<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(A) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, For Use of the Commission Only (as permitted by
[_] Rule 14a-b(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to ((S))240.14a-11(c) or ((S))240.14a-12
ADELPHIA COMMUNICATIONS CORPORATION
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(Name of Registrant as Specified In Its Charter)
COLIN H. HIGGIN, ESQ.
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[X] No Fee Required
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Note
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION
One North Main Street
Coudersport, Pennsylvania 16915
Notice of Annual Meeting of Stockholders
to be held on October 25, 1999
To the Stockholders of
Adelphia Communications Corporation:
The Annual Meeting of Stockholders of Adelphia Communications Corporation
will be held at the Coudersport Theater, Main Street, Coudersport, Pennsylvania
on Monday, October 25, 1999 at 10:00 a.m., for the following purposes:
1. To elect one (1) Director by vote of the holders of Class A Common Stock
voting as a separate class.
2. To elect nine (9) Directors by vote of the holders of Class A Common Stock
and Class B Common Stock, voting together.
3. To approve a proposed amendment to Article IV of the Certificate of
Incorporation increasing the authorized number of shares of capital stock
from 230,000,000 to 1,550,000,000, the authorized number of shares of Class
A Common Stock from 200,000,000 to 1,200,000,000, the authorized number of
shares of Class B Common Stock from 25,000,000 to 300,000,000 and the
authorized number of shares of Preferred Stock from 5,000,000 to 50,000,000.
4. To consider and act upon such other matters as may properly come before the
meeting.
The Board of Directors has fixed the close of business on September 14,
1999 as the record date for determination of stockholders entitled to notice of
and to vote at the Annual Meeting.
IF YOU ARE UNABLE TO ATTEND THE MEETING AND YOU WISH TO VOTE YOUR STOCK, IT
IS REQUESTED THAT YOU COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
AS PROMPTLY AS POSSIBLE IN THE ENCLOSED ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
John J. Rigas
Chairman and Chief Executive Officer
October ___, 1999
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION
One North Main Street
Coudersport, Pennsylvania 16915
PROXY STATEMENT FOR ANNUAL MEETING
OF STOCKHOLDERS
October 25, 1999
This proxy statement is being furnished to the stockholders of Adelphia
Communications Corporation, a Delaware corporation (the "Company"), in
connection with the solicitation by the Board of Directors of the Company of
proxies to be voted at the annual meeting of stockholders (the "Annual
Meeting") scheduled to be held on Monday, October 25, 1999, at the Coudersport
Theater, Main Street, Coudersport, Pennsylvania. The address of the principal
executive offices of the Company is One North Main Street, Coudersport,
Pennsylvania 16915, and the date this proxy statement was first mailed to
stockholders was on or about October __, 1999. A copy of the Annual Report to
Stockholders for the nine months ended December 31, 1998 is being furnished with
this proxy statement.
Only stockholders of record as of the close of business on September 14,
1999 are entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof. The outstanding common stock of the Company on that date
consisted of 50,328,343 shares of Class A Common Stock, $.01 par value ("Class
A Common Stock"), and 10,834,476 shares of Class B Common Stock, $.01 par value
("Class B Common Stock"). With respect to the matters described in this proxy
statement, other than the election of the Class A director as described below,
the holders of Class A Common Stock and of Class B Common Stock vote together as
a single class, and each holder of Class A Common Stock is entitled to cast one
(1) vote for each share of Class A Common Stock standing in their name on the
books of the Company and each holder of Class B Common Stock is entitled to cast
ten (10) votes for each share of Class B Common Stock standing in their name on
the books of the Company. The presence, in person or by proxy, of holders of a
majority of the votes of all outstanding shares of the Company's common stock
entitled to vote is necessary to constitute a quorum at the Annual Meeting. A
majority of the votes of all outstanding shares of the Company's common stock
entitled to vote and represented at the Annual Meeting are required for the
adoption of the proposals described below, except that for proposal 1 a majority
of the votes of all outstanding shares of Class A common stock entitled to vote
and represented at the Annual Meeting is required.
All shares represented by valid proxies received by the Company prior to
the Annual Meeting will be voted at the Annual Meeting as specified in the
proxy, unless such proxies previously have been revoked. If no specification is
made, the shares will be voted FOR the election of each of the Board's nominees
to the Board of Directors, and FOR the approval of the proposed amendment to the
Certificate of Incorporation. Unless otherwise indicated by the stockholder,
the proxy card also confers discretionary authority on the Board-appointed
proxies to vote the shares represented by the proxy on any matter that is
properly presented for action at the Annual Meeting. A stockholder giving a
proxy has the power to revoke it any time prior to its exercise by delivering to
the Secretary of the Company a written revocation or a duly executed proxy
bearing a later date, or by attendance at the meeting and voting his shares in
person.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining whether a quorum is present. Abstentions will count as
shares entitled to vote and represented at the Annual Meeting and not voting in
favor of the proposals. Broker non-votes will not count as shares entitled to
vote and represented at the Annual Meeting and will not be included in
calculating the number of votes necessary for approval of the proposals
described below.
<PAGE>
PROPOSALS 1 AND 2
ELECTION OF DIRECTORS
Description of Board of Directors
The Certificate of Incorporation of the Company provides for the Board of
Directors to be elected as follows: a majority of the votes cast by the holders
of Class A Common Stock, voting as a separate class, are entitled to elect one
(1) director; and a majority of the votes cast by the holders of Class A Common
Stock and the holders of Class B Common Stock, voting together as a single
class, are entitled to elect the remaining directors, with each share of Class A
Common Stock entitled to one (1) vote and each share of Class B Common Stock
entitled to ten (10) votes. Stockholders of the Company are not entitled to
cumulate their votes in the election of directors.
The Bylaws of the Company provide that the Board of Directors shall
establish the number of directors which shall not be less than five (5) nor more
than twenty-five (25). The Board of Directors currently consists of eight (8)
directors, seven (7) of whom are also nominees for director.
Each director is to hold office until the next annual meeting of
stockholders and until his successor is duly elected and qualified, subject to
the right of the stockholders to remove any director as provided in the Bylaws.
Any vacancy in the office of a director elected by the holders of Class A Common
Stock voting as a separate class may be filled by such holders voting as a
separate class, and any vacancy in the office of a director elected by the
holders of Class A Common Stock and the holders of Class B Common Stock voting
as a single class may be filled by such holders voting as a single class. In
the absence of a stockholder vote, a vacancy in the office of a director elected
by the holders of Class A Common Stock voting as a separate class or by the
holders of Class A Common Stock and the holders of Class B Common Stock voting
as a single class, as the case may be, may be filled by the remaining directors
then in office, even if less than a quorum, or by the sole remaining director.
Any director elected by the Board of Directors to fill a vacancy shall serve
until the next annual meeting of stockholders and until his successor has been
duly elected and qualified. If the Board of Directors increases the number of
directors, any vacancy so created may be filled by the Board of Directors.
Pursuant to the Agreement and Plan of Merger dated as of March 5, 1999, as
amended, by and among the Company, Century Communications Corp. ("Century") and
Adelphia Acquisition Subsidiary, Inc. ("Merger Sub") whereby Century would merge
with and into Merger Sub and become a wholly owned subsidiary of the Company
(the "Merger Agreement"), the Board of Directors of the Company has agreed to
expand the size of the current Board of Directors by three (3) positions, upon
consummation of the merger, and to appoint Leonard Tow, Scott Schneider and
Bernard Gallagher to the Board of Directors of the Company, at a date to be
mutually agreed upon by the Company and Century, but after the closing of the
transaction, and have the new appointees serve until the next annual meeting of
stockholders. The transaction is expected to close on or shortly after October
1, 1999. Messrs. Tow, Schneider and Gallagher currently serve as directors and
executive officers of Century.
The persons named as proxies in the enclosed form of proxy were selected by
the Board of Directors and have advised the Board of Directors that, unless
authority is withheld, they intend to vote the shares represented by them at the
Annual Meeting for the election of Perry S. Patterson, on behalf of the Class A
Common Stockholders, and for the election of John J. Rigas, Michael J. Rigas,
Timothy J. Rigas, James P. Rigas, Pete J. Metros, Dennis P. Coyle, Leslie J.
Gelber, Peter L. Venetis and Erland E. Kailbourne, on behalf of all of the
common stockholders of the Company. All nominees except Mr. Coyle, Mr. Gelber,
Mr. Kailbourne and Mr. Venetis were first elected or appointed as directors of
the Company in 1986. Mr. Coyle was first elected as a director of the Company
in 1995. This is the first time that Mr. Gelber, Mr. Venetis and Mr. Kailbourne
are being nominated as directors of the Company.
The Board of Directors knows of no reason why any nominee for director
would be unable to serve as director. If at the time of the Annual Meeting any
of the named nominees are unable or unwilling to serve as
2.
<PAGE>
directors of the Company, the persons named in the proxy intend to vote for such
substitutes as may be nominated by the Board of Directors.
The following sets forth certain information concerning each nominee for
election as a director of the Company. Seven of the current directors of the
Company are nominees for reelection as directors.
Proposal 1--Nominee for Election by Holders of Class A Common Stock
Perry S. Patterson
Age 82
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.
Proposal 2--Nominees for Election by Holders of Class A Common Stock and Class B
Common Stock
John J. Rigas
Age 74
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 Telecommunications, Inc. ("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 John J. Rigas family or entities
controlled by them ("the Rigas Family"). Mr. Rigas has owned and operated cable
television systems since 1952. Among 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, and is the father-in-law of Peter Venetis who is
nominated to serve as a director of the Company.
Michael J. Rigas
Age 45
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.
3.
<PAGE>
Timothy J. Rigas
Age 43
Timothy J. Rigas is Executive Vice President, Chief Financial 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
Age 41
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,
Chief Executive Officer and Chief Operating Officer and a director of Hyperion.
Since 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.
Pete J. Metros
Age 59
Pete J. Metros became a director of Adelphia on November 4, 1986. Mr.
Metros is the Managing Director of Mannesmann Dematic Systems - worldwide. On
February 1, 1998, he was appointed to the Board of Directors of Mannesmann
Dematic AG, headquartered in Wetter, Germany. He continues to be the President
and a member of the Board of Directors for Mannesmann Dematic Rapistan
Corporation (since 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 has served as a director of Hyperion since 1997 and
received a BS degree from Georgia Institute of Technology in 1962.
4.
<PAGE>
Dennis P. Coyle
Age 61
Dennis P. 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 Communications,
L.P. ("Olympus," a joint venture of the Company), John, Michael, Timothy and
James Rigas had agreed to vote a sufficient number of shares of the Company's
Class A common stock to elect to the Board of Directors a nominee of Telesat
Cablevision, Inc., which is the Company's joint venture partner in Olympus.
This agreement terminated on January 29, 1999 when Telesat sold all of its
Adelphia stock to the Company. Prior to such termination, Mr. Coyle was the
nominee of Telesat Cablevision, Inc., which is an indirect, wholly-owned
subsidiary of FPL Group, Inc.
Leslie J. Gelber
Age 43
Leslie J. Gelber has been President and Chief Operating Officer of
Caithness Corporation since January 1, 1999. Prior to this position, Mr.
Gelber was President of Cogen Technologies, Inc. from July 1998 until December
1998. From 1993 until July 1998, Mr. Gelber was the President of ESI Energy,
Inc., a former subsidiary of FPL Group, Inc. Prior to joining ESI, Mr. Gelber
was the Director of Corporate Development for FPL Group and was Chairman of FPL
Group's cable television subsidiary and President of its information services
subsidiary. Mr. Gelber received a B.A. degree from Alfred University in 1977
and a Master's degree in business administration from the University of Miami in
1978.
Peter L. Venetis
Age 42
Peter L. Venetis is President and Chief Executive Officer of the Atlantic
Bank of New York. Mr. Venetis also serves as a member of Atlantic Bank's Board
of Directors and as Chairman of the Executive Committee of the Board. Mr.
Venetis joined Atlantic Bank as its Chief Executive Officer in 1992. From 1986
to 1992 Mr. Venetis was a Director in the Leveraged Finance Group at Salomon
Brothers, Inc. in New York. Mr. Venetis is also a board member of the NY Metro
Chapter of the Young President's Organization and is a Trustee of the Churchill
School and Center in Manhattan. Mr. Venetis graduated from Columbia University
(cum laude) in 1979 and received his MBA in Finance and International Business
from the Columbia University Graduate School of Business in 1981.
5.
<PAGE>
Erland E. Kailbourne
Age 57
Erland E. Kailbourne is the retired Chairman and Chief Executive Officer of
Fleet National Bank. He served with the Fleet organization or its predecessors
for 37 years prior to his retirement on December 31, 1998. Mr. Kailbourne is
currently Vice Chairman of the State University of New York Board of Trustees,
Chairman of the John R. Oshei Foundation, a director of the New York ISO
Utilities Board, a director of Albany International Corporation, a director of
Jaran Aerospace Corporation, Rand Capital Corporation and Statewide Zone Capital
Corporation and is a member of the Trooper Foundation. He is a past director of
the New York Business Development Corporation, the Business Council of New York
State, Inc., Fleet National Bank, Security New York State Corp., Fleet Trust
Company, Robert Morris Associates, the Buffalo and Rochester Chambers of
Commerce, the SUNY Albany Foundation, the SUNY Buffalo Foundation, WXXI-Public
Television, WNED-Public Television, WMHT-Public Television and a member of the
Advisory Board of Chautauqua Airlines. Mr. Kailbourne graduated with a degree
in business administration from Alfred University in 1961.
Audit and Compensation Committees and Meetings of the Board of Directors
The Board of Directors has a Compensation Committee, consisting of Perry S.
Patterson and Pete J. Metros, which reviews and has authority to approve the
compensation of the key officers and employees of the Company. The Compensation
Committee met once during the nine-month period ended December 31, 1998. The
Board of Directors also has an Audit Committee, comprised of Perry S. Patterson,
Pete J. Metros and Timothy J. Rigas, which is responsible for monitoring the
financial reporting of the Company on behalf of the Board of Directors and the
investing public. The Audit Committee met once to review the Company's financial
condition and results of operations for the nine-month period ended December 31,
1998. The Company did not have a nominating committee during the nine-month
period ended December 31, 1999, although one was appointed in August 1999,
comprised of John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P.
Rigas. The Board of Directors met or acted by written consent in lieu of meeting
13 times during the nine-month period ended December 31, 1998. Each director
attended at least 75% of the meetings of the Board of Directors and the
respective committees of which each is a member.
Recommendation of the Board of Directors
The Board of Directors of the Company recommends a vote FOR each of the
nominees named above for election as directors.
6.
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the Company's nine and twelve
months ended December 31, 1998 and the fiscal years ended March 31, 1998 and
March 31, 1997 to the Company's Chief Executive Officer and the four most highly
compensated executive officers whose compensation exceeded $100,000 in salary
and bonus during the twelve months ended December 31, 1998:
Compensation
<TABLE>
<CAPTION>
Long-Term
Compensation($) Compensation
Period ----------------- Restricted All Other
Name and Principal Position Ended (a) Salary Bonus Stock Awards($) Compensation ($) (b) (c)
- ------------------------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
John J. Rigas 9 months ended 12/98 1,018,789 - - 200,750
Chairman, President and 12 months ended 12/98 1,367,399 - - 461,061
Chief Executive Officer 12 months ended 3/98 1,271,939 - - 461,378
12 months ended 3/97 1,235,194 - - 473,852
Michael J. Rigas 9 months ended 12/98 171,484 - - 10,950
Executive Vice President, 12 months ended 12/98 229,866 - - 10,950
Operations 12 months ended 3/98 213,011 - - 10,950
12 months ended 3/97 206,857 - - 10,950
Timothy J. Rigas 9 months ended 12/98 171,484 - - 10,950
Executive Vice President, 12 months ended 12/98 229,866 - - 10,950
Chief Financial Officer 12 months ended 3/98 213,089 - - 10,950
and Treasurer 12 months ended 3/97 207,618 - - 10,950
James P. Rigas 9 months ended 12/98 171,003 - - 11,431
Executive Vice President, 12 months ended 12/98 229,385 - - 11,431
Strategic Planning 12 months ended 3/98 213,011 - - 11,410
12 months ended 3/97 206,857 - - 11,410
Daniel R. Milliard (d) 9 months ended 12/98 176,438 - 760,500 5,340
Senior Vice President and 12 months ended 12/98 238,191 - 760,500 5,340
Secretary 12 months ended 3/98 229,810 - 27,000 5,340
12 months ended 3/97 238,863 75,000 156,000 5,340
</TABLE>
__________
(a) On March 30, 1999, the Company changed its fiscal year end from March 31 to
December 31. The twelve months ended December 31, 1998 includes three
months of compensation from the fiscal year ended March 31, 1998.
(b) Nine months ended December 31, 1998, twelve months ended December 31, 1998
and fiscal years ended March 31, 1998 and 1997 amounts include: (i) life
insurance premiums paid during each respective period by the Company (or,
in the case of Daniel R. Milliard, Hyperion) under employment agreements
with John J. Rigas, Michael J. Rigas, Timothy J. Rigas, James P. Rigas and
Daniel R. Milliard, in premium payment amounts of $200,000, $10,200,
$10,200, $10,681 and $4,590, respectively, during the nine and
7.
<PAGE>
twelve months ended December 31, 1998, $200,000, $10,200, $10,200, $10,660
and $4,590, respectively, during the fiscal years ended March 31, 1998 and
1997 on policies owned by the respective named executive officers; (ii) $0,
$227,805, $230,746 and $250,970 for John J. Rigas which represents the
dollar value of the benefit of the whole-life portion of the premiums paid
by the Company during the nine and twelve months ended December 31, 1998,
respectively, and the fiscal years ended March 31, 1998 and 1997,
respectively, pursuant to a split-dollar life insurance arrangement
projected on an actuarial basis; (iii) $0, $32,506, $29,882 and $22,132 for
John J. Rigas which represents payments by the Company during the nine and
twelve months ended December 31, 1998, respectively, and the fiscal years
ended March 31, 1998 and 1997, respectively, pursuant to a split-dollar
life insurance arrangement that is attributable to term life insurance
coverage; and (iv) $750 in Company matching contributions for each
executive officer under the Company's 401(k) savings plan for the nine and
twelve months ended December 31, 1998 and the fiscal years ended March 31,
1998 and 1997, respectively. The amounts shown above do not include
transactions between the Company and certain executive officers or certain
entities which are privately owned in whole or in part by the executive
officers named in the table. See "Certain Transactions."
In accordance with an agreement related to the split-dollar life insurance
arrangement referred to above, the Company will be reimbursed for all
premiums paid related to such arrangement upon the earlier of death of both
the insured and his spouse or termination of the insurance policies related
to such arrangement.
(c) Does not include the value of certain non-cash compensation to each
respective named individual which did not exceed the lesser of $50,000 or
10% of such individual's total annual salary shown in the table.
(d) Amounts shown for Daniel R. Milliard include amounts paid by the Company
under Mr. Milliard's employment agreement with the Company, which was
terminated March 4, 1997 and amounts paid since March 4, 1997 under Mr.
Milliard's new employment agreement with Hyperion as described below. Mr.
Milliard was granted, pursuant to his employment agreement, restricted
stock bonus awards under Hyperion's 1996 Long-Term Incentive Compensation
Plan ("1996 Plan") of 338,000, 58,500 and 58,500 shares of Hyperion Class A
common stock which had a value of approximately $156,000, $27,000 and
$760,500 as of March 4, 1997, April 1, 1997 and April 1, 1998 (the dates of
grant), respectively. The 455,000 shares are not subject to vesting and
will fully participate in dividends and distributions.
All of the executive officers are eligible to receive stock options or
stock bonuses of Class A Common Stock under the Company's 1998 Long-Term
Incentive Compensation Plan ("1998 Plan"), to be awarded or granted at the
discretion of the Plan Administrator (as defined therein), subject to certain
limitations on the number of shares that may be awarded to each executive
officer under the 1998 Plan. No awards were made under the 1998 Long-Term
Incentive Compensation Plan or the Stock Option Plan of 1986 during the twelve
months ended December 31, 1998, although Hyperion approved the issuance of
certain stock options and restricted stock awards under its 1996 Plan to certain
executive officers of Adelphia. See "Certain Transactions."
Employment Contracts and Termination of Employment
During the nine months ended December 31, 1998, each of the named executive
officers other than Mr. Milliard had an employment agreement with the Company
which is automatically renewable each year unless one party gives the other
prior notice and which provides among other things for compensation review by
the Compensation Committee, the insurance premium payments listed in note (a)(i)
to the Summary Compensation Table above, and benefits. In addition, under such
employment agreements, upon termination of such employment for any reason other
than "for cause," each of the executive officers will be entitled to receive
severance pay equal to three months of his salary plus the amount of insurance
premiums payable under such officer's employment agreement which, as of January
1, 1999, in the aggregate in the case of John J. Rigas would be approximately
$452,446.
8.
<PAGE>
As of March 4, 1997, Mr. Milliard entered into an employment agreement with
Hyperion, currently a 66% owned subsidiary of the Company, and terminated his
employment agreement with the Company. Mr. Milliard served as President and Vice
Chairman of Hyperion. Mr. Milliard's employment agreement with Hyperion
provided for base salary, annual cash bonuses based on achievement, stock
options and stock bonuses, certain employee benefits and certain change-in-
control and other provisions, and was set to expire on March 31, 2001.
Mr. Milliard resigned as senior vice president and secretary of the Company and
as President and Secretary of Hyperion effective as of September 20, 1999
although he will continue to serve as a director of the Company until the 1999
annual stockholders meeting.
The Company pays the annual premiums related to a split-dollar life
insurance arrangement for joint and survivor life insurance coverage for John J.
Rigas and his spouse. Upon the earlier of the death of Mr. Rigas and the death
of his spouse or the termination of the arrangement, the Company will recover
all of the premiums previously paid by the Company. The compensation related to
such arrangement is derived as described in notes (b)(ii) and (iii) to the
Summary Compensation Table above.
Board of Directors Compensation
Directors who are not also employees of the Company each receive
compensation from the Company for services as a director at a rate of $750 plus
reimbursement of expenses for each Board of Directors and committee meeting
attended. Directors who are employees of the Company do not receive any
compensation for services as a director or as a member of a committee of the
Board of Directors.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors which, during the nine
months ended December 31, 1998, was composed of two independent, non-employee
directors, Pete J. Metros and Perry S. Patterson, addresses issues relating to
the compensation of executive officers.
The Compensation Committee recognizes that the compensation of executive
officers should be established at levels which are consistent with the Company's
objectives and achievements. However, no part of executive compensation is
strictly tied to statistical operating performance criteria. Each of the
executive officers of the Company, including the Chief Executive Officer,
entered into an employment agreement with the Company in July of 1986, which
fixed the initial annual base salary of each executive and provided the
Compensation Committee with the ability to increase the base salary as the
Compensation Committee deems appropriate to adequately reflect the scope and
success of the Company's operations, as well as to reflect increases in the
Consumer Price Index. The agreements also provide for bonus compensation in
amounts to be determined by the Compensation Committee from time to time, and
for certain de minimis fringe benefits. The agreements are renewable and have
been renewed at the end of each year, except in the case of Mr. Milliard, whose
agreement with the Company was terminated when he entered into a new employment
agreement with Hyperion, a majority owned subsidiary of the Company of which Mr.
Milliard is President, in March 1997.
With respect to compensation of executive officers other than the Chief
Executive Officer (the "Principal Executives"), the Compensation Committee
receives and accords significant weight to the input of the Chief Executive
Officer. Based on a review of public filings by other publicly-held cable
system operators and other independent compensation survey data, the
Compensation Committee believes that the annual base salaries and bonuses of the
Company's Principal Executives historically have been materially lower than the
annual base salaries and bonuses paid to corresponding Principal Executives of
most other publicly-held cable system operators and other telecommunications
firms, and remain relatively constant compared to increases made in the annual
base salaries of Principal Executives of such other corporations over the past
five years. Increases in annual base salary
9.
<PAGE>
from fiscal 1998 to the nine months ended December 31, 1998 were immaterial with
respect to the Principal Executives. The Compensation Committee believes that
the annual base salaries and overall compensation packages of the Principal
Executives continue to be set materially lower than those paid to corresponding
Principal Executives of other publicly-held cable system operators and
telecommunications firms.
The Compensation Committee has recognized the success of the Principal
Executives in accomplishing the Company's various strategic objectives. The
Company has continued to refinance its shorter-term debt at the level of the
operating subsidiaries with longer-term fixed rate debt and new equity infusions
at the parent Company level, and with new revolving credit facilities and public
fixed rate debt at the subsidiary and Olympus levels. These actions extend the
maturities of the Company's long-term debt and increase the Company's overall
longer-term liquidity and flexibility to obtain financing, which in turn will
assist the Company to meet the challenges of achieving growth while facing
increased competition and regulation within the telecommunications industry. In
addition, the Company has made strategic acquisitions of existing cable systems
and other telecommunications facilities, contributing to increases in cash flow,
and has continued to develop and expand its other telecommunications product and
service offerings, such as competitive local exchange services, residential
telephone services, internet and cable data services. The Company has also
continued to focus its efforts on other methods of increasing cash flow and on
providing superior customer service while realizing operating efficiencies and
cost-savings. Based upon its evaluation of these and other relevant factors,
the Compensation Committee is satisfied that the Principal Executives have
contributed positively to the Company's long-term financial performance, and the
Compensation Committee, in consultation with the Chief Executive Officer of the
Company, has set compensation under the employment agreements accordingly.
The annual base salary of John J. Rigas, the Chief Executive Officer, is
determined by the Compensation Committee in accordance with Mr. Rigas's
employment agreement. Over the past several years, the Compensation Committee
has recognized Mr. Rigas's success in achieving the strategic objectives
mentioned above with respect to the Principal Executives, and has also
recognized Mr. Rigas's leadership and vision in formulating strategies for
responding to the challenges of increased regulation and increasing competition,
and for positioning the Company for growth in a regulated environment. Based on
its survey of compensation data for other companies, the Compensation Committee
believes that Mr. Rigas's annual base salary and overall compensation package is
lower than the compensation packages (including salary, bonus, options and
deferred compensation) paid to chief executive officers of many other publicly-
held cable system operators and other telecommunications firms.
To date, the Company has not granted bonuses to its Chief Executive Officer
or its Principal Executives (with the exclusion of the bonuses paid to Mr.
Milliard by Hyperion), but may in its discretion grant bonuses from time to time
as it deems appropriate. In light of the historically significant equity
interests of the Chief Executive Officer and the Principal Executives, the
Compensation Committee has generally judged it unnecessary to offer its
executive officers equity participation plans or other equity-based incentives
in order to align the interests of its executive officers with those of its
stockholders, although the Compensation Committee may consider such incentives
in the future.
COMPENSATION COMMITTEE
Pete J. Metros, Chairman
Perry S. Patterson
Compensation Committee Interlocks and Insider Participation
Perry Patterson and Pete Metros serve as members of the Compensation
Committee of the Board of Directors. Neither Mr. Patterson nor Mr. Metros is or
has been an officer or employee of the Company.
10.
<PAGE>
Stock Performance Graph
The following graph compares the percentage change for the periods
presented, in the cumulative total shareholder return on the weighted average of
the Company's Class A Common Stock ("Adelphia Class A Common Stock") during
the five years ended March 31, 1998 and the nine months ended December 31, 1998
with the cumulative total return on the Standard & Poor's 500 Stock Index and
with a selected peer group of five companies engaged in the cable communications
industry: Cablevision Systems Corporation (Class A); Comcast Corporation (Class
A); Tele-Communications, Inc. (Class A); TCA Cable TV, Inc.; and Century
Communications Corporation (Class A). The returns of each component issuer in
the foregoing peer group have been weighted according to the respective issuer's
market capitalization. The comparison assumes $100 was invested on March 31,
1993 in the Company's Class A Common Stock and in each of the foregoing indices,
and also assumes reinvestment of dividends. The points marked on the horizontal
axis correspond to March 31 of each year and December 31, 1998.
[GRAPH APPEARS HERE]
<TABLE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG ADELPHIA COMMUNICATIONS CORPORATION, PEER GROUP INDEX AND S&P 500 INDEX
<CAPTION>
Measurement Period Peer Group S&P 500
(Fiscal year Covered) Adelphia Index Index
- --------------------- -------- ---------- -------
<S> <C> <C> <C>
Measurement PT--
3/31/93 $100 $100 $100
FYE 3/31/94 72 99 101
FYE 3/31/95 56 100 117
FYE 3/31/96 39 115 155
FYE 3/31/97 30 78 186
FYE 3/31/98 165 202 275
FYE 12/31/98 254 352 310
</TABLE>
$100 Invested on 3/31/93 in Stock or Index including Reinvestment of Dividends
11.
<PAGE>
CERTAIN TRANSACTIONS
Management Services
During the nine months ended December 31, 1998, the Company provided
management services for certain cable television systems not owned by the
Company, including managed partnerships (the "Managed Partnerships") in which
John J. Rigas, Michael J. Rigas, Timothy J. Rigas, James P. Rigas and Ellen K.
Rigas had varied ownership interests. These services included supervision of
technical and business operations, accounting, marketing, programming,
purchasing, field engineering and other technical and administrative nonfield
services. During this period, the Managed Partnerships paid the Company up to
five percent of system revenues for such services. Other fees were charged by
the Company to the Managed Partnerships during this period for goods and
services including mark-ups on the Company's volume purchases of equipment, pay
programming and other goods and services. In addition, the Managed Partnerships
charged the Company for system and corporate costs during this period. The net
fees and expenses charged by the Company to the Managed Partnerships amounted to
$2,713,000 for the nine months ended December 31, 1998. In addition, the
Company paid $3,422,000 to other entities owned by members of the Rigas Family,
primarily for property, plant and equipment and services. The Company believes
that these fees were no less favorable than the fees which the Company believes
it could obtain in similar transactions with unrelated third parties.
Loans to and from Affiliates
Certain loans to and from the Company by or to affiliates (which do not
include Olympus) as of December 31, 1998 are summarized below. Interest is
charged on such loans to affiliates at rates which ranged from 9.00% to 11.31%
for the nine months ended December 31, 1998.
Total interest income on loans to affiliates, excluding Olympus, aggregated
$9,610,000 for the nine months ended December 31, 1998. In addition, net
settlement amounts under interest rate swap agreements with the Managed
Partnerships, recorded as adjustments to interest expense during the period
incurred, increased the Company's interest expense by $2,049,000 for the nine
months ended December 31, 1998.
The Company earned a $2,017,000 preferred return on its Preferred Class B
Limited Partnership Interest in Syracuse Hilton Head Holdings, L.P. ("SHHH"), an
Adelphia managed partnership controlled by the Rigas Family for the nine months
ended December 31, 1998.
Net receivables due from the Managed Partnerships for advances made by the
Company for the construction and acquisition of cable television systems and for
working capital purposes, including accrued interest thereon, were $14,186,000
at December 31, 1998.
During the nine months ended December 31, 1998 the Company made net
advances of $4,005,000 to Dorellenic. At December 31, 1998, net receivables
from Dorellenic, a general partnership controlled by the Rigas Family,
(including accrued interest) were $29,922,000. Amounts advanced to Dorellenic
were primarily used for working capital purposes.
During fiscal 1990 and 1991, the Company loaned an aggregate $255,000 to
Daniel R. Milliard and an unaffiliated third party, pursuant to several
revolving term and term notes, for capital expenditures and working capital
purposes. As of December 31, 1998, the outstanding amount of these loans was
$152,500.
On an end-of-quarter basis, the largest aggregate amount of net outstanding
loans and advances receivable from affiliates (directors, executive officers and
five-percent shareholders) or entities they control, including John J. Rigas,
Michael J. Rigas, Timothy J. Rigas, James P. Rigas, Ellen K. Rigas, Daniel R.
Milliard, Dorellenic and/or the Managed Partnerships during the nine months
ended December 31, 1998 was $47,930,000.
12.
<PAGE>
Co-Borrowing Agreement
On March 29, 1996, a subsidiary of the Company entered into a $200,000,000
loan agreement with a Managed Partnership and an Olympus subsidiary, as co-
borrowers, which agreement remained in effect during the nine months ended
December 31, 1998.
On May 6, 1999, certain subsidiaries and affiliates of Adelphia and
Olympus, including Hilton Head Communications, L.P., a Rigas Family partnership,
closed on an $850,000,000 credit facility with several banks. The credit
facility consists of a $600,000,000 8 1/2 year reducing revolving credit loan
and a $250,000,000 9 year term loan.
Business Opportunities
The Company's executive officers have entered into a Business Opportunity
Agreement, dated July 1, 1986 (the "Business Opportunity Agreement"), under
which they have agreed not to acquire an interest (except that such persons may,
individually for their own account, engage in regular portfolio trading of
publicly traded securities of companies in the cable television industry) in any
cable television system except: cable television systems which they or their
affiliates (excluding the Company) owned, in whole or in part, operated or had
agreed to acquire as of July 1, 1986; any expansions of such systems within the
same county or an adjacent county (except for systems which are also contiguous
to Company-owned systems); and systems which the Company elects not to acquire
under its right of first refusal described below and any expansions of such
systems within the same county or an adjacent county (except for systems which
are also contiguous to Company-owned systems). Otherwise, the executive
officers will first offer to the Company the opportunity to acquire or invest in
any cable television system or franchise therefor or interest therein that is
offered or available to them. If a majority of the Company's Board of
Directors, including a majority of the independent directors, rejects such
offer, the executive officers may acquire or invest in all of such cable
television systems or franchises therefor or interest therein or with others on
terms no more favorable to them than those offered to the Company.
The Company's executive officers may from time to time evaluate and,
subject to the Company's rights and covenants in the Company's loan agreements
and indentures, may acquire cable television systems or interests therein for
their own accounts separately or along with the Company and/or other joint
venture parties.
Except for the limitations on the ownership of cable television systems as
described herein, the executive officers of Adelphia and their affiliates are
not subject to limitations with respect to their other business activities and
may engage in other businesses related to cable television or other
telecommunications media. The executive officers will devote as much of their
time to the business of the Company as is reasonably required to fulfill the
duties of their offices.
In the event that any executive officer (or his affiliate) decides to offer
for sale (other than to another executive officer or his or another executive
officer's family member, trust or family controlled entity) for his account, his
ownership interest in any cable television system or franchise, he or it will
(subject to the rights of third parties existing at such time) first offer such
interests to the Company. Such selling person or entity has a unilateral option
to elect to require that, if the Company accepts such offer, up to one half of
the consideration for his or its interest would consist of shares of Class B
Common Stock, which shares will be valued at the prevailing market price of the
Class A Common Stock, and the remainder would consist of shares of Class A
Common Stock and/or cash. If a majority of the Company's independent directors
rejects such offer, the executive officer (or his affiliate) may sell such
interest to third parties on terms no more favorable to such third parties than
those offered to the Company.
13.
<PAGE>
Registration Rights, Stock Purchase and Other Matters
Pursuant to a Registration Rights Agreement, as amended, between the
Company and the holders of Class B Common Stock, John J. Rigas has the right,
subject to certain limitations, to require the Company to register shares of the
Company's common stock owned by him for sale to the public and pay the expenses
(except for Mr. Rigas' counsel fees) of such registration on five occasions
selected by him (subject to certain limitations intended to prevent undue
interference with the Company's ability to distribute its securities) during a
fourteen-year period which began in December 1986. The other holders of Class B
Common Stock have the right to participate, at the option of John J. Rigas, as
selling stockholders in any such registration initiated by John J. Rigas. The
holders of Class B Common Stock also have unlimited rights to participate as
selling stockholders in any registered public offering initiated by the Company
and require the Company to pay their expenses (except counsel fees). Such
rights of participation are subject to limitation at the discretion of the
managing underwriter of such offering.
In addition, substantially all of the Class A Common Stock and Series C
Cumulative Convertible preferred stock owned by the Rigas Family or entities
they own or control has been registered by the Company on shelf registration
statements which remain in effect.
In April 1998 and in recognition for valuable past service to Hyperion and
as an incentive for future services, Hyperion authorized the issuance under its
1996 Plan to each of John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James
P. Rigas of (i) stock 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 the initial public
offering price for the IPO and (ii) phantom stock awards 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). At
December 31, 1998, no such options or grants have been granted.
On August 18, 1998, the Company issued 8,190,315 shares of Class A Common
Stock to the public and the Rigas Family. Of this total, 4,100,000 shares were
sold to the public at a price of $32.00 per share, with an underwriting discount
of $1.44 per share. The remaining 4,090,315 shares were sold to Highland
Communications, L.L.C., an entity controlled by the Rigas Family, at the public
offering price less the underwriting discount.
On September 30, 1998, the Company merged one of its subsidiaries with the
subsidiary of AT&T that held an interest in SHHH. Pursuant to the merger
agreement, AT&T received 2,250,000 newly issued shares of the Company's Class A
common stock. Simultaneously, SHHH distributed certain cable systems which
served approximately 34,100 basic subscribers in Virginia and North Carolina to
the Company, in exchange for the interest acquired by the Company from AT&T as
described above, the Company's preferred equity investment in SHHH and certain
affiliate receivables owed to the Company. The Virginia and North Carolina
systems were distributed to the Company without indebtedness.
On January 14, 1999, the Company completed offerings totaling 8,600,000
shares of Class A Common Stock. In those offerings, the Company sold 4,600,000
newly issued shares, including an overallotment option for 600,000 shares, to
Goldman, Sachs & Co. at $43.25 per share and it also sold 4,000,000 shares at
$43.25 per share to Highland Holdings II, an entity controlled by members of the
Rigas family.
On January 29, 1999, the Company purchased from Telesat Cablevision, Inc.,
a subsidiary of FPL Group, Inc., shares of Adelphia stock owned by Telesat for a
price of $149,213,000. In the transaction, the Company purchased 1,091,524
shares of its Class A Common Stock and 20,000 shares of its Series C Cumulative
convertible preferred stock which are convertible into an additional 2,358,490
shares of Class A Common Stock. These shares represent 3,450,014 shares of
Class A Common Stock on a fully converted basis. The Company and Telesat also
agreed to a redemption of Telesat's interests in Olympus Communications, L.P. by
the calendar quarter ending September 30, 1999, or shortly thereafter, for
approximately $108,000,000. The redemption is subject to applicable
14.
<PAGE>
third party approvals. As noted earlier, Mr. Dennis Coyle is the nominee of
Telesat to the Company's Board of Directors.
On March 2, 1999, Hyperion Telecommunications, Inc. issued $300,000,000 of
12% Senior Subordinated Notes due 2007. Highland Holdings, an entity controlled
by members of the Rigas Family, purchased $100,000,000 of the $300,000,000 of
Senior Subordinated Notes directly from Hyperion at a price equal to the
aggregate principal amount less the discount to the initial purchasers of the
other $200,000,000 of Senior Subordinated Notes.
On April 9, 1999, the Company entered into a stock purchase agreement with
Highland Holdings pursuant to which the Company agreed to sell to Highland
Holdings, and Highland Holdings agreed to purchase, $375,000,000 of the
Company's Class B Common Stock. The purchase price per share for the Class B
common stock will be equal to $60.76 (the public offering price in the Company's
April 28, 1999 public offering, less the underwriting discount), plus an
interest factor. The closing under this stock purchase agreement is to occur by
January 23, 2000. In addition, the Rigas Family waived their rights under the
Business Opportunity Agreement to acquire certain basic subscribers in the
Philadelphia area in connection with the Company's pending acquisition of the
cable television systems owned by Harron Communications Corp. entered into on
April 12, 1999. This acquisition is expected to close early in the calendar
quarter ending December 31, 1999.
From time to time, the Company makes announcements regarding proposed
transactions that may involve affiliates of the Company. No assurance can be
given that these transactions will be consummated.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's
directors, executive officers and persons who beneficially own more than ten
(10) percent of a class of the Company's registered equity securities to file
with the Securities and Exchange Commission and deliver to the Company initial
reports of ownership and reports of changes in ownership of such registered
equity securities.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company or written representations that no other
reports were required, the Company's directors, executive officers and more than
ten (10) percent stockholders filed on a timely basis all reports due under
Section 16(a) for the period from April 1, 1998 through December 31, 1998.
15.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, based on information available to the
Company as of September 2, 1999, certain information with respect to the
beneficial ownership of Class A Common Stock and Class B Common Stock by each
director or nominee for director, all executive officers and directors of
Adelphia as a group, and each person known to the Company to own beneficially
more than 5% of such Common Stock, based on 50,328,343 shares of Class A Common
Stock and 10,834,476 shares of Class B Common Stock outstanding, respectively,
as of such date. 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 One North Main Street, Coudersport,
Pennsylvania 16915.
<TABLE>
<CAPTION>
Shares of Percent of Shares of Percent of
Class A Class A Class B Class B
Common Common Common Common
Name Stock Stock Stock Stock
- ------------------------------------- ---------------------- ---------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
John J. Rigas........................ (a) (b) 5,883,004(c)(k) 54.3%
Michael J. Rigas..................... (a) (b) 1,915,970(c)(k) 17.7%
Timothy J. Rigas..................... (a) (b) 1,915,970(c)(k) 17.7%
James P. Rigas....................... (a) (b) 1,151,634(c)(k) 10.6%
Daniel R. Milliard................... 1,000(d) (e) (k) --
Perry S. Patterson................... 1,250 (e) -- --
Pete J. Metros....................... 100 (e) -- --
Dennis P. Coyle...................... 1,000 (e) -- --
All executive officers and directors
as a group (eight persons).......... 35,036,562(a)(c) (b) 10,572,731(c) 97.6%
Ellen K. Rigas....................... (f) (g) 261,762(c)(k) 2.4%
Doris Holdings, L.P. (h)............. 2,398,151 4.8% -- --
Highland Holdings II (i)............. 4,000,000 7.9% -- --
Highland Communications, L.L.C.(i)... 8,556,268 17.0% -- --
Highland Preferred
Communications, L.L.C. (i).......... 9,433,962 5.8% -- --
Highland Holdings (i)................ (i) (i) -- --
Janus Capital Corporation (j)
100 Fillmore Street
Denver, CO 80206-4923.............. 6,262,306 12.4% -- --
Booth American Company
333 W. Fort Street, 12th Floor
Detroit, MI 48226.................. 3,571,428 7.1% -- --
</TABLE>
16.
<PAGE>
__________
(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 Class A Common Stock in the following amounts: John J. Rigas,
431,800 shares - 71,700 shares directly and 360,100 shares through Doris
Holdings, L.P. ("Doris"); Michael J. Rigas, 193,500 shares - 200 shares
directly and 193,300 shares through Doris; Timothy J. Rigas, 193,500 shares
- 200 shares directly and 193,300 shares through Doris; James P. Rigas,
193,300 shares through Doris. John J. Rigas shares voting power with his
spouse with respect to 106,300 of such shares held through Doris. Each of
John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P. Rigas also
shares voting and dispositive power with respect to the 17,990,230 shares
of Class A common beneficially owned by Highland Holdings and subsidiaries
("Highland"), the 4,000,000 shares of Class A common held by Highland
Holdings II ("Highland II") and the other 1,458,151 shares of Class A
common held by Doris. 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 Series C Cumulative 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 notes (a) above or (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 would be 46.2%,
42.6%, 42.6% and 41.9%, respectively. Further, after giving effect to an
additional 4,856,540 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
a Class B Stockholders Agreement (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 49.9%.
(c) The amounts shown include 97,949 of the same shares which are owned of
record by Dorellenic, a general partnership in which the five named
individual Rigas Family members are general partners, 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. The amounts shown do not include any of the
shares of Class B Common Stock that Highland has agreed to purchase from
Adelphia on or before January 23, 2000, pursuant to an agreement between
Adelphia and Highland dated April 9, 1999.
(d) Daniel R. Milliard shares voting and investment power with his spouse with
respect to these shares.
(e) Less than 1%.
(f) 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 17,990,230 shares of Class A Common Stock held by Highland and 4,000,000
shares of Class A Common Stock held by Highland II. See note (i) below.
Ellen K. Rigas is the daughter of John J. Rigas.
(g) 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
Series C Cumulative 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 (i) below, the percentage of Class A Common Stock owned
by Ellen K. Rigas would be 37.1%.
17.
<PAGE>
(h) Doris 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 Doris. In addition, through irrevocable proxies,
each of the above-named individuals shares with Doris the power to vote or
direct the vote of such number of shares of Class A Common Stock held as is
described in note (a) above.
(i) Each of Highland and Highland II is a general partnership, the general
partners of which are John J. Rigas, Michael J. Rigas, Timothy J. Rigas,
James P. Rigas and Ellen K. Rigas. These Rigas Family members may be
deemed to share voting and investment power with respect to the shares held
by Highland's wholly owned subsidiaries, Highland Communications, L.L.C.
and Highland Preferred Communications, L.L.C., and also with respect to the
shares held by Highland II. The amount shown for Highland Preferred
Communications, L.L.C. includes, and the percentage shown reflects,
9,433,962 shares of Class A Common Stock into which the 80,000 shares of
the Company's Series C Cumulative Convertible preferred stock held by
Highland Preferred Communications, L.L.C. is convertible. The amount shown
for Highland Communications, L.L.C. includes 8,506,268 shares of Class A
Common Stock held directly by it and 50,000 shares of Class A Common Stock
held by Bucktail Broadcasting Corporation, another subsidiary of Highland.
(j) According to a Schedule 13G, the named entity provides investment advice to
several clients that hold the shares indicated. In addition, Thomas H.
Bailey, its President and Chairman and one of its shareholders, may be
deemed to beneficially own the same shares due to his positions and stock
ownership which may be deemed to enable him to exercise control over the
named entity.
(k) John J. Rigas, Michael J. Rigas, Timothy J. Rigas, James P. Rigas, Ellen K.
Rigas, Daniel R. Milliard, Dorellenic and the Company are parties to 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 is a party to an 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 and his descendants
certain rights to acquire the shares of common stock of such stockholder
under certain conditions.
18.
<PAGE>
PROPOSAL 3
INCREASE IN AUTHORIZED CAPITAL STOCK
On August 23, 1999, the Board of Directors adopted a resolution proposing
that Article IV of the Certificate of Incorporation of the Company be amended to
increase the authorized number of shares of the capital stock of the Company
from 230,000,000 to 1,550,000,000, to increase the authorized number of shares
of Class A Common Stock of the Company from 200,000,000 to 1,200,000,000, to
increase the authorized number of shares of Class B Common Stock of the Company
from 25,000,000 to 300,000,000 and to increase the authorized number of shares
of Preferred Stock from 5,000,000 to 50,000,000. On September 2, 1999,
50,328,343 shares of Class A Common Stock were outstanding, and 149,671,657
shares were authorized but not outstanding (although 10,834,476 of such shares
are reserved for issuance upon conversion of the issued and outstanding Class B
Common Stock); 10,834,476 shares of Class B Common Stock were issued and
outstanding, and 14,165,524 shares were authorized but not outstanding; and
4,475,000 shares of Preferred Stock were issued and outstanding, and 525,000
shares were authorized but not outstanding. After approval of the proposed
amendment by the stockholders, the Company will have the authority to issue
1,200,000,000 shares of Class A Common Stock, of which 1,149,671,657 shares will
be authorized but not outstanding, 300,000,000 shares of Class B Common Stock of
which 289,165,524 shares will be authorized but not outstanding and 50,000,000
shares of Preferred Stock, of which 45,525,000 shares will be authorized but not
outstanding. The additional 1,438,837,181 shares of common stock would each be
part of existing classes of common stock and, if and when issued, would have the
same respective rights and privileges as the shares of common stock presently
issued and outstanding.
In the judgment of the Board of Directors, the additional shares of common
stock should be authorized so that they will be available for issuance from time
to time by action of the Board of Directors if need therefore should arise; for
example, if it should become desirable to implement financing through the sale
of additional shares of common stock, make an acquisition by the issuance of
common stock, or effect a stock dividend or stock split. The Board of Directors
believes that increasing the authorized shares of common stock would enable it,
if it so chooses, to take actions promptly on behalf of the Company that may
involve the issuance of additional shares of common stock without the delay
necessarily incident to the convening of a stockholders meeting. After adoption
of the proposed amendment, the Board of Directors, without further action by the
stockholders, would have authority to issue additional authorized and unissued
shares of common stock at such times, for a consideration of such character and
value (not less than par), and upon such terms, as it may deem advisable and in
accordance with the Delaware General Corporation Law. In certain circumstances,
a vote of the stockholders on the issuance of additional shares may be required
under the rules of the National Association of Securities Dealers. The Board of
Directors believes it is prudent for the Company to have this flexibility. The
holders of the Company's common stock are not entitled to preemptive rights.
Accordingly, the issuance of additional shares of common stock might
dilute, under certain circumstances, the ownership and voting rights of
stockholders. The proposed increase in the number of shares of common stock the
Company is authorized to issue is not intended to inhibit a change of control of
the Company. The availability for issuance of additional shares of common stock
could discourage, or make more difficult, efforts to obtain control of the
Company. For example, the issuance of shares of common stock in a public or
private sale, merger or similar transaction would increase the number of
outstanding shares, thereby possibly diluting the interest of a party attempting
to obtain control of the Company. The Company is not aware of any pending or
threatened efforts to acquire control of the Company.
As of the date of this proxy statement and subject to the remainder of this
paragraph, the Board of Directors has plans to sell approximately $400 million
in Class A Common Stock to the public and $375 million of Class B Common Stock
to Highland Holdings, a Rigas Family partnership, pursuant to a stock purchase
agreement. The net proceeds from these offerings will be used for acquisitions
and general corporate purposes. The Board of Directors believes that the current
authorized but unissued shares of Class A Common Stock would be sufficient for
any such stock issuance without the adoption of the proposed amendment to the
Company's Certificate of Incorporation.
19.
<PAGE>
The Board of Directors also believes that it is advisable to authorize the
issuance of 45,000,000 additional shares of Preferred Stock. The additional
Preferred Stock would be available to the Company for issuance in one or more
series as determined in the future by the Board of Directors. The Board of
Directors would be empowered to fix, among other things, the designation of and
number of shares to comprise each series and the relative rights, preferences
and privileges of shares of each series, including the dividends payable
thereon, voting rights, conversion rights, the price and terms on which shares
may be redeemed, the amounts payable upon such shares in the event of voluntary
or involuntary liquidation and any sinking fund provisions for redemption or
purchases of such shares. The Board of Directors believes that increasing the
authorized shares of Preferred Stock would provide the Company with additional
flexibility concerning possible future acquisitions and financing and enable it
to quickly capitalize on such opportunities.
As of the date of this proxy statement the Board of Directors does not have
any plans, agreements or commitments for the issuance of additional shares of
Preferred Stock.
There may be, however, certain disadvantages to the additional flexibility
afforded the Company as a result of the authorization of the additional shares
of Preferred Stock. The adoption of the proposed amendment will permit the
Company to issue additional shares of Preferred Stock having voting rights, thus
diluting the voting and ownership interest of existing stockholders. The Board
of Directors could also issue Preferred Stock having terms that could discourage
an acquisition attempt or other transaction that some stockholders might believe
to be in their best interest or in which stockholders might receive a premium
for their stock over the then current market price of such stock. The Board of
Directors of the Company does not have any commitment or understanding relating
to the issuance of the Preferred Stock in any future transaction.
The Board of Directors of the Company recommends a vote FOR the approval of
the amendment to the Certificate of Incorporation.
20.
<PAGE>
TRANSITION REPORT ON FORM 10-K TO THE SECURITIES
AND EXCHANGE COMMISSION
A COPY OF THE TRANSITION REPORT ON FORM 10-K (EXCLUDING EXHIBITS) OF THE
COMPANY FOR THE PERIOD FROM APRIL 1, 1998 TO DECEMBER 31, 1998, AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION, WILL BE FURNISHED FREE OF CHARGE, UPON
WRITTEN REQUEST, TO STOCKHOLDERS WHO HAVE NOT PREVIOUSLY RECEIVED A COPY FROM
THE COMPANY. WRITTEN REQUESTS MAY BE DIRECTED TO THE SECRETARY, ADELPHIA
COMMUNICATIONS CORPORATION, ONE NORTH MAIN STREET, COUDERSPORT, PENNSYLVANIA
16915.
OTHER MATTERS
The Company knows of no other matters to be presented for action at the
Annual Meeting. If any other matters should properly come before the Annual
Meeting, however, it is intended that votes will be cast pursuant to the proxy
in respect thereto in accordance with the best judgment of the persons acting as
proxies.
The Company will pay the expense in connection with the printing,
assembling and mailing to the holders of capital stock of the Company the notice
of meeting, this proxy statement and the accompanying form of proxy. In
addition to the use of the mails, proxies may be solicited by directors,
officers or regular employees of the Company personally or by telephone or
telegraph. The Company may request the persons holding stock in their names, or
in the names of their nominees, to send proxy material to and obtain proxies
from their principals, and will reimburse such persons for their expense in so
doing.
The Company's certified public accountants during the nine months ended
December 31, 1998 were, and for fiscal 1999 will be, Deloitte & Touche LLP.
Such accountants are not expected to attend the Annual Meeting.
Stockholder Proposals
Stockholders who intend to submit a proposal at the annual meeting of the
stockholders of the Company expected to be held in October 2000 must submit such
proposal to the attention of the Secretary of the Company at the address of its
executive offices no later than May 1, 2000.
21.
<PAGE>
APPENDIX A
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Selected Financial Data.................................................................. A-2
Management's Discussion and Analysis of Financial Condition and Results of Operations.. A-5
Quantitative and Qualitative Disclosure about Market Risk.............................. A-17
Financial Statements and Supplementary Data............................................ A-18
Independent Auditors' Report........................................................... A-19
Consolidated Balance Sheets, March 31, 1998 and December 31, 1998...................... A-20
Consolidated Statements of Operations, Years Ended March 31, 1997 and 1998 and
Nine Months Ended December 31, 1998................................................ A-21
Consolidated Statements of Convertible Preferred Stock, Common Stock and Other
Stockholders' Equity (Deficiency), Years Ended March 31, 1997 and 1998 and
Nine Months Ended December 31, 1998................................................ A-22
Consolidated Statements of Cash Flows, Years Ended March 31, 1997 and 1998 and
Nine Months Ended December 31, 1998................................................ A-23
Notes to Consolidated Financial Statements............................................. A-24
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
The selected consolidated financial data as of and for each of the four years
in the period ended March 31, 1998 and the nine months ended December 31, 1998
have been derived from the audited consolidated financial statements of the
Company. The selected consolidated financial data for the nine months ended
December 31, 1997 have been derived from unaudited condensed consolidated
financial statements of the Company not included herein; however, in the opinion
of management, such data reflect all adjustments (consisting only of normal and
recurring adjustments) necessary to fairly present the data for such interim
period. These data should be read in conjunction with the consolidated
financial statements and related notes thereto as of March 31, 1998 and December
31, 1998 and for each of the two years in the period ended March 31, 1998 and
the nine months ended December 31, 1998 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this proxy statement. The statement of operations data with respect to fiscal
years ended March 31, 1995 and 1996, and the balance sheet data at March 31,
1995, 1996 and 1997, have been derived from audited consolidated financial
statements of the Company not included herein.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
------------------------------------------------------------------------------
Statements of Operations Data: 1995 1996 1997 1998 1997 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Revenues $ 361,505 $ 403,597 $ 472,778 $ 528,442 $ 389,905 $ 507,155
Direct operating and programming expense
106,993 124,116 148,982 167,288 121,924 167,963
Selling, general and administrative expense
63,487 68,357 81,763 95,731 70,085 107,249
Depreciation and amortization expenses
97,602 111,031 124,066 145,041 104,570 140,823
Rate regulation charge
- 5,300 - - - -
-----------------------------------------------------------------------------
Operating income 93,423 94,793 117,967 120,382 93,326 91,120
Priority investment income from Olympus 22,300 28,852 42,086 47,765 35,765 36,000
Cash interest expense - net (169,830) (183,780) (190,965) (209,677) (157,360) (167,930)
Noncash interest expense (14,756) (16,288) (41,360) (37,430) (29,981) (23,663)
Equity in loss of joint ventures (44,349) (46,257) (59,169) (79,056) (59,334) (58,471)
Hyperion preferred stock dividends - - - (12,682) (5,988) (21,536)
Minority interest in net losses of subsidiaries - - - - - 25,772
Gain on sale of investments - - 12,151 2,538 1,018 -
Other income 1,453 - - - - 1,113
-----------------------------------------------------------------------------
Loss before income taxes and extraordinary loss (111,759) (122,680) (119,290) (168,160) (122,554) (117,595)
Income tax benefit (expense) 5,475 2,786 358 5,606 (559) 6,802
-----------------------------------------------------------------------------
Loss before extraordinary loss (106,284) (119,894) (118,932) (162,554) (123,113) (110,793)
Extraordinary loss on early retirement of debt - - (11,710) (11,325) (11,325) (4,337)
-----------------------------------------------------------------------------
Net loss (106,284) (119,894) (130,642) (173,879) (134,438) (115,130)
Dividend requirements applicable to preferred stock - - - (18,850) (11,998) (20,718)
-----------------------------------------------------------------------------
Net loss applicable to common stockholders $ (106,284) $ (119,894) $ (130,642) $ (192,729)$ (146,436) $ (135,848)
=============================================================================
Basic and diluted loss per weighted average share of
common stock before extraordinary loss $ (4.32) $ (4.56) $ (4.50) $ (6.07) $ (4.57) $ (3.63)
Basic and diluted net loss per weighted average
share of common stock (4.32) (4.56) (4.94) (6.45) (4.95) (3.75)
Cash dividends declared per common share - - - - - -
</TABLE>
A-2
<PAGE>
Business Segment Information:
As more fully described in the Company's Transition Report on Form 10-K,
Adelphia operates primarily in two lines of business within the
telecommunications industry: cable television and related investments
("Adelphia, excluding Hyperion") and competitive local exchange carrier
telephony ("Hyperion"). The balance sheet data and other data as of and for
each of the four years ended March 31, 1998 and the nine months ended December
31, 1998 of Hyperion have been derived from audited consolidated financial
statements of Hyperion not included herein. The selected consolidated
financial data for the nine months ended December 31, 1997 have been derived
from unaudited condensed consolidated financial statements of Hyperion not
included herein; however, in the opinion of management, such data reflect all
adjustments (consisting only of normal and recurring adjustments) necessary to
fairly present the data for such interim period.
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Adelphia Consolidated
Total assets $ 1,267,291 $ 1,367,579 $ 1,643,826 $ 2,304,671 $ 3,294,457
Total debt 2,021,610 2,175,473 2,544,039 2,909,745 3,527,452
Cash and cash equivalents 5,045 10,809 61,539 276,895 398,644
Investments (a) 50,426 74,961 130,005 150,787 229,494
Redeemable preferred stock - - - 355,266 376,865
Convertible preferred stock
(liquidation preference) - - - 100,000 100,000
Hyperion
Total assets $ 23,212 $ 35,269 $ 174,601 $ 639,992 $ 836,342
Total debt 35,541 50,855 215,675 528,776 494,109
Cash and cash equivalents - - 59,814 230,750 242,570
Investments (a) 15,085 27,900 56,695 69,596 138,614
Redeemable preferred stock - - - 207,204 228,674
Adelphia, excluding Hyperion
Total assets $ 1,244,079 $ 1,332,310 $ 1,469,225 $ 1,664,679 $ 2,458,115
Total debt 1,986,069 2,124,618 2,328,364 2,380,969 3,033,343
Cash and cash equivalents 5,045 10,809 1,725 46,145 156,074
Investments (a) 35,341 47,061 73,310 81,191 90,880
Redeemable preferred stock - - - 148,062 148,191
Convertible preferred stock
(liquidation preference) - - - 100,000 100,000
</TABLE>
See "Other Data" on next page.
A-3
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
---------------------------------------------------------------------------------------------
Other Data: 1995 1996 1997 1998 1997 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Adelphia Consolidated
Revenues $ 361,505 $ 403,597 $ 472,778 $ 528,442 $ 389,905 $ 507,155
Priority income 22,300 28,852 42,086 47,765 35,765 36,000
Operating expenses (b) 170,480 192,473 230,745 263,019 192,009 275,212
Depreciation and
amortization expenses 97,602 111,031 124,066 145,041 104,570 140,823
Operating income 93,423 94,793 117,967 120,382 93,326 91,120
Interest expense - net (184,586) (200,068) (232,325) (247,107) (187,341) (191,593)
Preferred stock dividends - - - (31,532) (17,986) (42,254)
Capital expenditures 92,082 100,089 129,609 183,586 117,560 255,797
Cash paid for acquisitions 70,256 60,804 143,412 146,546 88,217 403,851
Cash used for investments 38,891 24,333 51,415 86,851 62,190 81,558
Hyperion
Revenues $ 1,729 $ 3,322 $ 5,088 $ 13,510 $ 8,690 $ 34,776
Operating expenses (b) 3,906 5,774 10,212 22,118 14,362 54,050
Depreciation and
amortization expenses 463 1,184 3,945 11,477 7,027 26,671
Operating loss (2,640) (3,636) (9,069) (20,085) (12,699) (45,945)
Interest expense - net (3,282) (5,889) (22,401) (36,030) (27,983) (20,010)
Preferred stock dividends - - - (12,682) (5,988) (21,536)
Capital expenditures 2,850 6,084 36,127 68,629 34,834 146,752
Cash paid for acquisitions - - 5,040 65,968 7,638 -
Cash used for investments 7,526 12,815 34,769 64,260 48,574 69,018
Adelphia,excluding Hyperion
Revenues $ 359,776 $ 400,275 $ 467,690 $ 514,932 $ 381,215 $ 472,379
Priority income 22,300 28,852 42,086 47,765 35,765 36,000
Operating expenses (b) 166,574 186,699 220,533 240,901 177,647 221,162
Depreciation and
amortization expenses 97,139 109,847 120,121 133,564 97,543 114,152
Operating income 96,063 98,429 127,036 140,467 106,025 137,065
Interest expense - net (181,304) (194,179) (209,924) (211,077) (159,358) (171,583)
Preferred stock dividends - - - (18,850) (11,998) (20,718)
Capital expenditures 89,232 94,005 93,482 114,957 82,726 109,045
Cash paid for acquisitions 70,256 60,804 138,372 80,578 80,579 403,851
Cash used for investments 31,365 11,518 16,646 22,591 13,616 12,540
</TABLE>
(a) Represents total investments before cumulative equity in net losses.
(b) Amount excludes depreciation and amortization expenses.
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)
Introduction
During the period January 29, 1999 through April 12, 1999, the Company
announced the pending acquisition of the Olympus partnership interests held by
FPL Group, Inc., and the pending acquisitions of FrontierVision Partners, L.P.,
Century Communications Corp. and Harron Communications Corp. (collectively, the
"Pending Acquisitions"). As of the time of filing of the Company's Transition
Report on Form 10-K, all of these transactions were pending and therefore, are
not reflected in the results of operations of the Company for the nine months
ended December 31, 1998. After the completion of the nine months ended December
31, 1998, the Company filed unaudited financial information, audited financial
statements and unaudited pro forma financial information related to the Pending
Acquisitions on a Form 8-K for the event dated April 19, 1999. In addition,
during the period January 13, 1999 through April 30, 1999, the Company entered
into several financing transactions, the proceeds of which will or may be used
to fund one or more of the Pending Acquisitions or for other general corporate
purposes. See Note 13 to Adelphia's Consolidated Financial Statements for
additional information regarding the Pending Acquisitions and financing
transactions referred to above.
Results of Operations
General
On March 30, 1999, the Board of Directors of Adelphia changed its fiscal year
from March 31 to December 31. The decision was made to conform to general
industry practice and for administrative purposes. The change became effective
for the nine months ended December 31, 1998. Management's discussion and
analysis of financial condition and results of operations compares the nine
months ended December 31, 1997 and 1998 and the years ended March 31, 1997 and
1998.
Adelphia earned substantially all of its revenues in each of the years ended
March 31, 1997 and 1998 and the nine months ended December 31, 1998 from monthly
subscriber fees for basic, satellite, premium and ancillary services (such as
installations and equipment rentals), local and national advertising sales, pay-
per-view programming, high speed data services and CLEC telecommunications
services.
The changes in Adelphia's results of operations for the year ended March 31,
1998 and the nine months ended December 31, 1998, compared to the respective
prior periods, 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 increases in cable rates, effective October
1, 1997 and August 1, 1998.
The high level of depreciation and amortization associated with the
significant number of acquisitions in recent years, the continued upgrade 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 Olympus, 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 information below for the years ended March 31, 1997 and 1998 and the
nine months ended December 31, 1998 is derived from Adelphia's consolidated
financial statements that are included in this proxy statement. Information for
the nine months ended December 31, 1997 is derived from unaudited condensed
consolidated financial statements of the Company not included herein; however,
in the opinion of management, such data reflect all adjustments (consisting only
of normal and recurring adjustments) necessary to fairly present the data for
such interim periods. This table sets forth the percentage relationship to
revenues of the components of operating income contained in such financial
statements for the periods indicated.
A-5
<PAGE>
<TABLE>
<CAPTION>
Percentage of Revenues
Year Ended Nine Months Ended
March 31, December 31,
1997 1998 1997 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Direct operating and programming....................... 31.5% 31.7% 31.3% 33.1%
Selling, general and administrative.................... 17.3% 18.1% 18.0% 21.1%
Depreciation and amortization.......................... 26.2% 27.4% 26.8% 27.8%
-------- ------- -------- --------
Operating Income............................................ 25.0% 22.8% 23.9% 18.0%
======== ======= ======== ========
</TABLE>
Comparison of the Nine Months Ended December 31, 1997 and 1998
Revenues. The primary revenue sources reflected as a percentage of total
--------
revenues were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1998
------ ------
<S> <C> <C>
Regulated service and equipment 76% 73%
Premium programming 12% 10%
Advertising sales and other services 10% 10%
Competitive local exchange carrier services 2% 7%
</TABLE>
Revenues increased approximately 30.1% for the nine month period ended
December 31, 1998 compared with the same period of the prior year. The increase
is attributable to the following:
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
1998
--------------
<S> <C>
Acquisitions 58%
Basic subscriber growth 4%
Rate increases 21%
Premium programming (5%)
Competitive local exchange carrier services 14%
Advertising sales and other services 8%
</TABLE>
Effective August 1, 1998, 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 nine months ended December 31, 1998.
The Company expects to implement rate increases related to certain regulated
cable services in substantially all of the Company's systems during 1999.
Direct Operating and Programming Expenses. Direct operating and programming
-----------------------------------------
expenses, which are mainly basic and premium programming costs and technical
expenses, increased 37.8% for the nine month period ended December 31,
A-6
<PAGE>
1998 compared with the same period of the prior year. 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. The
consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington and
Harrisburg networks also increased Hyperion's costs related to operations. The
increases in Adelphia excluding Hyperion were primarily due to increased
operating expenses from acquired systems, increased programming costs,
incremental costs associated with increased subscribers and new services.
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 53.0% for the
nine month period ended December 31, 1998 compared with the same period of the
prior year. Hyperion expenses increased due to increased expenses associated
with the network expansion plan, an increase in the sales force in the existing
networks and an increase in corporate overhead costs to accommodate the growth
in the number, size and operations of operating companies managed and monitored
by Hyperion, as well as the consolidation of the networks mentioned in direct
operating and programming expenses. The increases in Adelphia excluding
Hyperion were primarily due to incremental costs associated with acquisitions,
subscriber growth and new services.
Depreciation and Amortization. Depreciation and amortization, excluding
-----------------------------
Hyperion, increased 17.0% for the nine month period ended December 31, 1998,
compared with the same period of the prior year primarily due to increased
depreciation and amortization related to acquisitions, as well as increased
capital expenditures made during the past several years. Depreciation and
amortization for Hyperion increased 279.6% for the nine month period ended
December 31, 1998, compared with the same period of the prior year. These
increases were primarily a result of increased depreciation resulting from the
higher depreciable asset bases of the Hyperion network operations control
center, its wholly owned networks and the consolidation of several of its
networks and increased amortization of deferred financing costs.
Priority Investment Income. Priority investment income is comprised of
--------------------------
payments received from Olympus of accrued priority return on the Company's
investment in 16.5% preferred limited partner ("PLP") interests in Olympus.
Interest Expense - net. Interest expense - net, excluding Hyperion, increased
----------------------
7.7% for the nine month period ended December 31, 1998, compared with the same
period of the prior year. Interest expense - net, including Hyperion, increased
2.3% for the nine month period ended December 31, 1998, as compared with the
same period of the prior year. Interest expense increased primarily due to
incremental debt related to acquisitions and other new debt issuances. These
increases were partially offset by Hyperion's interest income on cash balances.
Interest expense includes noncash accretion of original issue discount on the
Hyperion 13% Senior Discount Notes and other noncash interest expense totaling
$23,663 for the nine month period ended December 31, 1998 compared with $29,981
the same period of the prior year.
Equity in Loss of Joint Ventures. The equity in loss of joint ventures
--------------------------------
represents primarily (i) the Company's pro-rata share of Olympus' losses and the
accretion requirements of Olympus' PLP interests, and (ii) Hyperion's pro-rata
share of its less than majority owned partnerships' operating losses.
Hyperion Preferred Stock Dividend. During the nine months ended December 31,
---------------------------------
1998, Hyperion incurred $21,536 of expense relating to its 12 7/8% Senior
Exchangeable Redeemable Preferred Stock, which was issued in October 1997.
Minority Interest in Net Losses of Subsidiaries. As a result of Hyperion's
------------------------------------------------
IPO, which occurred on May 8, 1998, a portion of Hyperion's net loss applicable
to common stockholders is attributable to minority interests.
Extraordinary Loss on Early Retirement of Debt. During the nine months
----------------------------------------------
ended December 31, 1998, $69,838 of 12 1/2% Senior Notes due 2002 were
redeemed at 103% of principal and subsidiary debt in the amount of $52,000 was
repaid prior to its maturity, at a premium. Additionally, Hyperion retired
$25,160 face value of its 13% Senior Discount Notes, resulting in a gain. As a
result of these transactions, Adelphia recognized a net extraordinary loss on
early retirement of debt of $4,337.
Income Tax Benefit. Income tax benefit for the nine months ended December
------------------
31, 1998 is primarily due to the impact of a change in tax law which extends the
number of years the Company can utilize its net operating loss carryforward
generated in the current fiscal year.
A-7
<PAGE>
Comparison of the Years Ended March 31, 1997 and 1998
Revenues. The primary revenue sources reflected as a percentage of total
---------
revenues were as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1997 1998
------ ------
<S> <C> <C>
Regulated service and equipment fees 76% 76%
Premium programming fees 13% 11%
Advertising sales and other services 10% 10%
Competitive local exchange carrier services 1% 3%
</TABLE>
Revenues increased approximately 11.8% for the year ended March 31, 1998
compared with the prior fiscal year.
The increase is attributable to the following:
<TABLE>
<CAPTION>
Year Ended
March 31,
1998
-----------
<S> <C>
Acquisitions 37%
Basic subscriber growth 9%
Rate increases 48%
Premium programming (7%)
Competitive local exchange carrier services 6%
Advertising sales and other services 7%
</TABLE>
Effective October 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 12.3% for the year ended March 31, 1998, compared with the
prior year. The increase was primarily due to increased operating expenses from
acquired systems, increased programming costs and incremental costs associated
with increased subscribers. Additionally, Hyperion expenses increased due to
expansion of operations at its network control center, as well as an increase in
the number and size of its networks, which resulted in increased employee
related costs and equipment maintenance 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 17.1% for the
year ended March 31, 1998, compared with the prior year. The increase was
primarily due to incremental costs associated with acquisitions, subscriber
growth and Hyperion overhead and network operating and control center cost
increases to accommodate the growth in the number of operating companies managed
and monitored.
Depreciation and Amortization. Depreciation and amortization was higher for
-----------------------------
the year ended March 31, 1998, compared with the prior year. The increase was
primarily due to increased depreciation and amortization related to acquisitions
consummated during the years ended March 31, 1997 and 1998, as well as increased
capital expenditures made during the past several years.
Priority Investment Income from Olympus. Priority investment income is
---------------------------------------
comprised of payments received from Olympus of accrued priority return on the
Company's investment in 16.5% PLP interests in Olympus.
Interest Expense - net. Interest expense - net increased approximately 6.4%
----------------------
for the year ended March 31, 1998. For the year ended March 31, 1998, interest
expense - net increased primarily due to incremental debt related to
acquisitions and
A-8
<PAGE>
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 $37,430 for
the year ended March 31, 1998. 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.
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 years ended March 31, 1997 and 1998 and
the nine months ended December 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. 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.
For information regarding significant events and financings subsequent to
December 31, 1998, including the Pending Acquisitions and the related use of
capital resources to consummate them, see "Introduction" above and Note 13 to
Adelphia's Consolidated Financial Statements.
Comparison of the Nine Months Ended December 31, 1997 and 1998
For the nine months ended December 31, 1997 and 1998, cash provided by
operating activities totaled $62,038 and $138,360, respectively; cash used for
investing activities totaled $423,965 and $1,015,690, respectively and cash
provided by financing activities totaled $681,791 and $999,079, respectively.
The Company's aggregate outstanding borrowings as of December 31, 1998 were
$3,527,452. The Company also had total redeemable preferred stock of $376,865
outstanding as of December 31, 1998.
Capital Expenditures. Capital expenditures for Adelphia, excluding Hyperion
--------------------
for the nine months ended December 31, 1997 and 1998 were $82,726 and $109,045,
respectively. Capital expenditures including Hyperion for the nine months
A-9
<PAGE>
ended December 31, 1997 and 1998 were $117,560 and $255,797, respectively. The
increase in capital expenditures for the nine month period ended December 31,
1998, compared to the nine month period ended December 31, 1997, was primarily
due to the upgrade of plant in markets in which Hyperion purchased its local
partners' interests, payments for indefeasible right of use agreements for fiber
optic networks and the commencement of switching services. The Company expects
that capital expenditures for the year ending December 31, 1999 will be in a
range of approximately $172,000 to $192,500 for Adelphia, excluding Hyperion and
Pending Acquisitions. The Company expects Hyperion to continue to have
significant capital expenditure and investment requirements, and estimates it
will require approximately $400,000 to fund capital expenditures, working
capital requirements, operating losses and investments in its existing and its
planned new networks through September 2000.
Comparison of the Years Ended March 31, 1997 and 1998
For the years ended March 31, 1997 and 1998, cash provided by operating
activities totaled $43,001 and $66,270, respectively; cash used for investing
activities totaled $322,047 and $563,520, respectively and cash provided by
financing activities totaled $329,776 and $712,606, 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.
Capital Expenditures. Capital expenditures for Adelphia, excluding Hyperion
--------------------
for the years ended March 31, 1997 and 1998 were $93,482 and $114,957,
respectively. Capital expenditures including Hyperion for the years ended March
31, 1997 and 1998 were $129,609 and $183,586, respectively. The increase in
capital expenditures for the year ended March 31, 1998, compared to the year
ended March 31, 1997, was primarily due to the acceleration of the rebuilding of
plant using fiber-to-feeder technology and Hyperion's introduction of switching
services.
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 years ended March 31, 1997 and 1998 and the nine
months ended December 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 generally 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 December 31, 1998, an aggregate
of $1,200,970 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. See Note 3 to the Adelphia Communications Corporation
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.
At December 31, 1998, Adelphia's subsidiaries had an aggregate of $360,000 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
$398,644 in cash and cash equivalents at December 31, 1998 which combined with
the Company's unused credit lines with banks aggregated to $758,644. Based upon
the results of operations of subsidiaries for the quarter ended December 31,
1998, approximately $731,500 of available assets could have been transferred to
Adelphia at December 31, 1998, under the most
A-10
<PAGE>
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 December 31, 1998, the Company's unused credit lines were
provided by reducing revolving credit facilities whose revolver periods expire
through December 31, 2007. The Company's scheduled maturities of debt are
currently $101,402 for the year ending December 31, 1999.
At December 31, 1998, the Company's total outstanding debt aggregated
$3,527,452, which included $1,810,212 of parent debt and $1,717,240 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 1.5%;
certificate of deposit rate plus 1.25% to 2.75%; or LIBOR plus 1% to 2.5%. The
Company's weighted average interest rate on notes payable to banks and
institutions was approximately 8.11% at March 31, 1998, compared to 7.89% at
December 31, 1998. At December 31, 1998, approximately 36% 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 65% of the
Company's total indebtedness was at fixed interest rates as of December 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 December 31, 1998, Adelphia would have had to pay
approximately $27,227 to settle its interest rate swap and cap agreements,
representing the excess of carrying cost over fair market value of these
agreements.
Financing Transactions
Adelphia, Excluding Hyperion
During the year ended March 31, 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.
During the year ended March 31, 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 Cablevision, Inc.,
a wholly owned subsidiary of FPL Group, Inc., 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 11,792,450 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.
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.
During the nine months ended December 31, 1998, Adelphia issued $300,000 of
Senior Notes.
Also, during the nine months ended December 31, 1998, Adelphia issued
8,190,315 shares of Class A common stock to the public and to the Rigas family
(principal shareholders and officers of Adelphia). Of this total, 4,100,000
shares were sold to the public at a price of $32.00 per share, with an
underwriting discount of $1.44 per share. The remaining 4,090,315 shares were
sold to entities controlled by the Rigas family at the public offering price
less the underwriting discount. In a related transaction on September 14, 1998,
the Company issued and sold 615,000 shares of Class A common stock at the
offering price of $32.00, with an underwriting discount of $1.44 per share,
pursuant to the underwriters' over-allotment option.
A-11
<PAGE>
Proceeds from the sale of the Senior Notes and the Class A common stock were
used to repay subsidiaries' senior notes and revolving credit facility
borrowings.
On May 15, 1998, Adelphia redeemed the remaining $69,838 of the 12 1/2%
Senior Notes due 2002 at 103% of principal.
During the nine months ended December 31, 1998, Adelphia redeemed $137,200
aggregate principal amount of subsidiary notes to banks and institutions. As a
result of these transactions, Adelphia recognized an extraordinary loss on early
retirement of debt of $1,970.
During the nine months ended December 31, 1998, the Western New York
Partnership closed on a $700,000, 8 1/2 year credit facility. The credit
facility consists of a $350,000 reducing revolving credit portion and a $350,000
term loan portion. Proceeds from initial borrowings were used to repay existing
indebtedness.
Hyperion
During the year ended March 31, 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. Net proceeds from these transactions have been used primarily used to
fund capital expenditures, working capital, potential increases in ownership
interests in existing networks and for general corporate purposes.
During the nine months ended December 31, 1998, Hyperion successfully
completed an IPO of Hyperion Stock. As part of the offering, Adelphia purchased
an incremental 3,324,001 shares of Hyperion Stock for $49,900 and converted
indebtedness owed to the Company by Hyperion into 3,642,666 shares of Hyperion
Stock. In addition, Adelphia purchased warrants issued by Hyperion to MCI Metro
Access Transmission Services, Inc., and purchased shares of Hyperion Class B
common stock from certain executive officers of Hyperion for a total purchase
price of approximately $12,580 and $3,000, respectively. Adelphia owns
approximately 66% of the Hyperion common stock on a fully diluted basis and 86%
of the total voting power. Additional net proceeds of $191,411 to Hyperion were
received as a result of the sale of 12,500,000 shares of Hyperion Stock to the
public. In a related transaction on June 5, 1998, Hyperion issued and sold
350,000 shares of its Class A common stock at the $16.00 IPO price pursuant to
the underwriters' over allotment option in the IPO. As a result of the IPO,
Adelphia's additional paid-in capital increased approximately $147,000 and
minority interests increased approximately $45,000. Net proceeds from this
transaction have been used primarily to fund capital expenditures, working
capital, 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 nine months ended December 31, 1998, Adelphia acquired (i) cable
systems serving approximately 11,250 subscribers in southern New York for an
aggregate price of $11,500, (ii) cable systems serving approximately 2,000
subscribers in western Pennsylvania for an aggregate price of $1,900, and (iii)
cable systems serving approximately 62,000 subscribers in Connecticut and
Vermont for an aggregate price of $150,126. 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 April 1, 1998, Adelphia and its affiliates and Time Warner Entertainment
and an affiliate ("Time Warner") traded certain cable systems. Adelphia
exchanged its systems serving 64,400 subscribers primarily in the Mansfield,
Ohio area for systems owned by Time Warner cable companies serving 70,200
subscribers adjacent to systems owned or managed by Adelphia in Virginia, New
England and New York.
On July 31, 1998, Adelphia consummated its transaction with AT&T to form a
joint venture limited partnership in the Western New York region (the "Western
New York Partnership"). Pursuant to this agreement, Adelphia contributed its
Western New York and Lorain, Ohio systems totaling approximately 298,000
subscribers and certain programming assets
A-12
<PAGE>
and $440,000 in debt. Subsidiaries of AT&T contributed their cable systems in
Buffalo, New York; Erie, Pennsylvania; and Ashtabula and Lake County, Ohio,
totaling approximately 171,000 subscribers and $228,000 in debt. Adelphia and
AT&T hold a 66.7% and 33.3% interest, respectively, in the partnership. Adelphia
manages the partnership and consolidates the partnership's results of operations
for financial reporting purposes beginning on the acquisition date.
On September 30, 1998, Adelphia merged a subsidiary of the Company with the
subsidiary of AT&T that held an interest in Syracuse Hilton Head Holdings, L.P.
("SHHH, L.P."), an Adelphia managed partnership controlled by the Rigas Family.
Pursuant to the merger agreement, AT&T received 2,250,000 newly issued shares of
the Company's Class A Common Stock, $.01 par value. Simultaneously, SHHH, L.P.
distributed certain SHHH, L.P. cable systems, which serve approximately 34,100
subscribers, in Virginia and North Carolina (the "Virginia and North Carolina
Systems") to Adelphia, in exchange for the interest acquired by Adelphia from
AT&T as described above, Adelphia's Preferred equity investment in Managed
Partnership and certain affiliate receivables owed to Adelphia. The Virginia
and North Carolina Systems were distributed to Adelphia without indebtedness.
For information regarding acquisitions subsequent to December 31, 1998,
including the Pending Acquisitions and the related use of capital resources to
consummate them, see "Introduction" above and Note 13 to Adelphia's Consolidated
Financial Statements.
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.
For information regarding significant events and financings subsequent to
December 31, 1998, including the Pending Acquisitions and related use of capital
resources to consummate them, see "Introduction" above and Note 13 to Adelphia's
Consolidated Financial Statements.
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 December 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 December 31, 1998, approximately $366,861 aggregate
principal amount of nonvoting PLP interests in
A-13
<PAGE>
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.
On January 29, 1999, Adelphia purchased from Telesat shares of Adelphia's
stock owned by Telesat for a price of $149,213. In the transaction, Adelphia
purchased 1,091,524 shares of Class A common stock and 20,000 shares of Series C
Cumulative convertible preferred stock which are convertible into an additional
2,358,490 shares of Class A common stock. These shares represent 3,450,014
shares of common stock on a fully converted basis. Adelphia and Telesat also
agreed to a redemption of Telesat's interests in Olympus by July 11, 1999 for
approximately $108,000. The redemption is subject to applicable third party
approvals.
During the year ended March 31, 1997, the Company received net distributions
and advances from Olympus totaling $9,012. During the year ended March 31, 1998
and the nine months ended December 31, 1998, the Company made net investments in
and advances to Olympus totaling $11,466 and $222,610, respectively. The
increase in the investments and advances to Olympus for the nine months ended
December 31, 1998 is due primarily to acquisitions. During the years ended
March 31, 1997 and 1998 and the nine months ended December 31, 1998, the
Company received priority investment income from Olympus of $42,086 , $47,765
and $36,000, 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, 1997 and 1998 and the nine months ended
December 31, 1998, Olympus acquired several cable and security systems, adding
approximately 128,000 subscribers for approximately $269,900. Olympus also
completed a financing arrangement for $200,000 in November 1996. For additional
information regarding Olympus acquisitions and financings, see Notes 1 and 3 to
Olympus' Consolidated Financial Statements.
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, 1998, which appear in Items 6 and 7 of
the Annual Report on Form 10-K of Olympus Communications, L.P. and Olympus
Capital Corporation for the year ended December 31, 1998, are incorporated
herein by reference.
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 year ended March 31, 1998,
the Company made advances in the net amount of $21,458 to these and other
related parties, primarily for capital expenditures and working capital
purposes. During the year ended March 31, 1997 and the nine months ended
December 31, 1998, the Managed Partnerships and other related parties repaid
advances in the net amounts of $34,250 and $8,150, respectively.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," has been issued and is effective
for fiscal quarters of fiscal years 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. Management of Adelphia has not completed its
evaluation of the impact of SFAS No. 133 on Adelphia's consolidated financial
statements. Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activites", 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 Adelphia believes that SOP 98-5 will not have a
material impact on Adelphia's consolidated financial statements.
Inflation
In the two fiscal years in the period ended March 31, 1998 and the nine
months ended December 31, 1998, inflation
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<PAGE>
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
December 31, 1998, after giving effect to interest rate hedging agreements,
approximately $772,350 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 ended FCC regulation of cable programming service tier rates on March 31,
1999.
Rates for basic services are set pursuant to a benchmark formula.
Alternatively, a cable operator may elect to use a cost-of-service methodology
to show that rates for basic services are reasonable. Refunds with interest will
be required to be paid by cable operators who are required to reduce regulated
rates. The FCC has reserved the right to reduce or increase the benchmarks it
has established. The rate regulations also limit increases in regulated rates to
an inflation indexed amount plus increases in certain costs such as taxes,
franchise fees, costs associated with specific franchise requirements and
increased programming costs. Cost-based adjustments to these capped rates can
also be made in the event a cable operator adds or deletes channels or completes
a significant system rebuild or upgrade. Because of the limitation on rate
increases for regulated services, future revenue growth from cable services will
rely to a much greater extent than has been true in the past on increased
revenues from unregulated services and new subscribers than from increases in
previously unregulated rates.
The FCC has adopted regulations implementing all of the requirements of the
1992 Cable Act. The FCC is also likely to continue to modify, clarify or refine
the rate regulations. Adelphia cannot predict the effect of the 1996 Act or
future rulemaking proceedings or changes to the rate regulations.
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.
A-15
<PAGE>
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 refers to the inability of computerized systems and
technologies to recognize and process dates beyond December 31, 1999. The
Company is evaluating the impact of the year 2000 issue on its business
applications and its products and services. The evaluation includes a review of
the Company's information technology systems, cable network equipment and other
embedded technologies. A significant portion of the Company's computerized
systems and technologies have been developed, installed or upgraded in recent
years and are generally more likely to be year 2000 ready. The Company is also
evaluating the potential impact as a result of its reliance on third-party
systems that may have year 2000 issue.
Computerized business applications that could be adversely affected by the
year 2000 issue include:
. information processing and financial reporting systems;
. customer billing systems;
. customer service systems;
. telecommunication transmission and reception systems; and
. facility systems.
System failure or miscalculation could result in an inability to process
transactions, send invoices, accept customer orders or provide customers with
products and services. Customers could also experience a temporary inability to
receive or use the Company's products and services.
The Company has developed a program to assess and address the year 2000
issue. This program consists of the following phases:
. inventorying and assessing the impact on affected technology and systems;
. developing solutions for affected technology and systems;
. modifying or replacing affected technology and systems;
. testing and verifying solutions;
. implementing solutions; and
. developing contingency plans.
The Company has substantially completed inventorying and assessing the
affected computerized systems and technologies. The Company is in various
stages of its year 2000 compliance program with respect to the remaining phases
as it relates to the affected systems and technologies.
The Company has engaged a consulting firm familiar with its financial
reporting systems. This firm has developed and tested year 2000 solutions that
the Company is in the process of implementing. The Company expects its
financial reporting systems to be year 2000 compliant by July 1999.
A third-party billing vendor currently facilitates customer billing. The
Company is currently in the process of testing an in-house service ordering,
provisioning, maintenance and billing system that would replace the third-party
billing vendor. The Company expects to have this new system implemented by
August 1999. On a contingency basis, the third-party vendor implemented its own
year 2000 solution in April 1999.
Telecommunication plant rebuilds and upgrades in recent years have minimized
the potential impact of the year 2000 issue on the Company's facilities,
customer service, telecommunication transmission and reception systems. The
Company is engaged in a comprehensive internal inventory and assessment of all
hardware components and component controlling software throughout its
telecommunication networks. The Company expects to implement any hardware and
software modifications, upgrades or replacements resulting from the internal
review by August 1999.
Costs incurred to date directly related to addressing the year 2000 issue
have been approximately $750. The Company
A-16
<PAGE>
has also redeployed internal resources to meet the goals of its year 2000
program. The Company currently estimates the total cost of its year 2000
remediation program to be approximately $3,500. Although the Company will
continue to incur substantial capital expenditures in the ordinary course of
meeting its telecommunications system upgrade goals through the year 2000, it
will not specifically accelerate its expenditures to facilitate year 2000
readiness, and accordingly such expenditures are not included in the above
estimate.
The Company has begun communicating with others with whom it does significant
business to determine their year 2000 readiness and to determine the extent to
which the Company is vulnerable to the year 2000 issue related to those third
parties. The Company purchases much of its technology from third parties. There
can be no assurance that the systems of other companies on which the Company's
systems rely will be year 2000 ready or timely converted into systems compatible
with the Company systems. The Company's failure or a third-party's failure to
become year 2000 ready or the Company's inability to become compatible with
third parties with which the Company has a material relationship, may have a
material adverse effect on the Company, including significant service
interruption or outages; however, the Company cannot currently estimate the
extent of any such adverse effects.
The Company is in the process of identifying secondary sources to supply its
systems or services in the event it becomes probable that any of its systems
will not be year 2000 ready prior to the end of 1999. The Company is also in
the process of identifying secondary vendors and service providers to replace
those vendors and service providers whose failure to be year 2000 ready could
lead to a significant delay in the Company's ability to provide its service to
its customers.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(Dollars in thousands)
The Company uses fixed and variable rate debt to fund its working capital
requirements, capital expenditures and acquisitions. These debt arrangements
expose the Company to market risk related to changes in interest rates. The
Company 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. As of December 31, 1998, the
Company had interest rate swap agreements covering notional principal of
$650,000 that expire through 2008 and that fix the interest rate at an average
of 6.55%. The Company also 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. As of December 31, 1998, the Company had
interest rate swap agreements covering notional principal of $45,000 that expire
through 2003 and that have a variable rate at an average of 5.32%. The Company
enters into interest rate caps to reduce the risk of incurring higher interest
costs due to rising interest rates. As of December 31, 1998, the Company had
interest rate cap agreements covering a notional amount of $140,000, which
expire in 1999 and cap rates at an average rate of 7.82%. The Company does not
enter into any interest rate swap or cap agreements for trading purposes. The
Company is exposed to credit loss in the event of non-performance by the banks.
No such non-performance is expected. The table below summarizes the fair values
and contract terms of the Company's financial instruments subject to interest
rate risk as of December 31, 1998.
A-17
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity
---------------------------------------------------------- Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---------- ---------- ---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt and Redeemable
Preferred Stock:
Fixed Rate $ 12,375 $ 112,375 $ 3,000 $ 325,000 $ 453,000 $ 1,870,021 $ 2,775,771 $ 2,807,970
Average Interest Rate 10.63% 10.64% 10.65% 10.69% 10.71% 10.74% - -
Variable Rate 88,262 122,002 184,834 212,412 235,577 375,619 1,218,706 1,218,706
Average Interest Rate 6.43% 6.46% 6.74% 6.94% 7.27% 7.11% - -
Interest Rate Swaps
and Caps:
Variable to Fixed $ 175,000 $ - $ - $ - $ - $ 475,000 $ 650,000 $ (28,316)
Average Pay Rate 6.55% - - - - 6.55% - -
Average Receive Rate 5.33% - - - - 5.61% - -
Fixed to Variable - - - - 45,000 - 45,000 1,112
Average Pay Rate - - - - 5.32% - - -
Average Receive Rate - - - - 5.46% - - -
Interest Rate Caps 140,000 - - - - - 140,000 (23)
Average Cap Rate 7.82% - - - - - - -
</TABLE>
Interest rates on variable debt are estimated by us using the average implied
forward London Interbank Offer Rate ("LIBOR") rates for the year of maturity
based on the yield curve in effect at December 31, 1998, plus the borrowing
margin in effect at December 31, 1998. Average receive rates on the variable to
fixed swaps are estimated by us using the average implied forward LIBOR rates
for the year of maturity based on the yield curve in effect at December 31,
1998.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Adelphia and related notes thereto
and independent auditors' report follow.
The consolidated financial statements of Olympus and related notes thereto and
independent auditors' report dated March 19, 1999, appearing in Item 8 of the
Annual Report on Form 10-K of Olympus Communications, L.P. and Olympus Capital
Corporation for the year ended December 31, 1998, are incorporated by reference
in this proxy statement.
A-18
<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, 1998 and December
31, 1998, and the related consolidated statements of operations, of convertible
preferred stock, common stock and other stockholders' equity (deficiency), and
of cash flows for the years ended March 31, 1997 and 1998 and the nine months
ended December 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, 1998 and December 31, 1998, and the results of
their operations and their cash flows for the years ended March 31, 1997 and
1998 and the nine months ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
May 17, 1999
A-19
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1988 1998
--------------- ---------------
<S> <C> <C>
ASSETS:
- ------
Property, plant and equipment--net $ 918,637 $ 1,207,655
Intangible assets--net 695,104 1,029,159
Cash and cash equivalents 276,895 398,644
U.S. government securities--pledged 70,535 58,054
Investments 127,827 196,893
Preferred equity investment in Managed Partnership 18,338 -
Subscriber receivables--net 30,551 53,911
Prepaid expenses and other assets--net 114,526 114,625
Investment in and amounts due from Olympus - 191,408
Related party receivables--net 52,258 44,108
---------------- ----------------
Total $ 2,304,671 $ 3,294,457
================ ================
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
- ----------------------------------------------
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
- --------------------------------------
Subsidiary debt $ 1,329,471 $ 1,717,240
Parent debt 1,580,274 1,810,212
Accounts payable 65,019 96,985
Subscriber advance payments and deposits 17,129 19,377
Accrued interest and other liabilities 98,087 137,131
Deferred income taxes 116,351 109,609
---------------- ----------------
Total liabilities 3,206,331 3,890,554
---------------- ----------------
Minority interests 27,737 48,784
---------------- ----------------
Cumulative equity in loss in excess of investment in and amounts
due from Olympus 31,202 -
---------------- ----------------
Hyperion redeemable exchangeable preferred stock 207,204 228,674
---------------- ----------------
Series A cumulative redeemable exchangeable preferred stock 148,062 148,191
---------------- ----------------
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 1
Class A common stock, $.01 par value, 200,000,000 shares
authorized, 20,043,528 and 31,258,843 shares outstanding, respectively 200 313
Class B common stock, $.01 par value, 25,000,000 shares
authorized, 10,944,476 and 10,834,476 shares outstanding, respectively 109 108
Additional paid-in capital 331,263 738,102
Accumulated deficit (1,647,438) (1,760,270)
---------------- --------------
Convertible preferred stock, common stock and other
stockholders' equity (deficiency) (1,315,865) (1,021,746)
---------------- ---------------
Total $ 2,304,671 $ 3,294,457
================ ================
</TABLE>
See notes to consolidated financial statements.
A-20
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended March 31, December 31,
1997 1998 1998
----------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 472,778 $ 528,442 $ 507,155
----------- ------------- -------------
Operating expenses:
Direct operating and programming 148,982 167,288 167,963
Selling, general and administrative 81,763 95,731 107,249
Depreciation and amortization 124,066 145,041 140,823
----------- ------------- -------------
Total 354,811 408,060 416,035
----------- ------------- -------------
Operating income 117,967 120,382 91,120
----------- ------------- -------------
Other income (expense):
Priority investment income from Olympus 42,086 47,765 36,000
Interest expense -- net (see Note 1) (232,325) (247,107) (191,593)
Equity in loss of Olympus and other joint ventures (51,946) (66,089) (48,891)
Equity in loss of Hyperion joint ventures (7,223) (12,967) (9,580)
Minority interest in net losses of subsidiaries - - 25,772
Hyperion preferred stock dividends - (12,682) (21,536)
Gain on sale of investments 12,151 2,538 -
Other income - - 1,113
------------ ------------- -------------
Total (237,257) (288,542) (208,715)
------------ ------------- -------------
Loss before income taxes and extraordinary loss (119,290) (168,160) (117,595)
Income tax benefit 358 5,606 6,802
------------ ------------- -------------
Loss before extraordinary loss (118,932) (162,554) (110,793)
Extraordinary loss on early retirement of debt (11,710) (11,325) (4,337)
------------ ------------- -------------
Net loss (130,642) (173,879) (115,130)
Dividend requirements applicable to preferred stock - (18,850) (20,718)
------------ ------------- -------------
Net loss applicable to common stockholders $ (130,642) $ (192,729) $ (135,848)
============ ============= =============
Basic and diluted net loss per weighted average share of common
stock before extraordinary loss $ (4.50) $ (6.07) $ (3.63)
Basic and diluted extraordinary loss on early retirement of debt per
weighted average share of common stock (0.44) (0.38) (0.12)
============ ============= =============
Basic and diluted net loss per weighted average share of common stock $ (4.94) $ (6.45) $ (3.75)
============ ============= =============
Weighted average shares of common stock outstanding (in thousands) 26,411 29,875 36,226
============ ============= =============
</TABLE>
See notes to consolidated financial statements.
A-21
<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
Convertible Class A Class B Additional
Preferred Common Common Paid-In Accumulated
Stock Stock Stock Capital Deficit Total
---------- --------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 $ - $ 154 $ 109 $ 214,415 $ (1,342,917) $ (1,128,239)
Issuance of Class A common
stock for cable television assets - 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 for cable television assets - 39 - 33,792 - 33,831
Issuance of Series C convertible
preferred stock 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)
--------- --------- --------- ---------- ------------ -------------
Hyperion issuance of Class A
common stock - - - 146,440 - 146,440
Issuance of Class A common stock
to the public - 88 - 267,838 - 267,926
Dividend requirements applicable to
exchangeable preferred stock - - - (14,625) - (14,625)
Dividend requirements applicable to
convertible preferred stock - - - (6,093) - (6,093)
Issuance of Class A common stock
for affiliate cable television
assets - 23 - 77,085 - 77,108
Excess of purchase price over
carrying value of cable television
assets purchased from affiliate - - - (63,676) - (63,676)
Conversion of Class B common
stock into Class A common stock - 1 (1) - - -
Other - 1 - (130) 2,298 2,169
Net loss - - - - (115,130) (115,130)
--------- --------- --------- ---------- ------------ -------------
Balance, December 31, 1998 $ 1 $ 313 $ 108 $ 738,102 $(1,760,270) $ (1,021,746)
========= ========= ========= ========== ============ =============
</TABLE>
See notes to consolidated financial statements.
A-22
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended March 31, December 31,
1997 1998 1998
--------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (130,642) $ (173,879) $ (115,130)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 124,066 145,041 140,823
Noncash interest expense 41,360 37,430 23,663
Noncash dividends - 12,682 21,536
Equity in loss of Olympus and other joint ventures 51,946 66,089 48,891
Equity in loss of Hyperion joint ventures 7,223 12,967 9,580
Gain on sale of investments (12,151) (2,538) -
Minority interest in losses of subsidiaries - - (25,772)
Extraordinary loss on early retirement of debt 11,710 11,325 4,337
Decrease in deferred taxes, net of effects of acquisitions (500) (6,305) (6,510)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Subscriber receivables (813) (4,351) (19,874)
Prepaid expenses and other assets (27,858) (23,437) (6,942)
Accounts payable (9,784) 4,282 31,029
Subscriber advance payments and deposits 1,298 658 1,678
Accrued interest and other liabilities (12,854) (13,694) 31,051
------------- ------------ --------------
Net cash provided by operating activities 43,001 66,270 138,360
------------- ------------ --------------
Cash flows used for investing activities:
Acquisitions (143,412) (146,546) (403,851)
Expenditures for property, plant and equipment (129,609) (183,586) (255,797)
Investments in Hyperion joint ventures (34,769) (64,260) (69,018)
Investments in other joint ventures (16,646) (22,591) (12,540)
Purchase of minority interest in Hyperion - - (15,580)
Investment in U.S. government securities--pledged - (83,400) -
Sale of U.S. government securities--pledged - 15,653 15,312
Amounts invested in and advanced to Olympus
and related parties (9,229) (91,468) (274,216)
Proceeds from sale of investments 11,618 12,678 -
------------- ------------ --------------
Net cash used for investing activities (322,047) (563,520) (1,015,690)
------------- ------------ --------------
Cash flows from financing activities:
Proceeds from debt 1,280,649 1,298,137 836,176
Repayments of debt (933,517) (977,591) (269,778)
Costs associated with debt financings (20,236) (20,498) (7,125)
Premium paid on early retirement of debt (8,207) (12,153) (3,634)
Issuance of Hyperion Class A common stock - - 205,599
Issuance of Class A common stock - - 275,880
Costs associated with issuances of common stock - - (22,196)
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) (15,843)
------------- ------------ --------------
Net cash provided by financing activities 329,776 712,606 999,079
------------- ------------ --------------
Increase in cash and cash equivalents 50,730 215,356 121,749
Cash and cash equivalents, beginning of period 10,809 61,539 276,895
------------- ------------ --------------
Cash and cash equivalents, end of period $ 61,539 $ 276,895 $ 398,644
============= ============ ==============
Supplemental disclosure of cash flow activity--
Cash payments for interest $ 203,939 $ 220,888 $ 162,113
============= ============ ==============
</TABLE>
See notes to consolidated financial statements.
A-23
<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. and subsidiaries ("Hyperion") is a consolidated
subsidiary of Adelphia which owns, operates and manages entities which provide
competitive local exchange carrier ("CLEC") telecommunications services under
the name Hyperion Communications.
On March 30, 1999, the Board of Directors of Adelphia changed Adelphia's
fiscal year from March 31 to December 31. The decision was made to conform to
general industry practice and for administrative purposes. The change became
effective for the nine months ended December 31, 1998.
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, 1997 and 1998 and the nine months ended
December 31, 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 from the date acquired.
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 cable systems from Small Cities Cable
Television, L.P. and Small Cities Cable Television, Inc.. 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. 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.
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, Adelphia 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.
A-24
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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. Adelphia issued 341,220 shares of Class A
common stock to the sellers in connection with this purchase.
On April 1, 1998, Adelphia exchanged its interest in Mansfield, Ohio area
systems, which served approximately 64,400 subscribers and approximately $11,000
cash for Time Warner Entertainment's 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 June 5, 1998, Adelphia acquired cable systems from Cablevision Systems.
These systems served approximately 11,250 subscribers at the acquisition date in
southern New York and were purchased for an aggregate price of $11,500.
On July 31, 1998, Adelphia consummated its transaction with AT&T to form a
joint venture limited partnership in the Western New York region (the "Western
New York Partnership"). Pursuant to this agreement, Adelphia contributed its
Western New York and Lorain, Ohio systems totaling approximately 298,000
subscribers and certain programming assets and $440,000 in debt. Subsidiaries
of AT&T contributed their cable systems in Buffalo, New York; Erie,
Pennsylvania; and Ashtabula and Lake County, Ohio, totaling approximately
171,000 subscribers and $228,000 in debt. Adelphia and AT&T hold a 66.7% and
33.3% interest, respectively, in the partnership. Adelphia manages the
partnership.
On September 1, 1998, a majority owned subsidiary of Adelphia acquired cable
systems from Marcus Cable. These systems served approximately 62,000
subscribers at the acquisition date in Connecticut and Virginia and were
purchased for an aggregate price of $150,126.
On September 30, 1998, Adelphia merged one of its subsidiaries with the
subsidiary of AT&T that held an interest in Syracuse Hilton Head Holdings, L.P.
("SHHH, L.P."), an Adelphia managed partnership controlled by the Rigas family,
principal stockholders of Adelphia. Pursuant to the merger agreement, AT&T
received 2,250,000 newly issued shares of Adelphia's Class A common stock.
Simultaneously, SHHH, L.P. distributed certain cable systems, which served
approximately 34,100 subscribers, in Virginia and North Carolina to Adelphia,
in exchange for the interest acquired by Adelphia from AT&T as described above,
Adelphia's preferred equity investment in Managed Partnership and certain
affiliate receivables owed to Adelphia.
The following unaudited financial information assumes that the acquisitions
that were consummated during the nine months ended December 31, 1998 had
occurred on April 1, 1996.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended March 31, December 31,
1997 1998 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenue $ 597,418 $ 652,367 $ 554,352
Loss before extraordinary loss 132,990 174,216 115,280
Net loss 144,700 185,541 119,617
Basic and diluted net loss per weighted
average share of common stock 5.05 6.36 3.72
</TABLE>
A-25
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Investment in Olympus Joint Venture Partnership
The investment in the Olympus Communications, L.P. ("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. At March 31,
1997 and 1998 and December 31, 1998, Adelphia owned $271,546, $325,911 and
$366,861 in Olympus PLP Interests, respectively.
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.
Property, Plant and Equipment
Property, plant and equipment, at cost, are comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
--------------- --------------
<S> <C> <C>
Operating plant and equipment $ 1,290,915 $ 1,531,405
Real estate and improvements 78,435 93,457
Support equipment 26,961 30,533
Construction in progress 171,853 283,133
--------------- --------------
1,568,164 1,938,528
Accumulated depreciation (649,527) (730,873)
--------------- --------------
$ 918,637 $ 1,207,655
=============== ==============
</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. Depreciation expense amounted to $78,328, $93,688 and
$98,699 for the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998, respectively. Capitalized interest amounted to $1,727,
$5,985 and $11,285 for the years ended March 31, 1997 and 1998 and the nine
months ended December 31, 1998, respectively.
Intangible Assets
Intangible assets, at cost, net of accumulated amortization, are comprised of
the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
------------- -------------
<S> <C> <C>
Purchased franchises $ 526,333 $ 828,410
Goodwill 89,029 119,012
Non-compete agreements 8,705 8,922
Purchased subscribers lists 71,037 72,815
------------- -------------
$ 695,104 $ 1,029,159
============== =============
</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
A-26
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 $211,967 and $249,618 at March 31, 1998 and December 31, 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 $5,789, $13,383 and $10,752 for the years ended March 31, 1997
and 1998 and the nine months ended December 31, 1998, respectively. Book
overdrafts of $20,528 and $7,855 existed at March 31, 1998 and December 31,
1998, respectively. These book overdrafts were reclassified as accrued interest
and other liabilities and accounts payable.
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 the 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 20% or less 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.
Adelphia's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
Investments accounted for using the equity method: March 31, December 31,
Gross investment: 1998 1998
----------------- -----------------
<S> <C> <C>
Hyperion investments in joint ventures $ 69,596 $ 138,614
Benbow PCS Ventures, Inc. 15,539 17,170
Mobile communications 15,387 18,249
Other 1,757 2,308
----------------- ----------------
Total 102,279 176,341
----------------- ----------------
Investments accounted for using the cost method:
Niagara Frontier Hockey, L.P. 40,497 44,897
SuperCable ALK International 3,190 3,190
Programming ventures 1,427 1,469
Mobile communications 2,582 2,925
Other 812 672
----------------- ----------------
Total 48,508 53,153
----------------- ----------------
Total investments before cumulative equity in net losses 150,787 229,494
Cumulative equity in net losses (22,960) (32,601)
----------------- ----------------
Total investments $ 127,827 $ 196,893
================= ================
</TABLE>
A-27
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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. On October 7, 1997, Adelphia sold its Republic Stock, on which a gain of
$408 was recognized. On March 16, 1998, Adelphia 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"). Closing of
the agreement is subject to third party approvals. Adelphia has capital funding
notes of NFHLP of $40,497 and $44,897 as of March 31, 1998 and December 31,
1998, respectively. The capital funding notes are convertible into non-voting
preferred equity of NFHLP at the option of Adelphia. These amounts represent
advances to NFHLP plus accrued return of 11.5% to 14.0%. The return on these
capital funding notes amounted to approximately $3,500, $5,100 and $4,400 for
the years ended March 31, 1997 and 1998 and the nine months ended December 31,
1998, respectively. Adelphia advanced approximately $8,150 and $7,500,
respectively, during the year ended March 31, 1998 and the nine months ended
December 31, 1998 to fund working capital requirements of NFHLP. These amounts
could be repaid by NFHLP in the future or converted into programming rights to
air future Buffalo Sabres hockey games. NFHLP continues to generate net losses
and working capital deficiencies and is attempting to re-negotiate the terms of
certain of its operating and financial agreements. The ability of NFHLP to re-
negotiate the terms of certain operating and financial agreements will impact
the ability of NFHLP to generate positive operating cash flow in the future.
Adelphia is unable to predict the ability of NFHLP to successfully re-negotiate
these agreements on terms that are favorable to NFHLP. Management believes that
all amounts advanced to NFHLP and the related accrued return are recoverable.
Subscriber Receivables
An allowance for doubtful accounts of $1,166 and $2,853 is recorded as a
reduction of subscriber receivables at March 31, 1998 and December 31, 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 $47,653
and $47,542 at March 31, 1998 and December 31, 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 certain subscriber revenues and are
expensed currently.
Basic and Diluted 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 Adelphia's preferred stock. Diluted net loss per
weighted average common share is equal to basic net loss per weighted average
common share because Adelphia'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.
A-28
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Noncash Financing and Investing Activities
Capital leases entered into during the years ended March 31, 1997 and 1998
and the nine months ended December 31, 1998 totaled $1,624, $2,842 and $15,522,
respectively, for Adelphia, excluding Hyperion. Hyperion entered into capital
leases totaling $1,683, $24,489 and $1,155, respectively, during the years ended
March 31, 1997 and 1998 and the nine months ended December 31, 1998. Reference
is made to Notes 1 and 6 for descriptions of additional noncash financing and
investing activities.
Interest Expense -- Net
Interest expense -- net includes interest income of $8,367, $23,949 and
$20,952 for the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 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. 133, "Accounting for
Derivative Instruments and Hedging Activities," has been issued and is effective
for fiscal quarters of fiscal years 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. Management of Adelphia has not completed its
evaluation of the impact of SFAS No. 133 on Adelphia's consolidated financial
statements. 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 Adelphia believes that SOP 98-5 will not
have a material impact on Adelphia's consolidated financial statements.
Reclassifications
Certain March 31, 1997 and 1998 amounts have been reclassified to conform
with the December 31, 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
(collectively, the "Rigas family"), including entities they own or control. No
related party advances are collateralized.
Investment in and amounts due from Olympus is comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
----------------- ------------------
<S> <C> <C>
Cumulative equity in loss over investment in Olympus $ (94,833) $ (102,888)
Amounts due from Olympus 63,631 294,296
----------------- ------------------
$ (31,202) $ 191,408
================= ==================
</TABLE>
A-29
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The major components of the financial position of Olympus as of December 31,
1997 and 1998 and the results of operations for the years ended December 31,
1997 and 1998 were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
--------------- ---------------
<S> <C> <C>
Balance Sheet Data:
Property, plant and equipment--net $ 265,783 $ 355,470
Total assets
728,952 1,011,999
Subsidiary debt 427,000 519,443
Parent debt 200,000 200,000
Total liabilities 841,169 1,147,946
Limited partners' interests 488,398 570,298
General partners' equity (deficiency) (600,615) (706,245)
Statement of Operations Data:
Revenues $ 176,363 $ 215,642
Operating income 34,392 38,944
Net loss (19,802) (16,074)
Net loss of general and limited partners
after priority return (95,695) (105,530)
</TABLE>
On January 28, 1999, Adelphia announced an agreement to acquire the Olympus
partnership interests owned by various Telesat Cablevision, Inc. ("Telesat")
entities which are wholly owned subsidiaries of FPL Group, Inc. for a price of
$108,000, subject to definitive terms to be negotiated by both parties.
Subsequent to the closing of this transaction, Adelphia will own 100% of
Olympus. Closing of this transaction is expected to occur during the third
quarter of 1999.
On October 6, 1993, Adelphia purchased the preferred Class B Limited
Partnership Interest in SHHH, L.P., a managed partnership, for a price of
$18,338 from Robin Media Group. The Class B Limited Partnership Interest had a
preferred return annually which was payable on a current basis at the option of
SHHH, L.P., and was senior in priority to the partnership interests of the Rigas
family and TCI. Preferred return on the Class B Limited Partner Interest in
SHHH, L.P. totaled $3,066, $3,750 and $2,017 and is included in revenues for the
years ended March 31, 1997 and 1998, and the nine months ended December 31,
1998, respectively. On September 30, 1998, the Class B limited partner interest
was redeemed (see Note 1).
3. Debt:
Subsidiary Debt
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
---------------- ---------------
<S> <C> <C>
Notes to banks and institutions $ 827,725 $ 1,200,970
13% Senior Discount Notes of Hyperion due 2003 215,213 220,784
12 1/4% Senior Secured Notes of Hyperion due 2004 250,000 250,000
Other subsidiary debt 36,533 45,486
----------------- -----------------
Total subsidiary debt $ 1,329,471 $ 1,717,240
================= =================
</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 $360,000 at December 31, 1998 which expire through December
31, 2007. Adelphia pays commitment fees of up to 0.5% of unused principal.
A-30
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 December 31, 1998,
approximately $731,500 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 December 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 2007. Bank
debt interest rates are based upon one or more of the following rates at the
option of Adelphia: prime rate plus 0% to 1.5%; certificate of deposit rate plus
1.25% to 2.75%; or LIBOR plus 1% to 2.5%. Total bank debt with interest rates
under these options was approximately $644,000 and $1,173,220 at March 31, 1998
and December 31, 1998, respectively. At March 31, 1998 and December 31, 1998,
the weighted average interest rate on notes payable to banks and institutions
was 8.11% and 7.89%, respectively. At March 31, 1998 and December 31, 1998,
the rates on 28.8% and 35.9%, 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 the nine months ended December 31, 1998, Adelphia redeemed $137,200
aggregate principal amount of subsidiary notes to banks and institutions. As a
result of these transactions, Adelphia recognized an extraordinary loss on early
retirement of debt of $1,970.
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 Hyperion Class A Common Stock at $0.00308 per share. Proceeds of
$11,087 were allocated to the value of the warrants. 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.
During the quarter ended September 30, 1998, Hyperion paid $17,313 to repurchase
a portion of the 13% Senior Discount Notes due 2003 which had a face value of
$25,160 and a carrying value of $17,550. The notes were retired upon repurchase
which resulted in a $237 gain.
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. Interest is payable semi-annually. 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
A-31
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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.
Other Subsidiary Debt
As of March 31, 1998 and December 31, 1998, other debt consists, in part, of
purchase money indebtedness and capital leases incurred in connection with the
acquisition of, and are collateralized by, certain equipment. The interest rate
on such debt is based on the Federal Funds rate plus 1.4% or the U.S. Treasury
rate plus 2.8%.
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 the year
ended March 31, 1998 and the nine months ended December 31, 1998 were used to
reduce amounts outstanding on Adelphia's subsidiaries' notes payable to banks
and to purchase, redeem or otherwise retire the 12 1/2% Notes due 2002.
<TABLE>
<CAPTION>
Outstanding as of
Interest Issue Amount March 31, December 31, Maturity First Call First Call
Rate Date Issued 1998 1998 Date Date Rate
-------- ---- ------ ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
10 1/4% 7/28/93 $110,000 $ 99,504 $ 99,653 7/15/00 Non-call N/A
12 1/2% (a) 5/14/92 400,000 69,838 - 5/15/02 5/15/97 106.00%
9 1/4% 9/25/97 325,000 325,000 325,000 10/1/02 Non-call N/A
9 1/2% (b) 2/15/94 150,000 186,347 186,347 2/15/04 2/15/99 103.56%
10 1/2% 7/07/97 150,000 150,000 150,000 7/15/04 Non-call N/A
11 7/8% 9/10/92 125,000 124,579 124,613 9/15/04 9/15/99 104.50%
9 7/8% 3/11/93 130,000 128,407 128,531 3/01/05 Non-call N/A
9 7/8% 2/26/97 350,000 347,446 347,586 3/01/07 Non-call N/A
8 3/8% 1/21/98 150,000 149,153 149,197 2/01/08 Non-call N/A
8 3/8% 11/12/98 150,000 - 150,000 2/01/08 Non-call N/A
8 1/8% 7/02/98 150,000 - 149,285 7/15/03 Non-call N/A
----------------- ---------------
$ 1,580,274 $ 1,810,212
================= ===============
</TABLE>
(a) On May 15, 1998, Adelphia redeemed the remaining $69,838 aggregate principal
amount of notes at 103% of principal. As a result, Adelphia recognized an
extraordinary loss on early retirement of debt of $2,604.
(b) These Senior Notes are Pay-in-Kind with respect to interest payments at the
option of Adelphia. During the year ended March 31, 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. On
February 15, 1999, Adelphia redeemed $154,500 aggregate principal amount of
notes at 103.56% of principal. As a result, Adelphia recognized an
extraordinary loss on early retirement of debt of $6,676.
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 December 31, 1998:
<TABLE>
<S> <C>
Year ending December 31, 1999 $ 101,402
Year ending December 31, 2000 236,795
Year ending December 31, 2001 190,403
Year ending December 31, 2002 540,318
Year ending December 31, 2003 693,663
</TABLE>
A-32
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Adelphia 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 11) to reduce
the impact of changes in interest rates on its debt. 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, 1998 and December 31, 1998,
for these swaps and caps, which expire through 2008.
<TABLE>
<CAPTION>
March 31, December 31,
Pay Fixed Swaps: 1998 1998
--------------- ------------- -------------
<S> <C> <C>
Notional amount $ 315,000 $ 650,000
Average receive rate 5.87% 5.33%
Average pay rate 7.42% 6.55%
Receive Fixed Swaps:
-------------------
Notional amount $ 35,000 $ 45,000
Average receive rate 5.68% 5.98%
Average pay rate 5.91% 5.32%
Interest Rate Caps:
------------------
Notional amount $ 190,000 $ 140,000
Average cap rate 8.13% 7.82%
</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. 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 redeem all of the shares of preferred stock
outstanding on October 15, 2007 at a redemption price equal to 100%
A-33
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 may satisfy, and
has to date satisfied, the dividend requirements on this preferred stock by
issuing additional shares.
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. 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. Adelphia paid cash dividends on this preferred stock of $10,183 and
$9,750 during the year ended March 31, 1998 and the nine months ended December
31, 1998, respectively.
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 $6,232, $7,420 and $8,054 for the years
ended March 31, 1997 and 1998 and the nine months ended December 31, 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.
During the nine months ended December 31, 1998, Adelphia has entered into
purchase commitments for certain telecommunication services and digital
convertor purchases. In the aggregate, purchase commitments under these
agreements total $12,350 in 1999, $4,000 in 2000 and $5,000 in 2001.
Since April 1, 1998, Hyperion entered into a series of agreements, totaling
$126,000 with several local and long-haul fiber optic network providers. These
agreements will provide Hyperion with ownership or an indefeasible right of use
("IRU") to over 9,000 route miles of local and long-haul fiber optic cable,
which will significantly increase its presence in the eastern half of the United
States. Through December 31, 1998, Hyperion has paid $42,604 of the total due
under these agreements, which is included in property, plant and equipment.
Adelphia and Hyperion have entered into several commitments to acquire
certain cable and telecommunications companies (see Note 13).
The cable television industry and Adelphia are subject to extensive
regulation at the federal, state and local levels.
A-34
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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")
deregulated 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.
On February 24, 1999, Hyperion was served with a summons and complaint filed
in the United States District Court for the Northern District of New York, Case
Number 99-CV-268, by Hyperion Solutions Corporation ("Solutions"), which is
described in the complaint as a company in the business of developing, marketing
and supporting comprehensive computer software tools, executive information
systems and applications that companies use to improve their business
performance. The complaint alleges, among other matters, that Hyperion's use of
the name "Hyperion" in its business infringes upon various trademarks and
service marks of Solutions in violation of federal trademark laws and violates
various New York business practices, advertising and business reputation laws.
The complaint seeks, among other matters, to enjoin Hyperion from using the name
or mark "Hyperion" in Hyperion's business as well as to recover unspecified
damages, treble damages and attorney's fees. Management of Hyperion believes
that Hyperion has meritorious defenses to the complaint and intends to
vigorously defend this lawsuit. Although management believes that this lawsuit
will not in any event have a material adverse effect upon the Company, no
assurance can be given regarding the effect upon the Company if Solutions were
to prevail in this lawsuit.
On or about March 10, 1999, Robert Lowinger (the "Plaintiff"), on behalf of
himself and all other shareholders of Class A common stock of Century, commenced
an action by filing a putative Class Action Complaint (the "Complaint") in the
Superior Court of Connecticut, Judicial District of Stamford/Norwalk, Case
Number CV-99-0171092, against Century, all of its directors, and Adelphia. The
Plaintiff claims that he owns shares of Class A common stock of Century, and
alleges that in connection with the proposed merger of Adelphia with Century,
holders of Class B common stock of Century - which have superior voting rights
to the holders of Class A common stock - will receive $4.00 per share more than
the consideration to be paid to the holders of Class A common stock. This would
allegedly result in the Class B shareholders receiving approximately $170,000
more than if they held the equivalent number of Century Class A shares. The
Plaintiff claims that the individual defendants, comprising the directors of
Century and the majority shareholders of Century's Class B shares, breached
their fiduciary duties of loyalty, good faith, and due care to Century's Class A
shareholders by agreeing to these two levels of consideration. The sole claim
against Adelphia is that it, together with Century, aided and abetted these
alleged breaches of fiduciary duty. The Plaintiff seeks certification of a
class of Century's Class A shareholders and seeks recovery on behalf of himself
and the class of unspecified damages, profits, and special benefits. He also
seeks all costs, expenses and attorney's fees. Adelphia has entered an
appearance in the case and is required to respond to the Complaint by June 21,
1999. Adelphia believes the allegation of liability against it to be without
merit and intends to vigorously defend the action.
There are no other material pending legal proceedings, other than routine
litigation incidental to the business, to which Adelphia is a part of or which
any of its property is subject.
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 Telesat. The preferred stock accrues
dividends at the rate of 8 1/8% of the
A-35
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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. Adelphia paid cash dividends on this preferred stock of
$4,605 and $6,093 during the year ended March 31, 1998 and the nine months ended
December 31, 1998, respectively.
Adelphia Common Stock Issued
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).
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).
On August 18, 1998, Adelphia issued 8,190,315 shares of Class A common stock
to the public and to the Rigas family. Of this total, 4,100,000 shares were sold
to the public at a price of $32.00 per share, with an underwriter discount of
$1.44 per share. The remaining 4,090,315 shares were sold to entities
controlled by the Rigas family at the public offering price less the
underwriters discount. In a related transaction on September 14, 1998, the
Company issued and sold 615,000 shares of Class A common stock at the offering
price of $32.00, with an underwriter discount of $1.44 per share pursuant to the
underwriters' over-allotment option. Adelphia realized aggregate net proceeds
of $267,926 after deducting underwriter and other fees.
On September 30, 1998, Adelphia issued 2,250,000 shares of Class A common
stock in connection with the acquisition of AT&T interests in SHHH, L.P. (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.
Hyperion Common Stock Issued
On May 8, 1998, Hyperion completed an 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 $49,000 and converted indebtedness owed
to the Company by Hyperion into 3,642,666 shares of Hyperion Stock. In
addition, Adelphia purchased warrants issued by Hyperion to MCI Metro Access
Transmission Services, Inc., and purchased shares of Hyperion Class B common
stock from certain executive officers of Hyperion for a total purchase price of
approximately $12,580 and $3,000, respectively. Adelphia owns approximately 66%
of the Hyperion common stock on a fully diluted basis and 86% of the total
voting power. Additional net proceeds of $191,411 to Hyperion were received as
a result of the sale of 12,500,000 shares of Hyperion Stock to the public. In a
related transaction on June 5, 1998, Hyperion issued and sold 350,000 shares of
its Class A common stock at the $16.00 IPO price pursuant to the underwriters'
over allotment option in the IPO. As a result of the IPO, Adelphia's additional
paid-in capital increased approximately $147,000 and minority interests
increased approximately $45,000.
A-36
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Restricted Stock Bonus Plan
Adelphia had 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 were to be awarded without any cash
payment by the recipient unless otherwise determined by the Compensation
Committee. Shares awarded under the plan would vest over a five year period. No
awards have been made under the plan. The plan was terminated as of the
stockholder approval of the 1998 Long-Term Incentive Compensation Plan (see
Note 7).
Stock Option Plan
Adelphia had 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 Adelphia. Options could be granted at an exercise
price equal to the fair market value of the shares on the date of grant. The
plan permitted the granting of tax-qualified incentive stock options, in
addition to non-qualified stock options. Options outstanding under the plan
could be exercised by paying the exercise price per share through various
alternative settlement methods. No stock options have been granted under the
plan. The plan was terminated as of the stockholder approval of the 1998 Long-
Term Incentive Compensation Plan (see Note 7).
7. Employee Benefit Plans:
Savings Plan
Adelphia has a savings plan (401(k)) which provides that eligible full-time
employees may contribute from 2% 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 $638, $687 and $605 for the years ended March 31, 1997 and 1998 and
the nine months ended December 31, 1998, respectively.
Adelphia Long-Term Incentive Compensation Plan
On October 6, 1998, Adelphia adopted its 1998 Long-Term Incentive
Compensation Plan (the "1998 Plan"). The 1998 Plan provides for the granting of
(i) options which qualify as "incentive stock options" within 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 Adelphia Class A common stock available for issuance under
the 1998 Plan is 3,500,000. Options, awards and units may be granted under the
1998 Plan to directors, officers, employees and consultants of Adelphia. The
1998 Plan provides that incentive stock options must be granted with an exercise
price of not less than the fair market value of the underlying Adelphia common
stock on the date of the grant. Options outstanding under the Plan may be
exercised by paying the exercise price per share through various alternative
settlement methods. No grants had been made under the 1998 Plan as of December
31, 1998.
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 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.
A-37
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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). At December 31,
1998, no Rigas Options or Rigas Grants have been granted. Also in April 1998,
pursuant to the then existing stockholders agreement, Hyperion authorized the
issuance under the 1996 Plan to certain Officers' stock options (the "Management
Stockholder Options") currently 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 and the 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 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 of operations. At December 31, 1998, Adelphia had
net operating loss carryforwards for federal income tax purposes of
approximately $1,300,000 expiring through 2018. 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.
The tax effects of significant items comprising Adelphia's net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1998
---------- ------------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of
property, plant and equipment and
intangible assets $ 250,298 $ 251,289
---------- ------------
Deferred tax assets:
Investment in partnerships 82,461 102,472
Operating loss carryforwards 459,546 478,488
---------- ------------
542,007 580,960
Valuation allowance (408,060) (439,280)
---------- ------------
Subtotal 133,947 141,680
---------- ------------
Net deferred tax liability $ 116,351 $ 109,609
========== ============
</TABLE>
The net change in the valuation allowance for the years ended March 31, 1998
and the nine months ended December 31, 1998 was an increase of $48,775 and
$31,220, respectively.
Income tax benefit is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended March 31, December 31,
1997 1998 1998
------ -------- -----------
<S> <C> <C> <C>
Current $ (142) $ (699) $ 60
Deferred 500 6,305 6,742
------ -------- --------
Total $ 358 $ 5,606 $ 6,802
====== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate and Adelphia's
effective income tax rate is as follows:
A-38
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Ended
Year Ended March 31, December 31,
1997 1998 1998
-------- -------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate......................... 35% 35% 35%
Change in federal valuation allowance..................... (41%) (30%) (26%)
State taxes, net of federal benefit....................... 6% (2%) 1%
Other..................................................... -% -% (4%)
-------- -------- -----------
Effective income tax benefit rate......................... -% 3% 6%
======== ======== ===========
</TABLE>
9. Disclosures about Fair Value of Financial Instruments:
Included in Adelphia's financial instrument portfolio are cash, U.S.
government securities, 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, 1998 and December 31, 1998. The carrying cost of the publicly traded
notes, debentures and redeemable preferred stock at March 31, 1998 and December
31, 1998 were $2,400,753 and $2,657,861, respectively. At March 31, 1998 and
December 31, 1998, the fair value exceeded the carrying cost by $199,296 and
$139,970, respectively. At March 31, 1998 and December 31, 1998, Adelphia would
have been required to pay approximately $5,822 and $27,227, respectively, to
settle its interest rate swap 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 page A-3 of this proxy statement for information regarding business
segments as of and for the years ended March 31, 1997 and 1998 and as of and for
the nine months ended December 31, 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 $2,939, $3,960 and $2,022 for
the years ended March 31, 1997 and 1998 and the nine months ended December 31,
1998, respectively. In addition, Adelphia was reimbursed by Olympus and the
Managed Partnerships for allocated corporate costs of $6,335, $6,436 and $7,548
for the years ended March 31, 1997 and 1998 and the nine months ended December
31, 1998, respectively, which have been recorded as a reduction of selling,
general and administrative expenses.
Interest expense - net includes interest income from affiliates for long term
borrowings of $8,367, $7,129 and $5,221 for the years ended March 31, 1997 and
1998 and the nine months ended December 31, 1998, respectively, and for short
term borrowings of $9,340 and $9,339 for the year ended March 31, 1998 and the
nine months ended December 31, 1998, respectively.
At March 31, 1998, Adelphia had interest rate swaps with affiliates for a
notional amount of $175,000, which expired during the nine months ended December
31, 1998. The net effect of these interest rate swaps was to increase interest
expense by $50, $128 and $2,049 for the years ended March 31, 1997 and 1998 and
the nine months ended December 31, 1998, respectively.
During the years ended March 31, 1997 and 1998 and the nine months ended
December 31, 1998, Adelphia paid $2,563, $2,485 and $3,422, respectively, to
entities owned by certain shareholders of Adelphia primarily for property, plant
and equipment and services.
A-39
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 year ended March 31, 1998 and the nine months ended December
31, 1998:
<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 programming 39,673 38,540 43,711 45,364
Selling, general and administrative 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 dividends - - (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 extraordinary 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>
A-40
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30 September 30 December 31
------------ --------------- ----------
<S> <C> <C> <C>
Nine Months Ended December 31, 1998:
- -------------------------------------
Revenues $ 144,756 $ 169,387 $ 193,012
------------ --------------- ----------
Operating expenses:
Direct operating and programming 48,738 56,595 62,630
Selling, general and administrative 29,111 33,043 45,095
Depreciation and amortization 38,559 46,083 56,181
------------ --------------- ----------
Total 116,408 135,721 163,906
------------ --------------- ----------
Operating income 28,348 33,666 29,106
------------ --------------- ----------
Other income (expense):
Priority investment income from Olympus 12,000 12,000 12,000
Interest expense - net (62,745) (63,317) (65,531)
Equity in loss of Olympus and other joint ventures (18,316) (14,803) (15,772)
Equity in loss of Hyperion joint ventures (3,190) (2,614) (3,776)
Minority interest in losses of subsidiaries 5,460 8,543 11,769
Hyperion preferred stock dividends (6,946) (7,166) (7,424)
Other income 1,000 113 -
------------ --------------- ----------
Total (72,737) (67,244) (68,734)
------------ --------------- ----------
Loss before income taxes and extraordinary loss (44,389) (33,578) (39,628)
Income tax benefit (expense) 5,614 (852) 2,040
------------ --------------- ----------
Loss before extraordinary loss (38,775) (34,430) (37,588)
Extraordinary loss on early retirement of debt (2,604) (1,733) -
------------ --------------- ----------
Net loss (41,379) (36,163) (37,588)
Dividend requirements applicable to preferred stock (6,906) (6,906) (6,906)
------------ --------------- ----------
Net loss applicable to common stockholders $ (48,285) $ (43,069) $ (44,494)
============ =============== ==========
Basic and diluted loss per weighted average share of common stock before
extraordinary loss $ (1.48) $ (1.16) $ (1.06)
Basic and diluted extraordinary loss per weighted average share on
early retirement of debt (0.08) (0.05) -
------------ --------------- ----------
$ (1.56) $ (1.21) $ (1.06)
Basic and diluted net loss per weighted average share of common stock ============ =============== ==========
Weighted average shares of common stock outstanding (in thousands) 30,988 35,533 42,093
============ =============== ==========
</TABLE>
13. Subsequent Events:
On January 13, 1999, Adelphia completed offerings of $100,000 of 7 1/2%
Senior Notes due 2004 and $300,000 of 7 3/4% Senior Notes due 2009. Net
proceeds from these offerings, after deducting offering expenses, were
approximately $393,700. Of this amount, Adelphia used approximately $160,000 to
pay accrued interest and retire a portion of its 9 1/2% Senior Pay-In-Kind Notes
due 2004. Adelphia used the remainder to repay borrowings under revolving
credit facilities of its subsidiaries which may be reborrowed and used for
general corporate purposes. The terms of these notes are similar to those of
Adelphia's other publicly held senior debt.
On January 14, 1999, Adelphia completed offerings totaling 8,600,000 shares
of its Class A common stock. In those offerings, Adelphia sold 4,600,000 newly
issued shares of Class A common stock to Goldman, Sachs & Co. at $43.25 per
share and it also sold 4,000,000 shares of its Class A common stock at $43.25
per share to entities controlled by the Rigas family. Adelphia used the
proceeds of approximately $372,000 from these offerings to repay subsidiary bank
debt, which may be reborrowed and used for general corporate purposes.
On January 21, 1999, Adelphia acquired Verto Communications, Inc. ("Verto")
pursuant to a merger
A-41
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
agreement between Adelphia, Verto and Verto's shareholders. These systems served
approximately 56,000 subscribers in the greater Scranton, PA area at the date of
acquisition. In connection with the Verto acquisition, Adelphia issued 2,561,024
shares of its Class A common stock to the former owners of Verto and assumed
approximately $35,000 of net liabilities of Verto. The acquisition is being
accounted for under the purchase method of accounting. Accordingly, the
financial results of the acquired systems will be included in the consolidated
results of Adelphia effective from the date acquired.
On January 29, 1999, Adelphia purchased from Telesat shares of Adelphia's
stock owned by Telesat for a price of $149,213. In the transaction, Adelphia
purchased 1,091,524 shares of Class A common stock and 20,000 shares of Series C
Cumulative convertible preferred stock which are convertible into an additional
2,358,490 shares of Class A common stock. These shares represent 3,450,014
shares of common stock on a fully converted basis. Adelphia and Telesat also
agreed to a redemption of Telesat's interests in Olympus Communications, L.P. by
July 11, 1999 for approximately $108,000. The redemption is subject to
applicable third party approvals.
On February 23, 1999, Adelphia announced that it had entered into a
definitive agreement to acquire FrontierVision Partners, L.P. ("FrontierVision")
for approximately $2,100,000. Under that agreement Adelphia would acquire 100%
of FrontierVision in exchange for approximately $550,000 in cash, 7,000,000
shares of Adelphia Class A common stock and the assumption of approximately
$1,110,000 of debt. The transaction is subject to customary closing conditions.
As of December 31, 1998, FrontierVision had approximately 702,000 basic
subscribers.
On March 2, 1999, Hyperion issued $300,000 of 12% Senior Subordinated Notes
due 2007 (the "Subordinated Notes"). An entity controlled by members of the
Rigas family purchased $100,000 of the Subordinated Notes directly from Hyperion
at a price equal to the aggregate principal amount less the discount to the
initial purchasers. The net proceeds of approximately $295,000 were or will be
used to fund Hyperion's acquisition of interests held by local partners in
certain of its markets, and will be used to fund capital expenditures and
investments in its networks and for general corporate and working capital
purposes.
On March 5, 1999, Adelphia announced that it had entered into a definitive
merger agreement to acquire Century Communications Corp. ("Century") for
approximately $5,200,000. Under the agreement, Adelphia would acquire 100% of
the outstanding common stock of Century for approximately $826,000 in cash,
48,700,000 shares of Class A common stock and the assumption of approximately
$1,600,000 of debt. This transaction is subject to shareholder approval by
Century and Adelphia and other customary closing conditions. As of December 31,
1998, Century had approximately 1,593,000 basic subscribers after giving effect
to Century's pending joint venture with AT&T.
On March 31, 1999, Hyperion consummated its transaction with subsidiaries of
MediaOne of Colorado, Inc. ("MediaOne"), its local partners in the Jacksonville,
FL and Richmond, VA networks, whereby MediaOne received approximately $81,520 in
cash for MediaOne's ownership interests in these networks. In addition,
Hyperion will be responsible for the payment of fiber lease liabilities due to
MediaOne in the amount of approximately $14,500 over the next ten years. As a
result of the transactions, Hyperion's ownership interest in each of these
networks will increase to 100%.
On April 9, 1999, Adelphia entered into a stock purchase agreement with
Highland Holdings, a general partnership controlled by the Rigas family, in
which Adelphia agreed to sell to Highland Holdings, and Highland Holdings agreed
to purchase, from $250,000 to $375,000 of Adelphia's Class B common stock. The
purchase price for the Class B common stock will be equal to the public offering
price in the April 28, 1999 public offering of Class A common stock, described
below, less the underwriting discount, plus an interest factor. Closing under
this stock purchase agreement is to occur by January 23, 2000.
On April 12, 1999, Adelphia announced that it had entered into a definitive
agreement to acquire cable television systems from Harron Communications Corp.
("Harron") for approximately $1,200,000. The transaction is subject to
customary closing conditions. As of December 31, 1998, Harron had
approximately
A-42
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
294,000 basic subscribers after giving effect to recent and pending acquisitions
involving approximately 9,000 basic subscribers.
On April 28, 1999, Adelphia completed an offering of $350,000 of 7 7/8%
Senior Notes due 2009. Net proceeds from this offering, after deducting
offering expenses, were approximately $345,500. Adelphia used the proceeds to
repay borrowings under revolving credit facilities of its subsidiaries, which
may be reborrowed and used for general corporate purposes, including
acquisitions, capital expenditures and investments. The terms of these notes
are similar to those of Adelphia's other publicly held senior debt.
On April 28, 1999, Adelphia consummated its offering of 8,000,000 shares of
Class A common stock. Net proceeds of the offering, after deducting offering
expenses, were approximately $485,500. Adelphia initially used the net proceeds
to repay borrowings under subsidiary credit agreements, which Adelphia plans to
reborrow and use to fund one or more of the recently announced acquisitions.
On April 30, 1999, and, in a related transaction on May 14, 1999, Adelphia
sold an aggregate 2,875,000 shares of 5 1/2% Series D convertible preferred
stock with a liquidation preference of $200 per share. The preferred stock
accrues dividends at $11 per share annually and is convertible at $81.45 per
share into an aggregate of 7,059,546 shares of Class A common stock of Adelphia.
The preferred stock is redeemable at the option of Adelphia on or after May 1,
2002 at 103% of the liquidation preference. Net proceeds from the convertible
preferred stock offering were approximately $557,400 after deducting
underwriting discounts and commissions and offering expenses. Adelphia initially
used the net proceeds to repay borrowings under subsidiary credit agreements
which Adelphia plans to reborrow and use to fund one or more of the recently
announced acquisitions.
On May 6, 1999, certain subsidiaries and affiliates of Adelphia and Olympus
closed on an $850,000 credit facility. The credit facility consists of a
$600,000, 8 1/2 year reducing revolving credit loan and a $250,000, 9 year term
loan. Proceeds from initial borrowings were held as cash and used to repay
existing indebtedness, which may be reborrowed and used for capital
expenditures, investments and other general corporate purposes.
A-43
