquidation preference)........... 1 1 1
Class A common stock, $.01 par
value, 200,000,000 shares
authorized and 20,043,528 shares
outstanding on an Actual basis,
and 28,233,843 shares outstanding
on an As Adjusted for the
Transactions basis and on an As
Further Adjusted basis............ 200 282 282
Class B common stock, $.01 par
value, 25,000,000 shares
authorized and 10,944,476 shares
outstanding....................... 109 109 109
Additional paid-in capital......... 331,263 723,274 723,274
Accumulated deficit................ (1,647,438) (1,650,042) (1,650,042)
----------- ----------- -----------
Total convertible preferred
stock, common stock and other
stockholders' equity
(deficiency).................... (1,315,865) (926,376) (926,376)
----------- ----------- -----------
Total capitalization............ $ 1,949,146 $ 2,092,980 $ 2,320,980
=========== =========== ===========
</TABLE>
- --------
(a) Gives effect to the application of the net proceeds from the Public
Offerings, the Direct Placement and the Fiscal 1999 Transactions.
(b) Gives effect to the Western New York Joint Venture and the application of
the net proceeds from the Public Offerings, the Direct Placement and the
Fiscal 1999 Transactions. Excludes 50,000 shares of Class A Common Stock
issued to the Rigas Family in connection with the Western New York Joint
Venture.
(c) See Note 3 to Adelphia's consolidated financial statements, for a
description of long-term debt of the Company and its subsidiaries. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
S-17
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1998 was $(2,010,969,000) or approximately $(64.90) per share. Net tangible
book value per share represents the amount of the Company's convertible
preferred stock, common stock and other stockholders' equity (deficiency),
less intangible assets, divided by 30,988,004 shares of Common Stock
outstanding.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Class A Common Stock in
the Public Offerings and the pro forma net tangible book value per share of
the Common Stock immediately after completion of the Public Offerings and the
Direct Placement. After giving effect to the sale by the Company of (i)
4,100,000 shares of Class A Common Stock in the Public Offerings at the public
offering price of $32.00 per share, after deduction of underwriting discounts
and commissions and estimated offering expenses and (ii) 4,090,315 shares of
Class A Common Stock in the Direct Placement, the pro forma net tangible book
value of the Company as of March 31, 1998 would have been $(1,760,969,000), or
$(44.95) per share of Common Stock. This represents an immediate increase in
net tangible book value of $19.95 per share to existing stockholders and an
immediate dilution of net tangible book value of $76.95 per share to
purchasers of Class A Common Stock in the Public Offerings, as illustrated in
the following table:
<TABLE>
<S> <C> <C>
Public offering price per share of Class A Common Stock...... $ 32.00
Net tangible book value per share of Common Stock before
the Public Offerings and the Direct Placement............. $(64.90)
Increase per share of Common Stock attributable to the
Direct Placement.......................................... 9.97
Increase per share of Common Stock attributable to the
Public Offerings.......................................... 9.98
-------
Pro forma net tangible book value per share of Common Stock
after the Public Offerings and the Direct Placement......... (44.95)
-------
Net tangible book value dilution per share................... $(76.95)
=======
</TABLE>
S-18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data as of and for each of the five
years in the period ended March 31, 1998 have been derived from the audited
consolidated financial statements of the Company. This data should be read in
conjunction with the consolidated financial statements and related notes
thereto as of March 31, 1997 and 1998 and for each of the three years in the
period ended March 31, 1998 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus Supplement. The statement of operations data with respect to fiscal
years ended March 31, 1994 and 1995, and the balance sheet data at March 31,
1994, 1995 and 1996, have been derived from audited consolidated financial
statements of the Company not included herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $ 319,045 $ 361,505 $ 403,597 $ 472,778 $ 528,442
Direct operating and
programming expense.... 90,547 106,993 124,116 148,982 167,288
Selling, general and
administrative expense. 52,801 63,487 68,357 81,763 95,731
Depreciation and
amortization expenses.. 89,402 97,602 111,031 124,066 145,041
Rate regulation charge.. -- -- 5,300 -- --
--------- --------- --------- --------- ---------
Operating income ....... 86,295 93,423 94,793 117,967 120,382
Other income (expense).. (299) 1,453 -- -- --
Priority investment in-
come from Olympus...... 22,300 22,300 28,852 42,086 47,765
Cash interest expense--
net.................... (171,268) (169,830) (183,780) (190,965) (209,677)
Noncash interest
expense................ (1,680) (14,756) (16,288) (41,360) (37,430)
Equity in loss of joint
ventures............... (30,054) (44,349) (46,257) (59,169) (79,056)
Hyperion preferred stock
dividends.............. -- -- -- -- (12,682)
Gain on sale of
investments............ -- -- -- 12,151 2,538
--------- --------- --------- --------- ---------
Loss before income
taxes, extraordinary
loss
and cumulative effect
of change in accounting
principle (a).......... (94,706) (111,759) (122,680) (119,290) (168,160)
Income tax (expense)
benefit................ (2,742) 5,475 2,786 358 5,606
--------- --------- --------- --------- ---------
Loss before
extraordinary loss and
cumulative effect of
change
in accounting principle
(a).................... (97,448) (106,284) (119,894) (118,932) (162,554)
Extraordinary loss on
early retirement of
debt................... (752) -- -- (11,710) (11,325)
Cumulative effect of
change in accounting
for income taxes (a)... (89,660) -- -- -- --
--------- --------- --------- --------- ---------
Net loss................ (187,860) (106,284) (119,894) (130,642) (173,879)
Dividend requirements
applicable to preferred
stock.................. -- -- -- -- (18,850)
--------- --------- --------- --------- ---------
Net loss applicable to
common stockholders.... $(187,860) $(106,284) $(119,894) $(130,642) $(192,729)
========= ========= ========= ========= =========
Basic and diluted loss
per weighted average
share of common stock
before extraordinary
loss and cumulative
effect of change in
accounting principle
(a).................... $ (5.66) $ (4.32) $ (4.56) $ (4.50) $ (6.07)
Basic and diluted net
loss per weighted
average share of common
stock.................. (10.91) (4.32) (4.56) (4.94) (6.45)
Cash dividends declared
per common share....... -- -- -- -- --
Weighted average shares
of common stock
outstanding (in
thousands)............. 17,221 24,628 26,305 26,411 29,875
</TABLE>
- --------
(footnotes included on next page)
S-19
<PAGE>
As more fully described herein, Adelphia operates primarily in two lines of
business within the telecommunications industry: cable television (Adelphia,
excluding Hyperion) and competitive local exchange carrier telephony
(Hyperion). The balance sheet data and other data as of and for each of the
five years ended March 31, 1998 of Hyperion have been derived from audited
consolidated financial statements of Hyperion not included herein.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Adelphia Consolidated
Total assets........... $ 1,073,846 $ 1,267,291 $ 1,367,579 $1,643,826 $2,304,671
Total debt............. 1,793,711 2,021,610 2,175,473 2,544,039 2,909,745
Total debt and
redeemable preferred
stock................. 1,793,711 2,021,610 2,175,473 2,544,039 3,265,011
Investments (b)........ 24,416 50,426 74,961 130,005 150,787
Convertible preferred
stock, common stock
and other
stockholders' equity
(deficiency).......... (918,064) (1,011,575) (1,128,239) (1,253,881) (1,315,865)
Hyperion
Total assets........... $ 14,765 $ 23,212 $ 35,269 $ 174,601 $ 634,893
Total debt............. 19,968 35,541 50,855 215,675 528,776
Total debt and
redeemable preferred
stock................. 19,968 35,541 50,855 215,675 735,980
Investments (b)........ 9,068 15,085 27,900 56,695 66,648
Common stock and other
stockholders' equity
(deficiency).......... (6,011) (13,703) (27,323) (50,254) (118,991)
Adelphia, Excluding Hyperion
Total assets........... $ 1,059,081 $ 1,244,079 $ 1,332,310 $1,469,225 $1,669,778
Total debt............. 1,773,743 1,986,069 2,124,618 2,328,364 2,380,969
Total debt and
redeemable preferred
stock................. 1,773,743 1,986,069 2,124,618 2,328,364 2,529,031
Investments (b)........ 15,348 35,341 47,061 73,310 84,139
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Adelphia Consolidated
EBITDA (c).............. $ 175,697 $ 191,025 $ 211,124 $ 242,033 $ 265,423
Capital expenditures.... 75,894 92,082 100,089 129,609 183,586
Cash paid for
acquisitions........... 21,681 70,256 60,804 143,412 146,546
Hyperion
Revenues................ $ 417 $ 1,729 $ 3,322 $ 5,088 $ 13,510
Operating expenses (d).. 2,375 3,906 5,774 10,212 22,118
Depreciation and
amortization expense... 189 463 1,184 3,945 11,477
EBITDA (c).............. (1,958) (2,177) (2,452) (5,124) (8,608)
Interest expense--net... (2,147) (3,282) (5,889) (22,401) (36,030)
Preferred stock
dividends.............. -- -- -- -- (12,682)
Capital expenditures.... 3,097 2,850 6,084 36,127 68,629
Cash paid for
acquisitions........... -- -- -- 5,040 65,968
Adelphia, Excluding Hyperion
Revenues................ $ 318,628 $ 359,776 $ 400,275 $ 467,690 $ 514,932
Operating expenses (d).. 140,973 166,574 186,699 220,533 240,901
Depreciation and
amortization expense... 89,213 97,139 109,847 120,121 133,564
EBITDA (c).............. 177,655 193,202 213,576 247,157 274,031
Interest expense--net... (170,801) (181,304) (194,179) (209,924) (211,077)
Capital expenditures.... 72,797 89,232 94,005 93,482 114,957
Cash paid for
acquisitions........... 21,681 70,256 60,804 138,372 80,578
</TABLE>
- --------
(a) "Cumulative Effect of Change in Accounting Principle" refers to a change
in accounting principle for the Company. Effective April 1, 1993, the
Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires
an asset and liability approach for financial accounting and reporting for
income taxes. The adoption of SFAS No. 109 resulted in the cumulative
recognition of an additional liability by the Company of $89,660.
(b) Represents total investments before cumulative equity in net losses.
(c) EBITDA presented above is defined as operating income plus depreciation
and amortization and rate regulation charge. EBITDA and other similar
measurements of cash flow are commonly used in the telecommunications
industry to analyze and compare telecommunications companies on the basis
of operating performance, leverage and liquidity. While EBITDA is not an
alternative to operating income as an indicator of operating performance
or an alternative to cash flows from operating activities as a measure of
liquidity, all 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.
(d) Amount excludes depreciation and amortization expense.
S-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS
General
Adelphia earned substantially all of its revenues in each of the last three
fiscal years from monthly subscriber fees for basic, cable value, premium and
ancillary services (such as installations and equipment rentals), local and
national advertising sales, pay-per-view programming, home shopping networks
and CLEC services.
The changes in Adelphia's results of operations for the years ended March
31, 1997 and 1998, compared to the respective prior year, were primarily the
result of acquisitions, expanding existing cable television operations and the
impact of increased advertising sales and other service offerings as well as
an increase in cable rates, effective October 1, 1996 and August 1, 1997.
The high level of depreciation and amortization associated with the
significant number of acquisitions in recent years, the recent upgrading and
expansion of systems, interest costs associated with financing activities and
Hyperion's continued investment in the CLEC business will continue to have a
negative impact on the reported results of operations. Also, significant
charges for depreciation, amortization and interest are expected to be
incurred in the future by the Olympus joint venture, which will also adversely
impact Adelphia's future results of operations. Adelphia expects to report net
losses for the next several years.
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.
The following table is derived from Adelphia's consolidated financial
statements that are included in this Prospectus Supplement and sets forth the
historical percentage relationship to revenues of the components of operating
income contained in such financial statements for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF
REVENUES
YEAR ENDED MARCH
31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0%
Operating Expenses:
Direct operating and programming................... 30.8 31.5 31.7
Selling, general and administrative................ 16.9 17.3 18.1
Depreciation and amortization...................... 27.5 26.2 27.4
Rate regulation charge............................. 1.3 -- --
----- ----- -----
Operating Income..................................... 23.5% 25.0% 22.8%
===== ===== =====
</TABLE>
COMPARISON OF THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
Revenues
The primary revenue sources reflected as a percentage of total revenues were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Regulated service and equipment fees....................... 73% 74% 75%
Premium programming fees................................... 12% 12% 10%
Advertising sales and other services....................... 15% 14% 15%
</TABLE>
S-21
<PAGE>
Revenues increased approximately 17.1% for the year ended March 31, 1997 and
11.8% for the year ended March 31, 1998 compared with the respective prior
fiscal year. The increases were attributable to the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Acquisitions................................... 42% 37%
Basic subscriber growth........................ 12% 9%
Rate increases................................. 38% 48%
Premium programming fees....................... (5%) (7%)
Advertising sales and other services........... 13% 13%
</TABLE>
Effective October 1, 1996 and 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 year
ended March 31, 1998.
Direct Operating and Programming Expenses. Direct operating and programming
expenses, which are mainly basic and premium programming costs and technical
expenses, increased 20.0% and 12.3% for the years ended March 31, 1997 and
1998, respectively, compared with the respective prior year. Such increases
were 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, direct operating and
programming expenses have increased at a greater rate than corresponding
revenue increases. As a result of recent FCC regulatory rulemaking decisions,
the Company intends to continue its systematic program of rate increases to
reverse this trend. 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 costs.
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 19.6% and
17.1% for the years ended March 31, 1997 and 1998, respectively, compared with
the respective prior year. The increases were 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 operating companies managed and monitored.
Depreciation and Amortization. Depreciation and amortization was higher for
the years ended March 31, 1997 and 1998, compared with the respective prior
year, primarily due to increased depreciation and amortization related to
acquisitions consummated during the years ended March 31, 1996, 1997 and 1998,
as well as increased capital expenditures made during the past several years.
Rate Regulation Charge. The fiscal year ended March 31, 1996 includes a
$5,300 charge representing management's estimate of the total costs associated
with the resolution of subscriber rate disputes. Such costs include (i) an
estimate of credits to be extended to customers in future periods of up to
$2,700, (ii) legal and other costs incurred during the two fiscal years ended
March 31, 1998, and (iii) an estimate of legal and other costs to be incurred
associated with the ultimate resolution of this matter. On May 1, 1997, the
Company reached a settlement with the FCC regarding such rate disputes. The
amount recorded in the year ended March 31, 1996 was adequate to cover the
settlement.
Priority Investment Income from Olympus. Priority investment income is
comprised of payments received from Olympus of accrued priority return on the
Company's investment in PLP Interests in Olympus. Priority investment income
increased during the years ended March 31, 1997 and 1998 as compared with the
respective prior year due to increased payments by Olympus.
Interest Expense--net. Interest expense--net increased approximately 16.1%
and 6.4% for the years ended March 31, 1997 and 1998, respectively. For the
year ended March 31, 1997 interest expense increased primarily
S-22
<PAGE>
due to incremental debt related to acquisitions and the issuance of the
Hyperion 13% Senior Discount Notes. These increases were partially offset by a
decrease in the average interest rate on outstanding debt. For the year ended
March 31, 1998, interest expense--net increased primarily due to incremental
debt related to acquisitions and the issuance of the Hyperion 12 1/4% Senior
Secured Notes. These increases were partially offset by (i) the utilization of
the proceeds from the convertible preferred stock and the redeemable preferred
stock offerings to repay outstanding debt; (ii) the refinancing of outstanding
borrowings and (iii) interest income on cash balances. Interest expense
includes non-cash accretion of original issue discount and non-cash interest
expense totaling $16,288, $41,360 and $37,430 for the years ended March 31,
1996, 1997 and 1998, respectively. The decrease in non-cash interest for the
year ended March 31, 1998 as compared to the prior year was primarily due to
Adelphia's cash payment of interest on its 9 1/2% Senior Pay-In-Kind notes for
the six month period ended February 15, 1998. This decrease was partially
offset by the accretion of original issue discount related to the Hyperion 13%
Senior Discount Notes.
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' preferred limited partner interests,
and (ii) Hyperion's pro rata share of its less than majority owned
partnerships' operating losses. The increase in the loss during the year ended
March 31, 1997, compared with the prior year, is due to an increase in the
losses of certain investments in the CLEC business in which Hyperion is a less
than majority partner and increased losses of Olympus. The increase in the
loss during the year ended March 31, 1998, compared with the prior year, is
primarily due to losses of Olympus and an increase in the losses of certain
Hyperion CLEC joint ventures.
Hyperion Preferred Stock Dividends. During the year ended March 31, 1998,
Hyperion incurred $12,682 of expense relating to its 12 7/8% Senior
Exchangeable Redeemable Preferred Stock issued in October 1997.
Gain on Sale of Investments. On May 16, 1996, Hyperion completed the sale of
its 15.7% partnership interest in TCG South Florida to Teleport Communications
Group Inc. for an aggregate sales price of $11,618 resulting in a gain of
$8,405. On January 23, 1997, the Company received 284,425 shares of Republic
Industries, Inc. Common Stock ("Republic stock") in exchange for its interest
in Commonwealth Security, Inc. for an aggregate sales price of $9,315
resulting in a gain of $3,746. During the year ended March 31, 1998, the
Company sold its Republic stock, its investment in the Golf Channel and
certain other assets, resulting in a gain of $2,538.
Extraordinary Loss on Early Retirement of Debt. During the year ended March
31, 1997, certain bank indebtedness was repaid and a portion of the 12 1/2%
Senior Notes due 2002 was reacquired resulting in an extraordinary loss on
retirement of debt. The amount pertaining to the repayment of bank debt was
$2,079, which primarily represents the write-off of the remaining deferred
debt financing costs associated with the debt retired. The amount pertaining
to the 12 1/2% Senior Notes was $9,631, which represents the excess of
reacquisition cost over the net carrying value of the related debt. During the
year ended March 31, 1998, Adelphia reacquired through open market purchases
$20,000 of 9 1/2% Senior Pay-in-Kind Notes due 2004 and redeemed $202,000 of
12 1/2% Senior Notes due 2002 at 106% of principal. As a result of these two
transactions, Adelphia recognized an extraordinary loss of $11,325 for the
year ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The cable television and other telecommunications businesses are capital
intensive and typically require continual financing for the construction,
modernization, maintenance, expansion and acquisition of cable and other
telecommunications systems. During the three fiscal years in the period ended
March 31, 1998, the Company committed substantial capital resources for these
purposes and for investments in Olympus, and other affiliates and entities.
These expenditures were funded through long-term borrowings and internally
generated funds. For the fiscal years ended March 31, 1996, 1997 and 1998,
cash provided by operating activities totaled $64,287, $43,001 and $66,270,
respectively; cash used for investing activities totaled $189,462, $322,047
and $563,520, respectively and cash provided by financing activities totaled
$130,939, $329,776 and $712,606,
S-23
<PAGE>
respectively. The Company's aggregate outstanding borrowings as of March 31,
1998 were $2,909,745. The Company also had total redeemable preferred stock of
$355,266 outstanding as of March 31, 1998. 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.
Capital Expenditures. Capital expenditures for Adelphia, excluding Hyperion
for the years ended March 31, 1996, 1997 and 1998 were $94,005, $93,482 and
$114,957, respectively. Capital expenditures including Hyperion for the years
ended March 31, 1996, 1997 and 1998 were $100,089, $129,609 and $183,586,
respectively. The increase in capital expenditures for fiscal 1996, 1997 and
1998, compared to each respective prior year, was primarily due to the
acceleration of the rebuilding of plant using fiber-to-feeder technology and
Hyperion's introduction of switching services. The Company expects that
capital expenditures for fiscal 1999 will be in a range of approximately
$150,000 to $170,000 for Adelphia, excluding Hyperion. The Company expects
Hyperion to continue to have significant capital expenditure and investment
requirements.
Financing Activities. The Company's financing strategy has been to maintain
its public long-term debt at the parent holding company level while the
Company's consolidated subsidiaries have their own senior and subordinated
credit arrangements with banks and insurance companies, or for Hyperion, its
own public debt and equity. The Company's ability to generate cash adequate to
meet its future needs will depend generally on its results of operations and
the continued availability of external financing. During the three-year period
ended March 31, 1998, the Company generally funded its working capital
requirements, capital expenditures, and investments in Olympus, CLEC joint
ventures and other affiliates and entities through long-term borrowings
primarily from banks, short-term borrowings, internally generated funds and
the issuance of public debt or 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 and subsidiary company debt securities, and by paying the
interest out of internally generated funds. Adelphia has funded the interest
obligations on its public borrowings from internally generated funds.
Most of Adelphia's directly-owned subsidiaries have their own senior credit
agreements with banks and/or insurance companies. Typically, borrowings under
these agreements are collateralized by the stock and, in some cases, by the
assets of the borrowing subsidiary and its subsidiaries and, in some cases,
are guaranteed by such subsidiary's subsidiaries. At March 31, 1998, an
aggregate of $775,725 in borrowings was outstanding under these agreements.
These agreements contain certain provisions which, among other things, provide
for limitations on borrowings of and investments by the borrowing
subsidiaries, transactions between the borrowing subsidiaries and Adelphia and
its other subsidiaries and affiliates, and the payment of dividends and fees
by the borrowing subsidiaries. Several of these agreements also contain
certain cross-default provisions relating to Adelphia or other subsidiaries.
These agreements also require the maintenance of certain financial ratios by
the borrowing subsidiaries. In addition, at March 31, 1998, an aggregate of
$52,000 subordinated and unsecured borrowings by Adelphia's subsidiaries was
outstanding under credit agreements containing limitations and restrictions
similar to those mentioned above. See Note 3 to Adelphia's consolidated
financial statements. Management believes the Company is in compliance with
the financial covenants and related financial ratio requirements contained in
its various credit agreements, based on operating results for the three months
ended March 31, 1998. In addition, as of March 31, 1998, Hyperion had
outstanding $329,000 aggregate principal amount at maturity of 13% Senior
Discount Notes due 2003, with a carrying amount of $215,213, which were issued
under an indenture dated April 15, 1996 and $250,000 of 12 1/4% Senior Secured
Notes due 2004, which were issued under an indenture dated August 27, 1997.
Also, on October 9, 1997, Hyperion issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due 2007.
At March 31, 1998, Adelphia's subsidiaries had an aggregate of $235,620 in
unused credit lines with banks, part of which is subject to achieving certain
levels of operating performance. In addition, the Company had an aggregate
$276,895 in cash and cash equivalents at March 31, 1998 which combined with
the Company's unused credit lines with banks aggregated to $512,515. The
Company has the ability to pay interest on its 9 1/2% Senior Pay-In-Kind Notes
by issuing additional notes totaling approximately $18,123 in lieu of cash
interest payments
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from April 1, 1998 through February 15, 1999. Based upon the results of
operations of subsidiaries for the quarter ended March 31, 1998, approximately
$442,000 of available assets could have been transferred to Adelphia at March
31, 1998, under the most restrictive covenants of the subsidiaries' credit
agreements. The subsidiaries also have the ability to sell, dividend or
distribute certain assets to other subsidiaries or Adelphia, which would have
the net effect of increasing availability. At March 31, 1998, the Company's
unused credit lines were provided by reducing revolving credit facilities
whose revolver periods expire through September 30, 2004. The Company's
scheduled maturities of debt are currently $128,213 for fiscal 1999.
At March 31, 1998, the Company's total outstanding debt aggregated
$2,909,745, which included $1,580,274 of parent company debt and $1,329,471 of
subsidiary debt. Bank debt interest rates are based upon one or more of the
following rates at the option of Adelphia: prime rate plus 0% to 1.75%;
certificate of deposit rate plus 1.125% to 2.125%; or LIBOR plus .625% to
2.75%. The Company's weighted average interest rate on notes payable to banks
and institutions was approximately 8.11% at March 31, 1998, compared to 8.83%
at March 31, 1997. At March 31, 1998, approximately 28.77% of subsidiary debt
was subject to fixed interest rates for at least one year under the terms of
such debt or applicable interest rate swap agreements. Approximately 76.61% of
the Company's total indebtedness was at fixed interest rates as of March 31,
1998.
Adelphia has entered into interest rate swap agreements and interest rate
cap agreements with banks and affiliates to reduce the impact of changes in
interest rates on its debt. Adelphia enters into pay-fixed agreements to
effectively convert a portion of its variable-rate debt to fixed-rate debt.
Adelphia enters into receive-fixed agreements to effectively convert a portion
of its fixed-rate debt to variable-rate debt which is indexed to LIBOR.
Interest rate cap agreements are used to reduce the impact of increases in
interest rates on variable rate debt. Adelphia is exposed to credit loss in
the event of nonperformance by the banks and the affiliates. The Company does
not expect any such nonperformance. At March 31, 1998, Adelphia would have had
to pay approximately $5,822 to settle its interest rate swap and cap
agreements, representing the excess of carrying cost over fair market value of
these agreements.
The Company plans to use the net proceeds of approximately $250,000 from the
Public Offerings and the Direct Placement to repay indebtedness outstanding
under revolving credit facilities of its subsidiaries. Subject to compliance
with the terms of and the maturity of the revolving credit facilities, the
respective subsidiaries will be able to reborrow and use such amounts for
general corporate purchases. See "Use of Proceeds."
FINANCING TRANSACTIONS
Adelphia, Excluding Hyperion
During fiscal 1997, Adelphia issued $350,000 of publicly held senior debt
and certain subsidiaries of the Company entered into a $690,000 financing
arrangement consisting of a $540,000 revolving credit facility maturing
December 31, 2003 and a $150,000 term loan facility maturing December 31,
2004.
During fiscal 1998, Adelphia issued $625,000 of senior notes and $150,000
aggregate liquidation preference, 13% Cumulative Exchangeable Preferred Stock
(the "Exchangeable Preferred Stock"), which is mandatorily redeemable in 2009.
On July 2, 1998, Adelphia issued $150,000 of 8 1/8% Senior Notes due 2003.
During fiscal 1998, Adelphia also issued 100,000 shares of perpetual Series
C Convertible Preferred Stock (the "Convertible Preferred Stock") with a par
value of $.01 per share and 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, a wholly owned subsidiary of FPL Group, a
New York Stock Exchange company and a 50% partner in Olympus. The Convertible
Preferred Stock accrues 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 11,792,452 shares of Class A Common Stock of Adelphia. The Convertible
Preferred Stock is redeemable at the option of Adelphia after three years from
the date of issuance at a premium declining to the liquidation preference in
2002.
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Proceeds from the sale of the Exchangeable Preferred Stock, the Senior Notes
and the Convertible Preferred Stock were used to repay subsidiaries' senior
notes and revolving credit facility borrowings.
On October 31, 1997, Adelphia redeemed $202,000 aggregate principal amount
of 12 1/2% Senior Notes due 2002 at 106% of principal. On May 15, 1998,
Adelphia redeemed the remaining $69,838 of the 12 1/2% Senior Notes due 2002
at 103% of principal.
Hyperion
During Fiscal 1998, Hyperion issued $250,000 aggregate principal amount of
12 1/4% Senior Secured Notes due 2004 and $200,000 aggregate liquidation
preference 12 7/8% Senior Exchangeable Redeemable Preferred Stock due 2007. In
addition, on May 8, 1998, Hyperion completed an initial public offering
("IPO") of its Class A Common Stock ("Hyperion Stock"). As part of the
Hyperion IPO, 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. Adelphia currently owns approximately
66% of the Hyperion Common Stock on a fully diluted basis and 85% of the total
voting power. Hyperion received additional net proceeds of approximately
$192,000 as a result of the Hyperion IPO.
Net proceeds from the above Hyperion transactions will primarily be used to
fund capital expenditures, working capital, potential increases in ownership
interests in existing networks and for general corporate purposes. For
additional information regarding Adelphia's and Hyperion's financing
transactions, see Notes 3, 4, 6 and 13 to Adelphia's consolidated financial
statements.
ACQUISITIONS
Adelphia, Excluding Hyperion
For the year ended March 31, 1998, Adelphia acquired (i) cable systems
serving approximately 25,800 subscribers in the Virginia cities of Blacksburg
and Salem for an aggregate price of $54,500, (ii) 61% of the partnership
interests of cable systems serving approximately 20,300 subscribers in the
Western New York area for an aggregate price of $20,737, (iii) cable systems
serving approximately 3,400 subscribers in Vermont for an aggregate price of
$8,096, and (iv) 82% of the partnership interests of cable systems serving
approximately 16,000 subscribers in Pennsylvania, Maryland and West Virginia
for an aggregate price of $23,615. These acquisitions further contributed to
Adelphia's existing clusters. See Note 1 to Adelphia's consolidated financial
statements for a further discussion of acquisitions.
On March 2, 1998, Adelphia entered into a definitive agreement to acquire
cable television systems serving approximately 62,000 subscribers in
Connecticut and Virginia from Marcus Cable, Inc. for approximately $150,000 in
cash. The Company expects this acquisition to close during fiscal year 1999.
On April 1, 1998, Adelphia and its affiliates and Time Warner traded certain
cable systems. Adelphia exchanged systems serving 64,400 subscribers primarily
in the Mansfield, Ohio area for systems owned by Time Warner serving 70,200
subscribers adjacent to systems owned or managed by Adelphia in Virginia, New
England and New York.
On July 31, 1998, Adelphia established a joint venture partnership with TCI
into which TCI contributed its cable systems in Buffalo, New York; Erie,
Pennsylvania; and Ashtabula and Lake County, Ohio, totaling approximately
171,000 subscribers, and Adelphia contributed its Western New York and Lorain,
Ohio systems, totaling approximately 298,000 subscribers. TCI holds a minority
interest in the partnership.
The Company also has signed an agreement to acquire cable systems serving
approximately 10,000 subscribers in Vermont for a purchase price of $18.0
million.
Hyperion
On September 12, 1997 and February 12, 1998, Hyperion acquired the
partnership interests of various of its local cable operators or utility
providers (each a "Local Partner"), thereby increasing its ownership interest
in seven of its networks to 100% for an aggregate cash purchase price of
approximately $52,000 and certain other
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consideration. As a result of these transactions, Hyperion's weighted average
ownership in its networks, based upon gross property plant and equipment,
increased to 77% as of March 31, 1998. These transactions are consistent with
Hyperion's goal to own at least a 50% interest in each of its networks and to
dispose of its interests in those in which acquiring a controlling interest is
not economically attractive. Hyperion may consider similar transactions from
time to time in its other markets.
On March 25, 1998, the FCC completed the auction of licenses for Local
Multipoint Distribution Service ("LMDS"). Hyperion, through a limited
partnership in which it is a 49.9% limited partner, was the successful bidder
at a net cost of $25,600 for 232 31-Ghz licenses, which cover approximately
38% of the nation's population--in excess of 90 million people in the eastern
half of the United States. Hyperion funded $10,000 of such purchase in January
1998, and is committed to provide further funding to consummate such purchase
upon the granting of such licenses by the FCC, expected during fiscal 1999.
LMDS is a fixed broadband point-to-multipoint service which the FCC
anticipates will be used for the deployment of wireless local loop, high-speed
data transfer and video broadcasting services. Hyperion plans to use such
spectrum for "last-mile" connectivity in certain of its markets, and believes
the spectrum to be highly complementary to its fiber-based systems. There can
be no assurances that LMDS spectrum will provide a cost-effective means to
connect to end user locations.
RESOURCES
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 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 telecommunications 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.
AFFILIATES
Olympus. The Company serves as the managing general partner of Olympus and,
as of March 31, 1998, held $5 of voting general partnership interests
representing, in the aggregate, 50% of the voting interests of Olympus. The
Company also held, as of March 31, 1998, approximately $325,911 aggregate
principal amount
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of nonvoting PLP interests in Olympus, which entitle the Company to a 16.5%
per annum priority return. The remaining equity in Olympus consists of voting
and non-voting partnership interests held by FPL Group.
During the years ended March 31, 1996 and 1997, the Company received net
distributions and advances from Olympus totaling $45,499 and $9,012,
respectively. During the year ended March 31, 1998, the Company made net
investments in and advances to Olympus totaling $11,466. During the years
ended March 31, 1996, 1997 and 1998, the Company received priority investment
income from Olympus of $28,852, $42,086 and $47,765, respectively.
The Olympus limited partnership agreement requires approval by the holders
of 85% of the voting interests for, among other things, significant
acquisitions and dispositions of assets, and the issuance of certain
partnership interests, and also requires approval by the holders of 75% of the
voting interests for, among other things, material amendments to the Olympus
partnership agreement, certain financings and refinancings, certain issuances
of PLP interests, certain transactions with related parties and the adoption
of annual budgets.
During the years ended March 31, 1996, 1997 and 1998, Olympus acquired
several cable and security systems, adding approximately 151,000 subscribers
for approximately $295,800. Olympus also completed two financing arrangements
totaling $675,000 during the years ended March 31, 1996, 1997 and 1998. For
additional information regarding Olympus acquisitions and financings, see Note
1 to Olympus' consolidated financial statements contained in its Form 10-K for
the year ended December 31, 1997.
On July 15, 1998, Olympus purchased cable television systems from Jones
Intercable, Inc. for $110,000 cash which serve approximately 46,000
subscribers in and around the city of Ft. Myers, Florida. Olympus also entered
into a definitive agreement expected to close during calendar year 1998 for
the purchase of cable systems serving approximately 20,000 subscribers in the
Lake Okeechobee area of southeast Florida for $33,400. These acquisitions will
be accounted for under the purchase method of accounting.
The Selected Financial Data and Management's Discussion and Analysis of
Financial Condition and Results of Operations for Olympus for each of the
three years in the period ended December 31, 1997, which appear on pages 22
through 31 of the Annual Report on Form 10-K of Olympus Communications, L.P.
and Olympus Capital for the year ended December 31, 1997, are incorporated
herein by reference. The financial information for Olympus as of March 31,
1998 and for the three months ended March 31, 1997 and 1998, which appears on
pages 3 through 5 of the Olympus and Olympus Capital Corporation Form 10-Q for
the quarterly period ended March 31, 1998, is incorporated by reference in
this Prospectus Supplement.
Managed Partnerships. On September 29, 1993, the Board of Directors of the
Company authorized the Company to make loans in the future to the Managed
Partnerships up to an amount of $50,000. During the years ended March 31, 1996
and 1998, the Company made advances in the net amount of $14,859 and $21,458,
respectively, to these and other related parties, primarily for capital
expenditures and working capital purposes. During the year ended March 31,
1997, the Managed Partnerships and other related parties repaid advances in
the net amount of $34,250.
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
significant impact on the Company's financial statements or disclosures. SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," has
been issued and is effective for fiscal quarters beginning after June 15,
1999. SFAS No. 133 establishes accounting and
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reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Statement of Position ("SOP") 98-5, "Reporting on
the Costs of Start-Up Activities," has been issued and is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It requires such
costs to be expensed as incurred. Management of the Company has not evaluated
the impact of SFAS 133 or SOP 98-5.
INFLATION
In the three fiscal years in the period ended March 31, 1998, inflation did
not have a significant effect on the Company. Periods of high inflation could
have an adverse effect to the extent that increased borrowing costs for
floating-rate debt may not be offset by increases in subscriber rates. At
March 31, 1998, after giving effect to interest rate hedging agreements,
approximately $589,575 of the Company's total debt was subject to floating
interest rates.
REGULATORY AND COMPETITIVE MATTERS
The cable television operations of the Company may be adversely affected by
changes and developments in governmental regulation, competitive forces and
technology. The cable television industry and the Company are subject to
extensive regulation at the federal, state and local levels. The 1992 Cable
Act significantly expanded the scope of regulation of certain subscriber rates
and a number of other matters in the cable industry, such as mandatory
carriage of local broadcast stations and retransmission consent, and increased
the administrative costs of complying with such regulations. The FCC has
adopted rate regulations that establish, on a system-by-system basis, maximum
allowable rates for (i) basic and cable programming services (other than
programming offered on a per-channel or per-program basis), based upon a
benchmark methodology, and (ii) associated equipment and installation services
based upon cost plus a reasonable profit. Under the FCC rules, franchising
authorities are authorized to regulate rates for basic services and associated
equipment and installation services, and the FCC will regulate rates for
regulated cable programming services in response to complaints filed with the
agency. The 1996 Act ends FCC regulation of cable programming service tier
rates on March 31, 1999.
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 rulemaking proceedings or changes to the rate regulations.
In fiscal 1996, Adelphia recorded a $5,300 charge representing management's
estimate of the total costs to be incurred to resolve all of Adelphia's 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. Under the terms of
the agreement, Adelphia made refunds of approximately $2,400 (including
interest through December 31, 1996), plus interest from January 1, 1997
through the date of payment. Adelphia also reduced its rates in certain
communities. At March 31, 1998, $832 of the $5,300 charge remained in accrued
interest and other liabilities, which management believes is adequate to cover
the settlement. No assurance can
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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.
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 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.
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.
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BUSINESS
GENERAL
Adelphia owns, operates, develops and acquires cable television systems and,
based on the number of basic subscribers in its owned and managed systems as
of March 31, 1998, is the seventh largest cable system operator in the United
States. Pro Forma for the Recent and Pending Acquisitions and the Western New
York Joint Venture, the Company owns or manages cable systems which served
2,305,785 subscribers as of March 31, 1998. Adelphia founded and developed,
and continues to own a 66% ownership interest in, Hyperion, one of the largest
domestic independent, facilities-based competitive local exchange carriers,
which currently operates 22 fiber optic networks serving 46 cities in the
eastern half of the United States. The Company also has minority ownership
interests in certain other unconsolidated cable and programming assets. John
J. Rigas, the Chairman, President, Chief Executive Officer and majority
stockholder of Adelphia is a pioneer in the cable television industry, having
built his first system in 1952 in Coudersport, Pennsylvania.
CABLE TELEVISION OPERATIONS
The Company Systems passed 1,670,068 homes and served 1,215,040 subscribers
as of March 31, 1998. The Company Systems are located primarily in suburban
areas of large and medium-sized cities within the 50 largest television
markets. The Company Systems are organized and operate in seven regional
clusters: Western New York, Virginia, Western Pennsylvania, New England,
Eastern Pennsylvania, Ohio and Coastal New Jersey. On July 31, 1998, the
Company established a joint venture partnership with TCI in the Western New
York area. The Company will manage this joint venture and owns a 67% interest.
Pro forma for the Recent and Pending Acquisitions and the Western New York
Joint Venture, the Company Systems served 1,477,395 subscribers as of March
31, 1998.
Adelphia is a joint venture partner in and is the managing general partner
of Olympus which operates the largest contiguous cable system in Florida
located in some of the nation's fastest growing markets. As of March 31, 1998,
the Olympus Systems passed 755,185 homes and served 501,722 basic subscribers.
Olympus is a joint venture limited partnership between the Company and
subsidiaries of FPL Group. FPL Group is one of the largest public utility
holding companies in the United States. The Company owns a 50% voting interest
and 67% of the PLP interests in Olympus. Olympus is accounted for under the
equity method of accounting.
The Company also provides, for a fee, management and consulting services to
certain cable television systems in which certain entities controlled by the
Rigas Family have substantial ownership interests. As of March 31, 1998, the
Managed Systems passed 347,278 homes and served 259,409 basic subscribers.
OPERATING AND GROWTH STRATEGY
The Company's cable television operations strategy is to construct and
operate a broadband network capable of offering a broad range of
telecommunications services and to provide superior customer service while
maximizing operating efficiencies. The Company has built on its expertise as a
cable television provider to expand its product offering to include high-speed
internet access, long distance telephone service and paging services to its
residential subscriber base. Through Hyperion, the Company has expanded its
business to include the sale of communication services to business customers
within its cable franchise areas and also in other markets. The Company
intends to combine the expertise it has developed in the business telephony
market with its expertise in the consumer market to provide local exchange
telephone services to its residential customers. The Company intends to
continue to provide new advanced communication services when they become
technically and commercially feasible.
Key elements in Adelphia's operational and growth strategy for its cable
business include:
Consolidating and Expanding Regional System Clusters
By acquiring and developing systems in geographic proximity, the Company
realizes significant operating efficiencies through the consolidation of
managerial, administrative and technical functions. The Company has
consolidated virtually all administrative operations of its systems, including
customer service, service call
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dispatching, marketing, human resources, advertising sales and government
relations into regional offices. Regional clustering of systems also
facilitates a more uniform, cost-effective delivery of customer service, with
more advanced telecommunications equipment and software available to customer
service representatives than would otherwise be economically feasible in
smaller systems. The Company also believes that its long operating history
within its regional clusters contributes to its consistency in operating
margins, and capital efficiency in spending on plant upgrades and enhances
branding of its services. Pro forma for the Recent and Pending Acquisitions
and for the Western New York Joint Venture, 89% of the total subscribers for
the Systems (as defined) will be located in the five largest regional
clusters, each with a minimum of 240,000 subscribers per cluster as of March
31, 1998.
Upgrading Cable Plant for New Digital Services
The Company considers technological innovation to be an important component
of the Company's service offerings and customer satisfaction. The Company's
upgrades incorporate an aggressive deployment of fiber to achieve an average
of 180 homes passed per fiber node. This results in significant improvements
in system reliability and operating efficiency. This upgrade of its network
infrastructure will add channel capacity and increase digital transmission
capabilities. These improvements will enable the Company to continue its
introduction of additional services, such as digital video, high speed
internet access service and impulse-ordered pay-per-view programming, all of
which expand customer choices and provide a potential for increased revenue
per subscriber. Management believes the Company is a leader in the cable
industry in the deployment of fiber optic cable, having one of the most
advanced cable network infrastructures. As of March 31, 1998 approximately
55.2% of Adelphia's Company Systems homes passed had cable plant bandwidth
capacity of 550 MHz or 750 MHz with 40.1% of its plant miles being two-way
capable. The Company believes that approximately 95% of its Company Systems
will have a bandwidth capacity of greater than 550 MHz by the end of the year
2000, with 100% of these plant miles being two-way capable.
Developing Superior Customer Service and Marketing Capabilities
The Company believes that maintaining high quality customer service
standards is a critical element to retaining and attracting new subscribers
and is an integral prerequisite to marketing new advanced communications
services. The Company has developed and implemented customer service policies
and benchmarks that exceed national standards proposed by the National Cable
Television Association and the FCC and systematically measures customer
satisfaction levels to ensure that quality standards are met. The Company's
marketing strategy with respect to digital video and high speed internet
access is to make new services broadly available in all its markets, as early
as technically feasible, typically in advance of targeted promotional
campaigns, in order to meet the demand of early adopters and enhance customer
perception of the Company's technical leadership in the delivery of new
services.
VIDEO SERVICES
The Company offers its subscribers a variety of basic and pay video and
information programming packages. Services offered vary from system to system
due to differences in channel capacity, viewer demand and regulatory
requirements. The basic service offered by the Company includes signals of
local and distant television broadcast stations carrying broadcast networks,
satellite-delivered non-broadcast channels (which offer programming such as
news, sports, family entertainment, music, weather, shopping, etc.) and public
governmental and educational access channels.
The Company's expanded basic service offering, marketed as the Cable Value
package, includes the basic service channel offerings plus certain satellite
delivered networks designated by the FCC as CPS tier channels, including CNN,
ESPN, USA Network, TNT, Nickelodeon and MTV. Rates for basic and CPS services
are currently subject to governmental regulation.
The Company also offers its subscribers premium programming services, either
on an individual channel "a la carte" basis or as part of a premium service
package. These services are satellite-delivered channels such as HBO,
Showtime, and Cinemax that provide feature films, live sporting events, taped
and live concerts and
S-32
<PAGE>
other programming. Certain of the Company's systems also offer pay-per-view
channels, which allows the subscriber to order special events or movies on a
per-event basis. Rates for premium services and pay-per-view services
currently are not subject to governmental regulation.
The Company began offering digital video services in December 1997 in
substantially all its market areas. Digital television incorporates
computerized technology that defines, transmits and sorts information that
comprise a television signal. The digital technology "compresses" the signals,
allowing for the transmission of up to 12 channels of programming in the space
currently used to transmit one analog channel. In combination with cable plant
capacity upgrades, the deployment of digital compression technology allows the
Company to provide customers expanded programming diversity and improved
picture quality while increasing technical reliability of the service. The
Company's digital television service package generally is comprised of
multiplex premium channels, enhanced pay-per-view options with 18-24 movie
channels, 40 channels of CD-quality music, and an interactive on-screen
program guide to assist the viewer in navigating the new digital choices.
Digital television service is available to subscribers who buy or lease a
digital converter from the Company. The Company believes the availability of
two-way capable converters, expected in late 1998, will substantially increase
the range of services that can be delivered to subscribers including internet
access, e-mail and IP telephony.
RECENT SYSTEM DEVELOPMENT AND CLUSTER EXPANSION
The Company has expanded and consolidated its regional clusters in recent
years through a combination of outright acquisitions of contiguous systems,
joint ventures, system exchanges, and internal subscriber growth from existing
systems. The Company has focused on acquiring and developing systems in
markets which have favorable historical growth trends. The Company believes
that the strong household growth trends in its Systems' market areas are a key
factor in positioning itself for future growth in basic subscribers. During
fiscal 1996, 1997 and 1998, the Company acquired cable systems serving 35,423,
78,314 and 63,886 basic subscribers, respectively, for an aggregate purchase
price of approximately $60.5 million, $144.8 million and $106.9 million,
respectively, primarily to expand its clusters in its existing market areas.
For further information regarding acquisitions by the Company from April 1,
1995 to March 31, 1998, see Note 1 to Adelphia's consolidated financial
statements.
On March 2, 1998, Adelphia entered into a definitive agreement to acquire
cable television systems serving approximately 62,000 subscribers in
Connecticut and Virginia from Marcus Cable, Inc. for approximately $150.0
million in cash. The Company expects this acquisition to close during fiscal
year 1999.
On April 1, 1998, Adelphia and its affiliates and Time Warner and an
affiliate traded certain cable systems. Adelphia exchanged systems serving
64,400 subscribers primarily in the Mansfield, Ohio area for systems owned by
Time Warner serving 70,200 subscribers adjacent to systems owned or managed by
Adelphia in Virginia, New England and New York.
On June 5, 1998, the Company acquired cable systems from Cablevision
Systems. As of the acquisition date, these systems served approximately 11,200
subscribers in Wellsville and Penn Yan, New York and were purchased for an
aggregate purchase price of approximately $11.5 million.
On July 15, 1998 Olympus acquired cable systems from Jones Intercable, Inc.
serving approximately 46,000 subscribers in and around Ft. Myers, Florida for
a purchase price of approximately $110.0 million.
On July 31, 1998, Adelphia closed a transaction with TCI to form the Western
New York Joint Venture. Adelphia contributed its Western New York and Lorain,
Ohio systems, serving approximately 298,000 subscribers; Empire; and $440.0
million in debt. Subsidiaries of TCI contributed to the joint venture their
cable systems in Buffalo, New York; Erie, Pennsylvania; and Ashtabula and Lake
County, Ohio, totaling approximately 171,000 subscribers and $228.0 million in
debt. In exchange for the respective contribution of assets, Adelphia and TCI
hold a 66.7% and 33.3% interest, respectively, in the partnership. In
connection with
S-33
<PAGE>
the transaction, Adelphia also issued 50,000 shares of its Class A Common
Stock to the Rigas Family to acquire their interest in Empire. The joint
venture became a party to one of Adelphia's subsidiaries' revolving credit
facilities, and repaid the TCI contributed debt with borrowings under that
revolving credit facility. Adelphia will manage the partnership and will
consolidate the partnership's results of operations for financial reporting
purposes beginning on the acquisition date.
In addition, the Company and Olympus have signed agreements to acquire cable
systems serving 9,950 and 20,300 subscribers, for a purchase price of $18.0
million and $33.4 million, respectively.
The Company will continue 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 market
areas or in locations that can serve as the basis for new market areas, either
directly or indirectly through joint ventures, where appropriate.
MARKET AREAS
Adelphia's owned and managed systems are clustered in eight regional market
areas. The Company Systems, Olympus Systems, and Managed Systems
(collectively, the "Systems"), as adjusted for the Recent and Pending
Acquisitions and the Western New York Joint Venture, will encompass the
following market areas in the eastern portion of the United States:
<TABLE>
<CAPTION>
MARKET AREA LOCATION OF SYSTEMS
----------- -------------------
<C> <S>
Southeastern Florida Portions of southern Dade, Citrus, Orange, Hillsborough, Palm Beach, Martin and St. Lucie Counties
and Hilton Head, South Carolina
Western New York City of Buffalo and surrounding areas and the adjacent Niagara Falls area and several communities in
the southern tier of New York and portions of northwestern Pennsylvania and northeastern Ohio.
Virginia Winchester, Charlottesville, Staunton, Richland, Martinsville, Blacksburg, Salem and surrounding
communities in Virginia, and South Boston and Elizabeth City, North Carolina
Western Pennsylvania Suburbs of Pittsburgh and several communities in western Pennsylvania, Maryland and West Virginia
New England Cape Cod communities, South Shore communities (the area between Boston and Cape Cod, Massachusetts),
Martha's Vineyard, Massachusetts; and Bennington, Burlington, Rutland and Montpelier, Vermont and
surrounding communities in Vermont, New Hampshire and New York, and Seymour, Connecticut
Eastern Pennsylvania Suburbs of Philadelphia and suburbs of Scranton
Ohio Suburbs of Cleveland, Mt. Vernon and portions of Kalamazoo County, Michigan
Coastal New Jersey Ocean County, New Jersey
</TABLE>
S-34
<PAGE>
The following table summarizes by market area the basic subscribers for the
Systems:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------
PRO FORMA(A)
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
COMPANY SYSTEMS:
Western New York...... 228,868 233,519 237,111 279,345 300,016 494,818
New England........... 120,201 181,194 183,819 228,649 233,783 304,076
Virginia.............. 155,335 165,761 174,019 180,285 204,736 266,426
Western Pennsylvania.. 114,289 115,685 159,272 159,355 179,773 179,773
Coastal New Jersey.... 93,237 96,228 98,304 98,952 101,648 101,648
Ohio.................. 91,979 95,496 97,917 99,843 100,897 36,467
Eastern Pennsylvania.. 84,258 87,183 89,262 91,985 94,187 94,187
--------- --------- --------- --------- --------- ---------
TOTAL............... 888,167 975,066 1,039,704 1,138,414 1,215,040 1,477,395
========= ========= ========= ========= ========= =========
OLYMPUS SYSTEMS:
Southeastern Florida.. 239,357 306,317 403,901 416,760 501,722 568,981
========= ========= ========= ========= ========= =========
TOTAL COMPANY AND
OLYMPUS SYSTEMS........ 1,127,524 1,281,383 1,443,605 1,555,174 1,716,762 2,046,376
========= ========= ========= ========= ========= =========
MANAGED SYSTEMS:
Southeastern Florida.. 75,164 165,467 176,499 177,503 116,880 116,880
Western Pennsylvania.. 24,074 24,462 23,956 25,231 62,618 62,618
Virginia.............. 31,408 42,163 43,770 43,850 55,563 55,563
Eastern Pennsylvania.. 22,026 23,038 23,753 24,213 24,348 24,348
Western New York...... 42,010 42,924 41,053 42,469 -- --
--------- --------- --------- --------- --------- ---------
TOTAL............... 194,682 298,054 309,031 313,266 259,409 259,409
========= ========= ========= ========= ========= =========
TOTAL SYSTEMS:
Southeastern Florida.. 314,521 471,784 580,400 594,263 618,602 685,861
Western New York...... 270,878 276,443 278,164 321,814 300,016 494,818
Virginia.............. 186,743 207,924 217,789 224,135 260,299 321,989
Western Pennsylvania.. 138,363 140,147 183,228 184,586 242,391 242,391
New England........... 120,201 181,194 183,819 228,649 233,783 304,076
Eastern Pennsylvania.. 106,284 110,221 113,015 116,198 118,535 118,535
Coastal New Jersey.... 93,237 96,228 98,304 98,952 101,648 101,648
Ohio.................. 91,979 95,496 97,917 99,843 100,897 36,467
--------- --------- --------- --------- --------- ---------
TOTAL............... 1,322,206 1,579,437 1,752,636 1,868,440 1,976,171 2,305,785
========= ========= ========= ========= ========= =========
</TABLE>
- --------
(a) Gives effect to the Western New York Joint Venture and the Recent and
Pending Acquisitions.
The five year average annual growth rate through March 31, 1998 of
subscribers for the Company Systems, Olympus Systems and Managed Systems was
2.3%, 6.3% and 2.2%, respectively. The five year average annual growth rate
for total Systems was 3.1%. The annual growth rate for the year ended March
31, 1998 for the Company Systems, Olympus Systems and Managed Systems was
1.1%, 3.7% and 1.2%. The annual growth rate for the year ended March 31, 1998
for total Systems was 1.7%.
Technological Developments
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. The result is significant increases in
network capacity, digital capability, two-way communication and network
reliability.
S-35
<PAGE>
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 1,000 homes passed per fiber optic node. Approximately 75% of the system
will be upgraded to 750 MHz with the balance to remain at 550 MHz. The
upgraded system will be completely addressable and provide two-way
communication capability. Increased bandwidth will enable the Company to offer
additional video programming services. A portion of the bandwidth will be
allocated to the new service offerings such as two-way data, telephony and
video-on-demand. The Company believes this combination of bandwidth and the
relatively low homes passed per fiber node will provide adequate capacity and
flexibility to offer any and all of the existing and anticipated services into
the foreseeable future with minimal additional capital expenditures. By the
end of Fiscal 1999, approximately 50% of customers will be served by two way
cable plant.
The upgraded Systems, on average, will include only two active pieces of
equipment between the headend and the home. Limiting the number of active
pieces of equipment combined with the small number of homes per fiber node
reduces the potential for technical failure and the number of customers
affected by such a failure, all of which provides increased reliability to the
customers.
In addition to the activities described above, the Company has made a
substantial commitment to technological development as a member of Cable
Television Laboratories, Inc., a not-for-profit research and development
company serving the cable industry.
The following table sets forth information regarding plant capacity, cable
plant miles, fiber route miles, and fiber nodes for the Systems by cluster:
<TABLE>
<CAPTION>
PERCENTAGE OF HOMES PASSED PERCENTAGE HOMES
-------------------------------- OF PLANT PASSED
FIBER MILES PER
550 AND PLANT ROUTE TWO-WAY FIBER FIBER
550 MHZ 750 MHZ 750 MHZ MILES MILES CAPABLE NODES NODE
-------- -------- -------- ------ ----- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMPANY SYSTEMS:
Western New York........ 34.7% 35.2% 69.9% 4,668 1,276 59.9% 987 408
New England............. 35.1 14.7 49.8 5,683 982 20.4 567 578
Virginia................ 25.8 4.3 30.1 5,451 454 22.9 202 1,270
Western Pennsylvania.... 18.6 17.5 36.1 3,240 231 17.0 196 1,262
Ohio.................... 16.0 26.2 42.2 2,918 455 54.9 401 438
Coastal New Jersey...... 21.4 75.2 96.6 1,584 338 87.7 470 276
Eastern Pennsylvania.... 36.5 45.2 81.7 1,832 504 78.7 567 230
-------- -------- -------- ------ ----- ---- ----- -----
TOTAL................. 28.3% 26.9% 55.2% 25,376 4,240 40.1% 3,390 493
======== ======== ======== ====== ===== ==== ===== =====
OLYMPUS SYSTEMS:
Southeastern Florida.... 11.6% 13.1% 24.7% 8,774 521 14.2% 381 1,982
======== ======== ======== ====== ===== ==== ===== =====
COMPANY AND OLYMPUS
SYSTEMS................ 23.0% 22.6% 45.6% 34,150 4,761 33.5% 3,771 643
======== ======== ======== ====== ===== ==== ===== =====
MANAGED SYSTEMS:
Southeastern Florida.... 33.0% 36.5% 69.5% 1,012 107 48.2% 86 1,690
Virginia................ 26.6 3.2 29.8 2,326 167 32.0 151 511
Western Pennsylvania.... 15.0 42.8 57.8 1,668 234 22.4 211 381
Eastern Pennsylvania.... 1.9 62.5 64.4 454 -- 63.7 -- --
-------- -------- -------- ------ ----- ---- ----- -----
TOTAL................. 22.1% 27.0% 49.1% 5,460 508 34.7% 448 775
======== ======== ======== ====== ===== ==== ===== =====
TOTAL SYSTEMS:
Southeastern Florida.... 13.5% 15.2% 28.7% 9,786 628 17.7% 467 1,947
Western New York........ 34.7 35.2 69.9 4,668 1,276 59.9 987 408
Virginia................ 26.1 3.9 30.0 7,777 621 25.6 353 945
New England............. 35.1 14.7 49.8 5,683 982 20.4 567 578
Western Pennsylvania.... 17.4 25.6 43.0 4,908 465 18.8 407 805
Ohio.................... 16.0 26.2 42.2 2,918 455 54.9 401 438
Eastern Pennsylvania.... 29.1 48.9 78.0 2,286 504 75.7 567 293
Coastal New Jersey...... 21.4 75.2 96.6 1,584 338 87.7 470 276
-------- -------- -------- ------ ----- ---- ----- -----
TOTAL................. 22.9% 23.1% 46.1% 39,610 5,269 33.7% 4,219 657
======== ======== ======== ====== ===== ==== ===== =====
</TABLE>
S-36
<PAGE>
HIGH-SPEED INTERNET ACCESS
The Company began offering its customers high-speed internet access service
through cable modems in July 1997. Marketed under the name "Power Link," the
Company's high-speed data service, which includes residential, institutional,
and business service offerings, constitutes an alternative to the traditional
slower speed data service offerings available through ISPs. Power Link offers
customers speeds greater than those available through a T1 line, at costs that
compare to a typical ISP plus a second telephone line.
The Company's deep fiber design allows the use of the expanded bandwidth
potential of digital compression technology for cable data and video services.
High-speed data internet access services are now available at speeds far in
excess of that which is currently available via traditional telephone and ISDN
modems. In addition, using a high-speed cable modem and special ethernet card
allows the user to bypass telephone lines, does not require the user to log
on, and allows for multiple sessions or connections to multiple services
simultaneously.
The Company also offers high-speed internet access through the use of one-
way cable modems, which provide the high speeds of broadband on the data
downstream and utilize a telephone line return path. One-way cable modems
enable the Company to offer the high-speed data service to 100% of its
customers, while completing the system buildout of the two-way broadband
plant.
The Company also offers traditional dial-up internet access for those
customers who initially prefer this method of internet access to the higher
speeds of our broadband network. This establishes the Company as a full
service internet provider and creates a customer base which can be upgraded to
the high-speed service in the future.
IP TELEPHONY (PACKET TELEPHONY)
Currently the Company is offering residential telephone service as part of a
technical trial in Buffalo, New York. This service uses the same basic
switched-circuit architecture as the incumbent local exchange carriers
("ILECs") with the exception that calls are carried to and from the user's
home from the ILECs central office over the Company's hybrid fiber-coaxial
("HFC") network.
Hyperion, Adelphia's majority owned CLEC, owns switches in six of the
Company's regional clusters and is collocated with 113 local serving offices
of ILECs. The Company believes this will enhance its ability to provide
residential telephony service in the future. The Company expects to use its
HFC network to provide IP telephony or packet telephony to its cable
customers. Packet telephony is an emerging technology that compresses voice
streams into digital packets for transmission over cable networks, such as
those owned by the Company. The principal difference between cable IP
telephony and traditional wireline telecommunications service is that the
cable IP digital transmission does not require a dedicated circuit to complete
a call. An IP transmitted call is broken down into a series of data
transmissions (packets) that are sent through the network, allowing other
transmissions to reach their destinations simultaneously. The Company believes
this technology will be significantly more efficient and cost-effective than
its current telephony system.
OTHER REVENUE SOURCES
Adelphia offers paging services through its wholly owned subsidiary, Page
Time, Inc., which provides one-way messaging services to the Company's Systems
via resale arrangements with existing paging network operators. The Company
plans to offer two-way messaging services to its customers in the near future.
In July 1997, Adelphia began selling long distance telephone service on a
resale basis. Services offered include state-to-state and in-state long
distance, as well as 800 service, international calling, calling card services
and debit card services. The Company's sales effort is focused on the consumer
market and emphasizes the simplicity and savings of one low monthly rate
available 24 hours a day, 7 days a week.
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<PAGE>
In addition to monthly subscription fees, the Company derives ancillary
revenue from the sale of local spot advertising time on locally-originated
programming and satellite-delivered networks. Currently the Company inserts
advertising on its basic and expanded basic satellite-delivered channels on
its system. Advertising rates charged to advertisers are based on the
programming service on which the advertisement is shown, the volume of ad time
sold, and the time of day during which the advertisement is broadcast.
Advertising revenues represented approximately 5% of the total revenues for
the fiscal year ended March 31, 1998. The Company also derives revenue from
affiliation with home shopping networks, which are included in the basic
programming package, whereby the Company receives commissions from
subscriber's product purchases from the networks.
SUBSCRIBER SERVICES AND RATES
The Company's revenues are derived principally from monthly subscription
fees for various services. Rates to subscribers vary in accordance with the
type of service selected. Although services vary across franchise areas
because of differences in plant capabilities, each of the areas typically
offer services at monthly prices ranging as follows:
<TABLE>
<CAPTION>
SERVICE RATE RANGE
------- --------------------------
<S> <C>
Basic Cable Television............................ $ 7.00 -- $17.00
Cable Value Cable Television...................... $ 9.00 -- $25.00
Premium Cable Television.......................... $ 9.00 -- $14.00
High Speed Internet Access........................ $35.00 -- $45.00
Dial-up Internet Access........................... $20.00
Paging............................................ $ 9.00 -- $30.00
Long Distance..................................... $4.95 plus $.10 per minute
</TABLE>
An installation fee, which the Company may wholly or partially waive during
a promotional period, is usually charged to new subscribers. Subscribers are
free to terminate services at any time without charge, but often are charged a
fee for reconnection or change of service.
For a discussion of FCC rate regulation and related developments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Regulatory and Competitive Matters."
FRANCHISES
The 1984 Cable Act provides that cable operators may not offer cable service
to a particular community without a franchise unless such operator was
lawfully providing service to the community on July 1, 1984 and the
franchising authority does not require a franchise. The Systems operate
pursuant to franchises or other authorizations issued by governmental
authorities, substantially all of which are nonexclusive. Such franchises
or authorizations awarded by a governmental authority generally are not
transferable without the consent of the authority. As of March 31, 1998, the
Company held 536 franchises, Olympus held 144 franchises and the Managed
Systems held 121 franchises. Most of these franchises can be terminated prior
to their stated expiration by the relevant governmental authority, after due
process, for breach of material provisions of the franchise.
Under the terms of most of the Company's franchises, a franchise fee
(generally ranging up to 5% of the gross revenues of the cable system) is
payable to the governmental authority. For the past three years, franchise fee
expense incurred by the Company has averaged approximately 2.5% of gross
system revenues.
The franchises issued by the governmental authorities are subject to
periodic renewal. In renewal hearings, the authorities generally consider,
among other things, whether the franchise holder has provided adequate service
and complied with the franchise terms. In connection with a renewal, the
authority may impose different and more stringent terms, the impact of which
cannot be predicted. To date, all of the Company's material franchises have
been renewed or extended, at or effective upon their stated expiration,
generally on modified terms. Such modified terms have not been materially
adverse to the Company.
S-38
<PAGE>
The Company believes that all of its material franchises are in good
standing. From time to time, the Company notifies the franchising authorities
of the Company's intent to seek renewal of the franchise in accordance with
the procedures set forth in the 1984 Cable Act. The 1984 Cable Act process
requires that the governmental authority consider the franchise holder's
renewal proposal on its own merits in light of the franchise holder's past
performance and the community's needs and interests, without regard to the
presence of competing applications. See "Legislation and Regulation." The 1992
Cable Act alters the administrative process by which operators utilize their
1984 Cable Act franchise renewal rights. Such changes could make it easier in
some instances for a franchising authority to deny renewal of a franchise.
COMPETITIVE LOCAL EXCHANGE SERVICE OPERATIONS
The Company is engaged in the facilities-based provision of local
telecommunication services as a CLEC through Hyperion, its 66% owned,
publicly-traded subsidiary. Founded in 1991 by Adelphia, Hyperion currently
operates 22 state-of-the-art fiber optic networks. These networks are located
in the eastern U.S. encompassing 46 cities and include 5,363 route miles of
fiber optic cable. Based on route mile of fiber constructed, Hyperion is among
the largest independent CLECs in the United States.
GROWTH STRATEGY
Hyperion's objective is to be the leading local telecommunications service
provider to businesses, governmental and educational end users, value added
resellers ("VARs"), ISPs and IXCs within its markets. To achieve this
objective, Hyperion has pursued a regionalized facilities-based strategy to
provide extensive, high capacity network coverage and to broaden the range of
telecommunications products and services it offers to targeted customers. The
principal elements of Hyperion's growth strategy include focusing on medium
and large businesses, governmental and educational end users, and other
telecommunications providers; increasing the size and scope of network
clusters through plans, over the next eighteen months, to complete development
and construction of 14 new networks serving 29 additional cities within the
current clusters, as sole owner/operator or through partnerships or long-term
fiber lease agreements; providing switched voice, enhanced services and long
distance access on its own fiber optic networks, which Hyperion believes can
better control the provisioning, delivery and monitoring of its services as
well as increase its operating margins; and providing a bundled package of
telecommunications services which Hyperion believes a significant portion of
business, governmental and educational customers prefer.
SERVICES AND TARGETED CUSTOMERS
Hyperion intends to offer a complete range of telecommunications services to
its customers in all of its markets. Hyperion's current service offerings
include local switched dialtone, long distance, dedicated access and
enhanced services such as frame relay, high speed internet access and video
conferencing. Hyperion also plans to become an ISP in all of its markets, and
expects to provide such services in a majority of its markets during 1998.
Hyperion has begun selling long distance services pursuant to a resale
agreement with IXC Communications, Inc. and expects to begin offering
facilities-based long distance services through the regional interconnection
of Hyperion's networks in the near future.
Hyperion's targeted customers include medium and large businesses,
governmental and educational end users, and other telecommunications service
providers, such as VARs, ISPs and IXCs. Management believes that Hyperion's
existing 22 networks represent an addressable market opportunity of
approximately 6.8 million business lines or approximately $13.3 billion
annually, substantially all of which is currently serviced by LECs and IXCs.
As of March 31, 1998, Hyperion served customers through a dedicated sales
force of approximately 128 highly trained professionals focused on selling
Hyperion's portfolio of service offerings. Hyperion expects to increase its
marketing efforts by doubling the size of its current sales force during
fiscal 1999. Management believes that a significant competitive advantage over
other CLECs is Hyperion's ability to utilize its broad geographic networks and
extensive network clusters to offer a single source solution for all of its
customers' telecommunications needs principally over its own regional network
clusters.
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<PAGE>
Hyperion's existing networks have typically been developed by partnering
with a Local Partner who generally owns or controls extensive conduits and
rights-of-way. In all but three of the existing networks, Hyperion retains at
least a 50% equity stake in the respective operating companies which own
Hyperion's existing 22 networks ("Hyperion Operating Companies"). In all of
Hyperion Operating Companies, Hyperion is responsible for the design,
management and operation of the Hyperion Operating Companies' networks
pursuant to management agreements. Management believes that its partnering
strategy provides Hyperion with the following significant competitive
advantages over other CLECs: (i) by sharing the cost of construction and
utilizing the rights-of-way controlled by the Local Partner, Hyperion has been
able to build its networks more quickly and at a lower cost and (ii) by
partnering with Local Partners that typically operate in a broad geographic
region, Hyperion is frequently able to expand its partnering agreements into
multiple contiguous markets, thereby supporting its clustering strategy.
Hyperion has increased, and intends to continue to increase, its ownership
interests in Hyperion Operating Companies when it can do so on attractive
economic terms. To date, this goal has been facilitated by the substantial
completion of a number of Hyperion's networks, along with the desire of
certain Local Partners to reduce their telecommunications investments and
focus on their core cable or utility operations. For Hyperion Operating
Companies in which Hyperion does not own a majority interest, partnership
agreements generally provide for rights of first refusal or buy/sell
arrangements enabling Hyperion to have an opportunity to acquire additional
equity interests or sell its equity interests in the network.
The following is an overview of the Hyperion networks and respective
ownership interests as of March 31, 1998.
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED DATE HYPERION
HYPERION NETWORKS OF OPERATION(A) INTEREST LOCAL PARTNER
- ----------------- --------------- -------- -------------------
<S> <C> <C> <C>
Northeast Cluster
Vermont............................ 11/94 100.0% --
Syracuse, NY....................... 8/92 100.0 --
Buffalo, NY........................ 1/95 100.0 --
Albany, NY......................... 12/98 100.0 --
Mid-Atlantic Cluster
Charlottesville, VA................ 11/95 100.0 --
Scranton/Wilkes-Barre, PA.......... 6/98 100.0 --
Harrisburg, PA..................... 4/95 100.0 --
Morristown, NJ..................... 7/96 100.0 --
New Brunswick, NJ.................. 11/95 100.0 --
Philadelphia, PA................... 8/96 50.0 PECO Energy
Allentown/Bethlehem/Easton/Reading,
PA................................ 6/98 50.0 PECO Energy
York, PA........................... 5/97 50.0 Susquehanna Cable
State College/Altoona, PA.......... 10/98 50.0 Allegheny Energy
Richmond, VA....................... 9/93 37.0 MediaOne
Mid-South Cluster
Lexington, KY...................... 6/97 100.0 --
Louisville, KY..................... 3/95 100.0 --
Nashville, TN...................... 11/94 95.0 InterMedia Partners
Baton Rouge, LA.................... 12/97 50.0 Entergy
Jackson, MS........................ 12/97 50.0 Entergy
Little Rock, AR.................... 12/97 50.0 Entergy
Other Networks
Wichita, KS........................ 9/94 49.9 Gannett
Jacksonville, FL................... 9/92 20.0 MediaOne
WEIGHTED AVERAGE OWNERSHIP(b)...... -- 77.0% --
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC Point of Presence, (ii) the network is capable of accepting traffic
from IXCs and end users, (iii) the Company's central office is fully
functional and (iv) the initial network SONET fiber ring has been
completed.
(b) Based upon gross property, plant and equipment of Hyperion and the
Hyperion Operating Companies as of March 31, 1998.
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<PAGE>
Cluster Statistics(a)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MARCH 31,
ROUTE FIBER BUILDINGS LEC-COS 1998
CLUSTER MILES MILES CONNECTED COLLOCATED REVENUES
- ------- ----- ------- --------- ---------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast........................ 1,530 65,712 356 14 $ 8,481
Mid-Atlantic..................... 1,914 91,872 613 61 7,981
Mid-South........................ 1,142 54,792 589 21 2,506
Other Networks................... 777 37,296 351 17 9,353
----- ------- ----- --- -------
Total.......................... 5,363 249,672 1,909 113 $28,321
===== ======= ===== === =======
</TABLE>
- --------
(a) Non-financial information is as of March 31, 1998 and includes networks
under construction.
RECENT DEVELOPMENTS
Hyperion recently entered into a series of agreements with Qwest
Communications, Williams Communications and several other fiber optic network
providers that will allow the Company to significantly increase its presence
in the eastern half of the United States. These agreements, totalling $107.0
million to be paid by Hyperion over the next two years, provide Hyperion the
ownership or an indefeasible right of use (IRU) to over 8,100 route miles of
fiber optic cable. The Company believes this will allow Hyperion to expand its
business strategy to include on-net provisioning of regional long distance,
internet and data communications and to cost-effectively interconnect most of
its existing networks with each other and with approximately 50 additional
markets by the end of 2001.
OTHER NON-CONSOLIDATED INVESTMENTS
In addition to Olympus, Adelphia holds investments in various entities that
are not consolidated. Adelphia holds preferred equity interests and capital
funding notes in Niagara Frontier Hockey, L.P., which holds the NHL Buffalo
Sabres franchise and a two-thirds interest in the Marine Midland Arena complex
in Buffalo, New York. Adelphia also has investments in SuperCable ALK
International, a cable system operator in Venezuela, certain programming
ventures and mobile communications. See Note 1 to Adelphia's consolidated
financial statements.
COMPETITION
Although the Company and the cable television industry have historically
faced modest competition, the competitive landscape is changing and
competition will increase. The Company believes that the increase in
competition within its communities will occur gradually over a period of time.
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered program services formerly
available only to cable television subscribers. Most satellite-distributed
program signals are being electronically scrambled to permit reception only
with authorized decoding equipment, generally at a cost to the viewer. From
time to time, legislation has been introduced in Congress which, if enacted
into law, would prohibit the scrambling of certain satellite-distributed
programs or would make satellite services available to private earth stations
on terms comparable to those offered to cable systems. Broadcast television
signals are being made available to owners of earth stations under the
Satellite Home View Copyright Act of 1988, which became effective January 1,
1989 for a six-year period. This Act establishes a statutory compulsory
license for certain transmissions made by satellite owners to home satellite
dishes for which carriers are required to pay a royalty fee to the Copyright
Office. This Act has been extended by Congress until December 31, 1999. The
1992 Cable Act enhances the right of cable competitors to purchase
nonbroadcast satellite-delivered programming. See "Legislation and
Regulation--Cable Television/Federal Law and Regulation."
Video programming is now being delivered to individuals by high-powered DBS
satellite utilizing video compression technology. This technology has the
capability of providing more than 100 channels of programming over a single
high-powered DBS satellite with significantly higher capacity available if
multiple satellites are placed in the same orbital position. Video compression
technology is being used by cable operators
S-41
<PAGE>
in the future to similarly increase their channel capacity. DBS service can be
received virtually anywhere in the United States through the installation of a
small rooftop or side-mounted antenna, and it is more accessible than cable
television service where a cable plant has not been constructed or where it is
not cost effective to construct cable television facilities. DBS service is
being heavily marketed on a nationwide basis by several service providers. One
DBS service provider is proposing to deliver at least some local television
stations via satellite, thus lessening the distinction between cable
television and DBS service.
Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive agreements with apartment building owners or homeowners'
associations which preclude franchised cable television operators from serving
residents of such private complexes. However, the 1984 Cable Act gives
franchised cable operators the right to use existing compatible easements
within their franchise areas upon nondiscriminatory terms and conditions.
Accordingly, where there are preexisting compatible easements, cable operators
may not be unfairly denied access or discriminated against with respect to the
terms and conditions of access to those easements. There have been conflicting
judicial decisions interpreting the scope of the access right granted by the
1984 Cable Act, particularly with respect to easements located entirely on
private property. Further, while a franchised cable television system
typically is obligated to extend service to all areas of a community
regardless of population density or economic risk, a SMATV system may confine
its operation to small areas that are easy to serve and more likely to be
profitable. Under the 1996 Act, SMATV systems can interconnect non-commonly
owned buildings without having to comply with local, state and federal
regulatory requirements that are imposed upon cable systems providing similar
services, as long as they do not use public rights-of-way. The U.S. Copyright
Office has concluded that SMATV systems are "cable systems" for purposes of
qualifying for the compulsory copyright license established for cable systems
by federal law.
The FCC has authorized a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used by the cable television industry.
The FCC also has initiated a new rulemaking proceeding looking toward the
allocation of frequencies in the 28 Ghz range for a new multi-channel wireless
video service which could make 98 video channels available in a single market.
It cannot be predicted at this time whether competitors will emerge utilizing
such frequencies or whether such competition would have a material impact on
the operations of cable television systems.
The FCC has recently auctioned a sizable amount of spectrum in the 28 and 31
Ghz bands for use by a new wireless service, LMDS, which among other uses, can
deliver over 100 channels of digital programming directly to consumers' homes.
The extent to which the winning licenses in this service will use this
spectrum in particular regions of the country to deliver multichannel video
programming to subscribers, and therefore provide competition for franchised
cable systems, is at this time uncertain.
Hyperion operates in a highly competitive environment and has no significant
market share in any market in which it operates. In each of the markets served
by Hyperion's networks, the services offered by Hyperion compete principally
with the services offered by the incumbent LEC serving that area. Incumbent
LECs have long-standing relationships with their customers, have far greater
technical and financial resources and provide services that an Hyperion
Operating Company may not currently be authorized by State Public Utility
Commission ("PUCs") to offer. See "Legislation and Regulation--Cable
Television/State and Local Regulation." Following the enactment of the 1996
Act, there has been significant merger activity among the RBOCs which will
result in competitors with even greater financial resources and geographic
scope than currently faced by the Company. In addition, in many markets, the
incumbent LEC currently is excused from paying license or franchise fees or
pays fees materially lower than those required to be paid by the Hyperion
Operating Companies.
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<PAGE>
While new business opportunities will be made available to Hyperion through
the 1996 Act and other federal and state regulatory initiatives, regulators
are likely to provide the incumbent LECs with an increased degree of
flexibility with regard to pricing of their services as competition increases.
If the incumbent LECs elect to lower their rates and can sustain lower rates
over time, this may adversely affect the revenues of the Hyperion Operating
Companies and Hyperion by placing downward pressure on the rates the Hyperion
Operating Companies can charge.
Competition for Hyperion's and the Hyperion Operating Companies' services is
based on price, quality, network reliability, service features, salesmanship
and responsiveness to customer needs. Hyperion believes that its management
expertise, coupled with its highly reliable, state-of-the-art digital networks
and back-office infrastructure, which offer significant transmission capacity
at competitive prices, will allow it to compete effectively with the incumbent
LECs, which may not yet have fully deployed fiber optic networks in many of
Hyperion's target markets. Hyperion believes that the Hyperion Operating
Companies price their services at a modest discount compared to the prices of
incumbent LECs while providing a higher level of customer service. Hyperion's
networks provide diverse access routing and redundant electronics, design
features not widely deployed by the incumbent LEC networks at the present
time. However, as incumbent LECs continue to upgrade their networks, any
competitive advantage held by Hyperion due to the superiority of its
facilities may diminish.
Other current or potential competitors of Hyperion's networks include other
CLECs, IXCs, wireless telecommunications providers, microwave carriers,
satellite carriers, private networks built by large end users and cable
television operators or utilities in markets in which Hyperion has not
partnered with one or the other. Substantially all of Hyperion's markets are
served by one or more CLECs other than Hyperion. Furthermore, the three major
IXCs have in the past announced ambitious plans to enter the local exchange
market. If this occurs, there is no assurance that these IXCs will choose to
obtain local services from the Operating Companies in Hyperion's markets. In
addition, recent sweeping changes enacted by the Telecommunications Act
facilitate entry by such competitors into local exchange and exchange access
markets, including requirements that incumbent LECs make available
interconnection and unbundled network elements to any requesting
telecommunications carrier at cost-based rates, as well as requirements that
LECs offer their services for resale. See "Legislation and Regulation--
Cable/Television/Federal Law and Regulation--Telecommunications Act of 1996."
Such requirements permit companies to enter the market for local
telecommunications services with little or no investment in new facilities,
thereby increasing the number of likely competitors in any given market, and
enable the IXCs to provide local services by reselling the service of the
incumbent LEC, or purchasing unbundled network elements, rather than using
services provided by Hyperion.
EMPLOYEES
At June 6, 1998, there were 3,895 full-time employees of the Company,
Olympus, and the Managed Partnerships, of which 115 employees were covered by
collective bargaining agreements at three locations. The Company considers its
relations with its employees to be good.
PROPERTIES
The Company's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and
decoding devices, headends and distribution systems and subscriber house drop
equipment for each of its cable television systems. The signal receiving
apparatus typically includes a tower, antenna, ancillary electronic equipment
and earth stations for reception of satellite signals. Headends, consisting of
associated electronic equipment necessary for the reception, amplification and
modulation of signals, are located near the receiving devices. The Company's
distribution system consists primarily of coaxial and fiber optic cables and
related electronic equipment. Subscriber devices consist of decoding
converters. The physical components of cable television systems require
maintenance and periodic upgrading to keep pace with technological advances.
S-43
<PAGE>
The Company's cables and related equipment are generally attached to utility
poles under pole rental agreements with local public utilities, although in
some areas the distribution cable is buried in underground ducts or trenches.
See "Legislation and Regulation--Cable Television/Federal Law and Regulation."
The Company owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices
in each of its market areas, and owns most of its service vehicles. The
Company also leases certain cable, operating and support equipment from a
corporation owned by members of the Rigas Family. All leasing transactions
between the Company and its officers, directors or principal stockholders, or
any of their affiliates, are, in the opinion of management, on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
Substantially all of the assets of Adelphia's subsidiaries are subject to
encumbrances as collateral in connection with the Company's credit
arrangements, either directly with a security interest or indirectly through a
pledge of the stock in the respective subsidiaries. See Note 3 to the
Adelphia's consolidated financial statements. The Company believes that its
properties, both owned and leased, are in good operating condition and are
suitable and adequate for the Company's business operations.
Hyperion's fiber optic cable, fiber optic telecommunications equipment and
other properties and equipment used in its networks, are owned or leased.
Fiber optic cable plant used in providing service is primarily on or under
public roads, highways or streets, with the remainder being on or under
private property. As of March 31, 1998, Hyperion's total telecommunications
equipment in service consists of fiber optic telecommunications equipment,
switching equipment, fiber optic cable, furniture and fixtures, leasehold
improvements and construction in progress.
The ownership interests held by Adelphia and other parties in Hyperion,
Olympus, the Western New York Joint Venture and other non-wholly owned
subsidiaries or investments may be subject to certain buy/sell, option or
similar agreements among the owners. Additionally, Hyperion has issued
warrants and options to third parties to acquire its common stock.
LITIGATION
There are no material pending legal proceedings, other than routine
litigation incidental to the business, to which the Company or any of its
subsidiaries is a part of or to which any of their property is subject.
S-44
<PAGE>
LEGISLATION AND REGULATION
The Company's existing and anticipated businesses are regulated by the FCC,
some state governments and most local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies may materially affect the Company's
existing and anticipated businesses. The following is a summary of federal
laws and regulations affecting the growth and operation of the Company's
existing and anticipated businesses and a description of certain state and
local laws.
CABLE TELEVISION/FEDERAL LAWS AND REGULATIONS
Cable Communications Policy Act of 1984 ("the 1984 Cable Act")
The 1984 Cable Act became effective on December 29, 1984. This federal
statute, which amended the Communications Act, created uniform national
standards and guidelines for the regulation of cable television systems.
Violations by a cable television system operator of provisions of the
Communications Act, as well as of FCC regulations, can subject the operator to
substantial monetary penalties and other sanctions. Among other things, the
1984 Cable Act affirmed the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more
franchises within their jurisdictions. It also prohibited non-grandfathered
cable television systems from operating without a franchise in such
jurisdictions. In connection with new franchises, the 1984 Cable Act provides
that in granting or renewing franchises, franchising authorities may establish
requirements for cable-related facilities and equipment, but may not establish
or enforce requirements for video programming or information services other
than in broad categories.
Cable Television Consumer Protection and Competition Act of 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This legislation
effected significant changes to the legislative and regulatory environment in
which the cable industry operates. It amended the 1984 Cable Act in many
respects. The 1992 Cable Act became effective on December 4, 1992, although
certain provisions, most notably those dealing with rate regulation and
retransmission consent, became effective at later dates. The legislation also
required the FCC to initiate a number of rulemaking proceedings to implement
various provisions of the statute. The 1992 Cable Act allows for a greater
degree of regulation on the cable industry with respect to, among other
things: (i) cable system rates for both basic and certain nonbasic services,
(ii) programming access and exclusivity arrangements, (iii) access to cable
channels by unaffiliated programming services, (iv) leased access terms and
conditions, (v) horizontal and vertical ownership of cable systems, (vi)
customer service requirements, (vii) franchise renewals, (viii) television
broadcast signal carriage and retransmission consent, (ix) technical
standards, (x) subscriber privacy, (xi) consumer protection issues, (xii)
cable equipment compatibility, (xiii) obscene or indecent programming and
(xiv) requiring subscribers to subscribe to tiers of service other than basic
service as a condition of purchasing premium services. Additionally, the
legislation encourages competition with existing cable systems by allowing
municipalities to own and operate their own cable systems without having to
obtain a franchise, preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area and prohibiting the common ownership of
cable systems and co-located Mutichannel Multipoint Distribution System
("MMDS") or SMATV systems. The 1992 Cable Act also precludes video programmers
affiliated with cable television companies from favoring cable operators over
competitors and requires such programmers to sell their programming to other
multichannel video distributors. This provision may limit the ability of cable
programming suppliers to offer exclusive programming arrangements to cable
television companies. A number of provisions in the 1992 Cable Act relating
to, among other things, rate regulation, have had a negative impact on the
cable industry and the Company's business.
Telecommunications Act of 1996
The 1996 Act significantly revised the federal regulatory structure. As it
pertains to cable television, the 1996 Act, among other things, (i) eliminates
the regulation of certain nonbasic programming services in 1999,
S-45
<PAGE>
(ii) expands the definition of effective competition, the existence of which
displaces rate regulation, (iii) eliminates the restriction against the
ownership and operation of cable systems by telephone companies within their
local exchange service areas and (iv) liberalizes certain of the FCC's cross-
ownership restrictions. The FCC has been conducting a number of rulemaking
proceedings in order to implement many of the provisions of the 1996 Act.
FCC REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations covering such areas as the
registration of cable systems, cross-ownership between cable systems and other
communications businesses, carriage of television broadcast programming,
consumer education and lockbox enforcement, origination cablecasting and
sponsorship identification, children's programming, the regulation of basic
cable service rates in areas where cable systems are not subject to effective
competition, signal leakage and frequency use, technical performance,
maintenance of various records, equal employment opportunity, and antenna
structure notification, marking and lighting. The FCC has the authority to
enforce these regulations through the imposition of substantial fines, the
issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. Furthermore, the 1992 Cable Act required the FCC to adopt
regulations covering, among other things, cable rates, signal carriage,
consumer protection and customer service, leased access, indecent programming,
programmer access to cable television systems, programming agreements,
technical standards, consumer electronics equipment compatibility, ownership
of home wiring, program exclusivity, equal employment opportunity, and various
aspects of direct broadcast satellite system ownership and operation. The 1996
Act requires certain changes to various provisions of these regulations. A
brief summary of the most material federal regulations as adopted to date
follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional nonbasic program tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the
FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the statutory and FCC rate regulation standards. The 1992 Cable Act
replaced the FCC's old standard for determining effective competition, under
which most cable systems were not subject to local rate regulation, with a
statutory provision that has resulted in nearly all cable television systems
becoming subject to local rate regulation of basic service. Additionally, the
1992 Cable Act eliminated the 5% annual rate increase for basic service
previously allowed by the 1984 Cable Act without local approval; required the
FCC to adopt a formula, for franchising authorities to enforce, to assure that
basic cable rates are reasonable; allows the FCC to review rates for nonbasic
service tiers (other than per-channel or per-program services) in response to
complaints filed by franchising authorities; prohibits cable television
systems from requiring customers to purchase service tiers above basic service
in order to purchase premium services if the system is technically capable of
doing so; required the FCC to adopt regulations to establish, on the basis of
actual costs, the price for installation of cable service, remote controls,
converter boxes and additional outlets; and allows the FCC to impose
restrictions on the retiering and rearrangement of cable services under
certain limited circumstances. The 1996 Act expands the definition of
effective competition to cover situations where a local telephone company or
its affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except DBS.
Satisfaction of this test deregulates both basic and nonbasic tiers. The 1996
Act ends FCC regulation of nonbasic tier rates on March 31, 1999.
The FCC's regulations set standards for the regulation of basic and nonbasic
cable service rates (other than per-channel or per-program services). The
FCC's original rules became effective on September 1, 1993. The rules have
been amended several times. The rate regulations adopt a benchmark price cap
system for measuring the reasonableness of existing basic and nonbasic service
rates, and a formula for future rate increases based on inflation and
increases in certain costs. Alternatively, cable operators have the
opportunity to make cost-of-
S-46
<PAGE>
service showings which, in some cases, may justify rates above the applicable
benchmarks. The rules also require that charges for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services
be unbundled from the provision of cable service and based upon actual costs
plus a reasonable profit. Local franchising authorities and/or the FCC are
empowered to order a reduction of existing rates which exceed the benchmark
level for either basic and/or nonbasic cable services and associated
equipment, and refunds could be required. The retroactive refund period for
basic cable service rates is limited to one year. A significant number of
franchising authorities have become certified by the FCC to regulate the rates
charged by the Company for basic cable service and for associated equipment.
The Company's ability to implement rate increases consistent with its past
practices will likely be limited by the regulations that the FCC has adopted.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains new mandatory carriage requirements. These new
rules allow commercial television broadcast stations which are "local" to a
cable system (i.e., the system is located in the station's Area of Dominant
Influence), to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station.
Local, noncommercial television stations are also given mandatory carriage
rights, subject to certain exceptions, within the larger of (i) a 50 mile
radius from the station's city of license or (ii) the station's Grade B
contour (a measure of signal strength). Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable systems will have
to obtain retransmission consent for the carriage of all "distant" commercial
broadcast stations, except for certain "superstations," (i.e., commercial
satellite-delivered independent stations such as WTBS). The 1992 Cable Act
also eliminated, effective December 4, 1992, the FCC's regulations requiring
the provision of input selector switches. The statutory must-carry provisions
for noncommercial stations became effective on December 4, 1992. Must-carry
rules for both commercial and noncommercial stations and retransmission
consent rules for commercial stations were adopted by the FCC on March 11,
1993. The must-carry requirement for commercial stations went into effect on
June 2, 1993, and any stations for which retransmission consent had not been
obtained (other than must-carry stations, non-commercial stations and
superstations) had to be dropped as of October 6, 1993. The most recent
election between must-carry and retransmission consent for local commercial
television broadcast stations was on October 1, 1996. A number of stations
previously carried by the Company's cable television systems elected
retransmission consent. The Company was able to reach agreements with
broadcasters who elected retransmission consent and has therefore not been
required to pay cash compensation to broadcasters for retransmission consent
or been required by broadcasters to remove broadcast stations from the cable
television channel line-ups. The Company has, however, agreed to carry some
services (e.g., ESPN2 and a new service by FOX) in specified markets pursuant
to retransmission consent arrangements which it believes are comparable to
those entered into by most other large cable operators.
The FCC is currently conducting a rulemaking proceeding regarding the
carriage responsibilities of cable television systems during the transition of
broadcast television from analog to digital transmission. Specifically, the
FCC is exploring whether to amend the signal carriage rules to accommodate the
carriage of digital broadcast television signals.
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require cable
operators to set aside certain channels for public, educational and
governmental access programming. The Company believes that none of the
Systems' franchises contain unusually onerous access requirements. The 1984
Cable Act further requires cable systems with thirty-six or more activated
channels to designate a portion of their channel capacity for commercial
leased access by unaffiliated third parties. While the 1984 Cable Act
presently allows cable operators substantial latitude in setting leased access
rates, the 1992 Cable Act requires leased access rates to be set according to
a
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<PAGE>
formula determined by the FCC. The FCC has recently revised the existing rate
formula in a way which will significantly lower the rates cable operators have
been able to charge. It is possible that such leased access will result in
competition to services offered by the Company on the other channels of its
cable systems.
Competing Franchises
Questions concerning the ability of municipalities to award a single cable
television franchise and to impose certain franchise restrictions upon cable
television companies have been considered in several recent federal
appellate and district court decisions. These decisions have been somewhat
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable television's First Amendment protections, the legality of the
franchising process and of various specific franchise requirements is likely
to be in a state of flux. It is not possible at the present time to predict
the constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant
franchises to competing cable systems and permits franchising authorities to
operate their own cable systems without franchises.
Cross-Ownership
The 1996 Act repealed the 1984 Cable Act's prohibition on LECs providing
video programming directly to customers within their local exchange telephone
service areas, except in rural areas or by specific waiver of FCC rules. The
1996 Act also authorized LECs to operate OVS Systems without obtaining a local
cable franchise, although LECs operating such systems can be required to make
payments to local governmental bodies in lieu of cable franchise fees. Where
demand exceeds channel capacity, up to two-thirds of the channels on an OVS
System must be available to programmers unaffiliated with the LEC.
The 1996 Act eliminated the FCC rule prohibiting common ownership between a
cable system and a national broadcast television network. The 1996 Act also
eliminated the statutory ban covering certain common ownership interests,
operation or control between a television station and cable system within the
station's Grade B signal coverage area. However, the parallel FCC rules
against cable/television station cross-ownership remains in place, subject to
review by the FCC within two years. Finally, the 1992 Cable Act prohibits
common ownership, control or interest in cable television systems and MMDS
facilities or SMATV systems having overlapping service areas, except in
limited circumstances. The 1996 Act exempts cable systems facing "effective
competition" from the MMDS and SMATV cross-ownership restrictions.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable systems which a single cable operator can own. In general, no cable
operator can have an attributable interest in cable systems which pass more
than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder
of more than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of these rules
pending the outcome of the appeal from the U.S. District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a cable
system which can be occupied by programming in which the cable system's owner
has an attributable interest. The limit is 40% of all activated channels.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after
receipt of all information required by FCC regulations and by the franchising
authority. Approval is deemed to be granted if the franchising authority fails
to act within such period.
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<PAGE>
Technical Requirements
Historically, the FCC has imposed technical standards applicable to the
cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards which were in conflict with or
more restrictive than those established by the FCC. The FCC has recently
revised such standards and made them applicable to all classes of channels
which carry downstream NTSC video programming. Local franchising authorities
are permitted to enforce the FCC's new technical standards. The FCC also has
adopted additional standards applicable to cable television systems using
frequencies in the 108-137 MHz and 225-400
MHz bands in order to prevent harmful interference with aeronautical
navigation and safety radio services, and has also established limits on cable
system signal leakage. Periodic testing by cable operators for compliance with
these technical standards and signal leakage limits is required. The Company
believes that the Systems are in compliance with these standards in all
material respects. The 1992 Cable Act requires the FCC to update periodically
its technical standards to take into account changes in technology. The FCC
has adopted regulations to implement the requirements of the 1992 Cable Act
designed to improve the compatibility of cable systems and consumer
electronics equipment.
Customer Premises Equipment
Pursuant to the 1992 Cable Act, the FCC has adopted rules to assure the
competitive availability to consumers of customer premises equipment, such as
converters, used to access the services offered by cable television systems
and other multichannel video programming distributors ("MVPD"). Pursuant to
those rules, consumers are given the right to attach compatible equipment to
the facilities of their MVPD so long as the equipment does not harm the
network, does not interfere with the services purchased by other customers,
and is not used to receive unauthorized services. As of July 1, 2000, MVPDs
(other than DBS operators) are required to separate security from non-security
functions in the customer premises equipment which they sell or lease to their
customers and offer their customers the option of using component security
modules obtained from the MVPD with set-top units purchased or leased from
retail outlets. As of January 1, 2005, MVPDs will be prohibited from
distributing new set-top equipment integrating both security and non-security
functions to their customers.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles, unless under the Federal Pole
Attachments Act, state public service commissions are able to demonstrate that
they regulate rates, terms and conditions of the cable television pole
attachments. A number of states (including Massachusetts, Michigan, New
Jersey, New York, Ohio and Vermont) and the District of Columbia have
certified to the FCC that they regulate the rates, terms and conditions for
pole attachments. In the absence of state regulation, the FCC administers such
pole attachment rates through use of a formula which it has devised and from
time to time revises. The 1996 Act directs the FCC to adopt a new rate formula
for any attaching party, including cable systems, which offers
telecommunications services. This new formula will result in significantly
higher attachment rates for cable systems which choose to offer such services.
Other Matters
FCC regulation also includes matters regarding a cable system's carriage of
local sports programming; restrictions on origination and cablecasting by
cable system operators; application of the rules governing political
broadcasts; customer service; home wiring; and limitations on advertising
contained in nonbroadcast children's programming.
Copyright
Cable television systems are subject to federal copyright licensing covering
carriage of broadcast signals. In exchange for making semi-annual payments to
a federal copyright royalty pool and meeting certain other
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obligations, cable operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations.
Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory license. At the
request of Congress, the Copyright Office has commenced an inquiry into
possible revisions of the compulsory license. Without the compulsory license,
cable operators might need to negotiate rights from the copyright owners for
each program carried on each broadcast station in the channel lineup. Such
negotiated agreements could increase the cost to cable operators of carrying
broadcast signals. The 1992 Cable Act's retransmission consent provisions
expressly provide that retransmission consent agreements between television
broadcast stations and cable operators do not obviate the need for cable
operators to obtain a copyright license for the programming carried on each
broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) has generally been licensed by the networks through private
agreements with the American Society of Composers and Publishers ("ASCAP") and
BMI, Inc. ("BMI"), the two major performing rights organizations in the United
States. As a result of extensive litigation, ASCAP and BMI are both now
required to offer "through to the viewer" licenses to the cable networks which
would cover the retransmission of the cable networks' programming by cable
systems to their subscribers.
Copyrighted music performed by cable systems themselves on local origination
channels, PEG channels, and in locally inserted advertising and cross
promotional announcements must also be licensed. A blanket license is
available from BMI. Cable industry negotiations with ASCAP are still in
progress.
CABLE TELEVISION/STATE AND LOCAL REGULATION
Because a cable television system uses local streets and rights-of-way,
cable television systems are subject to state and local regulation, typically
imposed through the franchising process. State and/or local officials are
usually involved in franchise selection, system design and construction,
safety, service rates, consumer relations, billing practices and community
related programming and services.
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and
in many cases are terminable if the franchise operator fails to comply with
material provisions. The 1984 Cable Act established renewal procedures and
criteria designed to protect incumbent franchises against arbitrary denials of
renewal. While these formal procedures are not mandatory unless timely invoked
by either the cable operator or the franchising authority, they can provide
substantial protection to incumbent franchisees. Even after the formal renewal
procedures are invoked, franchising authorities and cable operators remain
free to negotiate a renewal outside the formal process. Nevertheless, renewal
is by no means assured, as the franchisee must meet certain statutory
standards. Even if a franchise is renewed, a franchising authority may impose
new and more onerous requirements such as upgrading facilities and equipment,
although the municipality must take into account the cost of meeting such
requirements. The 1992 Cable Act makes several changes to the process under
which a cable operator seeks to enforce its renewal rights which could make it
easier in some cases for a franchising authority to deny renewal.
Franchises usually call for the payment of fees, often based on a percentage
of the system's gross subscriber revenues, to the granting authority. Although
franchising authorities may impose franchise fees under the 1984 Cable Act,
such payments cannot exceed 5% of a cable system's annual gross revenues. In
those communities in which franchise fees are required, the Company currently
pays franchise fees ranging up to 5% of gross revenues. Franchising
authorities are also empowered in awarding new franchises or renewing existing
franchises to require cable operators to provide cable-related facilities and
equipment and to enforce compliance with voluntary
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commitments. In the case of franchises in effect prior to the effective date
of the 1984 Cable Act, franchising authorities may enforce requirements
contained in the franchise relating to facilities, equipment and services,
whether or not cable-related. The 1984 Cable Act, under certain limited
circumstances, permits a cable operator to obtain modifications of franchise
obligations.
Upon receipt of a franchise, the cable system owner usually is subject to a
broad range of obligations to the issuing authority directly affecting the
business of the system. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or
burdensome. The 1984 Cable Act places certain limitations on a franchising
authority's ability to control the operation of a cable system operator and
the courts have from time to time reviewed the constitutionality of several
general franchise requirements, including franchise fees and access channel
requirements, often with inconsistent results. On the other hand, the 1992
Cable Act prohibits exclusive franchises, and allows franchising authorities
to exercise greater control over the operation of franchised cable systems,
especially in the area of customer service and rate regulation. The 1992 Cable
Act also allows franchising authorities to operate their own multichannel
video distribution system without having to obtain a franchise and permits
states or local franchising authorities to adopt certain restrictions on the
ownership of cable systems. Moreover, franchising authorities are immunized
from monetary damage awards arising from regulation of cable systems or
decisions made on franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of
the cable television system. Cable franchises generally contain provisions
governing charges for basic cable television services, fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of
cable services provided. The 1996 Act prohibits a franchising authority from
either requiring or limiting a cable operator's provision of
telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, even to the exclusion
of local community regulation. Some of these states regulate jointly and
impose regulation of a character similar to that of a public utility. Attempts
in other states to regulate cable television systems are continuing and can be
expected to increase. Such proposals and legislation may be preempted by
federal statute and/or FCC regulation. To date, the states in which the
Company operates that have enacted such state level regulation are New York,
New Jersey, Massachusetts and Vermont. The Company cannot predict whether
other states in which it currently operates, or in which it may acquire
systems, will engage in such regulation in the future.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry or the Company can be predicted at this time.
TELEPHONY AND TELECOMMUNICATIONS/FEDERAL LAWS AND REGULATIONS
The 1996 Act also alters federal, state and local laws and regulations
regarding telecommunications providers and services, including the Company,
and creates a favorable environment in which the Company may provide telephone
and other telecommunications services and facilities. The following is a
summary of the key provisions of the 1996 Act that could materially affect the
telecommunications business of the Company.
The 1996 Act was intended to promote the provision of competitive telephone
services and facilities by cable television companies and others. The 1996 Act
declares that no state or local laws or regulations may
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prohibit or have the effect of prohibiting the ability of any entity to
provide any interstate or intrastate telecommunications service. States are
authorized to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
The 1996 Act further provides that cable operators and affiliates providing
telecommunications services are not required to obtain a separate franchise
from local franchising authorities ("LFAs") for such services. An LFA may not
order a cable operator or affiliate to discontinue providing
telecommunications services or discontinue operating its cable system on the
basis that it has failed to obtain a separate franchise or renewal for the
provision of telecommunications services. The 1996 Act prohibits LFAs from
requiring cable operators to provide telecommunications service or facilities
as a condition of the grant of a franchise, franchise renewal, or franchise
transfer, except that LFAs may seek "institutional networks" as part of such
franchise negotiations.
The 1996 Act provides that, when cable operators provide telecommunications
services, LFAs may require reasonable, competitively neutral compensation for
management of the public rights-of-way. The LFA must publicly disclose such
compensation requirements.
The Company believes that it qualifies as a connecting carrier under federal
law and therefore does not need FCC certification to provide intrastate
service. In the event that it is determined that the Company must seek FCC
certification, the Company believes that such certification will be granted by
the FCC in a timely manner. The Company may be required to file certain
tariffs and reports with the FCC.
Interconnection and Other Telecommunications Carrier Obligations
To facilitate the entry of new telecommunications providers (including cable
operators), the 1996 Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks
with other carriers and must not deploy network features and functions that
interfere with interoperability. LECs also have a set of separate identified
obligations beyond those that apply to new entrants: (i) good faith
negotiation with those seeking interconnection, (ii) unbundling, equal access
and non-discrimination requirements, (iii) resale of services, including
"resale at wholesale rates," (iv) notice of changes in the network that would
affect interconnection and interoperability and (v) physical collocation
unless shown that practical technical reasons, or space limitations, make
physical collocation impractical.
Under the 1996 Act, individual interconnection rates must be just and
reasonable, based on cost, and may include a reasonable profit. Traffic
termination charges shall be "mutual and reciprocal." The 1996 Act permits
carriers to agree on a "bill and keep" system, but does not require such a
system.
The 1996 Act contemplates that interconnection agreements will be negotiated
by the parties and submitted to a state public service commission ("SPSC") for
approval. A SPSC may become involved, at the request of either party, if
negotiations fail. If the state regulator refuses to act, the FCC may
determine the matter. If the SPSC acts, an aggrieved party's remedy is to file
a case in federal district court. The 1996 Act provides for a rural exemption
to interconnection requests, but also provides that the exception does not
apply where a cable operator makes an interconnection request of a rural LEC
within the operator's franchise area.
The 1996 Act requires that all telecommunications providers (including cable
operators that provide telecommunications services) must contribute equitably
to a Universal Service Fund ("USF"), and the FCC may exempt an interstate
carrier or class of carriers if their contribution would be minimal under the
USF formula. The 1996 Act allows states to determine which intrastate
telecommunications providers contribute to the USF. The 1996 Act prohibits
geographic end user rate de-averaging to protect rural subscribers' rates.
FCC Interconnection Order
On August 8, 1996 the FCC released its First Report and Order, Second Report
and Order and memorandum Opinion and Order promulgating rules and regulations
to implement Congress' statutory directive concerning the interconnection
obligations of all telecommunications carriers, including obligations of CLECs
and LECs,
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and incumbent LEC pricing of interconnection and unbundled elements (the
"Local Competition Orders"). The Local Competition Orders adopted a national
framework for interconnection but left to the individual states the task of
implementing the FCC's rules. The Local Competition Orders also established
rules implementing the 1996 Act requirements that LECs negotiate
interconnection agreements, and provide guidelines for review of such
agreements by State PUCs.
On July 18, 1997, the U.S. Court of Appeals for the Eighth Circuit (the
"Eighth Circuit") vacated certain portions of the Local Competition Orders,
including provisions establishing a methodology for pricing interconnection
and unbundled network elements, a rule permitting new entrants to "pick and
choose" among various provisions of existing interconnecton agreements between
LECs and their competitors, and other provisions relating to the purchase of
access to unbundled network elements. The Operating Companies had negotiated
and obtained State PUCs approval of a number of interconnection agreements
with incumbent LECs prior to this Eighth Circuit decision. The Eighth Circuit
decision has created uncertainty about individual state rules governing
pricing, terms and conditions of interconnection decisions, and could make
negotiating and enforcing such agreements in the future more difficult and
protracted. It could also require renegotiation of relevant portions of
existing incerconnection agreements, or subject them to additional court and
regulatory proceedings. It remains to be seen whether the network can continue
to obtain and maintain interconnection agreements on terms acceptable to them
in every state, though most states have already adopted pricing rules, if not
interim prices, which are for the most part consistent with the FCC's related
pricing provisions.
The Supreme Court has agreed to review the various Eighth Circuit decisions
vacating major portions of the FCC's Local Competition Orders. In so doing,
the Court also granted several cross-petitions for review by incumbent LECs
challenging portions of the Eighth Circuit opinion that upheld certain FCC
determinations with respect to unbundled network elements. A decision by the
Supreme Court is not expected until early 1999.
INTERNET SERVICES/FEDERAL LAWS AND REGULATIONS
Transmitting indecent material via the internet was made criminal by the
1996 Act. However, on-line access providers are exempted from criminal
liability for simply providing interconnection service; they are also granted
an affirmative defense from criminal or other action where in "good faith"
they restrict access to indecent materials. These provisions have been
challenged in federal court. The 1996 Act further exempts on-line access
providers from civil liability for actions taken in good faith to restrict
access to obscene, excessively violent or otherwise objectionable material.
TELEPHONY AND TELECOMMUNICATIONS/STATE LAW AND REGULATION
Adelphia's nonconsolidated joint venture, Olympus, has systems in Florida.
In 1995, the Florida Legislature amended Chapter 362 of Florida Statutes by
enacting "An Act Relating to Local Exchange Telecommunications Companies"
("Florida Act") (Chapter 362, Fl. Stat. (1995)). This new law substantially
altered Florida law regarding telecommunications providers and services, such
as Olympus. The following is a summary of the key provisions of the Florida
Act and associated Florida Public Service Commission (the "PSC") actions that
could materially affect Olympus' telecommunications business.
The Florida Act
The Florida Act vests in the PSC virtually exclusive jurisdiction over
intrastate telecommunications matters. The Florida Act limits municipalities
to taxation of certain telecommunications services or management of long
distance carriers' occupation of local rights-of-way. The Florida Act further
directs the PSC to employ flexible regulatory treatment to ensure the widest
possible range of telecommunications services, and provides that new entrants
such as the Company are subject to a lesser level of regulatory oversight than
LECs.
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PSC Actions
Pursuant to the Florida Act (and the 1996 Act and the FCC's First Report and
Order), the PSC is conducting several proceedings to address competitive
issues. To summarize, pursuant to the Florida Act, the PSC has adopted rules
requiring certification of CLEC Interexchange Telecommunications Service
Providers; Operator Service Providers; Alternative Access Vendor Services; and
Shared Tenant Services Providers. The Florida Act provides that the PSC shall
grant certification to applicants upon a showing of sufficient technical,
financial, and managerial capability to provide service in the geographic area
proposed to be served. The Company believes that Olympus meets the statutory
requirements for PSC certification for any type of intrastate
telecommunications service provider, and that any such application process
should be completed expeditiously. In addition, like the 1996 Act, the Florida
Act requires LECs to interconnect with certified CLECs. Approximately fourteen
interconnection agreements have been reached between LECs and CLECs to date,
while approximately five CLECs have requested PSC arbitration of stalled
agreements. The PSC is obligated under the Florida Act to arbitrate any
disputes in no more than 120 days from date of request. As well, the PSC has
ordered BellSouth, the state's largest LEC, to unbundle eight network elements
for resale by CLECs, and the PSC has ordered favorable interim rates for these
elements. The PSC has not yet adopted an order resolving wholesale discounts
associated with local service resale.
Based on the foregoing, the Company believes that the Florida Act and
actions of the PSC to date reflect a generally favorable legal and regulatory
environment for new entrants, such as Olympus, to intrastate
telecommunications in Florida.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
John J. Rigas 73 Chairman, Chief Executive Officer, President and
Director
Michael J. Rigas 44 Executive Vice President, Operations and Director
Timothy J. Rigas 42 Executive Vice President, Chief Financial Officer,
Chief Accounting Officer, Treasurer and Director
James P. Rigas 40 Executive Vice President, Strategic Planning and
Director
Daniel R. Milliard 51 Senior Vice President, Secretary and Director
Perry S. Patterson 81 Director
Pete J. Metros 58 Director
Dennis P. Coyle 59 Director
</TABLE>
John J. Rigas is the founder, Chairman, President and Chief Executive
Officer of Adelphia and is President of its subsidiaries. He is also Chairman
and a director of Hyperion. Mr. Rigas has served as President or general
partner of most of the constituent entities which became wholly-owned
subsidiaries of Adelphia upon its formation in 1986, as well as the cable
television operating companies acquired by the Company which were wholly or
partially owned by members of the Rigas Family. Mr. Rigas has owned and
operated cable television systems since 1952. Among his business and community
service activities, Mr. Rigas is Chairman of the Board of Directors of
Citizens Bancorp., Inc., Coudersport, Pennsylvania, and a member of the Board
of Directors of Charles Cole Memorial Hospital. He is a director of the
National Cable Television Association and a past President of the Pennsylvania
Cable Television Association. He is also a member of the Board of Directors of
C-SPAN and the Cable Advertising Bureau, and is a Trustee of St. Bonaventure
University. He graduated from Rensselaer Polytechnic Institute with a B.S. in
Management Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company.
Michael J. Rigas is Executive Vice President, Operations of Adelphia and is
a Vice President of its subsidiaries. He is also Vice Chairman and a director
of Hyperion. Since 1981, Mr. Rigas has served as a Senior Vice President, Vice
President, general partner or other officer of the constituent entities which
became wholly-owned subsidiaries of Adelphia upon its formation in 1986, as
well as the cable television operating companies acquired by the Company which
were wholly or partially owned by members of the Rigas Family. From 1979 to
1981, he worked for Webster, Chamberlain & Bean, a Washington, D.C. law firm.
Mr. Rigas graduated from Harvard University (magna cum laude) in 1976 and
received his Juris Doctor degree from Harvard Law School in 1979.
Timothy J. Rigas is Executive Vice President, Chief Financial Officer, Chief
Accounting Officer and Treasurer of Adelphia and its subsidiaries. He is also
Vice Chairman, Chief Financial Officer and Treasurer and a director of
Hyperion. Since 1979, Mr. Rigas has served as Senior Vice President, Vice
President, general partner or other officer of the constituent entities which
became wholly-owned subsidiaries of Adelphia upon its formation in 1986, as
well as the cable television operating companies acquired by the Company which
were wholly or partially owned by members of the Rigas Family. Mr. Rigas
graduated from the University of Pennsylvania, Wharton School, with a B.S.
degree in Economics (cum laude) in 1978.
James P. Rigas is Executive Vice President, Strategic Planning of Adelphia
and is a Vice President of its subsidiaries, and also serves as Vice Chairman
and Chief Executive Officer and a director of Hyperion. Since
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February 1986, Mr. Rigas has served as a Senior Vice President, Vice President
or other officer of the constituent entities which became wholly-owned
subsidiaries of Adelphia upon its formation in 1986, as well as the cable
television operating companies acquired by the Company which were wholly or
partially owned by members of the Rigas Family. Among his business activities,
Mr. Rigas is a member of the Board of Directors of Cable Labs. Mr. Rigas
graduated from Harvard University (magna cum laude) in 1980 and received a
Juris Doctor degree and an M.A. degree in Economics from Stanford University
in 1984. From June 1984 to February 1986, he was a consultant with Bain & Co.,
a management consulting firm.
Daniel R. Milliard is Senior Vice President and Secretary of Adelphia and
its subsidiaries, and also serves as President and Chief Operating Officer and
a director of Hyperion. Since 1982, Mr. Milliard served as Vice President,
Secretary and/or General Counsel of Adelphia and the constituent entities
which became wholly-owned subsidiaries of Adelphia, as well as the cable
television operating companies acquired by the Company which were wholly or
partially owned by members of the Rigas Family. He served as outside general
counsel to the Company's predecessors from 1979 to 1982. Mr. Milliard
graduated from American University in 1970 with a Bachelor of Science degree
in Business Administration. He received an M.A. degree in Business from
Central Missouri State University in 1971, where he was an Instructor in the
Department of Finance, School of Business and Economics, from 1971-1973, and
received a Juris Doctor degree from the University of Tulsa School of Law in
1976. He is a Director of Citizens Bancorp., Inc. in Coudersport, Pennsylvania
and President of the Board of Directors of Charles Cole Memorial Hospital.
Perry S. Patterson became a director of Adelphia on September 9, 1986. Since
1977, Mr. Patterson has practiced law in Coudersport, Pennsylvania. From 1975
to 1977, Mr. Patterson served as President Judge of the Court of Common Pleas
of the 55th Judicial District in Potter County, Pennsylvania. He was a partner
of the law firm of Kirkland & Ellis, in Chicago, Illinois and Washington, D.C.
from 1950 to 1973. Mr. Patterson attended Georgetown University and graduated
from Northwestern University Law School in 1941.
Pete J. Metros became a director of Adelphia on November 4, 1986. Mr. Metros
has been President and a member of the Board of Directors of Rapistan Demag
Corporation, a subsidiary of Mannesmann AG, since December 1991. From August
1987 to December 1991, he was President of Rapistan Corp., the predecessor of
Rapistan Demag Corporation, and of Truck Products Corp., both of which were
major subsidiaries of Lear Siegler Holdings Corp. From 1980 to August 1987,
Mr. Metros was President of the Steam Turbine, Motor & Generator Division of
Dresser-Rand Company. From 1964 to 1980, he held various positions at the
General Electric Company, the last of which was Manager--Manufacturing for the
Large Gas Turbine Division. Mr. Metros is also on the Board of Directors of
Hyperion and Borroughs Corporation of Kalamazoo, Michigan. Mr. Metros received
a BS degree from the Georgia Institute of Technology in 1962.
Dennis P. Coyle became a director of Adelphia on September 26, 1995. Mr.
Coyle is General Counsel and Secretary of FPL Group, Inc. and Florida Power &
Light Company. Mr. Coyle was named General Counsel of FPL Group, Inc. and
Florida Power & Light Company in 1989, and assumed the additional title and
responsibilities of Secretary of such companies in 1991. He graduated from
Dartmouth College in 1960 and received his law degree from Columbia University
in 1965. In an investment agreement with respect to Olympus, John, Michael,
Timothy and James Rigas have agreed to vote a sufficient number of shares of
the Company's Class A Common Stock to elect to the Board a nominee of Telesat
Cablevision, Inc., which is the Company's joint venture partner in Olympus.
Mr. Coyle is the nominee of Telesat Cablevision, Inc., which is an indirect,
wholly-owned subsidiary of FPL Group, Inc.
OTHER PRINCIPAL EMPLOYEES
James R. Brown, 36, joined the Company in 1984 and currently holds the
position of Vice President of Finance. Mr. Brown graduated with a B.S. degree
in Industrial and Management Engineering from Rensselaer Polytechnic Institute
in 1984.
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Randall D. Fisher, 45, joined the Company in 1991 and is Vice President,
General Counsel and Assistant Corporate Secretary. Previously Mr. Fisher was
in private practice with the Washington, D.C. law firm of Baraff, Koerner,
Olender & Hochberg, P.C. Mr. Fisher earned his J.D. from Texas Tech
University. He received a Masters Degree in Public Administration from
Midwestern University in Wichita Falls, Texas, and a B.A. degree in Journalism
from the University of Texas at Austin.
James M. Kane, CPA, 35, joined the Company in April 1992 and currently holds
the position of Vice President of Corporate Development. From 1989 to 1992,
Mr. Kane served in accounting and consulting positions with Price Waterhouse
in Pittsburgh. From 1984-1987, Mr. Kane served in accounting positions with
Coopers & Lybrand in Pittsburgh. Mr. Kane received his B.S. degree in
Accounting from Pennsylvania State University in 1984 and his M.B.A. from
Carnegie Mellon's Graduate School of Industrial Administration in 1989.
Jeremy P. Harris, 50, joined the Company in 1997 and currently holds the
position of Vice President of Sales and Marketing, with overall responsibility
for all corporate and regional sales and marketing responsibilities within
Adelphia. Mr. Harris has a background in packaged goods marketing and
telecommunications, where prior to joining the Company in September 1997, he
had worked in both Canada and the U.S. He joined Quaker Oats in 1976 and RJR
Nabisco in 1980, where he held the position of Vice President Marketing and
Business Development prior to joining AT&T in 1994 in their consumer product
organization with responsibility for the marketing of multi product bundled
offers and local market entry. Mr. Harris graduated from Kingston University
in England, with a Bachelors Degree in Business Administration.
Orby G. Kelley, 65, joined the Company in 1986 and currently holds the
position of Vice President of Administration/Labor Relations. From 1981 until
joining the Company, Mr. Kelley served as Vice President Human Resources--
Columbus Operations for Warner Amex Cable Communications, Inc. Prior to that
time he served in a similar capacity for Colony Communications, Inc. and
Landmark Communications, Inc. Mr. Kelley received his B.A. degree from Old
Dominion University in 1958 and his M.B.A. from California Western University
in 1980.
Daniel Liberatore, 48, has been Vice President of Engineering since 1986. He
is responsible for technical operations, engineering and related supervisory
and management functions for the Company Systems. Mr. Liberatore received a
B.S. degree in Electrical Engineering from West Virginia University and a
Masters Degree in Engineering Management from the University of Massachusetts.
He previously served as director of engineering for Warner Amex Cable
Communications, Inc. from June 1982 until joining the Company. From December
1980 to June 1982, Mr. Liberatore served as a Project Administrator for Warner
Amex Cable Communications, Inc.
Jack A. Olson, 43, joined the Company in 1982 and currently holds the
position of Vice President of Media Development. Mr. Olson has held various
sales and marketing positions with the Company and is currently responsible
for the sale of television advertising and the development and sales of other
media related services. Prior to joining the Company, Mr. Olson was a partner
in a family owned contract sales and marketing firm consulting to the cable
industry.
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Class A
Common Stock applicable to "Non-United States Holders." A "Non-United States
Holder" is any beneficial owner of Class A Common Stock that, for United
States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership or a non-resident fiduciary of a
foreign estate or trust as such terms are defined in the Code. This discussion
is based on the Code and administrative and judicial interpretations as of the
date hereof, all of which are subject to change
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either retroactively or prospectively. This discussion does not address all
aspects of United States federal income and estate taxation that may be
relevant to Non-United States Holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of any state, local or foreign taxing jurisdiction. Prospective investors are
urged to consult with their tax advisors regarding the United States federal,
state and local income and other tax consequences, and the non-United States
tax consequences, of owning and disposing of Class A Common Stock.
DIVIDENDS
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable income tax treaty. For purposes of determining
whether tax is to be withheld at a 30% rate or at a reduced rate as specified
by an income tax treaty, the Company ordinarily will presume that dividends
paid to an address in a foreign country are paid to a resident of such country
absent knowledge that such presumption is not warranted. However, under United
States Treasury regulations not currently in effect, a Non-United States
Holder would be required to file certain forms accompanied by a statement from
a competent authority of the treaty country in order to claim the benefits of
a tax treaty. Dividends paid to a holder with an address within the United
States generally will not be subject to this withholding tax, unless the
Company has actual knowledge that the holder is a Non-United States Holder.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the
same manner as if the Non-United States Holder were a United States resident.
A Non-United States Holder may claim exemption from withholding under the
effectively connected income exception by filing Form 4224 (Statement Claiming
Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of Business in the United States) each year with the Company or its
paying agent prior to the payment of the dividends for such year. Effectively
connected dividends received by a corporate Non-United States Holder may be
subject to an additional "branch profits tax" at a rate of 30% (or such lower
rate as may be specified by an applicable tax treaty) of such corporate Non-
United States Holder's effectively connected earnings and profits, subject to
certain adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF ORDINARY COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to a gain realized upon the sale or a
disposition of Class A Common Stock unless: (i) such gain is effectively
connected with a United States trade or business of the Non-United States
Holder, (ii) the Non-United States Holder is an individual who is present in
the United States for a period or periods aggregating 183 days or more during
the taxable year in which such sale or disposition occurs and certain other
conditions are met, or (iii) the Company is or has been a "United States real
property holding corporation" for federal income tax purposes at any time
within the shorter of the five-year period preceding such disposition or such
holder's holding period and certain other conditions are met. The Company has
determined that it is not, has not been for the last five years, and does not
believe that it will become a "United States real property holding
corporation" for federal income tax purposes. If a Non-United States Holder
falls under clause (i) above, the Non-United States holder will be taxed on
the net gain derived from the sale under regular graduated United States
federal income tax rates (and, with respect to corporate Non-United States
Holders, may also be subject to the branch profits tax described above). If an
individual Non-United States Holder falls under clause (ii) above, the Non-
United States Holder generally will be subject to a 30% tax on the gain
derived from the sale, which gain may be offset by United States capital
losses recognized within the same taxable year of such sale.
S-58
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
other agreements, the IRS may make its reports available to tax authorities in
the recipient's country of residence.
Unless the Company has actual knowledge that a holder is a non-United States
person, dividends paid to a holder at an address within the United States may
be subject to backup withholding at a rate of 31% if the holder is not an
exempt recipient as defined in Treasury Regulation Section 1.6049-4(c)(1)(ii)
(which includes corporations) and fails to provide a correct taxpayer
identification number and other information to the Company. Backup withholding
will generally not apply to dividends paid to holders at an address outside
the United States (unless the Company has knowledge that the holder is a
United States person.)
If the proceeds of the disposition of Class A Common Stock by a Non-United
States Holder are paid over, by or through a United States office of a broker,
the payment is subject to information reporting and to backup withholding at a
rate of 31% unless the disposing holder certifies as to its name, address and
status as a Non-United States Holder under penalties of perjury or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office
of a non-United States broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment of
disposition proceeds outside the United States if (a) the payment is made
through an office outside the United States of a broker that is either (i) a
United States person for United States federal income tax purposes, (ii) a
"controlled foreign corporation" for United States federal income tax
purposes, or (iii) a foreign person which derives 50% or more of its gross
income for certain periods from the conduct of a United States trade or
business, and (b) the broker fails to maintain documentary evidence in its
files that the holder is a Non-United States Holder and that certain
conditions are met or that the holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
The United States Treasury has issued regulations not yet currently in
effect regarding the withholding and information reporting rules discussed
above. In general, these regulations do not alter the substantive withholding
and information reporting requirements but unify current certification
procedures and forms and clarify reliance standards. These regulations would
generally be effective for payments made after December 31, 1999, subject to
certain transition rules.
ESTATE TAX
An individual Non-United States Holder who is treated as the owner of Class
A Common Stock at the time of his or her death or has made certain lifetime
transfers of an interest in Class A Common Stock will be required to include
the value of such Class A Common Stock in his or her gross estate for United
States federal estate tax purposes and may be subject to United States federal
estate tax, unless an applicable estate tax treaty provides otherwise.
S-59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, based on information available to the Company
as of July 31, 1998, certain information with respect to the beneficial
ownership of Class A Common Stock and Class B Common Stock by each director,
each of the five most highly compensated executive officers, all executive
officers and directors of Adelphia as a group, and each person known to
Adelphia to own beneficially more than 5% of such Common Stock, based on
20,093,528 shares of Class A Common Stock and 10,944,476 shares of Class B
Common Stock outstanding, respectively, as of such date. The following table
also reflects beneficial ownership after the Public Offerings and the Direct
Placement and assumes no named stockholder purchases any shares in the Public
Offerings. Unless otherwise noted, the individuals have sole voting and
investment power. The business address of each such 5% beneficial owner named
below, unless otherwise noted, is Main at Water Street, Coudersport,
Pennsylvania 16915.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF SHARES OF PERCENT OF
CLASS A CLASS A CLASS A CLASS A
COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK
OWNED OWNED OWNED OWNED
BEFORE BEFORE AFTER AFTER
PUBLIC PUBLIC PUBLIC PUBLIC
OFFERINGS OFFERINGS SHARES OF PERCENT OF OFFERINGS OFFERINGS
AND THE AND THE CLASS B CLASS B AND THE AND THE
DIRECT DIRECT COMMON COMMON DIRECT DIRECT
NAME AND ADDRESSES PLACEMENT PLACEMENT STOCK STOCK PLACEMENT PLACEMENT
- ------------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John J. Rigas........... (a) (b) 5,883,004(c) 53.8% (a)(d) (e)
Michael J. Rigas........ (a) (b) 1,915,970(c) 17.5% (a)(d) (e)
Timothy J. Rigas........ (a) (b) 1,915,970(c) 17.5% (a)(d) (e)
James P. Rigas.......... (a) (b) 1,151,634(c) 10.5% (a)(d) (e)
Daniel R. Milliard...... 1,000(f) (g) -- -- 1,000(f) (g)
Perry S. Patterson...... 2,250 (g) -- -- 2,250 (g)
Pete J. Metros.......... 100 (g) -- -- 100 (g)
Dennis P. Coyle......... 1,000 (g) -- -- 1,000 (g)
All executive officers
and directors as a
group (eight persons).. 26,947,247(a)(c) (b) 10,572,731(c) 96.6% 31,037,562(a)(c)(d) (e)
Syracuse Hilton Head
Holdings, L.P.......... 2,398,151(h) 12.0% -- -- 2,398,151(h) 8.5%
Highland Holdings ...... 13,899,915(i) 47.1% -- -- 17,990,230(i) 47.7%
Ellen K. Rigas.......... (j) (k) 371,762(c) 3.4% (j) (k)
Capital Research and
Management Company..... 1,784,200(l) 8.9% -- -- 1,784,200(l) 6.3%
333 South Hope Street
Los Angeles, CA 90071
Telesat Cablevision,
Inc.................... 3,449,890(m) 15.4% -- -- 3,449,890(m) 11.3%
700 Universe Blvd.
Juno Beach, FL 33408
Booth American Company.. 3,571,428 17.8% -- -- 3,571,428 12.6%
333 W. Fort Street,
12th Floor
Detroit, MI 48226
</TABLE>
- --------
(a) The holders of Class B Common Stock are deemed to be beneficial owners of
an equal number of shares of Class A Common Stock because Class B Common
Stock is convertible into Class A Common Stock on a one-to-one basis. In
addition, the following persons own or have the power to direct the voting
of shares of
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<PAGE>
Class A Common Stock in the following amounts: John J. Rigas, 431,800
shares-71,700 shares directly and 360,100 shares through Syracuse Hilton
Head Holdings, L.P. ("SHHH"); Michael J. Rigas, 193,500 shares-200 shares
directly and 193,300 shares through SHHH; Timothy J. Rigas, 193,500 shares-
200 shares directly and 193,300 shares through SHHH; James P. Rigas,
193,300 shares indirectly through SHHH. John J. Rigas shares voting power
with his spouse with respect to 106,300 of such shares held through SHHH.
Each of John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P.
Rigas also share voting and dispositive power with respect to 4,465,953
shares of Class A Common Stock beneficially owned by Highland
Communications, L.L.C., 9,433,962 shares of Class A Common Stock deemed to
be beneficially owned by Highland Preferred Communications, L.L.C., and
1,458,151 shares of Class A Common Stock held by SHHH. See notes (h) and
(i) below.
(b) After giving effect to the conversion solely by each individual holder of
all of his Class B Common Stock into Class A Common Stock and including
all shares of Class A Common Stock, and the conversion into Class A Common
Stock of Convertible Preferred Stock, currently held by such individual
holder or over which such individual holder has or shares voting or
investment power as disclosed in note (a) above or notes (h) and (i)
below, the percentage of Class A Common Stock owned by John J. Rigas,
Michael J. Rigas, Timothy J. Rigas and James P. Rigas, and by all
executive officers and directors as a group (eight persons), would be
62.9%, 58.0%, 58.0%, 57.0% and 67.3%, respectively. Further, after giving
effect to an additional 4,966,540 shares of Class A Common Stock of which
John J. Rigas has the right to direct the voting in the election of
directors pursuant to the Class B Stockholders Agreement discussed in the
paragraph following this table (and assuming the parties to such agreement
converted their Class B Common Stock into Class A Common Stock), as to all
of which additional shares John J. Rigas disclaims beneficial ownership,
the percentage of Class A Common Stock owned by John J. Rigas would be
67.5%.
(c) The amounts shown include 97,949 of the same shares which are owned of
record by Dorellenic, and such shares are only included once for "All
executive officers and directors as a group." The named Rigas individuals
have shared voting and investment power with respect to these shares.
(d) Each of John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P.
Rigas will also share voting and dispositive power with respect to
4,090,315 shares of Class A Common Stock that will be purchased by
Highland Holdings ("Highland") or its subsidiaries in the Direct Placement
and will be deemed to be beneficially owned by Highland. See note (i)
below.
(e) After giving effect to the conversion solely by each individual holder of
all of his Class B Common Stock into Class A Common Stock and including
all shares of Class A Common Stock, and the conversion into Class A Common
Stock of Convertible Preferred Stock, held by such individual holder or
over which such individual holder has or shares voting or investment power
after the Public Offerings and Direct Placement, as disclosed in notes
(a), (d), (h) and (i) to this table, the percentage of Class A Common
Stock owned by John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, and by all executive officers and directors as a group (eight
persons), would be 60.4%, 56.3%, 56.3%, 55.4% and 64.3%, respectively.
Further, after giving effect to an additional 4,966,540 shares of Class A
Common Stock of which John J. Rigas has the right to direct the voting in
the election of directors pursuant to the Class B Stockholders Agreement
discussed in the paragraph following this table (and assuming the parties
to such agreement converted their Class B Common Stock into Class A Common
Stock), as to all of which additional shares John J. Rigas disclaims
beneficial ownership, the percentage of Class A Common Stock owned by John
J. Rigas would be 64.5%.
(f) Daniel R. Milliard shares voting and investment power with his spouse with
respect to these shares.
(g) Less than 1%.
(h) SHHH, Doris Holdings, L.P. ("Doris"), the general partner of SHHH, and
Eleni Acquisition, Inc., the general partner of Doris, are affiliates of
John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P. Rigas, each
of whom has shared voting and investment power with respect to the shares
held by SHHH. In addition, through irrevocable proxies, each of the above-
named individuals shares with SHHH the power to vote or direct the vote of
such number of shares of Class A Common Stock held by as is specified in
note (a) above.
S-61
<PAGE>
(i) Highland Communications, L.L.C. and Highland Preferred Communications,
L.L.C. beneficially own shares of Class A Common Stock and are wholly
owned subsidiaries of Highland, which may be deemed to share voting and
investment power with respect to the shares held by its wholly owned
subsidiaries. See note (a) above. Highland, as beneficially owned, is a
general partnership, the general partners of which include John J. Rigas,
Michael J. Rigas, Timothy J. Rigas, James P. Rigas and Ellen K. Rigas,
each of whom is deemed to share voting and investment power with respect
to the shares held by Highland and its subsidiaries, including shares
purchased by Highland and its subsidiaries in the Direct Placement. The
amount shown includes, and the percentage shown reflects, 9,433,962 shares
of Class A Common Stock into which 80,000 shares of the Company's
Convertible Preferred Stock held by Highland Preferred Communications,
L.L.C. is convertible.
(j) As a holder of Class B Common Stock, Ellen K. Rigas is deemed to be the
beneficial owner of an equal number of shares of Class A Common Stock
because Class B Common Stock is convertible into Class A Common Stock on a
one-to-one basis. In addition, Ellen K. Rigas owns 1,600 shares of Class A
Common Stock directly and shares voting and investment power with respect
to 13,899,915 shares of Class A Common Stock held by Highland. See note
(i) above. Ellen K. Rigas is the daughter of John J. Rigas.
(k) After giving effect to the conversion of all of Ellen K. Rigas' Class B
Common Stock into shares of Class A Common Stock and including all shares
of Class A Common Stock, and the conversion into Class A Common Stock of
Convertible Preferred Stock, held by Ellen K. Rigas or over which Ellen K.
Rigas has or shares voting or investment power as discussed in note (j)
above, the percentage of Class A Common Stock owned by Ellen K. Rigas
would be 47.7% before, and 48.2% after, the Public Offerings and the
Direct Placement.
(l) According to a Schedule 13G and other information provided to the Company,
Capital Research and Management Company, an investment adviser, exercises
sole dispositive power with respect to 1,784,200 of such shares, and World
Fund, Inc., an investment company which is advised by Capital Research and
Management Company, has sole voting power over 1,185,800 of such shares.
(m) According to a Schedule 13D, the named entity shares voting and
dispositive power over the shares with FPL Group Capital, Inc., the parent
of Telesat, FPL Group, the parent of FPL Group Capital, Inc., and Cable
L.P. I, Inc. and Telesat Cablevision of South Florida, Inc., subsidiaries
of Telesat. Telesat is the Company's joint venture partner in Olympus and
is also a holder of in excess of five percent of the Company's Class A
Common Stock. The consent of both the Company and Telesat is required
under the Olympus partnership agreement for certain material transactions.
Mr. Dennis P. Coyle, is the nominee of Telesat for election to the Board
of Directors of the Company. The amount shown above includes, as
beneficially owned, 2,358,490 shares of Class A Common Stock into which
20,000 shares of the Company's Convertible Preferred Stock held by Telesat
is convertible.
John J. Rigas, Michael J. Rigas, Timothy J. Rigas, James P. Rigas, Ellen K.
Rigas, Daniel R. Milliard, Dorellenic and the Company have entered into a
Class B Stockholders Agreement providing that such stockholders shall vote
their shares of Common Stock for the election of directors designated by a
majority of voting power (as defined in the Agreement) of the shares of Common
Stock held by them. The Class B Stockholders Agreement also provides that, in
the absence of the consent of the holders of a majority of the voting power of
the shares of Common Stock owned by the parties to the Agreement, (i) none of
the stockholder parties may sell, assign or transfer all or any part of their
shares of Common Stock in a public sale (as defined in the Agreement) without
first offering the shares to the other parties to the Agreement and (ii) no
stockholder party may accept a bona fide offer from a third party to purchase
shares of such stockholder without first offering the shares to the Company
and then to the other parties to the Class B Stockholders Agreement. In
addition, each party has certain rights to acquire the shares of Common Stock
of the others under certain conditions. John J. Rigas has also entered into a
Stock Purchase Agreement with the other holder of Class B Common Stock who is
not a party to the Class B Stockholders Agreement which gives John J. Rigas
certain rights to acquire the shares of Common Stock of such stockholder under
certain conditions.
S-62
<PAGE>
INCENTIVE PLAN
During fiscal 1999, the Company expects to adopt, subject to any necessary
stockholder or other approvals, a new long-term incentive compensation plan
(the "Incentive Plan"). The Incentive Plan is expected to cover up to
3,500,000 shares of Class A Common Stock and to provide for various types of
stock options, share awards, stock appreciation rights and stock equivalent or
phantom units. The Company expects to issue during fiscal 1999, subject to any
necessary approvals, share awards, other awards or stock options covering up
to 200,000 shares for executive officers who are members of the Rigas Family,
in addition to any other share awards, other awards or stock options to other
officers and employees during such period.
S-63
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the U.S. Underwriting
Agreement dated August 12, 1998 (the "U.S. Underwriting Agreement"), each of
the Underwriters of the U.S. Public Offering named below (the "U.S.
Underwriters"), for whom Smith Barney Inc., Goldman, Sachs & Co., NationsBanc
Montgomery Securities LLC, Credit Suisse First Boston, Lehman Brothers Inc.
and TD Securities (USA) Inc. are acting as the Representatives
(the "Representatives"), has severally agreed to purchase, and the Company has
agreed to sell to each U.S. Underwriter, shares of Class A Common Stock which
equal the number of shares set forth opposite the name of such U.S.
Underwriter below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Smith Barney Inc................................................... 766,000
Goldman, Sachs & Co................................................ 765,000
NationsBanc Montgomery Securities LLC.............................. 765,000
Credit Suisse First Boston Corporation............................. 328,000
Lehman Brothers Inc. .............................................. 328,000
TD Securities (USA) Inc............................................ 328,000
---------
Total............................................................ 3,280,000
=========
</TABLE>
Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated August 12, 1998 (the "International Underwriting
Agreement"), each of the managers of the International Offering named below
(the "Managers"), for whom Smith Barney Inc., Goldman Sachs International,
NationsBanc Montgomery Securities LLC, Credit Suisse First Boston (Europe)
Limited, Lehman Brothers International (Europe) and The Toronto-Dominion Bank
are acting as the lead managers (the "Lead Managers"), has severally agreed to
purchase, and the Company has agreed to sell to each Manager, shares of Class
A Common Stock which equal the number of shares set forth opposite the name of
such Manager below:
<TABLE>
<CAPTION>
NUMBER
MANAGERS OF SHARES
-------- ---------
<S> <C>
Smith Barney Inc................................................... 191,334
Goldman Sachs International........................................ 191,333
NationsBanc Montgomery Securities LLC.............................. 191,333
Credit Suisse First Boston (Europe) Limited........................ 82,000
Lehman Brothers International (Europe)............................. 82,000
The Toronto-Dominion Bank.......................................... 82,000
-------
Total............................................................ 820,000
=======
</TABLE>
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares of Class A Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus Supplement and part to certain dealers at a price that represents a
concession not in excess of $.86 per share below the public offering price.
The U.S. Underwriters and the Managers may allow, and such dealers may
reallow, a concession not in excess of $.10 per share to the other U.S.
Underwriters or Managers, respectively, or to certain other dealers. After the
offering of shares to the public, the public offering price and such
concessions may be changed by the U.S. Underwriters and the Managers. The
Representatives and the Lead Managers have advised the Company that the U.S.
Underwriters and the Managers do not intend to confirm sales of any shares of
Class A Common Stock to accounts over which they exercise discretionary
authority.
The Company has granted to the U.S. Underwriters and the Managers an option,
exercisable for 30 days from the date of this Prospectus Supplement, to
purchase up to an aggregate of 615,000 additional shares of Class A Common
Stock at the public offering price set forth on the cover page of this
Prospectus Supplement less underwriting discounts and commissions. The U.S.
Underwriters and the Managers may exercise such option
S-64
<PAGE>
to purchase additional shares solely for the purpose of covering over-
allotments, if any, incurred in connection with the sale of the shares offered
hereby. To the extent such option is exercised, each U.S. Underwriter and each
Manager will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite such U.S. Underwriter's or Manager's name in the
preceding tables bears to the total number of shares in such tables.
The Company, the U.S. Underwriters and the Managers have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.
The Company and the Rigas Family have agreed that, for a period of 90 days
after the date of this Prospectus Supplement, they will not, without the prior
written consent of Smith Barney Inc. offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or grant any options or
warrants to purchase shares of Common Stock (except for certain permitted
transactions).
The U.S. Underwriters and the Managers have entered into an Agreement
between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the 3,280,000 shares offered
in the U.S. Offering (i) it is not purchasing any such shares for the account
of anyone other than a U.S. or Canadian Person and (ii) it has not offered or
sold, and will not, offer, sell, resell or deliver, directly or indirectly,
any of such shares or distribute any prospectus supplement relating to the
U.S. Offering outside the United States or Canada or to anyone other than a
U.S. or Canadian Person. In addition, each Manager has agreed that as part of
the distribution of the 820,000 shares offered in the International Offering:
(i) it is not purchasing any such shares for the account of any U.S. or
Canadian Person and (ii) it has not offered or sold, and will not offer, sell,
resell or deliver directly or indirectly, any of such shares or distribute any
prospectus supplement relating to the International Offering in the United
States or Canada or to any U.S. or Canadian Person. Each Manager has also
agreed that it will offer to sell shares only in compliance with all relevant
requirements of any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S.
Underwriters and Managers, including: (i) certain purchases and sales between
the U.S. Underwriters and the Managers, (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion, (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as Manager or by a Manager who is also acting
as a U.S. Underwriter and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is subject to United States or Canadian income taxation regardless of the
source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus summary in the relevant province of
Canada in which such offer is made.
Each Manager agrees that (i) it will not offer or sell any shares to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which will not involve an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 ("the
Regulations"); (ii) it will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulations with respect to anything done
by it in relation to the shares in, from, or otherwise involving the United
Kingdom; and (iii) it will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the offer of the shares
if that person is of a kind described in Article 11(3) of
S-65
<PAGE>
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996 or is a person to whom such document may otherwise lawfully be issued or
passed on.
No action has been or will be taken in any jurisdiction by the Company or
the Managers that would permit a public offering to the general public of the
shares offered hereby in any jurisdiction other than the United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the public offering price set forth on the cover page
of this Prospectus Supplement.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares as may be mutually agreed. The price of any shares so sold shall be the
public offering price as then in effect for shares being sold by the U.S.
Underwriters and the Managers, less all or any part of the selling concession,
unless otherwise determined by mutual agreement. To the extent that there are
sales between the U.S. Underwriters and the Managers pursuant to the Agreement
Between U.S. Underwriters and Managers, the number of shares initially
available for sale by the U.S. Underwriters and by the Managers may be more or
less than the number of shares appearing on the front cover of this Prospectus
Supplement.
Smith Barney Inc., NationsBanc Montgomery Securities LLC and TD Securities
(USA) Inc. have provided investment banking services to the Company and
certain of its affiliates in the past, including from time to time acting as
initial purchasers in connection with certain of the Company's or Hyperion's
private offerings of debt, for which they received usual and customary fees.
In addition, Smith Barney Inc., Credit Suisse First Boston Corporation and
NationsBanc Montgomery Securities LLC acted as underwriters in the Hyperion
IPO, for which they received usual and customary fees. Affiliates of
NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc. are agents
and lenders under certain of the Company's credit facilities. The Underwriters
may, in the future, provide investment banking services to the Company for
which they will receive compensation.
In connection with the Public Offerings and in compliance with applicable
law, the Underwriters may overallot (i.e., sell more Class A Common Stock than
the total amount shown on the lists of Underwriters and participations which
appear above) and may effect transactions which stabilize, maintain or
otherwise affect the market price of the Class A Common Stock at levels above
those which might otherwise prevail in the open market. Such transactions may
include placing bids for the Class A Common Stock or effecting purchases of
the Class A Common Stock for the purpose of pegging, fixing or maintaining the
price of the Class A Common Stock or for the purpose of reducing a syndicate
short position created in connection with the Public Offerings. A syndicate
short position may be covered by exercise of the options described above in
lieu of or in addition to open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby, if the
Representatives purchase Class A Common Stock in the open market for the
account of the underwriting syndicate and the securities purchased can be
traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the Class A Common Stock in question at the cost price to
the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
Because more than 10% of the net proceeds from the Public Offerings and the
Direct Placement may be received by affiliates of NASD members participating
in the Public Offerings, the Public Offerings are being conducted in
accordance with NASD Conduct Rule 2710(c)(8).
MARGIN AND PLEDGE ARRANGEMENTS
Adelphia has entered into an agreement with the Rigas Family, pursuant to
which 4,090,315 shares of Class A Common Stock will be offered and sold by
Adelphia in the Direct Placement directly to a subsidiary of Highland Holdings
(a partnership controlled by individual members of the Rigas Family).
S-66
<PAGE>
In connection with the Direct Placement, and other agreements, Highland
Communications, L.L.C. and Highland Preferred Communications, L.L.C.,
subsidiaries of Highland Holdings, a company controlled by individual members
of the Rigas Family have entered into agreements to pledge approximately
8,506,000 shares of Class A Common Stock (including shares acquired in the
Direct Placement) to an affiliate of Smith Barney Inc. and up to 80,000 shares
of Convertible Preferred Stock to an affiliate of NationsBanc Montgomery
Securities LLC as security for margin loans pursuant to margin and pledge
agreements. Pursuant to such pledge and margin loan arrangements, under
certain conditions, including the failure to maintain any required collateral
value, the pledgee will have, among other options, the right to cause
applicable pledged shares to be sold, with the proceeds of such sale to be
used to repay the amounts outstanding under any such loans. Adelphia has filed
and will maintain an effective shelf registration statement covering the
potential resale of any such pledged shares for the account of the applicable
Rigas Family members and pledgee for so long as such loans are outstanding.
Proceeds from these margin loans may be used for, among other purposes, the
purchase of the shares in the Direct Placement.
LEGAL MATTERS
The legality of the Class A Common Stock offered hereby will be passed upon
for the Company by Buchanan Ingersoll Professional Corporation, Pittsburgh,
Pennsylvania. Attorneys of that firm who are representing Adelphia in the
Public Offerings own an aggregate of 2,300 shares of Adelphia's Class A Common
Stock and 1,400 shares of Hyperion's Class A Common Stock. Certain legal
matters will be passed upon for the Underwriters by Latham & Watkins, New
York, New York. Certain legal matters with respect to regulation and
legislation concerning the cable television industry will be passed upon for
the Company by Fleischman and Walsh, Washington, D.C.
EXPERTS
The consolidated financial statements of Adelphia and its subsidiaries as of
March 31, 1997 and 1998, and for each of the three years in the period ended
March 31, 1998, and the consolidated financial statements and the related
financial statement schedules of Olympus Communications, L.P. and its
subsidiaries as of December 31, 1996 and 1997, and for each of the three years
in the period ended December 31, 1997, included in and/or incorporated in this
Prospectus Supplement by reference to the Company's Annual Report on Form 10-K
for the year ended March 31, 1998 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are so included and/or
incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
S-67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets, March 31, 1997 and 1998 ...................... F-3
Consolidated Statements of Operations, Years Ended March 31, 1996, 1997,
and 1998.................................................................. F-4
Consolidated Statements of Convertible Preferred Stock, Common Stock and
Other
Stockholders' Equity (Deficiency), Years Ended March 31, 1996, 1997, and
1998 ..................................................................... F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1996, 1997,
and 1998 ................................................................. F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Adelphia Communications Corporation:
We have audited the accompanying consolidated balance sheets of Adelphia
Communications Corporation and subsidiaries as of March 31, 1997 and 1998, and
the related consolidated statements of operations, of convertible preferred
stock, common stock and other stockholders' equity (deficiency), and of cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Adelphia Communications
Corporation and subsidiaries at March 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended March 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
June 10, 1998
F-2
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS:
- -------
Property, plant and equipment--net................... $ 659,575 $ 918,637
Intangible assets--net............................... 650,533 695,104
Cash and cash equivalents............................ 61,539 276,895
U.S. government securities--pledged.................. -- 70,535
Investments.......................................... 117,996 127,827
Preferred equity investment in Managed Partnership... 18,338 18,338
Subscriber receivables--net.......................... 24,692 30,551
Prepaid expenses and other assets--net............... 80,355 114,526
Related party receivables--net....................... 30,798 52,258
----------- -----------
Total............................................ $ 1,643,826 $ 2,304,671
=========== ===========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
- ----------------------------------------------
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
- ----------------------------------------
Subsidiary debt...................................... $ 1,369,367 $ 1,329,471
Parent debt.......................................... 1,174,672 1,580,274
Accounts payable..................................... 56,961 65,019
Subscriber advance payments and deposits............. 16,004 17,129
Accrued interest and other liabilities............... 127,938 125,824
Deferred income taxes................................ 110,097 116,351
----------- -----------
Total liabilities................................ 2,855,039 3,234,068
----------- -----------
Cumulative equity in loss in excess of investment in
and amounts due from Olympus........................ 42,668 31,202
----------- -----------
Hyperion redeemable exchangeable preferred stock..... -- 207,204
----------- -----------
Redeemable exchangeable preferred stock.............. -- 148,062
----------- -----------
Commitments and contingencies (Note 5)
Convertible preferred stock, common stock and
other stockholders' equity (deficiency):
8 1/8% Series C convertible preferred stock
($100,000 liquidation preference)................... -- 1
Class A common stock, $.01 par value, 200,000,000
shares authorized,
16,130,880 and 20,043,528 shares outstanding,
respectively........................................ 161 200
Class B common stock, $.01 par value, 25,000,000
shares authorized, 10,944,476 shares outstanding.... 109 109
Additional paid-in capital........................... 219,408 331,263
Accumulated deficit.................................. (1,473,559) (1,647,438)
----------- -----------
Convertible preferred stock, common stock and other
stockholders' equity (deficiency)................. (1,253,881) (1,315,865)
----------- -----------
Total............................................ $ 1,643,826 $ 2,304,671
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues...................................... $ 403,597 $ 472,778 $ 528,442
--------- --------- ---------
Operating expenses:
Direct operating and programming............ 124,116 148,982 167,288
Selling, general and administrative......... 68,357 81,763 95,731
Depreciation and amortization............... 111,031 124,066 145,041
Rate regulation............................. 5,300 -- --
--------- --------- ---------
Total..................................... 308,804 354,811 408,060
--------- --------- ---------
Operating income.............................. 94,793 117,967 120,382
--------- --------- ---------
Other income (expense):
Priority investment income from Olympus..... 28,852 42,086 47,765
Interest expense--net (see Note 1).......... (200,068) (232,325) (247,107)
Equity in loss of Olympus and other joint
ventures................................... (41,965) (51,946) (66,089)
Equity in loss of Hyperion joint ventures... (4,292) (7,223) (12,967)
Hyperion preferred stock dividends.......... -- -- (12,682)
Gain on sale of investments................. -- 12,151 2,538
--------- --------- ---------
Total..................................... (217,473) (237,257) (288,542)
--------- --------- ---------
Loss before income taxes and extraordinary
loss......................................... (122,680) (119,290) (168,160)
Income tax benefit............................ 2,786 358 5,606
--------- --------- ---------
Loss before extraordinary loss................ (119,894) (118,932) (162,554)
Extraordinary loss on early retirement of
debt......................................... -- (11,710) (11,325)
--------- --------- ---------
Net loss...................................... (119,894) (130,642) (173,879)
Dividend requirements applicable to preferred
stock........................................ -- -- (18,850)
--------- --------- ---------
Net loss applicable to common stockholders.... $(119,894) $(130,642) $(192,729)
========= ========= =========
Basic and diluted loss per weighted average
share of common stock before extraordinary
loss......................................... $ (4.56) $ (4.50) $ (6.07)
Basic and diluted extraordinary loss per
weighted average share on early retirement of
debt......................................... -- (0.44) (0.38)
--------- --------- ---------
Basic and diluted net loss per weighted
average share of common stock................ $ (4.56) $ (4.94) $ (6.45)
========= ========= =========
Weighted average shares of common stock
outstanding (in thousands)................... 26,305 26,411 29,875
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK, COMMON STOCK
AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES C CLASS CLASS
CONVERTIBLE A B ADDITIONAL
PREFERRED COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
----------- ------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1995. $ -- $149 $109 $211,190 $(1,223,023) $(1,011,575)
Issuance of Class A
common stock on April
3, 1995.............. -- 5 -- 4,995 -- 5,000
Excess of purchase
price of
acquired assets over
predecessor owners'
book
value................ -- -- -- (1,770) -- (1,770)
Net loss.............. -- -- -- -- (119,894) (119,894)
---- ---- ---- -------- ----------- -----------
Balance, March 31, 1996. -- 154 109 214,415 (1,342,917) (1,128,239)
Issuance of Class A
common
stock on February 10,
1997................. -- 7 -- 4,993 -- 5,000
Net loss.............. -- -- -- -- (130,642) (130,642)
---- ---- ---- -------- ----------- -----------
Balance, March 31, 1997. -- 161 109 219,408 (1,473,559) (1,253,881)
Issuance of Class A
common
stock on June 20,
1997................. -- 36 -- 24,964 -- 25,000
Issuance of Class A
common stock on March
6, 1998.............. -- 3 -- 8,828 -- 8,831
Issuance of Series C
convertible
preferred stock on
July 7, 1997......... 1 -- -- 96,999 -- 97,000
Dividend requirements
applicable
to exchangeable
preferred stock...... -- -- -- (14,246) -- (14,246)
Dividend requirements
applicable to
convertible preferred
stock................ -- -- -- (4,604) -- (4,604)
Other................. -- -- -- (86) -- (86)
Net loss.............. -- -- -- -- (173,879) (173,879)
---- ---- ---- -------- ----------- -----------
Balance, March 31, 1998. $ 1 $200 $109 $331,263 $(1,647,438) $(1,315,865)
==== ==== ==== ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(119,894) $(130,642) $(173,879)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation............................... 70,890 78,328 93,688
Amortization............................... 40,141 45,738 51,353
Noncash interest expense................... 16,288 41,360 37,430
Noncash dividends on Hyperion preferred
stock..................................... -- -- 12,682
Equity in loss of Olympus and other joint
ventures.................................. 41,965 51,946 66,089
Equity in loss of Hyperion nonconsolidated
joint ventures............................ 4,292 7,223 12,967
Rate regulation............................ 2,700 -- --
Gain on sale of investments................ -- (12,151) (2,538)
Extraordinary loss on early retirement of
debt...................................... -- 11,710 11,325
Decrease in deferred taxes, net of effects
of acquisitions........................... (3,930) (500) (6,305)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Subscriber receivables................... (3,370) (813) (4,351)
Prepaid expenses and other assets........ (14,465) (27,858) (23,437)
Accounts payable......................... 23,796 (9,784) 4,282
Subscriber advance payments and deposits. (1,788) 1,298 658
Accrued interest and other liabilities... 7,662 (12,854) (13,694)
--------- --------- ---------
Net cash provided by operating activities..... 64,287 43,001 66,270
--------- --------- ---------
Cash flows used for investing activities:
Acquisitions................................. (60,804) (143,412) (146,546)
Expenditures for property, plant and
equipment................................... (100,089) (129,609) (183,586)
Investments in Hyperion joint ventures....... (12,815) (34,769) (64,260)
Investments in other joint ventures.......... (11,518) (16,646) (22,591)
Investment in U.S. government securities--
pledged..................................... -- -- (83,400)
Sale of U.S. government securities--pledged.. -- -- 15,653
Amounts invested in and advanced to Olympus
and related parties......................... (4,236) (9,229) (91,468)
Proceeds from sale of investments............ -- 11,618 12,678
--------- --------- ---------
Net cash used for investing activities........ (189,462) (322,047) (563,520)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt........................... 273,508 1,280,649 1,298,137
Repayments of debt........................... (138,694) (933,517) (977,591)
Costs associated with debt financings........ (3,875) (20,236) (20,498)
Premium paid on early retirement of debt..... -- (8,207) (12,153)
Proceeds from Hyperion's issuance of
warrants.................................... -- 11,087 --
Issuance of redeemable exchangeable
preferred stock............................. -- -- 147,976
Issuance of convertible preferred stock...... -- -- 97,000
Issuance of Hyperion redeemable exchangeable
preferred stock............................. -- -- 194,522
Preferred stock dividends paid............... -- -- (14,787)
--------- --------- ---------
Net cash provided by financing activities..... 130,939 329,776 712,606
--------- --------- ---------
Increase in cash and cash equivalents......... 5,764 50,730 215,356
Cash and cash equivalents, beginning of year.. 5,045 10,809 61,539
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 10,809 $ 61,539 $ 276,895
========= ========= =========
Supplemental disclosure of cash flow
activity--
Cash payments for interest................... $ 198,369 $ 203,939 $ 220,888
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company and Basis for Consolidation
Adelphia Communications Corporation and subsidiaries ("Adelphia") owns,
operates and manages cable television systems and other related
telecommunications businesses. Adelphia's operations consist primarily of
selling video programming which is distributed to subscribers for a monthly
fee through a network of fiber optic and coaxial cables. These services are
offered in the respective franchise areas under the name Adelphia. Hyperion
Telecommunications, Inc. ("Hyperion") is a consolidated subsidiary of Adelphia
which owns operates and manages entities which provide competitive local
exchange carrier ("CLEC") telecommunications services.
The consolidated financial statements include the accounts of Adelphia and
its more than 50% owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
During the years ended March 31, 1996, 1997 and 1998, Adelphia consummated
several acquisitions, each of which was accounted for using the purchase
method. Accordingly, the financial results of each acquisition have been
included in the consolidated results of Adelphia effective with the date
acquired.
On April 12, 1995, Adelphia acquired cable systems from Clear Channels Cable
TV. These systems served approximately 10,700 subscribers at the acquisition
date located in Kittanning, New Bethlehem and Freeport, Pennsylvania and were
purchased for an aggregate price of $17,456.
On January 9, 1996, Adelphia acquired cable systems from Eastern Telecom
Corporation and Robinson Cable TV, Inc. These systems served approximately
24,000 subscribers at the acquisition date located in western Pennsylvania and
were purchased for an aggregate price of $43,000.
On April 1, 1996, Adelphia acquired cable systems from Cable TV Fund 11-B,
Ltd. These systems served approximately 39,700 subscribers at the acquisition
date located in the New York counties of Erie and Niagara and were purchased
for an aggregate price of $84,267.
On July 12, 1996, Adelphia acquired cable systems from First Carolina Cable
TV, L.P. These systems served approximately 32,500 subscribers at the
acquisition date primarily located in Vermont and were purchased for an
aggregate price of $48,500.
On February 10, 1997, Adelphia acquired the cable systems from Small Cities
Cable Television, L.P. and Small Cities Cable Television, Inc. (collectively,
"Small Cities"). These systems served approximately 6,000 subscribers at the
acquisition date, primarily located in Vermont and were purchased for an
aggregate price of $12,000 in cash and Adelphia Class A Common Stock.
On June 20, 1997, Adelphia acquired cable systems from Booth Communications
Company ("Booth"). These systems served approximately 25,800 subscribers at
the acquisition date in the Virginia cities of Blacksburg and Salem and were
purchased for an aggregate price of $54,500 in cash and Adelphia Class A
Common Stock.
On September 12, 1997, Hyperion consummated an agreement with Time Warner
Entertainment-Advance/Newhouse ("TWEAN") to exchange interests in four New
York CLEC networks. As a result of the transaction, Hyperion paid TWEAN $7,638
and increased its ownership in the networks serving Buffalo and Syracuse, New
York to 60% and 100%, respectively, and eliminated its interest in the Albany
and Binghamton networks, which became wholly owned by TWEAN.
F-7
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On November 7, 1997, Adelphia acquired approximately 61% of the partnership
interests in two cable systems from U.S. Cable Corporation. These systems
served approximately 20,300 subscribers at the acquisition date in the western
New York area and were purchased for an aggregate price of $20,737.
On November 22, 1997, Adelphia acquired a cable system from Memphrecom, Inc.
This system served approximately 3,400 subscribers at the acquisition date in
Vermont and was purchased for an aggregate price of $8,096.
On December 3, 1997, the Company exchanged its interest in Oxford, North
Carolina, a system which served approximately 4,400 subscribers, for TWEAN's
interest in its DuBois, Pennsylvania system, which served approximately 3,800
subscribers.
On December 31, 1997, Adelphia acquired 82% of the partnership interests in
Tele-Media Company of Tri States, L.P. The systems acquired in this
transaction served approximately 16,000 subscribers at the acquisition date in
Pennsylvania, Maryland and West Virginia and were purchased for an aggregate
price of $23,615.
On February 12, 1998, Hyperion issued a warrant for 731,624 shares of
Hyperion Class A Common Stock to its 50% partner in Hyperion of Harrisburg in
exchange for such partnership interest.
On February 12, 1998, Hyperion acquired the remaining partnership interests
in its Buffalo, NY, Louisville, KY and Lexington, KY networks for
approximately $18,300.
On February 12, 1998, Hyperion acquired the remaining partnership interests
in its Morristown and New Brunswick, NJ networks for approximately $26,328.
On March 6, 1998, Adelphia exercised its option to purchase the remaining
15% of its Northeast Cable, Inc. system. The Company issued 341,220 shares of
Class A Common Stock to the sellers in connection with this purchase.
Investment in Olympus Joint Venture Partnership
The investment in the Olympus joint venture partnership comprises both
limited and general partner interests. The general partner interest represents
a 50% voting interest in Olympus and is being accounted for using the equity
method. Under this method, Adelphia's investment, initially recorded at the
historical cost of contributed property, is adjusted for subsequent capital
contributions and its share of the losses of the partnership as well as its
share of the accretion requirements of the partnership's interests. The
limited partner interest represents a preferred interest ("PLP interests")
entitled to a 16.5% annual return.
The PLP interests are nonvoting, are senior to claims of certain other
partner interests, and provide for an annual priority return of 16.5%. Olympus
is not required to pay the entire 16.5% return currently and priority return
on PLP interests is recognized as income by Adelphia when received.
Correspondingly, equity in net loss of Olympus excludes accumulated unpaid
priority return (see Note 2).
Subscriber Revenues
Subscriber revenues are recorded in the month the service is provided.
F-8
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Property, Plant and Equipment
Property, plant and equipment, at cost, are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Operating plant and equipment...................... $ 969,900 $1,290,915
Real estate and improvements....................... 68,091 78,435
Support equipment.................................. 28,808 26,961
Construction in progress........................... 134,403 171,853
---------- ----------
1,201,202 1,568,164
Accumulated depreciation........................... (541,627) (649,527)
---------- ----------
$ 659,575 $ 918,637
========== ==========
</TABLE>
Depreciation is computed on the straight-line method using estimated useful
lives of 5 to 12 years for operating plant and equipment and 3 to 20 years for
support equipment and real estate. Additions to property, plant and equipment
are recorded at cost which includes amounts for material, applicable labor and
overhead, and interest. Capitalized interest amounted to $1,766, $1,727 and
$5,985 for the years ended March 31, 1996, 1997 and 1998, respectively.
Intangible Assets
Intangible assets, at cost, net of accumulated amortization, are comprised
of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Purchased franchises.................................... $486,887 $526,333
Goodwill................................................ 71,263 89,029
Non-compete agreements.................................. 12,937 8,705
Purchased subscribers lists............................. 79,446 71,037
-------- --------
$650,533 $695,104
======== ========
</TABLE>
A portion of the aggregate purchase price of systems acquired has been
allocated to purchased franchises, purchased subscriber lists, goodwill and
non-compete agreements. Purchased franchises and goodwill are amortized on the
straight-line method over 40 years. Purchased subscriber lists are amortized
on the straight-line method over periods which range from 5 to 10 years. Non-
compete agreements are amortized on the straight-line method over their
contractual lives which range from 4 to 12 years. Accumulated amortization of
intangible assets amounted to $170,801 and $211,967 at March 31, 1997 and
1998, respectively.
Cash and Cash Equivalents
Adelphia considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Interest income on liquid
investments was $1,859, $5,789 and $13,383 for the years ended March 31, 1996,
1997, and 1998, respectively. Book overdrafts of $25,700 and $20,528 existed
at March 31, 1997 and 1998, respectively. These book overdrafts were
reclassified as accrued interest and other liabilities and accounts payable.
F-9
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
U.S. Government Securities--Pledged
U.S. Government Securities--Pledged consist of highly liquid investments
which will be used to pay the first six semi-annual interest payments of the
Hyperion 12 1/4% Senior Secured Notes. Such investments are classified as held
to maturity and carrying value approximates market value.
Investments
The equity method of accounting is generally used to account for investments
in affiliates which are greater than 20% but not more than 50% owned. Under
this method, Adelphia's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its affiliates. Dividends or other distributions are recorded as a
reduction of Adelphia's investment. Investments in affiliates accounted for
using the equity method generally reflect Adelphia's equity in their
underlying assets.
Investments in entities in which Adelphia's ownership is less than 20% and
investments greater than 20% in which Adelphia does not influence the
operating or financial decisions of the entity are generally accounted for
using the cost method. Under the cost method, Adelphia's initial investment is
recorded at cost and subsequently adjusted for the excess, if any, of
dividends or other distributions received over its share of cumulative
earnings. Dividends received in excess of earnings subsequent to the date the
investment was made are recorded as reductions of the cost of the investment.
The balance of Adelphia's nonconsolidated investments is as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD:
Gross investment:
Hyperion investments in joint ventures............. $ 57,497 $ 66,647
Paging............................................. 14,990 15,539
Mobile communications.............................. 2,470 15,387
Other.............................................. 1,751 4,706
-------- --------
Total............................................ 76,708 102,279
-------- --------
INVESTMENTS ACCOUNTED FOR USING THE COST METHOD:
Niagara Frontier Hockey, L.P. ..................... 35,270 40,497
SuperCable ALK International....................... 3,172 3,190
Programming ventures............................... 2,945 1,427
Mobile communications.............................. 1,832 2,582
Other.............................................. 763 812
-------- --------
Total............................................ 43,982 48,508
-------- --------
AVAILABLE FOR SALE INVESTMENTS RECORDED AT FAIR MAR-
KET VALUE:
Republic Industries, Inc........................... 9,315 --
-------- --------
Total investments before cumulative equity in net
losses.............................................. 130,005 150,787
Cumulative equity in net losses...................... (12,009) (22,960)
-------- --------
Total investments.................................... $117,996 $127,827
======== ========
</TABLE>
On May 16, 1996, Hyperion sold its interest in one of its joint ventures for
$11,618, resulting in a gain of $8,405. On January 23, 1997, Adelphia received
284,425 shares of Republic Industries, Inc. Common Stock ("Republic Stock") in
exchange for its interest in Commonwealth Security, Inc., resulting in a gain
of $3,746.
F-10
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On October 7, 1997, the Company sold its Republic Stock, on which a gain of
$408 was recognized. On March 16, 1998, the Company sold its investment in the
Golf Channel, resulting in a gain of $1,520.
Certain members of the Rigas Family have entered into an agreement to
acquire all the voting interests of Niagara Frontier Hockey, L.P. ("NFHLP").
In connection with the agreement, Adelphia agreed to purchase additional NFHLP
capital funding notes of approximately $11,000. Closing is subject to National
Hockey League and bank approvals.
Subscriber Receivables
An allowance for doubtful accounts of $1,345 and $1,166 has been deducted
from subscriber receivables at March 31, 1997 and 1998, respectively.
Amortization of Other Assets and Debt Discounts
Deferred debt financing costs, included in prepaid expenses and other
assets, and debt discounts, a reduction of the carrying amount of the debt,
are amortized over the term of the related debt. The unamortized amounts of
deferred debt financing costs included in prepaid expenses and other assets
were $35,786 and $47,653 at March 31, 1997 and 1998, respectively.
Franchise Expense
The typical term of Adelphia's franchise agreements upon renewal is 10
years. Franchise fees range from 3% to 5% of subscriber revenues and are
expensed currently.
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.
Asset Impairments
Adelphia periodically reviews the carrying value of its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying value of assets may not be recoverable. Measurement of any impairment
would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.
Noncash Financing and Investing Activities
There were no material capital leases entered into during the year ended
March 31, 1996. Capital leases entered into during the years ended March 31,
1997 and 1998 totaled $1,624 and $2,842, respectively, for Adelphia, excluding
Hyperion. Hyperion entered into capital leases totaling $1,683 and $24,489,
respectively, during the years ended March 31, 1997 and 1998. Reference is
made to Notes 1 and 6 for descriptions of additional noncash financing and
investing activities.
F-11
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest Expense--Net
Interest expense--net includes interest income of $10,623, $8,367 and
$23,949 for the years ended March 31, 1996, 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 (see Note 11).
Interest Rate Swaps
Net settlement amounts under interest rate swap agreements are recorded as
adjustments to interest expense during the period incurred.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
significant effect on the Company's financial statements or disclosures. SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," has
been issued and is effective for fiscal quarters beginning after June 15,
1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," has
been issued and is effective for fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on the financial reporting of start-up costs
and organization costs. It requires such costs to be expensed as incurred.
Management of the Company has not evaluated the impact of SFAS 133 or SOP 98-
5.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
2. RELATED PARTY INVESTMENTS AND RECEIVABLES:
Related party receivables--net represent advances to managed partnerships
(see Note 11), John J. Rigas and certain members of his immediate family,
including entities they own or control (collectively, the "Rigas family"). No
related party advances are collateralized.
F-12
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Cumulative equity in loss in excess of investment in and amounts due from
Olympus is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Cumulative equity in loss over investment in Olympus. $(95,771) $(94,833)
Amounts due from Olympus............................. 53,103 63,631
-------- --------
$(42,668) $(31,202)
======== ========
</TABLE>
On March 28, 1996, ACP, Telesat, Olympus, Adelphia and certain shareholders
of Adelphia entered into an agreement which amended certain aspects of the
Olympus Partnership Agreement. The amendment provides for the repayment of
certain amounts owed to Telesat totaling $20,000, the release of certain
obligations of Telesat to Olympus and the reduction of Telesat's PLP and
accrued priority return balances by $20,000. The amendment further provides
for a $40,000 distribution to Adelphia as a reduction of its PLP interests and
accrued priority return. These repayments and distributions were made on March
29, 1996 and were funded through internally generated funds and advances from
an affiliate. At March 31, 1996, 1997 and 1998 Adelphia owned $222,860,
$271,546, and $325,911 in Olympus PLP Interests, respectively.
The major components of the financial position of Olympus as of December 31,
1996 and 1997 and March 31, 1997 and 1998 and the results of operations for
the years ended December 31, 1996 and 1997 and the three months ended March
31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Property, plant and equipment--
net............................. $ 225,775 $ 265,783 $ 229,140 $ 273,162
Total assets..................... 640,221 728,952 627,392 732,336
Subsidiary debt.................. 309,000 427,000 294,000 470,000
Parent debt...................... 200,000 200,000 200,000 200,000
Total liabilities................ 724,420 841,169 715,309 849,582
Limited partners' interests...... 407,669 488,378 427,325 508,873
General partners' equity
(deficiency).................... (491,868) (600,615) (515,242) (626,119)
Statement of Operations Data:
Revenues......................... $ 159,870 $ 176,363 $ 41,411 $ 50,918
Operating income................. 33,013 34,392 7,735 9,642
Net loss......................... (10,950) (19,802) (5,318) (4,663)
Net loss of general and limited
partners after priority return.. (76,594) (95,695) (23,324) (25,455)
</TABLE>
On October 6, 1993, Adelphia purchased the preferred Class B Limited
Partnership Interest in Syracuse Hilton Head Holdings, L.P. ("SHHH"), a
managed partnership, for a price of $18,338 from Robin Media Group. SHHH is a
joint venture of the Rigas Family and Tele-Communications, Inc. ("TCI"), which
owns systems managed by Adelphia. The Class B Limited Partnership Interest has
a preferred return annually which is payable on a current basis at the option
of SHHH, and is senior in priority to the partnership interests of the Rigas
family and TCI. Preferred return on the Class B Limited Partner Interest in
SHHH totaled $2,645, $3,066 and $3,750 and is included in revenues for the
years ended March 31, 1996, 1997 and 1998, respectively.
F-13
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During the year ended March 31, 1994, Adelphia made loans in the net amount
of $15,000 to SHHH, to facilitate the acquisition of cable television systems
serving Palm Beach County, Florida from unrelated parties. During fiscal year
1995, Adelphia sold its investment in Tele-Media Investment Partnership, L.P.
("TMIP") to SHHH for $13,000. On January 31, 1995, a wholly owned subsidiary
of Adelphia received a $20,000 preferred investment from SHHH to facilitate
the acquisition of TMV cable properties.
3. DEBT:
SUBSIDIARY DEBT
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
Notes to banks and institutions...................... $1,159,500 $ 827,725
13% Senior Discount Notes of Hyperion due 2003....... 187,173 215,213
12 1/4% Senior Secured Notes of Hyperion due 2004.... -- 250,000
Other subsidiary debt................................ 22,694 36,533
---------- ----------
Total subsidiary debt............................ $1,369,367 $1,329,471
========== ==========
</TABLE>
Notes to Banks and Institutions
The amount of borrowings available to Adelphia under its revolving credit
agreements is generally based upon the subsidiaries achieving certain levels
of operating performance. Adelphia had commitments from banks for additional
borrowings of up to $235,620 at March 31, 1998 which expire through December
31, 2004. Adelphia pays commitment fees of up to .5% of unused principal.
Borrowings under most of these credit arrangements of subsidiaries are
collateralized by a pledge of the stock in their respective subsidiaries, and,
in some cases, by other assets. These agreements limit, among other things,
additional borrowings, investments, transactions with affiliates and other
subsidiaries, and the payment of dividends and fees by the subsidiaries. The
agreements also require maintenance of certain financial ratios by the
subsidiaries. Several of the subsidiaries' agreements, along with the notes of
the parent company, contain cross default provisions. At March 31, 1998,
approximately $442,000 of the net assets of subsidiaries would be permitted to
be transferred to the parent company in the form of dividends, priority return
and loans without the prior approval of the lenders based upon the results of
operations of such subsidiaries for the quarter ended March 31, 1998. The
subsidiaries are permitted to pay management fees to the parent company or
other subsidiaries. Such fees are limited to a percentage of the subsidiaries'
revenues.
A subsidiary of Adelphia is a co-borrower with a managed partnership under a
$200,000 credit agreement. Each of the co-borrowers is liable for all
borrowings under this credit agreement, although the lenders have no recourse
against Adelphia other than against Adelphia's interest in such subsidiary.
Notes to banks and institutions mature at various dates through 2005. Bank
debt interest rates are based upon one or more of the following rates at the
option of Adelphia: prime rate plus 0% to 1.75%; certificate of deposit rate
plus 1.125% to 2.125%; or LIBOR plus .625% to 2.75%. Total bank debt with
interest rates under these options was $813,200 and $644,000 at March 31, 1997
and 1998, respectively. At March 31, 1997 and 1998, the weighted average
interest rate on notes payable to banks and institutions was 8.83% and 8.11%,
respectively. At March 31, 1997 and 1998, the rates on 45.5% and 28.8%,
respectively, of Adelphia's notes payable to banks and institutions were fixed
for at least one year through the terms of the notes or interest rate swap
agreements. During fiscal 1997, as a result of a bank refinancing, Adelphia
recognized an extraordinary loss on early retirement of debt of $2,079
representing the write-off of unamortized debt financing costs.
F-14
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13% Senior Discount Notes of Hyperion due 2003
On April 15, 1996, Hyperion realized proceeds, net of discount, commissions
and other transaction costs, of $168,600 upon issuance of $329,000 aggregate
principal amount of unsecured 13% Senior Discount Notes due April 15, 2003 and
329,000 warrants expiring April 1, 2001 to purchase an aggregate of 1,993,638
shares of Class A Common Stock of Hyperion at $0.00308 per share. Proceeds of
$11,087 were allocated to the value of the warrants. If all warrants were
exercised, the warrants would represent approximately 3.73% of the common
stock of Hyperion on a fully diluted basis. Proceeds were used to repay
certain indebtedness to Adelphia, to make loans to certain key Hyperion
officers and to fund Hyperion's expansion of its existing markets, to complete
construction of new networks and to enter additional markets, including
related capital expenditures, working capital requirements, operating losses
and investments in joint ventures. Prior to April 15, 2001, interest on the
notes is not payable in cash, but is added to principal. Thereafter, interest
is payable semi-annually commencing October 15, 2001. The notes contain
restrictions on Hyperion regarding, among other things, limitations on
additional borrowings, issuance of equity instruments, payment of dividends
and other distributions, repurchase of equity instruments or subordinated
debt, liens, transactions with affiliates, sales of assets, mergers and
consolidations. On or before April 15, 1999 and subject to certain
restrictions, Hyperion may redeem, at its option, up to 25% of the aggregate
principal amount of the notes at a price of 113% of the outstanding amount. On
or after April 15, 2001, Hyperion may redeem, at its option, all or a portion
of the notes at 106.5% of the outstanding amount, declining to par in 2002.
12 1/4% Senior Secured Notes of Hyperion due 2004
On August 27, 1997, Hyperion issued $250,000 aggregate principal amount of
12 1/4% Senior Secured Notes due September 1, 2004. The notes are
collateralized through the pledge of the common stock of certain of Hyperion's
wholly-owned subsidiaries. Of the proceeds to Hyperion of approximately
$244,000, net of commissions and other transaction costs, $83,400 was invested
in U.S. government securities and placed in an escrow account for payment in
full when due of the first six scheduled semi-annual interest payments on the
notes as required by the Indenture. The remainder of such proceeds will be
used to fund the acquisition of increased ownership interests in certain of
its networks, for capital expenditures, including the construction and
expansion of new and existing networks, and for general corporate and working
capital purposes. Interest is payable semi-annually commencing March 1, 1998.
The notes contain restrictions and covenants similar to those pertaining to
Hyperion's 13% Senior Discount Notes. On or before September 1, 2000 and
subject to certain restrictions, Hyperion may redeem, at its option, up to 25%
of the aggregate principal amount of the notes at a price of 112.25% of
principal with the net proceeds of one or more Qualified Equity Offerings (as
defined in the Indenture). On or after September 1, 2001, Hyperion may redeem,
at its option, all or a portion of the notes at 106.125% of principal which
declines to par in 2003.
PARENT DEBT
Interest on the Parent Debt is due semi-annually. The Parent Debt is
effectively subordinated to all liabilities of the subsidiaries and the
agreements contain restrictions on, among other things, the incurrence of
indebtedness, mergers and sale of assets, certain restricted payments by
Adelphia, investments in affiliates and certain other affiliate transactions.
The agreements further require that Adelphia maintain a ratio of debt to
annualized operating cash flow not greater than 8.75 to 1.00, based on the
latest fiscal quarter. Net proceeds from the issuance of notes during fiscal
1996, 1997, and 1998 were used to reduce amounts outstanding on Adelphia's
F-15
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
subsidiaries' notes payable to banks and to purchase, redeem or otherwise
retire a portion of 12 1/2% Notes due 2002.
<TABLE>
<CAPTION>
OUTSTANDING AS OF
MARCH 31, FIRST
INTEREST ISSUE AMOUNT --------------------- MATURITY CALL FIRST CALL
RATE DATE ISSUED 1997 1998 DATE DATE RATE
-------- ------- -------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
10 1/4% 7/28/93 $110,000 $ 99,322 $ 99,504 7/15/00 Non-call N/A
12 1/2%(a) 5/14/92 400,000 277,385 69,838 5/15/02 5/15/97 106.00%
9 1/4% 9/25/97 325,000 -- 325,000 10/1/02 Non-call N/A
9 1/2%(b) 2/15/94 150,000 197,897 186,347 2/15/04 2/15/99 103.56%
10 1/2% 7/07/97 150,000 -- 150,000 7/15/04 Non-call N/A
11 7/8% 9/10/92 125,000 124,539 124,579 9/15/04 9/15/99 104.50%
9 7/8% 3/11/93 130,000 128,255 128,407 3/01/05 Non-call N/A
9 7/8% 2/26/97 350,000 347,274 347,446 3/01/07 Non-call N/A
8 3/8% 1/15/98 150,000 -- 149,153 1/15/08 Non-call N/A
---------- ----------
$1,174,672 $1,580,274
========== ==========
</TABLE>
- --------
(a) During fiscal 1997, $122,615 of notes were reacquired through open market
purchases. As a result, Adelphia recognized an extraordinary loss on early
retirement of debt of $9,631, which represents the excess of reacquisition
cost over the net carrying value of the related debt. On October 31, 1997,
Adelphia redeemed $202,000 aggregate principal amount of notes at 106% of
principal and recognized an extraordinary loss on early retirement of debt
of $13,461, which represents the excess of reacquisition cost over the net
carrying value of the related debt. On May 15, 1998, Adelphia redeemed the
remaining $69,838 aggregate principal amount of notes at 103% of
principal.
(b) On or prior to February 1999, all interest on these Senior Pay-In-Kind
notes may at the option of Adelphia be paid in cash or through the
issuance of additional notes valued at 100% of their principal amount. The
notes will bear cash interest from February 1999 through maturity. During
fiscal 1998, $20,000 of notes were reacquired through open market
purchases. As a result, Adelphia recognized an extraordinary gain on early
retirement of debt of $2,136.
MATURITIES OF DEBT
The following table sets forth the mandatory reductions in principal under
all debt agreements for each of the next five years based on amounts
outstanding at March 31, 1998:
<TABLE>
<S> <C>
Year ending March 31, 1999....................................... $128,213
Year ending March 31, 2000....................................... 50,268
Year ending March 31, 2001....................................... 169,288
Year ending March 31, 2002....................................... 157,740
Year ending March 31, 2003....................................... 573,091
</TABLE>
The Company intends to fund its requirements for maturities of debt through
borrowings under new and existing credit arrangements and internally generated
funds. Changing conditions in the financial markets may have an impact on how
Adelphia will refinance its debt in the future.
INTEREST RATE SWAPS AND CAPS
Adelphia has entered into interest rate swap agreements and interest rate
cap agreements with banks, Olympus and Managed Partnerships (see Note 10) to
reduce the impact of changes in interest rates on its debt.
F-16
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Several of Adelphia's credit arrangements include provisions which require
interest rate protection for a portion of its debt. Adelphia enters into pay-
fixed agreements to effectively convert a portion of its variable-rate debt to
fixed-rate debt to reduce the risk of incurring higher interest costs due to
rising interest rates. Adelphia enters into receive-fixed agreements to
effectively convert a portion of its fixed-rate debt to a variable-rate debt
which is indexed to LIBOR to reduce the risk of incurring higher interest
costs in periods of falling interest rates. Interest rate cap agreements are
used to reduce the impact of increases in interest rates on variable rate
debt. Adelphia is exposed to credit loss in the event of nonperformance by the
banks, by Olympus or by the managed entities. Adelphia does not expect any
such nonperformance. The following table summarizes the notional amounts
outstanding and weighted average interest rate data, based on variable rates
in effect at March 31, 1997 and 1998, for these swaps and caps, all of which
expire through 1999.
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Pay Fixed Swaps:
----------------
Notional amount........................................ $340,000 $315,000
Average receive rate................................... 5.67% 5.87%
Average pay rate....................................... 7.64% 7.42%
Receive Fixed Swaps:
--------------------
Notional amount........................................ $ 35,000 $ 35,000
Average receive rate................................... 5.68% 5.68%
Average pay rate....................................... 5.50% 5.91%
Interest Rate Caps:
-------------------
Notional amount........................................ $165,000 $190,000
Average cap rate....................................... 8.30% 8.13%
</TABLE>
4. REDEEMABLE PREFERRED STOCK:
12 7/8% Hyperion Redeemable Exchangeable Preferred Stock
On October 9, 1997, Hyperion issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due
October 15, 2007. Proceeds to Hyperion will be used to fund the acquisition of
increased ownership interests in certain of its networks, for capital
expenditures, including the construction and expansion of new and existing
networks, and for general corporate and working capital purposes.
Dividends are payable quarterly commencing January 15, 1998 at 12 7/8% of
the liquidation preference of outstanding preferred stock. Through October 15,
2002, dividends are payable in cash or additional shares of preferred stock at
Hyperion's option. Subsequent to October 15, 2002, dividends are payable in
cash. The preferred stock ranks junior in right of payment to all indebtedness
of Hyperion, its Subsidiaries and Joint Ventures. On or before October 15,
2000, and subject to certain restrictions, Hyperion may redeem, at it option,
up to 35% of the initial aggregate liquidation preference of the preferred
stock originally issued with the net cash proceeds of one or more Qualified
Equity Offerings (as defined in the Certificate of Designation) at a
redemption price equal to 112.875% of the liquidation preference per share of
the preferred stock, plus, without duplication, accumulated and unpaid
dividends to the date of redemption; provided that, after any such redemption,
there are remaining outstanding shares of preferred stock having an aggregate
liquidation preference of at least 65% of the initial aggregate liquidation
preference of the preferred stock originally issued. On or after October 15,
2002, Hyperion may redeem, at its option, all or a portion of the preferred
stock at 106.438% of the liquidation preference thereof declining to 100% of
the liquidation preference in 2005. Hyperion is required to
F-17
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
redeem all of the shares of preferred stock outstanding on October 15, 2007 at
a redemption price equal to 100% of the liquidation preference thereof, plus,
without duplication, accumulated and unpaid dividends to the date of
redemption. The preferred stock contain restrictions and covenants similar to
Hyperion's 13% Senior Discount Notes.
Hyperion may, at its option, on any dividend payment date, exchange in
whole, but not in part, the then outstanding shares of preferred stock for 12
7/8% Senior Subordinated Debentures due October 15, 2007 which have provisions
consistent with the provisions of the preferred stock. Hyperion satisfied the
dividend requirements on this preferred stock by issuing 6,860 additional
shares of Preferred Stock in January 1998.
13% Exchangeable Redeemable Preferred Stock
On July 7, 1997, Adelphia issued $150,000 aggregate liquidation preference
of 13% Cumulative Exchangeable Preferred Stock due July 15, 2009. Proceeds
were used to reduce amounts outstanding on Adelphia's subsidiaries' notes
payable to banks and institutions.
Dividends are payable semi-annually commencing January 15, 1998 at 13% of
the liquidation preference of outstanding preferred stock. Dividends are
payable in cash with any accumulated unpaid dividends bearing interest at 13%
per annum. The preferred stock ranks junior in right of payment to all
indebtedness of Adelphia. On or before July 15, 2000, Adelphia may redeem, at
its option, up to 33% of the initial aggregate liquidation preference of the
preferred stock originally issued with the net cash proceeds of one or more
common equity offerings at a redemption price equal to 113% of the liquidation
preference per share of the preferred stock, plus, without duplication,
accumulated and unpaid dividends to the date of redemption; provided that,
after any such redemption, there are remaining outstanding shares of preferred
stock having an aggregate liquidation preference of at least 67% of the
initial aggregate liquidation preference of the preferred stock originally
issued. On or after July 15, 2002, Adelphia may redeem, at its option, all or
a portion of the preferred stock at 106.500% of the liquidation preference
thereof declining to 100% of the liquidation preference in 2008. Adelphia is
required to redeem all of the shares of preferred stock outstanding on July
15, 2009 at a redemption price equal to 100% of the liquidation preference
thereof, plus, without duplication, accumulated and unpaid dividends to the
date of redemption. The preferred stock contains restrictions and covenants
similar to Adelphia's parent debt.
Adelphia may, at its option, on any dividend payment date, exchange in whole
or in part (subject to certain restrictions), the then outstanding shares of
preferred stock for 13% Senior Subordinated Exchange Debentures due July 15,
2009 which have provisions consistent with the provisions of the preferred
stock. The Company paid cash dividends on this preferred stock of $10,183
during the year ended March 31, 1998.
5. COMMITMENTS AND CONTINGENCIES:
Adelphia rents office and studio space, tower sites, and space on utility
poles under leases with terms which are generally less than one year or under
agreements that are generally cancelable on short notice. Total rental expense
under all operating leases aggregated $4,687, $6,232 and $7,420 for the years
ended March 31, 1996, 1997 and 1998, respectively.
In connection with certain obligations under franchise agreements, Adelphia
obtains surety bonds guaranteeing performance to municipalities and public
utilities. Payment is required only in the event of nonperformance. Management
believes Adelphia has fulfilled all of its obligations such that no payments
under surety bonds have been required.
F-18
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On January 8, 1998, Adelphia signed a definitive agreement to establish a
partnership into which Tele-Communications, Inc. ("TCI") will contribute its
cable systems in Buffalo, New York; Erie, Pennsylvania; and Ashtabula and Lake
County, Ohio, totaling approximately 166,000 subscribers, and Adelphia will
contribute its Western New York and Lorain, Ohio systems, totaling
approximately 298,000 subscribers. Upon closing of the transaction, TCI will
hold a minority interest in the partnership. Adelphia will manage the
partnership and will consolidate the partnership's results for financial
reporting purposes. The Company expects that the transaction will close prior
to September 30, 1998.
On March 2, 1998, Adelphia entered into a definitive agreement for the
purchase of cable television systems from Marcus Cable, Inc. These systems
will be acquired for $150,000 cash and serve approximately 62,000 subscribers
in Connecticut and Virginia. The acquisition, which will be accounted for
under the purchase method of accounting, is expected to close during fiscal
year 1999.
The cable television industry and Adelphia are subject to extensive
regulation at the federal, state and local levels. Pursuant to the 1992 Cable
Act, which significantly expanded the scope of regulation of certain
subscriber rates and a number of other matters in the cable industry 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, or, in the alternative, a cost of service showing, 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 original rate
regulations became effective on September 1, 1993. Several amendments to the
rate regulations have subsequently been added.
The FCC has adopted regulations implementing all of the requirements of the
1992 Cable Act. The FCC is also likely to continue to modify, clarify or
refine the rate regulations. The Telecommunications Act of 1996 (the "1996
Act") deregulates the rates for cable programming services on March 31, 1999.
Adelphia cannot predict the effect or outcome of the future rulemaking
proceedings, changes to the rate regulations, or litigation.
6. CONVERTIBLE PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(DEFICIENCY):
Convertible Preferred Stock
On July 7, 1997, Adelphia issued 100,000 shares of 8 1/8% Series C
Cumulative Convertible Preferred Stock with a par value of $.01 per share and
an aggregate liquidation preference of $100,000 of which $80,000 was sold to a
Rigas family affiliate and the remainder was sold to a wholly owned subsidiary
of FPL Group, Inc., an affiliate of Olympus. The preferred stock accrues
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 preferred stock is redeemable at the
option of Adelphia on or after August 1, 2000 at 104% of the liquidation
preference declining to 100% of the liquidation preference in 2002. The
Company paid cash dividends on this preferred stock of $4,605 during the year
ended March 31, 1998.
Common Stock
On April 3, 1995, Olympus purchased from Adelphia, through a charge to its
receivable balance with Adelphia, 457,300 shares of Adelphia Class A Common
Stock for $5,000. Olympus used the stock in the acquisition of the cable and
security systems of WB Cable Associates, Ltd.
On February 10, 1997, Adelphia issued 766,871 shares of Class A Common Stock
in connection with the acquisition of Small Cities (see Note 1).
F-19
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On June 20, 1997, Adelphia issued 3,571,428 shares of Class A Common Stock
in connection with the acquisition of Booth (see Note 1).
On March 6, 1998, Adelphia issued 341,220 shares of Class A Common Stock in
connection with exercising its option to purchase the remaining 15% of its
Northeast Cable, Inc. system (see Note 1).
The Certificate of Incorporation of Adelphia authorizes two classes of
common stock, Class A and Class B. Holders of Class A Common Stock and Class B
Common Stock vote as a single class on all matters submitted to a vote of the
stockholders, with each share of Class A Common Stock entitled to one vote and
each share of Class B Common Stock entitled to ten votes, except (i) for the
election of directors and (ii) as otherwise provided by law. In the annual
election of directors, the holders of Class A Common Stock voting as a
separate class, are entitled to elect one of Adelphia's directors. In
addition, each share of Class B Common Stock is automatically convertible into
a share of Class A Common Stock upon transfer, subject to certain limited
exceptions. In the event a cash dividend is paid, the holders of Class A
Common Stock will be paid 105% of the amount payable per share for each share
of Class B Common Stock.
Upon liquidation, dissolution or winding up of Adelphia, the holders of
Class A Common Stock are entitled to a preference of $1.00 per share. After
such amount is paid, holders of Class B Common Stock are entitled to receive
$1.00 per share. Any remaining amount would then be shared ratably by both
classes.
Restricted Stock Bonus Plan
Adelphia has reserved 500,000 shares of Class A Common Stock for issuance to
officers and other key employees at the discretion of the Compensation
Committee of the Board of Directors. The bonus shares will be awarded without
any cash payment by the recipient unless otherwise determined by the
Compensation Committee. Shares awarded under the plan vest over a five year
period. No awards have been made under the plan.
Stock Option Plan
Adelphia has a stock option plan, which provides for the granting of options
to purchase up to 200,000 shares of Adelphia's Class A Common Stock to
officers and other key employees of the Company and its subsidiaries. Options
may be granted at an exercise price equal to the fair market value of the
shares on the date of grant. The plan permits the granting of tax-qualified
incentive stock options, in addition to non-qualified stock options. Options
outstanding under the plan may be exercised by paying the exercise price per
share through various alternative settlement methods. No stock options have
been granted under the plan.
7. EMPLOYEE BENEFIT PLANS:
Savings Plan
Adelphia has a savings plan (401(k)) which provides that eligible full-time
employees may contribute from 3% to 16% of their pre-tax compensation subject
to certain limitations. Adelphia makes matching contributions not exceeding
1.5% of each participant's pre-tax compensation. Adelphia's matching
contributions amounted to $350, $638 and $687 for the years ended March 31,
1996, 1997 and 1998, respectively.
Hyperion Long-Term Incentive Compensation Plan
On October 3, 1996, Hyperion adopted its 1996 Long-Term Incentive
Compensation Plan (the "1996 Plan"). The 1996 Plan provides for the granting
of (i) options which qualify as "incentive stock options" within
F-20
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
(ii) options which do not so qualify, (iii) share awards (with or without
restrictions on vesting), (iv) stock appreciation rights and (v) stock
equivalent or phantom units. The number of shares of Hyperion Class A Common
Stock available for issuance initially was 5,687,500. Such number is to
increase each year by 1% of outstanding shares of all classes of Hyperion
Common Stock, up to a maximum of 8,125,000 shares. Options, awards and units
may be granted under the 1996 Plan to directors, officers, employees and
consultants. The 1996 Plan provides that incentive stock options must be
granted with an exercise price of not less than the fair market value of the
underlying Hyperion Common Stock on the date of grant. Options outstanding
under the Plan may be exercised by paying the exercise price per share through
various alternative settlement methods. On March 4, 1997 and April 1, 1997 and
1998, Hyperion issued 338,000 shares, 58,500 shares and 58,500 shares,
respectively, of its Class A Common Stock to Daniel R. Milliard pursuant to
his employment agreement with Hyperion. In April 1998 and in recognition for
valuable past service to Hyperion and as an incentive for future services,
Hyperion authorized the issuance under the 1996 Plan to each of John J. Rigas,
Michael J. Rigas, Timothy J. Rigas and James P. Rigas of (i) stock options
(the "Rigas Options") covering 100,000 shares of Hyperion Class A Common
Stock, which options will vest in equal one-third amounts on the third, fourth
and fifth year anniversaries of grant (vesting conditioned on continued
service as an employee or director) and which shall be exercisable at $15.00
per share and (ii) phantom stock awards (the "Rigas Grants") covering 100,000
shares of Hyperion Class A Common Stock, which phantom awards will vest in
equal one-third amounts on the third, fourth and fifth year anniversaries of
grant (vesting conditioned on continued service as an employee or director).
Also in April 1998, pursuant to an existing stockholders agreement, Hyperion
authorized the issuance under the 1996 Plan to certain members of Hyperion's
management stock options (the "Management Stockholder Options") covering
13,047 shares of Hyperion Class A Common Stock with exercise price and vesting
terms identical to the Rigas Options. In addition to the Rigas Options, the
Rigas Grants, the Management Stockholder Options and the stock options or
share awards to be issued to Daniel R. Milliard under his employment
agreement, Hyperion currently expects to issue under the 1996 Plan stock
options, restrictive stock grants, phantom stock awards or other awards to
other 1996 Plan participants covering up to a total of 325,000 shares of
Hyperion Class A Common Stock during fiscal 1999.
8. TAXES ON INCOME:
Adelphia and its corporate subsidiaries file a consolidated federal income
tax return, which includes its share of the subsidiary partnerships and joint
venture partnership results. At March 31, 1998, Adelphia had net operating
loss carryforwards for federal income tax purposes of approximately $1.2
billion expiring through 2013. Depreciation and amortization expense differs
for tax and financial statement purposes due to the use of prescribed periods
rather than useful lives for tax purposes and also as a result of differences
between tax basis and book basis of certain acquisitions.
F-21
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The tax effects of significant items comprising Adelphia's net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment and intangible assets.......... $233,998 $250,298
-------- --------
Deferred tax assets:
Investment in partnerships.......................... 55,786 82,461
Operating loss carryforwards........................ 427,400 459,546
-------- --------
483,186 542,007
Valuation allowance................................. (359,285) (408,060)
-------- --------
Subtotal.......................................... 123,901 133,947
-------- --------
Net deferred tax liability.......................... $110,097 $116,351
======== ========
</TABLE>
The net change in the valuation allowance for the years ended March 31, 1997
and 1998 was an increase of $57,800 and $48,775, respectively.
Income tax benefit is as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1996 1997 1998
------- ----- ------
<S> <C> <C> <C>
Current............................................ $(1,144) $(142) $ (699)
Deferred........................................... 3,930 500 6,305
------- ----- ------
Total.......................................... $ 2,786 $ 358 $5,606
======= ===== ======
</TABLE>
A reconciliation of the statutory federal income tax rate and Adelphia's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35% 35% 35%
Change in valuation allowance............................ (37%) (41%) (26%)
State taxes, net of federal benefit...................... (1%) 6% (1%)
Other.................................................... 5% --% (5%)
---- ---- ----
Effective income tax benefit rate........................ 2% --% 3%
==== ==== ====
</TABLE>
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Included in Adelphia's financial instrument portfolio are cash, notes
payable to banks and institutions, debentures, redeemable preferred stock and
interest rate swaps and caps. The carrying values of notes payable to banks
and institutions approximate their fair values at March 31, 1997 and 1998. The
carrying cost of the publicly traded notes, debentures and redeemable
preferred stock at March 31, 1997 and 1998 were $1,361,845 and $2,400,753,
respectively. At March 31, 1997, the carrying cost exceeded the fair value by
$46,828. At March 31, 1998, the fair value exceeded the carrying cost by
$199,296. At March 31, 1997 and 1998, Adelphia would have been required to pay
approximately $7,632 and $5,822, respectively, to settle its interest rate
swap
F-22
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and cap agreements, representing the excess of carrying cost over fair value
of these agreements. The fair values of the debt, redeemable preferred stock
and interest rate swaps and caps were based upon quoted market prices of
similar instruments or on rates available to Adelphia for instruments of the
same remaining maturities.
10. BUSINESS SEGMENT INFORMATION:
Refer to pages 29 and 30 of Adelphia's Annual Report on Form 10-K for the
year ended March 31, 1998 for information regarding business segments for
fiscal 1996, 1997 and 1998.
11. RELATED PARTY TRANSACTIONS:
Adelphia currently manages cable television systems which are principally
owned by Olympus and limited partnerships in which certain of Adelphia's
principal shareholders who are executive officers have equity interests.
Adelphia has agreements with Olympus and the Managed Partnerships which
provide for the payment of fees to Adelphia. The aggregate fee revenues from
Olympus and the Managed Partnerships amounted to $2,700, $2,939 and $3,960 for
the years ended March 31, 1996, 1997 and 1998, respectively. In addition,
Adelphia was reimbursed by Olympus and the Managed Partnerships for allocated
corporate costs of $7,517, $6,335 and $6,436 for the years ended March 31,
1996, 1997 and 1998, respectively, which have been recorded as a reduction of
selling, general and administrative expense.
Adelphia leases from a partnership owned by principal shareholders who are
executive officers certain buildings under operating leases. Rent expense
under these operating leases aggregated $127, $133 and $104 for the years
ended March 31, 1996, 1997 and 1998, respectively.
Interest expense--net includes interest income from affiliates for long term
borrowings of $10,623, $8,367 and $7,129 for the years ended March 31, 1996,
1997 and 1998, respectively, and for short term borrowings of $9,340 for the
year ended March 31, 1998.
Adelphia had interest rate swaps with affiliates for a notional amount of
$175,000 for the years ended March 31, 1997 and 1998. Adelphia had $140,000 of
pay fixed swaps with Olympus and $35,000 of received fixed swaps with the
Managed Partnerships for the years ended March 31, 1997 and 1998. These swaps
expire at various dates in 1998. The net effect of these interest rate swaps
was to increase interest expense by $826, $50 and $128 for the years ended
March 31, 1996, 1997 and 1998, respectively.
During the years ended March 31, 1997 and 1998, respectively, Adelphia paid
$2,563 and $2,485 to entities owned by certain shareholders of Adelphia
primarily for property, plant and equipment and services.
F-23
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following tables summarize the financial results of Adelphia for each of
the quarters in the years ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-------- ------------ ----------- --------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997:
Revenues.......................... $111,011 $117,437 $122,127 $122,203
-------- -------- -------- --------
Operating expenses:
Direct operating and
programming.................... 33,597 35,864 39,005 40,516
Selling, general and
administrative................. 18,638 20,175 22,319 20,631
Depreciation and amortization... 28,477 30,262 30,813 34,514
-------- -------- -------- --------
Total......................... 80,712 86,301 92,137 95,661
-------- -------- -------- --------
Operating income.................. 30,299 31,136 29,990 26,542
-------- -------- -------- --------
Other income (expense):
Priority investment income from
Olympus........................ 9,817 10,273 10,542 11,454
Interest expense--net........... (58,447) (58,806) (57,201) (57,871)
Equity in loss of Olympus and
other joint ventures........... (13,011) (11,916) (14,061) (12,958)
Equity in loss of Hyperion joint
ventures....................... (1,636) (1,362) (2,145) (2,080)
Gain on sale of investments..... 8,405 -- -- 3,746
-------- -------- -------- --------
Total......................... (54,872) (61,811) (62,865) (57,709)
-------- -------- -------- --------
Loss before income taxes and
extraordinary loss............... (24,573) (30,675) (32,875) (31,167)
Income tax (expense) benefit...... (166) 175 55 294
-------- -------- -------- --------
Loss before extraordinary loss.... (24,739) (30,500) (32,820) (30,873)
Extraordinary loss on early
retirement of debt............... (2,079) -- -- (9,631)
-------- -------- -------- --------
Net loss.......................... $(26,818) $(30,500) $(32,820) $(40,504)
======== ======== ======== ========
Basic and diluted loss per
weighted average share of common
stock before extraordinary loss.. $ (0.94) $ (1.16) $ (1.25) $ (1.15)
Basic and diluted extraordinary
loss per weighted average share
on early retirement of debt...... (0.08) -- -- (0.36)
-------- -------- -------- --------
Basic and diluted net loss per
weighted average share of common
stock............................ $ (1.02) $ (1.16) $ (1.25) $ (1.51)
======== ======== ======== ========
Weighted average shares of common
stock outstanding (in thousands). 26,308 26,308 26,308 26,726
======== ======== ======== ========
</TABLE>
F-24
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-------- ------------ ----------- --------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1998:
Revenues.......................... $122,644 $128,990 $138,271 $138,537
-------- -------- -------- --------
Operating expenses:
Direct operating and program-
ming........................... 39,673 38,540 43,711 45,364
Selling, general and administra-
tive........................... 22,259 23,472 24,354 25,646
Depreciation and amortization... 33,733 33,586 37,251 40,471
-------- -------- -------- --------
Total......................... 95,665 95,598 105,316 111,481
-------- -------- -------- --------
Operating income.................. 26,979 33,392 32,955 27,056
-------- -------- -------- --------
Other income (expense):
Priority investment income from
Olympus........................ 11,765 12,000 12,000 12,000
Interest expense--net........... (61,737) (62,432) (63,172) (59,766)
Equity in loss of Olympus and
other joint ventures........... (19,198) (14,840) (16,012) (16,039)
Equity in loss of Hyperion joint
ventures....................... (2,540) (3,886) (2,858) (3,683)
Hyperion preferred stock divi-
dends.......................... -- -- (5,988) (6,694)
Gain on sale of investments..... -- 610 408 1,520
-------- -------- -------- --------
Total......................... (71,710) (68,548) (75,622) (72,662)
-------- -------- -------- --------
Loss before income taxes and ex-
traordinary gain (loss).......... (44,731) (35,156) (42,667) (45,606)
Income tax benefit (expense)...... 70 (365) (264) 6,165
-------- -------- -------- --------
Loss before extraordinary gain
(loss)........................... (44,661) (35,521) (42,931) (39,441)
Extraordinary gain (loss) on early
retirement of debt............... 2,300 -- (13,625) --
-------- -------- -------- --------
Net loss.......................... (42,361) (35,521) (56,556) (39,441)
Dividend requirements applicable
to preferred stock............... -- (4,550) (7,448) (6,852)
-------- -------- -------- --------
Net loss applicable to common
stockholders..................... $(42,361) $(40,071) $(64,004) $(46,293)
======== ======== ======== ========
Basic and diluted loss per
weighted average share of common
stock before extraordinary gain
(loss)........................... $ (1.62) $ (1.31) $ (1.64) $ (1.51)
Basic and diluted extraordinary
gain (loss) per weighted average
share on early retirement of
debt............................. 0.08 -- (0.45) --
-------- -------- -------- --------
Basic and diluted net loss per
weighted average share of common
stock............................ $ (1.54) $ (1.31) $ (2.09) $ (1.51)
======== ======== ======== ========
Weighted average shares of common
stock outstanding (in thousands). 27,468 30,647 30,647 30,730
======== ======== ======== ========
</TABLE>
13. SUBSEQUENT EVENTS:
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 for cash and interests
in systems adjacent to systems owned or managed by Adelphia in Virginia, New
England and New York, which served approximately 70,200 subscribers.
On May 8, 1998, 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
F-25
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Hyperion Stock. 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 approximately $192,000 to Hyperion were received as a result of
the sale of Hyperion Stock to the public.
On May 15, 1998, Adelphia redeemed $69,838 aggregate principal amount of 12
1/2% Senior Notes due 2002 at 103% of principal.
14. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT:
On July 2, 1998, Adelphia issued $150,000 aggregate principal amount of 8
1/8% Senior Notes due 2003. Net proceeds of approximately $147,300 were
advanced or contributed to Adelphia subsidiaries and used to repay revolving
credit facilities.
F-26
<PAGE>
PROSPECTUS
ADELPHIA COMMUNICATIONS CORPORATION
DEBT SECURITIES
PREFERRED STOCK
($.01 PAR VALUE)
CLASS A COMMON STOCK
($.01 PAR VALUE)
------------------
This Prospectus relates to (i) debentures, notes and other debt securities
in one or more series (the "Debt Securities") of Adelphia Communications
Corporation ("Adelphia" or the "Company") which may be senior debt securities
("Senior Debt Securities") or subordinated debt securities ("Subordinated Debt
Securities") of Adelphia, (ii) shares of Preferred Stock, $.01 par value (the
"Preferred Stock") of Adelphia issuable in series designated by the Board of
Directors of Adelphia and (iii) shares of Class A Common Stock, $.01 par value
(the "Class A Common Stock" and collectively with the Debt Securities and the
Preferred Stock, the "Securities") of Adelphia, which may be offered in
combination or separately from time to time by the Company. The aggregate
initial offering price of all of the Securities which may be sold pursuant to
this Prospectus will not exceed U.S. $750,000,000 (or its equivalent based on
the applicable exchange rate at the time of issue in one or more foreign
currencies or currency units as shall be designated by Adelphia).
The Class A Common Stock is listed for trading on the NASDAQ National Market
System under the symbol "ADLAC."
The rights of holders of Class A Common Stock and Class B Common Stock, $.01
par value (the "Class B Common Stock" and together with the Class A Common
Stock, the "Common Stock") differ with respect to certain aspects of dividend,
liquidation and voting rights. The Class A Common Stock has certain
preferential rights with respect to cash dividends and distributions upon the
liquidation of Adelphia. Holders of Class B Common Stock are entitled to
greater voting rights than the holders of Class A Common Stock; however, the
holders of Class A Common Stock, voting as a separate class, are entitled to
elect one of Adelphia's directors.
The Company may sell the Securities to or through underwriters, through
dealers or agents, directly to purchasers or through a combination of such
methods. See "Plan of Distribution." An accompanying Prospectus Supplement
sets forth the names of any underwriters, dealers or agents, if any, involved
in the sale of the Securities in respect of which this Prospectus is being
delivered, and any applicable fee, commission or discount arrangements with
them.
PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD CAREFULLY CONSIDER THE
MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 3.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
------------------
The date of this Prospectus is July 9, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement under the
Securities Act with respect to the Securities offered by this Prospectus. This
Prospectus, which is part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company,
reference is made to such Registration Statement and the exhibits and
schedules filed as part thereof. The Registration Statement and the exhibits
and schedules thereto filed with the Commission may be inspected without
charge at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also
be available for inspection and copying at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048, and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement may
be obtained from the Public Reference Section of the Commission upon payment
of certain prescribed fees. Electronic registration statements made through
the Electronic Data Gathering, Analysis, and Retrieval system are publicly
available through the Commission's Web site (http://www.sec.gov), which is
maintained by the Commission and which contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") are
incorporated herein by reference: (a) Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 which incorporates, in Items 7 and 8 to such
Form 10- K, portions of the Form 10-K for the fiscal year ended December 31,
1997 of Olympus Communications, L.P. and Olympus Capital Corporation (the
"Form 10- K"); (b) Adelphia's definitive proxy statement dated September 8,
1997, with respect to the Annual Meeting of Stockholders held September 29,
1997 (the "Proxy Statement"); (c) Adelphia's Current Report on Form 8-K for
the event dated June 29, 1998; and (d) the descriptions of the Company's
Common Stock contained in the registration statements filed under Section
12(g) of the Exchange Act, including any amendments or reports for the purpose
of updating such descriptions.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of this
offering shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the respective date of filing of each such
document. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is, or is deemed
to be, incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available upon request from
E. Hartman, Director of Finance, Adelphia Communications Corporation, Main at
Water Street, Coudersport, PA 16915, telephone number 814-274-9830.
No dealer, salesman or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus,
any accompanying Prospectus Supplement or the documents incorporated or deemed
incorporated by reference herein. If given or made, such information or
representations must not be relied upon as having been authorized by the
Company or any underwriter, dealer or agent. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the registered securities to which it relates, or an
offer to sell or a solicitation of an offer to buy those securities to
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which it relates, in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus or any Prospectus Supplement nor any sale made hereunder shall,
under any circumstances, create any implication that there has not been any
change in the facts set forth in this Prospectus or in the affairs of the
Company since the date hereof.
THE COMPANY
Adelphia Communications Corporation ("Adelphia" and, collectively with its
subsidiaries, the "Company") is a leader in the telecommunications industry
with cable television operations and competitive local exchange telephony
operations. John J. Rigas, the Chairman, President, Chief Executive Officer
and founder of Adelphia, has owned and operated cable television systems since
1952.
Cable systems owned by the Company (the "Company Systems") are located in
twelve states and are organized into seven regional clusters: Western New
York, Virginia, Western Pennsylvania, New England, Eastern Pennsylvania, Ohio
and Coastal New Jersey. The Company Systems are located primarily in suburban
areas of large and medium-sized cities within the 50 largest television
markets.
The Company also provides, for a fee, management and consulting services to
certain partnerships and certain corporations engaged in the ownership and
operation of cable television systems (the "Managed Partnerships"). John J.
Rigas and certain members of his immediate family, including entities they own
or control (collectively, the "Rigas Family"), have substantial ownership
interests in the Managed Partnerships.
The Company, through its 66% owned subsidiary Hyperion Telecommunications,
Inc. ("Hyperion"), owns and operates one of the largest facilities based
Competitive Local Exchange Carriers ("CLEC") in the United States based on
route miles and buildings connected. Hyperion designs, constructs, operates
and manages state-of-the-art, fiber optic networks and facilities.
The Company also owns a 50% voting interest and nonvoting Preferred Limited
Partnership ("PLP") interests entitling the Company to a 16.5% preferred
return in Olympus Communications, L.P. ("Olympus"). Olympus is a joint venture
limited partnership between the Company and subsidiaries of FPL Group, Inc.
(together with its subsidiaries, "FPL Group"). FPL Group is one of the largest
public utility holding companies in the United States supplying, through its
principal subsidiaries, electric service throughout most of the east and lower
west coasts of Florida.
Adelphia was incorporated in Delaware on July 1, 1986 for the purpose of
reorganizing five cable television companies, then principally owned by the
Rigas Family, into a holding company structure in connection with the initial
public offering of Adelphia's Class A Common Stock. The Company's executive
offices are located at Main at Water Street, Coudersport, Pennsylvania 16915,
and its telephone number is (814) 274-9830.
RECENT DEVELOPMENTS
Information set forth in the foregoing section of the Prospectus is as of
the date of this Prospectus. For recent developments regarding the Company as
well as other information contained in this Prospectus, reference is made to
the future filings by the Company under the Exchange Act and to the Prospectus
Supplement accompanying this Prospectus.
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, the following risk factors should be carefully considered
in evaluating the Company and its business before purchasing the securities
offered hereby.
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SUBSTANTIAL LEVERAGE
The Company is highly leveraged and has incurred substantial indebtedness to
finance acquisitions and expansion of its operations and, to a lesser extent,
for investments in and advances to affiliates. At March 31, 1998, the
Company's total indebtedness aggregated approximately $2,909,745,000, which
included approximately $864,258,000 of subsidiary bank, institutional and
other debt, $465,213,000 of Hyperion public debt and approximately
$1,580,274,000 of indebtedness of the parent company. The Company's total debt
has varying maturities to 2008, including an aggregate of approximately
$1,078,600,000 maturing on or prior to March 31, 2003. The Company has
maintained its public long-term debt at the holding company level and at
Hyperion while borrowing in the private debt markets (e.g., bank and insurance
company debt) through the Company's wholly-owned subsidiaries. The Company's
subsidiary financings are effected through separate borrowing groups, and
substantially all of the indebtedness in these borrowing groups is non-
recourse to Adelphia. The subsidiary credit arrangements have varied revolving
credit and term loan periods and contain separately negotiated covenants
relating to, among other things, cross-defaults and the incurrence of
additional debt for each borrowing group. In addition, Olympus has substantial
leverage. The high level of the Company's indebtedness will have important
consequences to investors, including: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to debt service and will
not be available for general corporate purposes or for capital improvements;
(ii) the Company's ability to obtain additional debt financing in the future
for working capital, capital expenditures, acquisitions or for capital
improvements may be limited; and (iii) the Company's level of indebtedness
could limit its flexibility in reacting to changes in the industry and
economic conditions generally. In addition, at March 31, 1998 Adelphia had
$148,062,000 and Hyperion had $207,204,000 of redeemable exchangeable
preferred stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Form 10-K.
Net Losses and Convertible Preferred Stock, Common Stock and Other
Stockholders' Equity (Deficiency)
The Total Convertible Preferred Stock, Common Stock and Other Stockholders'
Equity (Deficiency) at March 31, 1998 was ($1,315,865,000). The stockholders'
deficiency generally has resulted from the Company's reported net losses which
have been caused primarily by high levels of depreciation and amortization and
interest expense. The Company reported net losses applicable to common
stockholders of approximately $119,894,000, $130,642,000 and $192,729,000 for
the years ended March 31, 1996, 1997 and 1998, respectively. The Company
expects to continue to incur significant net losses for the next several
years. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Form 10-K.
For the years ended March 31, 1997 and March 31, 1998, respectively, the
Company's earnings were insufficient to cover its combined fixed charges and
preferred stock dividends by $61,848,000 and $113,941,000, respectively.
However, such amounts reflect non-cash charges totaling $165,426,000 and
$182,471,000, respectively, consisting of depreciation, amortization, and non-
cash interest expense on certain indebtedness of the Company and Hyperion
preferred stock dividends. Historically, the Company's cash generated from
operating activities and borrowings has been sufficient to meet its
requirements for debt service, working capital, capital expenditures, and
investments in and advances to affiliates, and the Company has depended on the
availability of additional borrowings to meet its liquidity requirements. The
Company believes that it will continue to generate cash and obtain financing
sufficient to meet such requirements. However, the Company's ability to incur
additional indebtedness is limited by covenants in its indentures and its
subsidiary credit agreements. Although in the past the Company has been able
both to refinance its indebtedness and to obtain new financing, there can be
no assurance that the Company would be able to do so in the future or that, if
the Company were able to do so, the terms available would be favorable to the
Company. In the event that the Company were unable to refinance its
indebtedness or obtain new financing under these circumstances, the Company
would likely have to consider various options such as the sale of certain
assets to meet its required debt service, negotiation with its lenders to
restructure applicable indebtedness or other options available to it under
applicable law. There can be no assurance that any such options would yield
net proceeds sufficient to repay its indebtedness in full. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Form 10-K.
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VOTING CONTROL AND DISPARATE VOTING RIGHTS
As of March 31, 1998, the Rigas Family beneficially owned 10,846,544 shares,
or 99.1%, of Adelphia's Class B Common Stock and 6,888,804 shares, or 34.4%,
of Adelphia's outstanding Class A Common Stock. On a combined basis, these
shares represented 57.2% of the total number of outstanding shares of both
classes of Common Stock and 89.1% of the total voting power of both classes.
Assuming conversion of the 8% Series C Cumulative Convertible Preferred Stock
("Convertible Preferred Stock") held by the Rigas Family, family members would
have held as of March 31, 1998 16,322,766 shares, or 55.4%, of Adelphia's
Class A Common Stock and would have held 67.2% of the total number of shares
and 89.8% of the total voting power of both classes of Common Stock. As a
result of the stock ownership by the Rigas Family and the Class B
Stockholders' Agreement, John J. Rigas and members of his family have the
power to elect all seven directors subject to election by both classes on a
combined basis, which directors constitute seven of the eight members of the
Board of Directors of Adelphia. (The holders of the Class A Common Stock are
entitled, as a separate class, to elect one of Adelphia's directors.)
Moreover, because holders of Class B Common Stock are entitled to ten votes
per share while holders of Class A Common Stock are entitled to one vote per
share, the Rigas Family may control stockholder decisions on matters in which
holders of Class A Common Stock and Class B Common Stock vote together as a
class. These matters include the amendment of certain provisions of Adelphia's
Certificate of Incorporation and the approval of certain fundamental corporate
transactions, including mergers.
HOLDING COMPANY STRUCTURE; RESTRICTIVE COVENANTS
As a holding company, Adelphia holds no significant assets other than its
investments in and advances to its subsidiaries and other investments.
Adelphia's ability to make interest and principal payments when due to holders
of debt of Adelphia is dependent upon the receipt of sufficient funds from its
subsidiaries or other investments. Under the terms of various debt agreements
between the Adelphia subsidiaries and other investments and their respective
lending institutions, upon the occurrence of an event of default (including
certain cross-defaults resulting from defaults under Adelphia's debt
agreements) or unless certain financial performance tests are met, the
Adelphia subsidiaries and other investments are restricted from distributing
funds to Adelphia. The Indentures governing the 8 1/8% Senior Notes due 2003
(the "8 1/8% Notes"), the 8 3/8% Senior Notes due 2008 (the "8 3/8% Notes"),
the 9 1/4% Senior Notes due 2002 (the "9 1/4% Notes"), the 9 7/8% Senior Notes
due 2007 (the "9 7/8% Notes"), the 10 1/2% Senior Notes due 2004 (the "10 1/2%
Notes"), the 12 1/2% Senior Notes due 2002 (the "12 1/2% Notes"), the 10 1/4%
Senior Notes due 2000 (the "10 1/4% Notes"), the 9 1/2% Senior Pay-In-Kind
Notes due 2004 (the "9 1/2% Notes"), the 11 7/8% Senior Debentures due 2004
(the "11 7/8% Debentures") and the 9 7/8% Senior Debentures due 2005 (the "9
7/8% Debentures") (collectively, "Adelphia's Public Debt") will not restrict
the Company's subsidiaries or other investments from contractually restricting
their ability to pay dividends to the Company in the future. In addition,
because Adelphia's subsidiaries and other investments do not guarantee the
payment of principal of and interest on debt of Adelphia, the claims of
holders of such debt effectively will be subordinated to the claim of
creditors of such entities. At March 31, 1998, the total amount of long-term
debt of such subsidiaries was $1,329,471,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Form 10-K.
The agreements governing the bank debt of the Company's subsidiaries (the
"Subsidiary Bank Agreements") contain, among other covenants, requirements
that Adelphia's subsidiaries maintain specified financial ratios, including
maximum leverage and minimum interest coverage. The ability of a subsidiary to
comply with such provisions may be affected by events that are beyond
Adelphia's control. The breach of any of these covenants could result in a
default by a subsidiary under its Subsidiary Bank Agreement. In the event of
any such default, lenders party to that Subsidiary Bank Agreement could elect
to declare all amounts borrowed under that Subsidiary Bank Agreement, together
with accrued interest and other fees, to be due and payable. If the
indebtedness under a Subsidiary Bank Agreement were to be accelerated, all
indebtedness outstanding under such Subsidiary Bank Agreement would be
required to be paid in full before such subsidiary would be permitted to
distribute any assets or cash to Adelphia. There can be no assurance that the
assets of Adelphia and its subsidiaries would be sufficient to repay all
borrowings under the Subsidiary Bank Agreements and indebtedness
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owed to the other creditors of such subsidiaries in full. In addition, as a
result of these covenants, the ability of Adelphia's subsidiaries to respond
to changing business and economic conditions and to secure additional
financing, if needed, may be significantly restricted, and Adelphia may be
prevented from engaging in transactions that might otherwise be considered
beneficial to Adelphia. There are similar restrictions under other
institutional debt of the Company's subsidiaries.
POTENTIAL CONFLICTS OF INTEREST
The Rigas Family holds substantially all of Adelphia's Class B Common Stock
and 89.1% of the combined voting power of both classes of Adelphia's
outstanding Common Stock (89.8% assuming the conversion of the Convertible
Preferred Stock owned by the Rigas Family) and has the power to elect seven of
eight members of Adelphia's Board of Directors. John J. Rigas and the other
executive officers of Adelphia (including other members of the Rigas Family)
hold direct and indirect ownership interests in the Managed Partnerships,
which are managed by the Company for a fee. Subject to the restrictions
contained in a business opportunity agreement regarding future acquisitions,
Rigas Family members and the executive officers are free to continue to own
these interests and acquire additional interests in cable television systems.
Such activities could present a conflict of interest with the Company in the
allocation of management time and resources of the executive officers. In
addition, there have been and will continue to be transactions between the
Company and the executive officers or other entities in which the executive
officers have ownership interests or with which they are affiliated. The
indentures under which Adelphia's Public Debt was issued and the Indenture
under which the Notes will be issued contain covenants that place certain
restrictions on transactions between the Company and its affiliates. See
"Certain Relationships and Related Transactions" in the Proxy Statement.
COMPETITION
The cable television systems owned by the Company compete with other
communications and entertainment media as well as other means of video
distribution including Direct Broadcast Satellite Systems ("DBS") and
Multichannel Multipoint Distribution Systems ("MMDS"). In addition, some of
the Regional Bell Operating Companies (the "RBOCs") and other local telephone
companies are in the process of entering the video-to-home business and
several have expressed their intention to enter the video-to-home business. In
addition, some RBOCs and local telephone companies have in place facilities
which are capable of delivering cable television service.
In addition, the Telecommunications Act of 1996 (the "1996 Act") has
repealed the cable/telephone cross-ownership plan, and telephone companies
will now be permitted to provide cable television service within their service
areas. Certain of such potential service providers have greater financial
resources than the Company, and in the case of local exchange carriers seeking
to provide cable service within their service areas, have an installed plant
and switching capabilities, any of which could give them competitive
advantages with respect to cable television operators such as the Company. The
Company cannot predict either the extent to which competition will materialize
or, if such competition materializes, the extent of its effect on the Company.
See "Business--Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Form 10-K.
The Company also faces competition from other communications and
entertainment media, including conventional off-air television broadcasting
services, newspapers, movie theaters, live sporting events and home video
products. The Company cannot predict the extent to which competition may
affect the Company.
In each of the markets served by Hyperion's networks, the services offered
by Hyperion compete principally with the services offered by the incumbent
local exchange carrier ("LEC") serving that area. Incumbent LECs have long-
standing relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the 1996
Act, federal and state regulatory initiatives will provide increased business
opportunities to CLECs such as Hyperion, but regulators are likely to provide
incumbent LECs with increased pricing flexibility for their
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services as competition increases. If incumbent LECs are allowed by regulators
to lower their rates substantially or selectively engage in excessive volume
and term discount pricing practices for their customers or charge CLECs
excessive fees for interconnection to the incumbent LECs' networks, the net
income and cash flow of CLECs, including Hyperion, could be materially and
adversely affected.
The 1996 Act also establishes procedures under which the RBOCs can obtain
authority to provide long distance services if they comply with certain
interconnection requirements. To date, the Federal Communications Commission
(the "FCC") authority to provide in-region interLATA service has been sought
by Ameritech in Michigan, Southwestern Bell in Oklahoma, and BellSouth in
Louisiana and South Carolina. The Department of Justice has opposed each
request, and each request has been denied by the FCC. An approval could result
in decreased market share for the major Inter-Exchange Carriers ("IXCs"),
which are among Hyperion's significant customers. Such a result could have an
adverse effect on Hyperion.
There has been significant merger activity among the RBOCs in anticipation
of entry into the long distance market, including the merger of Bell Atlantic
and NYNEX, whose combined territory covers a substantial portion of Hyperion's
markets. If RBOCs are permitted to provide such services, they will ultimately
be in a position to offer single source service for local and long distance
communications and subsidize the price of their long distance prices with
charges on local service. Other combinations are occurring in the industry,
which may have a material adverse effect on Hyperion. Hyperion also faces, and
will continue to face, competition from other current and potential market
entrants, including other CLECs, incumbent LECs which are not subject to RBOC
restrictions on long distance, AT&T, MCI, Sprint and other IXCs, cable
television companies, electric utilities, microwave carriers, wireless
telecommunications providers and private networks built by large end users. In
addition, all of the major IXCs are expected to enter the market for local
telecommunications services. Both AT&T and MCI have announced that they have
begun to offer local telephone services in some areas of the country, and AT&T
recently announced a new wireless technology for providing local telephone
service. AT&T and TCI also recently announced that they will merge. Although
Hyperion has good relationships with the IXCs, there are no assurances that
any of these IXCs will not build their own facilities, purchase other carriers
or their facilities, or resell the services of other carriers rather than use
Hyperion's services when entering the market for local exchange services.
Many of Hyperion's current and potential competitors, particularly incumbent
LECs, have financial, personnel and other resources substantially greater than
those of Hyperion, as well as other competitive advantages over Hyperion.
See "Business--Competition" and "--Legislation and Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Regulatory and Competitive Matters" in the Form 10-K.
NEED FOR ADDITIONAL FINANCING
The Company's business requires substantial investment on a continuing basis
to finance capital expenditures and related expenses for, among other things,
upgrade of the Company's plant (including the need to make cable system
upgrades mandated by franchise authorities), the offering of new services and
the servicing, repayment or refinancing of its indebtedness. The Company will
require significant additional financing, through debt and/or equity
issuances, to meet its capital expenditure plans and to pay its debt
obligations. There can be no assurance that Adelphia will be able to issue
additional debt or obtain additional equity capital on satisfactory terms, or
at all, to meet its future financing needs. See "Business--Technological
Developments" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Form 10-K.
REGULATION IN THE TELECOMMUNICATIONS INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, state and local levels, and many aspects of such regulation are
currently the subject of judicial proceedings and administrative or
legislative
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proposals. The Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act") significantly expanded the scope of cable
television regulation. In particular, pursuant to the 1992 Cable Act, the FCC
adopted regulations that limit the Company's ability to set and increase rates
for the Company's basic and cable programming service ("CPS") packages and for
the provision of cable television-related equipment. The 1992 Cable Act
permits certified local franchising authorities to order refunds of rates paid
in the previous twelve-month period determined to be in excess of the
permitted reasonable rates. It is possible that rate reductions or refunds of
previously collected fees may be required in the future.
The 1996 Act, which became law on February 8, 1996, materially alters
federal, state and local laws and regulations pertaining to cable television,
telecommunications and other related services and, in particular,
substantially amends the Communications Act of 1934 (the "Communications
Act"). Certain provisions of the 1996 Act could materially affect the growth
and operation of the cable television industry and the cable services provided
by the Company. Although the new legislation may substantially lessen certain
regulatory burdens, the cable television industry may be subject to additional
competition as a result. See "Business--Competition" in the Form 10-K. There
are numerous rulemakings that have been and continue to be undertaken by the
FCC which will interpret and implement the provisions of the 1996 Act. In
addition, certain provisions of the new legislation (such as the deregulation
of rates for CPS packages) will not immediately be effective. Furthermore,
certain provisions of the 1996 Act have been, and likely will be, subject to
judicial challenge. The Company is unable at this time to predict the outcome
of such rulemakings or litigation or the short and long-term effect (financial
or otherwise) of the 1996 Act and FCC rulemakings on the Company.
The cable television industry is subject to state and local regulations and
the Company must comply with rules of the local franchising authorities to
retain and renew its cable franchises, among other matters. There can be no
assurances that the franchising authorities will not impose new and more
restrictive requirements as a condition to franchise renewal.
Although the 1996 Act eliminates many legal barriers to entry (i.e.,
telephone companies entering the cable industry and cable companies entering
the telephone industry), the Company cannot assure that rules adopted by the
FCC or state regulators or other legislative or judicial initiatives relating
to the telecommunications industry will not have a material adverse effect on
the Company. In addition, the 1996 Act removes entry barriers for all
companies and could increase substantially the number of competitors offering
comparable services in the Company's potential markets. See "Legislation and
Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Regulatory and Competitive Matters" in the Form 10-
K.
NO DIVIDENDS PAID OR TO BE PAID
Adelphia has never declared or paid dividends on any of its Common Stock and
has no intention to pay cash dividends on such stock in the foreseeable
future. In addition, the indentures for Adelphia's Public Debt contain
covenants which limit Adelphia's ability to pay such dividends.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1998, 20,043,528 shares of Class A Common Stock, 10,944,476
shares of Class B Common Stock, each share of which is presently convertible
into a share of Class A Common Stock, and 100,000 shares of Convertible
Preferred Stock, each share of which is presently convertible into
approximately 117.9245 shares of Class A Common Stock, were outstanding. As of
that date, the Rigas Family beneficially owned 10,846,544 shares of Class B
Common Stock, 6,888,804 shares of Class A Common Stock and 80,000 shares of
Convertible Preferred Stock. Pursuant to various registration rights
agreements, the Rigas Family has the right, subject to certain limitations, to
require Adelphia to register substantially all of these shares including Class
A Common Stock issuable upon conversion of the Class B Common Stock and the
Convertible Preferred Stock. In addition to the shares of Class A Common Stock
which may be offered hereby, Adelphia has filed a registration statement for
Booth American Company which as of March 24, 1998 owned 3,571,428 shares of
Class A Common Stock. Sales of a substantial number of shares of Class A
Common Stock or Class B Common Stock
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including sale by any pledgees of such shares could adversely affect the
market price of the Class A Common Stock and could impair Adelphia's ability
in the future to raise capital through an offering of its equity securities.
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which statements can be identified
by the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "intends" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Certain information included or
incorporated by reference in this Prospectus, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Form 10-K, is forward-looking, such as information relating to the effects
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. Persons reading this Prospectus are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, readers should specifically
consider the various factors which could cause actual events or results to
differ materially from those indicated by such forward-looking statements.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the ratio of earnings to combined fixed
charges and preferred stock dividends of Adelphia for the periods indicated.
For purposes of calculating the ratio of earnings available to cover fixed
charges and preferred stock dividends (i) earnings consist of loss before
income taxes and extraordinary items plus fixed charges, excluding capitalized
interest and (ii) fixed charges consist of interest, whether expensed or
capitalized, plus amortization of debt issuance costs plus the assumed
interest component of rent expense.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
-- -- -- -- --
</TABLE>
For the years ended March 31, 1994, 1995, 1996, 1997 and 1998, respectively,
the Company's earnings were insufficient to cover its combined fixed charges
and preferred stock dividends by approximately $65,997,000, $69,146,000,
$78,189,000, $61,848,000, and $113,941,000, respectively.
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1998 was a deficit of $(2,010,969,000) or approximately $(64.90) per share.
Net tangible book value per share represents the amount of the Company's
convertible preferred stock, common stock and other stockholders' equity
(deficiency), less intangible assets, divided by 30,988,004 shares of Common
Stock outstanding. Purchasers of the Class A Common Stock will have an
immediate dilution of net book value as described in the applicable Prospectus
Supplement.
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USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, Adelphia
intends to apply the net proceeds from the sale of the Securities to which
this Prospectus relates to its general funds to be used for general corporate
purposes including capital expenditures, acquisitions, the reduction of
indebtedness and other purposes. Funds not required immediately for such
purposes may be invested in short-term obligations or used to reduce the
future level of the Company's indebtedness.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions of
the Debt Securities to which any Prospectus Supplement may relate. The
particular terms and provisions of the series of Debt Securities offered by a
Prospectus Supplement, and the extent to which such general terms and
provisions described below may apply thereto, will be described in the
Prospectus Supplement relating to such series of Debt Securities.
The Senior Debt Securities are to be issued in one or more series under an
Indenture, as supplemented or amended from time to time (as supplemented or
amended, the "Senior Indenture"), between the Company and an institution that
will be named in the applicable Prospectus Supplement, as trustee (the "Senior
Trustee"). The Subordinated Debt Securities are to be issued in one or more
series under an Indenture, as supplemented or amended from time to time (as
supplemented or amended, the "Subordinated Indenture" and together with the
Senior Indenture, the "Indentures"), between the Company and an institution
that will be named in the applicable Prospectus Supplement, as trustee (the
"Subordinated Trustee" and together with the Senior Trustee, the "Trustees").
This summary of certain terms and provisions of the Debt Securities and the
Indentures is not necessarily complete, and reference is hereby made to the
copy of the form of the Indentures which are filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and to the Trust
Indenture Act. Whenever particular defined terms of the Indentures are
referred to in this Section or in a Prospectus Supplement, such defined terms
are incorporated herein or therein by reference.
GENERAL
The Debt Securities will be issuable in one or more series pursuant to an
indenture supplemental to the Indenture or a resolution of the Company's Board
of Directors or a committee thereof. Unless otherwise specified in the
applicable Prospectus Supplement, each series of Senior Debt Securities will
rank pari passu in right of payment with all of the Company's other senior
unsecured obligations. Each series of Subordinated Debt Securities will be
subordinated and junior in right of payment to the extent and in the manner
set forth in the Subordinated Indenture and the Supplemental Indenture
relating thereto. Except as otherwise provided in the applicable Prospectus
Supplement, the Indentures do not limit the incurrence or issuance of other
secured or unsecured debt of the Company, whether under the Indentures, any
other indenture that the Company may enter into in the future or otherwise.
See the Prospectus Supplement relating to any offering of Securities.
The applicable Prospectus Supplement or Prospectus Supplements will describe
the following terms of each series of Debt Securities: (i) the title of the
Debt Securities and whether such series constitutes Senior Debt Securities or
Subordinated Debt Securities; (ii) any limit upon the aggregate principal
amount of the Debt Securities; (iii) the date or dates on which the principal
of the Debt Securities is payable or the method of determination thereof or
the right, if any, of the Company to defer payment of principal; (iv) the rate
or rates, if any, at which the Debt Securities shall bear interest (including
reset rates, if any, and the method by which any such rate will be
determined), the Interest Payment Dates on which any such interest shall be
payable and the right, if any, of the Company to defer any interest payment;
(v) the place or places where, subject to the terms of the Indenture as
described below under "--Payment and Paying Agents," the principal of and
premium, if any, and interest, if any, on the Debt Securities will be payable
("Place of Payment") and where, subject to the terms of the Indenture as
described below under "--Denominations, Registration and Transfer," the
Company will maintain an office or agency where Debt Securities may be
presented for registration of transfer or exchange and
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the place or places where notices and demands to or upon the Company in
respect of the Debt Securities and the Indenture may be made; (vi) any period
or periods within, or date or dates on which, the price or prices at which and
the terms and conditions upon which Debt Securities may be redeemed, in whole
or in part, at the option of the Company pursuant to any sinking fund or
otherwise; (vii) the obligation, if any, of the Company to redeem or purchase
the Debt Securities pursuant to any sinking fund or analogous provisions or at
the option of a holder and the period or periods within which, the price or
prices at which, the currency or currencies (including currency unit or units)
in which and the other terms and conditions upon which the Debt Securities
shall be redeemed or purchased, in whole or in part, pursuant to such
obligation; (viii) the denominations in which any Debt Securities shall be
issuable if other than denominations of $1,000 and any integral multiple
thereof; (ix) if other than in U.S. Dollars, the currency or currencies
(including currency unit or units) in which the principal of (and premium, if
any) and interest, if any, on the Debt Securities shall be payable, or in
which the Debt Securities shall be denominated; (x) any additions,
modifications or deletions in the Events of Default or covenants of the
Company specified in the Indenture with respect to the Debt Securities; (xi)
if other than the principal amount thereof, the portion of the principal
amount of Debt Securities that shall be payable upon declaration of
acceleration of the maturity thereof; (xii) any additions or changes to the
Indenture with respect to a series of Debt Securities as shall be necessary to
permit or facilitate the issuance of such series in bearer form, registrable
or not registrable as to principal, and with or without interest coupons;
(xiii) any index or indices used to determine the amount of payments of
principal of and premium, if any, on the Debt Securities and the manner in
which such amounts will be determined; (xiv) subject to the terms described
under "--Global Debt Securities," whether the Debt Securities of the series
shall be issued in whole or in part in the form of one or more Global
Securities and, in such case, the depositary for such Global Securities; (xv)
the appointment of any trustee, registrar, paying agent or agents; (xvi) the
terms and conditions of any obligation or right of the Company or a holder to
convert or exchange Debt Securities into Preferred Securities or other
securities; (xvii) whether the defeasance and covenant defeasance provisions
described under "--Satisfaction and Discharge; Defeasance" shall be
inapplicable or modified; (xviii) any applicable subordination provisions in
addition to those set forth herein with respect to Subordinated Debt
Securities; and (xix) any other terms of the Debt Securities not inconsistent
with the provisions of the applicable Indenture.
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time
of issuance is below market rates. Certain material U.S. federal income tax
consequences and special considerations applicable to any such Debt Securities
will be described in the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is payable in one or
more foreign currencies or currency units or if any Debt Securities are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any Debt Securities is
payable in one or more foreign currencies or currency units, the restrictions,
elections, certain material U.S. federal income tax considerations, specific
terms and other information with respect to such issue of Debt Securities and
such foreign currency or currency units will be set forth in the applicable
Prospectus Supplement.
If any index is used to determine the amount of payments of principal,
premium, if any, or interest on any series of Debt Securities, certain
material U.S. federal income tax, accounting and other considerations
applicable thereto will be described in the applicable Prospectus Supplement.
DENOMINATIONS, REGISTRATION AND TRANSFER
Unless otherwise specified in the applicable Prospectus Supplement, the Debt
Securities will be issuable only in registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. Debt Securities of
any series will be exchangeable for other Debt Securities of the same issue
and series, of any authorized denominations of a like aggregate principal
amount, the same original issue date ("Original Issue Date"), stated maturity
("Stated Maturity") and bearing the same interest rate.
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Each series of Debt Securities may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the appropriate Securities Registrar or at
the office of any transfer agent designated by the Company for such purpose
with respect to such series of Debt Securities and referred to in the
applicable Prospectus Supplement, without service charge and upon payment of
any taxes and other governmental charges as described in the Indenture. The
Company will appoint the Trustee of each series of Debt Securities as
Securities Registrar for such series under the Indenture. If the applicable
Prospectus Supplement refers to any transfer agents (in addition to the
Securities Registrar) initially designated by the Company with respect to any
series of Debt Securities, the Company may at any time rescind the designation
of any such transfer agent or approve a change in the location through which
any such transfer agent acts, provided that the Company maintains a transfer
agent in each Place of Payment for such series. The Company may at any time
designate additional transfer agents with respect to any series of Debt
Securities.
In the event of any redemption, neither the Company nor the Trustee shall be
required to (i) issue, register the transfer of or exchange Debt Securities of
any series during a period beginning at the opening of business 15 days before
the day of mailing of a notice for redemption of Debt Securities of that
series, and ending at the close of business on the day of mailing of the
relevant notice of redemption or (ii) transfer or exchange any Debt Securities
so selected for redemption, except, in the case of any Debt Securities being
redeemed in part, any portion thereof not to be redeemed.
GLOBAL DEBT SECURITIES
Unless otherwise specified in the applicable Prospectus Supplement, the Debt
Securities of a series may be issued in whole or in part in the form of one or
more global securities ("Global Debt Securities") that will be deposited with,
or on behalf of, a depositary identified in the Prospectus Supplement relating
to such series. Global Debt Securities may be issued only in fully registered
form and in either temporary or permanent form. Unless and until it is
exchanged in whole or in part for the individual Debt Securities represented
thereby, a Global Debt Security may not be transferred except as a whole by
the depositary for such Global Debt Security to a nominee of such depositary
or by a nominee of such depositary to such depositary or another nominee of
such depositary or by the depositary or any nominee to a successor depositary
or any nominee of such successor.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the Prospectus Supplement relating to
such series. The Company anticipates that the following provisions will
generally apply to depositary arrangements.
Upon the issuance of a Global Debt Security, and the deposit of such Global
Debt Security with or on behalf of the applicable depositary, the depositary
for such Global Debt Security or its nominee will credit on its book-entry
registration and transfer system, the respective principal amounts of the
individual Debt Securities represented by such Global Debt Security to the
accounts of persons that have accounts with such depositary ("Participants").
Such accounts shall be designated by the dealers, underwriters or agents with
respect to such Debt Securities or by the Company if such Debt Securities are
offered and sold directly by the Company. Ownership of beneficial interests in
a Global Debt Security will be limited to participants or persons that may
hold interests through Participants.
Ownership of beneficial interests in such Global Debt Security will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by the applicable depositary or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the
ability to transfer beneficial interests in a Global Debt Security.
So long as the depositary for a Global Debt Security, or its nominee, is the
registered owner of such Global Debt Security, such depositary or such
nominee, as the case may be, will be considered the sole owner or holder
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of the Debt Securities represented by such Global Debt Security for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Debt Security will not be entitled to have any of the
individual Debt Securities of the series represented by such Global Debt
Security registered in their names, will not receive or be entitled to receive
physical delivery of any such Debt Securities of such series in definitive
form and will not be considered the owners or holders thereof under the
Indenture.
Payments of principal of (and premium, if any) and interest on individual
Debt Securities represented by a Global Debt Security registered in the name
of a depositary or its nominee will be made to such depositary or its nominee,
as the case may be, as the registered owner of the Global Debt Security
representing such Debt Securities. None of the Company, or the Trustee, any
paying agent, or the Securities Registrar for such Debt Securities will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interest of the Global Debt
Security for such Debt Securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Company expects that the depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent Global Debt Security representing any of such Debt
Securities, immediately will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the principal
amount of such Global Debt Security for such Debt Securities as shown on the
records of such depositary or its nominee. The Company also expects that
payments by Participants to owners of beneficial interests in such Global Debt
Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name."
Such payments will be the responsibility of such Participants.
Unless otherwise specified in the applicable Prospectus Supplement, if the
depositary for a series of Debt Securities is at any time unwilling, unable or
ineligible to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, the Company will issue individual
Debt Securities of such series in exchange for the Global Debt Security
representing such series of Debt Securities. In addition, unless otherwise
specified in the applicable Prospectus Supplement, the Company may at any time
and in its sole discretion, subject to any limitations described in the
Prospectus Supplement relating to such Debt Securities, determine not to have
any Debt Securities of such series represented by one or more Global Debt
Securities and, in such event, will issue individual Debt Securities of such
series in exchange for such Global Debt Securities. Further, if the Company so
specifies with respect to the Debt Securities of a series, an owner of a
beneficial interest in a Global Debt Security representing Debt Securities of
such series may, on terms acceptable to the Company, the Trustee and the
depositary for such Global Debt Security, receive individual Debt Securities
of such series in exchange for such beneficial interests, subject to any
limitations described in the Prospectus Supplement relating to such Debt
Securities. In any such instance, an owner of a beneficial interest in a
Global Debt Security will be entitled to physical delivery of individual Debt
Securities of the series represented by such Global Debt Security equal in
principal amount to such beneficial interest and to have such Debt Securities
registered in its name. Individual Debt Securities of such series so issued
will be issued in denominations, unless otherwise specified by the Company, of
$1,000 and integral multiples thereof. The applicable Prospectus Supplement
may specify other circumstances under which individual Debt Securities may be
issued in exchange for the Global Debt Security representing any Debt
Securities.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of principal of (and premium, if any) and any interest on Debt Securities will
be made at the office of the Trustee in New York or at the office of such
paying agent or paying agents as the Company may designate from time to time
in the applicable Prospectus Supplement, except that at the option of the
Company payment of any interest may be made (i) except in the case of Global
Debt Securities, by check mailed to the address of the person or entity
entitled thereto as such address shall appear in the Securities Register or
(ii) by transfer to an account maintained by the person or entity entitled
thereto as specified in the Securities Register, provided that proper transfer
instructions have been
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received by the Regular Record Date. Unless otherwise indicated in the
applicable Prospectus Supplement, payment of any interest on Debt Securities
will be made to the person or entity in whose name such Debt Security is
registered at the close of business on the Regular Record Date for such
interest, except in the case of defaulted interest ("Defaulted Interest"). The
Company may at any time designate additional paying agents or rescind the
designation of any paying agent; however, the Company will at all times be
required to maintain a paying agent in each Place of Payment for each series
of Debt Securities.
Any moneys deposited with the Trustee or any paying agent, or held by the
Company in trust, for the payment of the principal of (and premium, if any) or
interest on any Debt Security and remaining unclaimed for two years after such
principal (and premium, if any) or interest has become due and payable shall,
at the request of the Company, be repaid to the Company or released from such
trust, as applicable, and the holder of such Debt Security shall thereafter
look, as a general unsecured creditor, only to the Company for payment
thereof.
OPTION TO DEFER INTEREST PAYMENTS OR TO PAY-IN-KIND
If provided in the applicable Prospectus Supplement, the Company shall have
the right, at any time and from time to time during the term of any series of
Debt Securities, to defer the payment of interest for such number of
consecutive interest payment periods as may be specified in the applicable
Prospectus Supplement (each, an "Extension Period"), subject to the terms,
conditions and covenants, if any, specified in such Prospectus Supplement,
provided that such Extension Period may not extend beyond the Stated Maturity
of the final installment of principal of such series of Debt Securities. If
provided in the applicable Prospectus Supplement, the Company shall have the
right, at any time and from time to time during the term of any series of Debt
Securities, to make payments of interest by delivering additional Debt
Securities of such series of Debt Securities. Certain material U.S. federal
income tax consequences and special considerations applicable to any such Debt
Securities will be described in the applicable Prospectus Supplement.
SUBORDINATION
Except as set forth in the applicable Prospectus Supplement, the
Subordinated Indenture provides that the Subordinated Debt Securities are
subordinated and junior in right of payment to all Senior Indebtedness of the
Company. If (i) the Company defaults in the payment of any principal, or
premium, if any, or interest on any Senior Indebtedness when the same becomes
due and payable, whether at maturity or at a date fixed for prepayment or
declaration or otherwise or (ii) an event of default occurs with respect to
any Senior Indebtedness permitting the holders thereof to accelerate the
maturity thereof and written notice of such event of default (requesting that
payments on Subordinated Debt Securities cease) is given to the Company by the
holders of Senior Indebtedness, then unless and until such default in payment
or event of default shall have been cured or waived or shall have ceased to
exist, no direct or indirect payment (in cash, property or securities, by set-
off or otherwise) shall be made or agreed to be made on account of the
Subordinated Debt Securities or interest thereon or in respect of any
repayment, redemption, retirement, purchase or other acquisition of
Subordinated Debt Securities.
Except as set forth in the applicable Prospectus Supplement, the
Subordinated Indenture provides that in the event of (i) any insolvency,
bankruptcy, receivership, liquidation, reorganization, readjustment,
composition or other similar proceeding relating to the Company, its creditors
or its property, (ii) any proceeding for the liquidation, dissolution or other
winding- up of the Company, voluntary or involuntary, whether or not involving
insolvency or bankruptcy proceedings, (iii) any assignment by the Company for
the benefit of creditors or (iv) any other marshaling of the assets of the
Company, all present and future Senior Indebtedness (including, without
limitation, interest accruing after the commencement of any such proceeding,
assignment or marshaling of assets) shall first be paid in full before any
payment or distribution, whether in cash, securities or other property, shall
be made by the Company on account of Subordinated Debt Securities. In any such
event, any payment or distribution, whether in cash, securities or other
property (other than securities of the Company or any other corporation
provided for by a plan of reorganization or a readjustment, the payment of
which is subordinate, at least to the extent provided in the subordination
provisions of the Indenture, to the payment of all Senior
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Indebtedness at the time outstanding and to any securities issued in respect
thereof under any such plan of reorganization or readjustment and other than
payments made from any trust described in the "Satisfaction and Discharge;
Defeasance" below), which would otherwise (but for the subordination
provisions) be payable or deliverable in respect of Subordinated Debt
Securities (including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Company
being subordinated to the payment of Subordinated Debt Securities) shall be
paid or delivered directly to the holders of Senior Indebtedness, or to their
representative or trustee, in accordance with the priorities then existing
among such holders until all Senior Indebtedness shall have been paid in full.
No present or future holder of any Senior Indebtedness shall be prejudiced in
the right to enforce subordination of the indebtedness evidenced by
Subordinated Debt Securities by any act or failure to act on the part of the
Company.
The term "Senior Indebtedness" is defined as the principal, premium, if any,
and interest on (i) all indebtedness of the Company, whether outstanding on
the date of the issuance of Subordinated Debt Securities or thereafter
created, incurred or assumed, which is for money borrowed, or which is
evidenced by a note or similar instrument given in connection with the
acquisition of any business, properties or assets, including securities, (ii)
any indebtedness of others of the kinds described in the preceding clause (i)
for the payment of which the Company is responsible or liable as guarantor or
otherwise and (iii) amendments, renewals, extensions and refundings of any
such indebtedness, unless in any instrument or instruments evidencing or
securing such indebtedness or pursuant to which the same is outstanding, or in
any such amendment, renewal, extension or refunding, it is expressly provided
that such indebtedness is not superior in right of payment to Subordinated
Debt Securities. The Senior Indebtedness shall continue to be Senior
Indebtedness and entitled to the benefits of the subordination provisions
irrespective of any amendment, modification or waiver of any term of the
Senior Indebtedness or extension or renewal of the Senior Indebtedness.
Except as provided in the applicable Prospectus Supplement, the Subordinated
Indenture for a series of Subordinated Debt does not limit the aggregate
amount of Senior Indebtedness that may be issued by the Company. As of March
31, 1998, Senior Indebtedness of the parent Company aggregated approximately
$1,580,274,000. In addition, because the Company is a holding company, the
Subordinated Debt Securities are effectively subordinated to all existing and
future liabilities of the Company's subsidiaries.
MODIFICATION OF INDENTURES
From time to time, the Indentures may be modified by the Company and the
Trustees without the consent of any holders of any series of Debt Securities
with respect to certain matters, including (i) to cure any ambiguity, defect
or inconsistency or to correct or supplement any provision which may be
inconsistent with any other provision of the Indenture, (ii) to qualify, or
maintain the qualification of, the Indentures under the Trust Indenture Act
and (iii) to make any change that does not materially adversely affect the
interests of any holder of such series of Debt Securities. In addition, under
the Indentures, certain rights, covenants and obligations of the Company and
the rights of holders of any series of Debt Securities may be modified by the
Company and the Trustee with the written consent of the holders of at least a
majority in aggregate principal amount of such series of outstanding Debt
Securities; but no extension of the maturity of any series of Debt Securities,
reduction in the interest rate or extension of the time for payment of
interest, change in the optional redemption or repurchase provisions in a
manner adverse to any holder of such series of Debt Securities, other
modification in the terms of payment of the principal of, or interest on, such
series of Debt Securities, or reduction of the percentage required for
modification, will be effective against any holder of such series of
outstanding Debt Securities without such holder's consent.
In addition, the Company and the Trustees may execute, without the consent
of any holder of the Debt Securities, any supplemental Indenture for the
purpose of creating any new series of Debt Securities.
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EVENTS OF DEFAULT
The Indentures provide that any one or more of the following described
events with respect to a series of Debt Securities that has occurred and is
continuing constitutes an "Event of Default" with respect to such series of
Debt Securities:
(i) failure for 60 days to pay any interest or any sinking fund payment on
such series of the Debt Securities when due (subject to the deferral of any
due date in the case of an Extension Period); or
(ii) failure to pay any principal or premium, if any, on such series of the
Debt Securities when due whether at maturity, upon redemption, by declaration
or otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice has been
given to the Company from the Trustee or the holders of at least 25% in
principal amount of such series of outstanding Debt Securities; or
(iv) default resulting in acceleration of other indebtedness of the Company
for borrowed money where the aggregate principal amount so accelerated exceeds
$25 million and such acceleration is not rescinded or annulled within 30 days
after the written notice thereof to the Company by the Trustee or to the
Company and the Trustee by the holders of 25% in aggregate principal amount of
the Debt Securities of such series then outstanding, provided that such Event
of Default will be remedied, cured or waived if the default that resulted in
the acceleration of such other indebtedness is remedied, cured or waived; or
(v) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in outstanding principal amount of such series of
Debt Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee of such
series. The Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of such series of Debt Securities may declare the
principal due and payable immediately upon an Event of Default. The holders of
a majority in aggregate outstanding principal amount of such series of Debt
Securities may annul such declaration and waive the default if the default
(other than the non-payment of the principal of such series of Debt Securities
which has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Trustee of such
series.
The holders of a majority in outstanding principal amount of a series of
Debt Securities affected thereby may, on behalf of the holders of all the
holders of such series of Debt Securities, waive any past default, except a
default in the payment of principal or interest (unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Trustee of such series) or a default in respect of a covenant or provision
which under the related Indenture cannot be modified or amended without the
consent of the holder of each outstanding Debt Security of such series of Debt
Securities. The Company is required to file annually with the Trustees a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indentures.
In case an Event of Default shall occur and be continuing as to a series of
Debt Securities, all of which are held by the Trust, the Trustee of such
series will have the right to declare the principal of and the interest on
such Debt Securities, and any other amounts payable under the Indenture, to be
forthwith due and payable and to enforce its other rights as a creditor with
respect to such Debt Securities.
No holder of any Debt Securities will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice of a
continuing Event of Default and unless also the holders of at least 25% in
aggregate principal amount of the outstanding Debt Securities of such series
shall have made written request and offered reasonably indemnity to the
Trustee of such series to institute such proceeding as a trustee, and unless
the Trustee shall not have received
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from the holders of a majority in aggregate principal amount of the
outstanding Debt Securities of such class a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of a
Debt Security for enforcement of payment of the principal or interest on such
Debt Security on or after the respective due dates expressed in such Debt
Security.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
Unless otherwise indicated in the applicable Prospectus Supplement, the
Indentures provide that the Company shall not consolidate with or merge into
any other person or entity or sell, assign, convey, transfer or lease its
properties and assets substantially as an entirety to any person or entity
unless (i) either the Company is the continuing corporation, or any successor
or purchaser is a corporation, partnership, or trust or other entity organized
under the laws of the United States of America, any State thereof or the
District of Columbia, and any such successor or purchaser expressly assumes
the Company's obligations on the Debt Securities under a supplemental
indenture; and (ii) immediately before and after giving effect thereto, no
Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have happened and be continuing.
Unless otherwise indicated in the applicable Prospectus Supplement, the
general provisions of the Indenture do not afford holders of the Debt
Securities protection in the event of a highly leveraged or other transaction
involving the Company that may adversely affect holders of the Debt
Securities.
SATISFACTION AND DISCHARGE; DEFEASANCE
The Indentures provide that when, among other things, all Debt Securities
not previously delivered to the Trustee for cancellation (i) have become due
and payable or (ii) will become due and payable at their Stated Maturity
within one year, and the Company deposits or causes to be deposited with the
Trustee, as trust funds in trust for the purpose, an amount in the currency or
currencies in which the Debt Securities are payable sufficient to pay and
discharge the entire indebtedness on the Debt Securities not previously
delivered to the Trustee for cancellation, for the principal (and premium, if
any) and interest to the date of the deposit or to the Stated Maturity, as the
case may be, then the Indenture will cease to be of further effect (except as
to the Company's obligations to pay all other sums due pursuant to the
Indenture and to provide the officers' certificates and opinions of counsel
described therein), and the Company will be deemed to have satisfied and
discharged the Indenture.
The Indentures provide that the Company may elect either (a) to terminate
(and be deemed to have satisfied) all its obligations with respect to any
series of Debt Securities (except for the obligations to register the transfer
or exchange of such Debt Securities, to replace mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of the Debt
Securities, to compensate and indemnify the Trustee ("defeasance") or (b) to
be released from its obligations with respect to certain covenants, ("covenant
defeasance"), upon the deposit with the Trustee, in trust for such purpose, of
money and/or U.S. Government Obligations (as defined in the Indenture) which
through the payment of principal and interest in accordance with their terms
will provide money, in an amount sufficient (in the opinion of a nationally
recognized firm of independent public accountants) to pay the principal of,
interest on and any other amounts payable in respect of the outstanding Debt
Securities of such series. Such a trust may be established only if, among
other things, the Company has delivered to the Trustee an opinion of counsel
(as specified in the Indenture) with regard to certain matters, including an
opinion to the effect that the holders of such Debt Securities will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit and discharge and will be subject to Federal income tax on the
same amounts and in the same manner and at the same times as would have been
the case if such deposit and defeasance or covenant defeasance, as the case
may be, had not occurred.
17
<PAGE>
REDEMPTION
Unless otherwise indicated in the applicable Prospectus Supplement, Debt
Securities will not be subject to any sinking fund requirements.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company may, at its option, redeem the Debt Securities of any series in whole
at any time or in part from time to time, at the redemption price set forth in
the applicable Prospectus Supplement plus accrued and unpaid interest to the
date fixed for redemption, and Debt Securities in denominations larger than
$1,000 may be redeemed in part but only in integral multiples of $1,000. If
the Debt Securities of any series are so redeemable only on or after a
specified date or upon the satisfaction of additional conditions, the
applicable Prospectus Supplement will specify such date or describe such
conditions.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Debt Securities to be
redeemed at such holder's registered address. Unless the Company defaults in
the payment of the redemption price, on and after the redemption date interest
shall cease to accrue on such Debt Securities or portions thereof called for
redemption.
CONVERSION OR EXCHANGE
If and to the extent indicated in the applicable Prospectus Supplement, the
Debt Securities of any series may be convertible or exchangeable into other
Securities. The specific terms on which Debt Securities of any series may be
so converted or exchanged will be set forth in the applicable Prospectus
Supplement. Such terms may include provisions for conversion or exchange,
either mandatory, at the option of the holder, or at the option of the
Company, in which case the number of shares of other securities to be received
by the holders of Debt Securities would be calculated as of a time and in the
manner stated in the applicable Prospectus Supplement.
CERTAIN COVENANTS
The Indentures contain certain covenants regarding, among other matters,
corporate existence, payment of taxes and reports to holders of Debt
Securities. If and to the extent indicated in the applicable Prospectus
Supplement, these covenants may be removed or additional covenants added with
respect to any series of Debt Securities.
GOVERNING LAW
The Indentures and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York.
INFORMATION CONCERNING THE TRUSTEES
Each Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the
Trust Indenture Act. Subject to such provisions, each Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Debt Securities, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which
might be incurred thereby. Each Trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance
of its duties if such Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of Adelphia and certain
provisions of Adelphia's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by Adelphia's Certificate of Incorporation
and Bylaws, which documents are incorporated herein by reference.
18
<PAGE>
Adelphia's authorized capital stock consists of 200,000,000 shares of Class
A Common Stock, par value $.01 per share, 25,000,000 shares of Class B Common
Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par
value $.01 per share.
COMMON STOCK
Dividends. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive such dividends as may be declared by Adelphia's Board of
Directors out of funds legally available for such purpose, but only after
payment of dividends required to be paid on outstanding shares of any other
class or series of stock having preference over Common Stock as to dividends.
No dividend may be declared or paid in cash or property on either class of
Common Stock, however, unless simultaneously a dividend is paid on the other
class of Common Stock as follows. In the event a cash dividend is paid, the
holders of Class A Common Stock will be paid a cash dividend per share equal
to 105% of the amount payable per share of Class B Common Stock. In the event
of a property dividend, holders of each class of Common Stock are entitled to
receive the same value per share of Common Stock outstanding. In the case of
any stock dividend, holders of Class A Common Stock are entitled to receive
the same percentage dividend (payable in Class A Common Stock) as the holders
of Class B Common Stock receive (payable in Class B Common Stock). Adelphia is
limited in its ability to pay cash dividends on Common Stock under its
outstanding long-term loan agreements. See Note 3 to the Adelphia
Communications Corporation consolidated financial statements in the Form 10-K.
Voting Rights. Holders of Class A Common Stock and Class B Common Stock vote
as a single class on all matters submitted to a vote of the stockholders, with
each share of Class A Common Stock entitled to one vote and each share of
Class B Common Stock entitled to ten votes, except (i) for the election of
directors and (ii) as otherwise provided by law. In the annual election of
directors, the holders of Class A Common Stock, voting as a separate class,
are entitled to elect one of Adelphia's directors. The holders of Class A
Common Stock and Class B Common Stock, voting as a single class with each
share of Class A Common Stock entitled to one vote and each share of Class B
Common Stock entitled to ten votes, are entitled to elect the remaining
directors. Consequently, holders of Class B Stock have sufficient voting power
to elect the remaining six members of the seven-member Board of Directors.
Holders of Class A Common Stock and Class B Common Stock are not entitled to
cumulate votes in the election of directors. Under Delaware law and Adelphia's
Certificate of Incorporation, the affirmative vote of a majority of the
outstanding shares of Class A Common Stock is required to approve, among other
matters, a change in the powers, preferences or special rights of the shares
of Class A Common Stock so as to affect them adversely, but is not required to
approve an increase or decrease in the number of authorized shares of Class A
Common Stock.
Liquidation Rights. Upon liquidation, dissolution or winding up of Adelphia,
any distributions to holders of any class of Common Stock would only be made
after payment in full of creditors and provision for the preference of any
other class or series of stock having a preference over the Common Stock upon
liquidation, dissolution or winding up that may then be outstanding.
Thereafter, the holders of Class A Common Stock are entitled to a preference
of $1.00 per share. After such amount is paid, holders of the Class B are
entitled to receive $1.00 per share. Any remaining amount would then be shared
ratably by both classes.
Other Provisions. Each share of Class B Common Stock is convertible at the
option of its holder into one share of Class A Common Stock at any time. The
holders of Class A Common Stock and Class B Common Stock are not entitled to
preemptive or subscription rights. Neither the Class A Common Stock nor the
Class B Common Stock may be subdivided, consolidated, reclassified or
otherwise changed unless concurrently the other class of Common Stock is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner.
PREFERRED STOCK
The 5,000,000 shares of authorized preferred stock may be issued with such
designations, powers, preferences and other rights and qualifications,
limitations and restrictions thereof as Adelphia's Board of
19
<PAGE>
Directors may authorize without further action by Adelphia's stockholders,
including but not limited to: (i) the distinctive designation of each series
and the number of shares that will constitute such series; (ii) the voting
rights, if any, of shares of such series; (iii) the dividend rate on the
shares of such series, any restriction, limitation or condition upon the
payment of such dividends, whether dividends shall be cumulative and the dates
on which dividends are payable; (iv) the prices at which, and the terms and
conditions on which, the shares of such series may be redeemed, if such shares
are redeemable; (v) the purchase or sinking fund provisions, if any, for the
purchase or redemption of shares of such series; (vi) any preferential amount
payable upon shares of such series in the event of the liquidation,
dissolution or winding up of Adelphia or the distribution of its assets; and
(vii) the prices or rates of conversion at which, and the terms and conditions
on which, the shares of such series may be converted into other securities, if
such shares are convertible. Adelphia has designated and has outstanding two
classes of Preferred Stock - 8 1/8% Series C Convertible Preferred Stock, par
value $.01 per share ("Convertible Preferred Stock") and 13% Cumulative
Exchangeable Preferred Stock, par value $.01 per share ("Exchangeable
Preferred Stock"), Series B. In connection with the foregoing designations,
the maximum number of shares authorized of Convertible Preferred Stock and
Exchangeable Preferred Stock is 100,000 shares and 1,500,000 shares,
respectively.
Convertible Preferred Stock. The Convertible Preferred Stock accrues
cumulative dividends at the rate of 8 1/8% per annum, or $81 1/4 per share of
the Convertible Preferred Stock per annum. The Convertible Preferred Stock has
a liquidation preference of $1,000 per share. Upon any voluntary or
involuntary liquidation, dissolution or winding-up of the affairs of the
Corporation, the holders of the Convertible Preferred Stock are entitled to
receive the liquidation preference for the Convertible Preferred Stock, plus
any accrued but unpaid dividends thereon, and no more. Neither the voluntary
sale, conveyance, exchange or transfer (for cash, shares of stock, securities
or other consideration) of all or substantially all of the property or assets
of Adelphia nor the consolidation or merger of Adelphia with or into one or
more corporations will be deemed to be a voluntary or involuntary liquidation,
dissolution or winding-up of Adelphia, unless such sale, conveyance, exchange
or transfer shall be in connection with a liquidation, dissolution or winding-
up of the business of Adelphia. The Convertible Preferred Stock ranks pari
passu with the Exchangeable Preferred Stock and ranks senior to the Common
Stock of the Company with respect to dividends and liquidation.
Each share of Convertible Preferred Stock is convertible based upon its
stated liquidation preference into shares of the Class A Common Stock of the
Company at any time at the election of the holder thereof at a conversion
price of $8.48 per share of Adelphia Class A Common Stock (or approximately
117.9245 shares of the Class A Common Stock per share of Convertible Preferred
Stock). The conversion price is subject to adjustment if Adelphia pays a
dividend in shares of Class A Common Stock or subdivides, combines or
reclassifies the shares of Class A Common Stock or distributes rights to
purchase Common Stock or makes certain other distributions to holders of
Common Stock. The Convertible Preferred Stock is not be entitled to vote in
the election of directors of the Company or upon any other matter (except as
provided by law), unless a Voting Rights Triggering Event with respect to the
Convertible Preferred Stock occurs, in which case the Board of Directors will
be expanded by two seats, which shall then be elected by the holders of the
Convertible Preferred Stock. The Convertible Preferred Stock is not subject to
mandatory redemption.
The Convertible Preferred Stock may be redeemed at the option of Adelphia,
in whole or in part, at any time on or after August 1, 2000 at 104%, 102% and
100% of the liquidation preference of the Convertible Preferred Stock plus
accrued dividends in the years beginning August 1, 2000, 2001 and 2002 and
thereafter, respectively.
Cumulative Exchangeable Preferred Stock. 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. Dividends on the
Exchangeable Preferred Stock accrue at a rate of 13% of the liquidation
preference per annum and are payable semiannually, commencing on January 15,
1998.
20
<PAGE>
The rights of holders of shares of Common Stock as described above will be
subject to, and may be adversely affected by, the rights of holders of any
additional classes of Preferred Stock that may be designated and issued in the
future.
TRANSFER AGENT
The Transfer Agent and Registrar for the Class A Common Stock and the
Exchangeable Preferred Stock is American Stock Transfer & Trust Company.
BOOK ENTRY ISSUANCE
Unless otherwise specified in the applicable Prospectus Supplement, DTC will
act as depositary for Securities issued in the form of Global Securities. Such
Securities will be issued only as fully-registered securities registered in
the name of Cede & Co. (DTC's nominee). One or more fully-registered Global
Securities will be issued for such Securities representing in the aggregate
the total number of such Securities, and will be deposited with or on behalf
of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock
Exchange, the American Stock Exchange and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain custodial relationships with Direct Participants, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the Commission.
Purchases of Securities within the DTC system must be made by or through
Direct Participants, which will receive a credit for such Securities on DTC's
records. The ownership interest of each actual purchaser of each Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Securities.
Transfers of ownership interests in Securities issued in the form of Global
Securities are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in such Securities, except
in the event that use of the book-entry system for such Securities is
discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Securities
issued in the form of Global Securities. DTC's records reflect only the
identity of the Direct Participants to whose accounts such Securities are
credited, which may or may not be the Beneficial Owners. The Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
21
<PAGE>
Although voting with respect to Securities issued in the form of Global
Securities is limited to the holders of record of such Securities, in those
instances in which a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to such Securities. Under its usual procedures,
DTC would mail an omnibus proxy (the "Omnibus Proxy") to the issuer of such
Securities as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants
to whose accounts such Securities are credited on the record date (identified
in a listing attached to the Omnibus Proxy).
Payments in respect of Securities issued in the form of Global Securities
will be made by the issuer of such Securities to DTC. DTC's practice is to
credit Direct Participants' accounts on the relevant payment date in
accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participant and not of DTC or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payments to DTC
are the responsibility of the issuer of the applicable Securities,
disbursement of such payments to Direct Participants is the responsibility of
DTC, and disbursements of such payments to the Beneficial Owners is the
responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as depositary with respect to any
Securities at any time by giving reasonable notice to the issuer of such
Securities. In the event that a successor depositary is not obtained,
individual Security certificates representing such Securities are required to
be printed and delivered. The Company, at its option, may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depositary).
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believe to be accurate, but
the Company assumes no responsibility for the accuracy thereof. The Company
has no responsibility for the performance by DTC or its Participants of their
respective obligations as described herein or under the rules and procedures
governing their respective operations.
PLAN OF DISTRIBUTION
Any of the Securities being offered hereby may be sold in any one or more of
the following ways from time to time: (i) through agents; (ii) to or through
underwriters; (iii) through dealers; and (iv) directly by the Company to
purchasers.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
Offers to purchase Securities may be solicited by agents designated by the
Company from time to time. Any such agent involved in the offer or sale of the
Securities in respect of which this Prospectus is delivered will be named, and
any commissions payable by the Company to such agent will be set forth, in the
applicable Prospectus Supplement. Unless otherwise indicated in such
Prospectus Supplement, any such agent will be acting on a reasonable best
efforts basis for the period of its appointment. Any such agent may be deemed
to be an underwriter, as that term is defined in the Securities Act, of the
Securities so offered and sold.
If Securities are sold by means of an underwritten offering, the Company
will execute an underwriting agreement with an underwriter or underwriters at
the time an agreement for such sale is reached, and the names of the specific
managing underwriter or underwriters, as well as any other underwriters, the
respective amounts underwritten and the terms of the transaction, including
commissions, discounts and any other compensation of the underwriters and
dealers, if any, will be set forth in the applicable Prospectus Supplement
which will be used by the underwriters to make resales of the Securities in
respect of which this Prospectus is being delivered to the public. If
underwriters are utilized in the sale of any Securities in respect of which
this Prospectus is being
22
<PAGE>
delivered, such Securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at
varying prices determined by the underwriters and the Company at the time of
sale. Securities may be offered to the public either through underwriting
syndicates represented by managing underwriters or directly by one or more
underwriters. If any underwriter or underwriters are utilized in the sale of
Securities, unless otherwise indicated in the applicable Prospectus
Supplement, the underwriting agreement will provide that the obligations of
the underwriters are subject to certain conditions precedent and that the
underwriters with respect to a sale of such Securities will be obligated to
purchase all such Securities if any are purchased.
The Company may grant to the underwriters options to purchase additional
Securities, to cover over-allotments, if any, at the initial public offering
price (with additional underwriting commissions or discounts), as may be set
forth in the Prospectus Supplement relating thereto. If the Company grants any
over-allotment option, the terms of such over-allotment option will be set
forth in the Prospectus Supplement for such Securities.
If a dealer is utilized in the sale of the Securities in respect of which
this Prospectus is delivered, the Company will sell such Securities to the
dealer as principal. The dealer may then resell such Securities to the public
at varying prices to be determined by such dealer at the time of resale. Any
such dealer may be deemed to be an underwriter, as such term is defined in the
Securities Act, of the Securities so offered and sold. The name of the dealer
and the terms of the transaction will be set forth in the Prospectus
Supplement relating thereto.
Offers to purchase Securities may be solicited directly by the Company and
the sale thereof may be made by the Company directly to institutional
investors or others, who may be deemed to be underwriters within the meaning
of the Securities Act with respect to any resale thereof. The terms of any
such sales will be described in the Prospectus Supplement relating thereto.
Securities may also be offered and sold, if so indicated in the applicable
Prospectus Supplement, in connection with a remarketing upon their purchase,
in accordance with a redemption or repayment pursuant to their terms, or
otherwise, by one or more firms ("remarketing firms"), acting as principals
for their own accounts or as agents for the Company. Any remarketing firm will
be identified and the terms of its agreement, if any, with the Company and its
compensation will be described in the applicable Prospectus Supplement.
Remarketing firms may be deemed to be underwriters, as that term is defined in
the Securities Act, in connection with the Securities remarketed thereby.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize agents and underwriters to solicit offers by certain institutions to
purchase Securities from the Company at the public offering price set forth in
the applicable Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on the date or dates stated in the
applicable Prospectus Supplement. Such delayed delivery contracts will be
subject to only those conditions set forth in the applicable Prospectus
Supplement. A commission indicated in the applicable Prospectus Supplement
will be paid to underwriters and agents soliciting purchases of Securities
pursuant to delayed delivery contracts accepted by the Company.
Agents, underwriters, dealers and remarketing firms may be entitled under
relevant agreements with the Company to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which such agents, underwriters, dealers
and remarketing firms may be required to make in respect thereof.
Each series of Securities will be a new issue and, other than the Class A
Common Stock, which is listed on the NASDAQ National Market, will have no
established trading market. Unless otherwise specified in the applicable
Prospectus Supplement, the Company will not be obligated to list any series of
Securities on an exchange or otherwise. No assurances can be given as to the
liquidity of the trading market for any of the Securities.
Agents, underwriters, dealers and remarketing firms may be customers of,
engage in transactions with, or perform services for, the Company and its
subsidiaries in the ordinary course of business.
23
<PAGE>
LEGAL MATTERS
The validity of the Securities will be passed upon by Buchanan Ingersoll
Professional Corporation, Pittsburgh, Pennsylvania. Any required information
regarding ownership of the Company's securities by lawyers of such firm will
be contained in the applicable Prospectus Supplement. If the Securities are
underwritten, the applicable Prospectus Supplement will also set forth whether
and to what extent, if any, the validity of the Securities will be passed upon
by a law firm for the underwriters.
EXPERTS
The consolidated financial statements and the related financial statement
schedules of Adelphia and its subsidiaries as of March 31, 1997 and 1998, and
for each of the three years in the period ended March 31, 1998, and the
consolidated financial statements and the related financial statement
schedules of Olympus and its subsidiaries as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, all
incorporated in this Prospectus by reference from the Company's Annual Report
on Form 10-K for the year ended March 31, 1998 have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
24
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH
THEY RELATE OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE
TO WHICH THEY RELATE IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
--------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................. S-1
Risk Factors.............................................................. S-8
Use of Proceeds........................................................... S-15
Price Range of the Company's Common Equity and Dividend Policy............ S-16
Capitalization............................................................ S-17
Dilution.................................................................. S-18
Selected Consolidated Financial Data...................................... S-19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-21
Business.................................................................. S-31
Legislation and Regulation................................................ S-45
Management................................................................ S-55
Certain United States Tax Consequences to Non-United States Holders....... S-57
Principal Stockholders.................................................... S-60
Underwriting.............................................................. S-64
Legal Matters............................................................. S-67
Experts................................................................... S-67
Index to Financial Statements............................................. F-1
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 3
Risk Factors.............................................................. 3
Ratio of Earning to Fixed Charges and Preferred Stock Dividends........... 9
Dilution.................................................................. 9
Use of Proceeds........................................................... 10
Description of Debt Securities............................................ 10
Description of Capital Stock.............................................. 18
Book Entry Issuance....................................................... 21
Plan of Distribution...................................................... 22
Legal Matters............................................................. 24
Experts................................................................... 24
</TABLE>
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4,100,000 SHARES
ADELPHIA
COMMUNICATIONS
CORPORATION
CLASS A COMMON STOCK
ADELPHIA
LOGO
---------------
PROSPECTUS SUPPLEMENT
AUGUST 12, 1998
---------------
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
TD SECURITIES
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<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 9, 1998)
ADELPHIA
LOGO
4,100,000 Shares
Adelphia Communications Corporation
Class A Common Stock
-----------
All of the shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock") offered hereby are being sold by Adelphia
Communications Corporation ("Adelphia" or the "Company"). Of the total,
820,000 shares are being offered hereby in an international offering outside
of the United States and Canada (the "International Offering") and 3,280,000
shares are being offered in a concurrent offering in the United States and
Canada (the "U.S. Offering" and, together with the International Offering, the
"Public Offerings"). On August 12, 1998, the closing sale price for the Class
A Common Stock as quoted on the Nasdaq Stock Market was $33.125 per share. See
"Price Range of the Company's Common Equity and Dividend Policy."
Adelphia has entered into an agreement with the Rigas Family (as defined
herein) pursuant to which certain affiliates controlled by individual members
of the Rigas Family will purchase directly from Adelphia, and Adelphia will
sell directly to such affiliates, at a purchase price equal to the public
offering price less the underwriting discounts, 4,090,315 shares of Class A
Common Stock with an aggregate net purchase price of approximately $125.0
million (the "Direct Placement").
The Company's outstanding common stock consists of Class A Common Stock and
Class B Common Stock, par value $.01 per share (the "Class B Common Stock"
and, together with the Class A Common Stock, the "Common Stock"). The Class B
Common Stock is convertible into Class A Common Stock on a share-for-share
basis, and substantially all of such Class B Common Stock is owned by the
Rigas Family. The rights of holders of Class A Common Stock and Class B Common
Stock differ with respect to certain aspects of dividend, liquidation and
voting rights. The Class A Common Stock has certain preferential rights with
respect to cash dividends and distributions upon the liquidation of Adelphia.
Holders of Class B Common Stock are entitled to greater voting rights than the
holders of Class A Common Stock; however, the holders of Class A Common Stock,
voting as a separate class, are entitled to elect one of Adelphia's directors.
See "Description of Capital Stock" in the Prospectus attached hereto. After
giving effect to the Public Offerings and the Direct Placement, and assuming
no exercise of the Underwriters' over-allotment option, the Rigas Family will
hold approximately 86.8% of the combined voting power of both classes of
Common Stock.
PROSPECTIVE PURCHASERS OF CLASS A COMMON STOCK SHOULD CAREFULLY CONSIDER THE
MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE S-8.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLE- MENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC (1) AND COMMISSIONS (2) COMPANY (1)(3)
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<S> <C> <C> <C>
Per Share $32.00 $1.44 $30.56
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Total (4) $131,200,000 $5,904,000 $125,296,000
</TABLE>
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(1) The total Price to Public and Proceeds to Company excludes the Direct
Placement.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting public offering expenses payable by the Company,
estimated to be $296,000. The Company will also receive the net proceeds
from the issuance of shares of Class A Common Stock to the Rigas Family in
connection with the Direct Placement.
(4) Adelphia has granted the Underwriters an option for 30 days to purchase up
to an additional 615,000 shares of Class A Common Stock, at the public
offering price per share, less the underwriting discount, to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $150,880,000, $6,789,600 and $144,090,400, respectively. See
"Underwriting."
-----------
The shares of Class A Common Stock are being offered severally by the
Underwriters named herein, subject to prior sale when as and if accepted by
them and subject to certain other conditions. It is expected that certificates
for the shares of the Class A Common Stock offered hereby will be made
available for delivery on or about August 18, 1998, at the office of Smith
Barney Inc., 333 West 34th Street, New York, New York 10001.
-----------
Salomon Smith Barney International
Goldman Sachs International
NationsBanc Montgomery Securities LLC
Credit Suisse First Boston Lehman Brothers TD Securities
The date of this Prospectus Supplement is August 12, 1998.
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH
THEY RELATE OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE
TO WHICH THEY RELATE IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
--------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................. S-1
Risk Factors.............................................................. S-8
Use of Proceeds........................................................... S-15
Price Range of the Company's Common Equity and Dividend Policy............ S-16
Capitalization............................................................ S-17
Dilution.................................................................. S-18
Selected Consolidated Financial Data...................................... S-19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-21
Business.................................................................. S-31
Legislation and Regulation................................................ S-45
Management................................................................ S-55
Certain United States Tax Consequenses to Non-United States Holders....... S-57
Principal Stockholders.................................................... S-60
Underwriting.............................................................. S-64
Legal Matters............................................................. S-67
Experts................................................................... S-67
Index to Financial Statements............................................. F-1
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 3
Risk Factors.............................................................. 3
Ratio of Earning to Fixed Charges and Preferred Stock Dividends........... 9
Dilution.................................................................. 9
Use of Proceeds........................................................... 10
Description of Debt Securities............................................ 10
Description of Capital Stock.............................................. 18
Book Entry Issuance....................................................... 21
Plan of Distribution...................................................... 22
Legal Matters............................................................. 24
Experts................................................................... 24
</TABLE>
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4,100,000 SHARES
ADELPHIA
COMMUNICATIONS
CORPORATION
CLASS A COMMON STOCK
ADELPHIA
LOGO
---------------
PROSPECTUS SUPPLEMENT
AUGUST 12, 1998
---------------
SALOMON SMITH BARNEY INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
NATIONSBANC MONTGOMERY SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
TD SECURITIES
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