UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended June 30, 1999
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______________ to
_____________
Commission File Number: 0-16014
ADELPHIA COMMUNICATIONS
CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2417713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Main at Water Street
Coudersport, PA 16915-1141
(Address of principal executive offices) (Zip code)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 13, 1999, 50,328,343 shares of Class A common stock, par value $.01
per share, and 10,834,476 shares of Class B common stock, par value $.01 per
share, of the registrant were outstanding.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets - December 31, 1998 and
June 30, 1999.................................................................................. 3
Condensed Consolidated Statements of Operations - Three and Six Months Ended
June 30, 1998 and 1999......................................................................... 4
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1999......................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................ 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 26
Item 2. Changes in Securities and Use of Proceeds..................................................... 26
Item 3. Defaults Upon Senior Securities............................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders........................................... 27
Item 5. Other Information............................................................................. 27
Item 6. Exhibits and Reports on Form 8-K.............................................................. 27
SIGNATURES............................................................................................. 28
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
December 31, June 30,
1998 1999
----------- -----------
ASSETS:
<S> <C> <C>
Property, plant and equipment - net $ 1,207,655 $ 1,581,065
Intangible assets - net 1,029,159 1,167,479
Cash and cash equivalents 398,644 802,701
U.S. government securities - pledged 58,054 44,178
Investments 196,893 179,905
Subscriber receivables - net 53,911 79,886
Prepaid expenses and other assets - net 114,625 196,493
Investment in and amounts due from Olympus 191,408 703,754
Related party receivables - net 44,108 86,001
----------- -----------
Total $ 3,294,457 $ 4,841,462
=========== ===========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
Subsidiary debt $ 1,717,240 $ 1,388,412
Parent debt 1,810,212 2,406,127
Accounts payable 96,985 91,692
Subscriber advance payments and deposits 19,377 20,436
Accrued interest and other liabilities 137,131 149,957
Deferred income taxes 109,609 105,530
----------- -----------
Total liabilities 3,890,554 4,162,154
----------- -----------
Minority interests 48,784 19,146
----------- -----------
Hyperion Redeemable Exchangeable Preferred Stock 228,674 244,153
----------- -----------
13% Series B Cumulative Redeemable Exchangeable Preferred Stock 148,191 148,277
----------- -----------
Commitments and contingencies (Note 8)
Convertible preferred stock, common stock and other stockholders' equity
(deficiency):
8 1/8% Series C convertible preferred stock ($100,000 liquidation preference) 1 1
5 1/2% Series D convertible preferred stock ($575,000 liquidation preference) -- 29
Class A common stock, $.01 par value, 200,000,000 shares authorized,
31,258,843 and 51,419,867 shares issued, respectively 313 514
Class B common stock, $.01 par value, 25,000,000 shares authorized,
10,834,476 shares issued and outstanding 108 108
Additional paid-in capital 738,102 2,317,383
Accumulated deficit (1,760,270) (1,842,991)
Class A common stock held in escrow -- (58,099)
Treasury stock, at cost, 0 and 1,091,524 shares of Class A common stock and
0 and 20,000 shares of 8 1/8% Series C convertible preferred stock, respectively -- (149,213)
----------- -----------
Convertible preferred stock, common stock and
other stockholders' equity (deficiency) (1,021,746) 267,732
=========== ===========
Total $ 3,294,457 $ 4,841,462
=========== ===========
See notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 144,756 $ 226,300 $ 283,293 $ 432,494
Operating expenses:
Direct operating and programming 48,738 72,635 94,102 139,930
Selling, general and administrative 29,111 61,616 54,757 110,727
Depreciation and amortization 38,559 63,736 79,030 120,551
----------- ----------- ----------- -----------
Total 116,408 197,987 227,889 371,208
----------- ----------- ----------- -----------
Operating income 28,348 28,313 55,404 61,286
----------- ----------- ----------- -----------
Other income (expense):
Priority investment income from Olympus 12,000 12,000 24,000 24,000
Other expense 1,000 -- 1,000 --
Interest expense - net (62,745) (59,729) (122,511) (131,783)
Equity in loss of Olympus and other joint ventures (18,316) (23,074) (34,355) (37,935)
Equity in loss of Hyperion joint ventures (3,190) (3,291) (6,873) (7,094)
Minority interest in net losses of subsidiaries 5,460 13,146 5,460 26,060
Hyperion preferred stock dividends (6,946) (7,860) (13,640) (15,479)
Gain on sale of investment -- -- 1,520 2,354
----------- ----------- ----------- -----------
Total (72,737) (68,808) (145,399) (139,877)
----------- ----------- ----------- -----------
Loss before income taxes and extraordinary loss (44,389) (40,495) (89,995) (78,591)
Income tax benefit 5,614 1,149 11,779 4,046
----------- ----------- ----------- -----------
Loss before extraordinary loss (38,775) (39,346) (78,216) (74,545)
Extraordinary loss on early retirement of debt (2,604) (1,438) (2,604) (10,027)
----------- ----------- ----------- -----------
Net loss (41,379) (40,784) (80,820) (84,572)
Dividend requirements applicable to preferred stock (6,906) (6,500) (13,758) (13,000)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (48,285) $ (47,284) $ (94,578) $ (97,572)
=========== =========== =========== ===========
Basic and diluted net loss per weighted average share of
common stock before extraordinary loss $ (1.48) $ (0.79) $ (2.98) $ (1.61)
Basic and diluted extraordinary loss on early retirement
of debt per weighted average share of common stock (0.08) (0.02) (0.08) (0.18)
----------- ----------- ----------- -----------
Basic and diluted net loss per weighted average share
of common stock $ (1.56) $ (0.81) $ (3.06) $ (1.79)
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding (in thousands) 30,988 58,141 30,860 54,381
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended June 30,
-----------------------------
1998 1999
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (80,820) $ (84,572)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 79,030 120,551
Noncash interest expense 15,344 16,376
Noncash dividends 13,640 15,479
Equity in loss of Olympus and other joint ventures 34,355 37,935
Equity in loss of Hyperion joint ventures 6,873 7,094
Gain on sale of investments (2,130) (2,354)
Minority interest in losses of subsidiaries (5,460) (26,060)
Extraordinary loss on early retirement of debt 2,604 10,027
Decrease in deferred income taxes, net of effect of acquisitions (11,825) (4,311)
Changes in operating assets and liabilities, net of effect of acquisitions:
Subscriber receivables (1,360) (20,997)
Prepaid expenses and other assets (19,465) (47,538)
Accounts payable 17,955 (7,362)
Subscriber advance payments and deposits 217 1,059
Accrued interest and other liabilities 11,417 13,094
------------- -------------
Net cash provided by operating activities 60,375 28,421
------------- -------------
Cash flows used for investing activities:
Acquisitions (81,099) (182,265)
Expenditures for property, plant and equipment (140,280) (226,786)
Investments in Hyperion joint ventures (21,046) (24,672)
Investments in other joint ventures (13,581) (7,755)
Purchase of minority interest (15,580) --
Sale of U.S. government securities - pledged 15,653 15,322
Amounts invested in and advanced to
Olympus and related parties (30,111) (590,134)
Other 3,065 (22,100)
------------- -------------
Net cash used for investing activities (282,979) (1,038,390)
------------- -------------
Cash flows provided by financing activities:
Proceeds from debt 315,467 1,050,000
Repayments of debt (192,924) (861,582)
Costs associated with financings (2,008) (19,537)
Premium paid on early retirement of debt (2,095) (7,413)
Net proceeds from issuance of convertible preferred stock -- 557,649
Net proceeds from issuance of Class A common stock -- 857,122
Net proceeds from issuance of Hyperion Class A common stock 191,682 --
Payments to acquire treasury stock -- (149,213)
Preferred stock dividends paid (14,245) (13,000)
------------- -------------
Net cash provided by financing activities 295,877 1,414,026
------------- -------------
Increase in cash and cash equivalents 73,273 404,057
Cash and cash equivalents, beginning of period 381,403 398,644
------------- -------------
Cash and cash equivalents, end of period $ 454,676 $ 802,701
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per share amounts)
The accompanying unaudited condensed consolidated financial statements
of Adelphia Communications Corporation and its majority owned subsidiaries
("Adelphia" or the "Company") have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments, consisting of only
normal recurring accruals necessary for a fair presentation of the financial
position of Adelphia at June 30, 1999, and the results of operations for the
three and six months ended June 30, 1998 and 1999, have been included. On March
30, 1999, Adelphia elected to change its fiscal year from a year ending on March
31 to a year ending on December 31. The decision was made to conform to general
industry practice and for certain administrative purposes. The change was
effective for the nine months ended December 31, 1998. The Company filed its
Transition Report on Form 10-K for the nine months ended December 31, 1998 on
May 25, 1999. These condensed consolidated financial statements should be read
in conjunction with Adelphia's consolidated financial statements included in its
Annual Report on Form 10-K for the year ended March 31, 1998 and its Transition
Report on Form 10-K for the nine months ended December 31, 1998. The results of
operations for the three and six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the year ending December 31, 1999.
1. Significant Events Subsequent to December 31, 1998:
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 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 was accounted for under the purchase
method of accounting. Accordingly, the financial results of the acquired systems
are included in the consolidated results of Adelphia effective 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
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<PAGE>
Communications, L.P., which is expected to close during the third quarter of
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 June 30, 1999, FrontierVision had approximately 710,000 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 May 31, 1999,
Century had approximately 1,610,000 basic subscribers after giving effect to
Century's pending joint venture with AT&T. In addition, Adelphia has agreed to
purchase the 50% interest in the Citizens-Century Cable Television Joint Venture
owned by Citizens Cable Company at a purchase price of approximately $157,500,
comprised of approximately $27,700 in cash, approximately 1,850,000 shares of
Adelphia Class A common stock and the assumption of indebtedness. The
transaction is subject to customary closing conditions.
On March 31, 1999, Hyperion consummated purchase agreements with
subsidiaries of MediaOne of Colorado, Inc. ("MediaOne"), its local partner 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 increased to 100%.
On April 9, 1999, Adelphia entered into a stock purchase agreement with
Highland Holdings, a general partnership controlled by members of the family of
John J. Rigas, 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 Corporation ("Harron") for approximately $1,170,000. The
transaction is subject to customary closing conditions. As of March 31, 1999,
Harron had approximately 301,000 basic subscribers after giving effect to recent
and pending acquisitions involving approximately 5,000 basic subscribers.
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<PAGE>
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 existing publicly held senior debt.
On April 28, 1999, Adelphia sold 8,000,000 shares of its Class A common
stock. Net proceeds of the offering, after deducting offering expenses, were
approximately $485,500. Adelphia used the net proceeds to repay borrowings under
subsidiary credit agreements, which the Company 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 $557,000 after deducting
underwriter discounts and commissions and offering expenses. Adelphia used the
net proceeds to repay borrowings under subsidiary credit agreements, which the
Company 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.
On May 26, 1999, the Company announced that it had agreed to swap
certain cable systems with Comcast Corporation ("Comcast") and Jones Intercable,
Inc. ("Jones") in a geographic rationalization of the companies' respective
markets. Adelphia will add approximately 440,000 subscribers in the Los Angeles,
CA area and the West Palm/Fort Pierce, FL area. In exchange, Comcast and Jones
will receive systems currently owned, managed or under contract to be purchased
by Adelphia serving approximately 464,000 subscribers in suburban Philadelphia,
PA, Ocean County, NJ, Ft. Myers, FL, Michigan, New Mexico and Indiana. All
systems involved in the transactions will be valued by agreement between the
parties or, following a failure to reach agreement, by independent appraisals,
with any difference in relative value to be funded with cash or additional cable
systems. The system swaps are subject to customary closing conditions and
regulatory approvals and are expected to close by mid-2000.
On July 1, 1999, Adelphia and Hyperion announced their decision to
further combine the efforts of both companies and that Hyperion was changing the
name under which it will be doing business to Adelphia Business Solutions. With
this decision, Adelphia and Hyperion will align the strengths of both
organizations and develop a single brand in the communications market place.
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2. Debt:
Debt is summarized as follows:
<TABLE>
<CAPTION>
Subsidiary Debt:
December 31, June 30,
1998 1999
----------------- ----------------
<S> <C> <C>
Notes to banks and institutions $ 1,200,970 $ 535,340
13% Senior Discount Notes of Hyperion due 2003 220,784 236,745
12 1/4% Senior Secured Notes of Hyperion due 2004 250,000 250,000
12% Senior Subordinated Notes of Hyperion due 2007 - 300,000
Other subsidiary debt 45,486 66,327
----------------- ----------------
Total subsidiary debt $ 1,717,240 $ 1,388,412
================= ================
</TABLE>
The following information updates to June 30, 1999, unless otherwise
noted, certain disclosures included in Note 3 to Adelphia's consolidated
financial statements contained in the Transition Report on Form 10-K for the
nine months ended December 31, 1998. <TABLE>
<S> <C>
Commitments for additional borrowings,
as of June 30, 1999 $ 1,428,120
Weighted average interest rate payable by subsidiaries
under credit agreements with banks and institutions 8.78%
Percentage of subsidiary notes to banks and institutions that
bear interest at fixed rates for at least one year (including the effects
of interest rate swap agreements) 84.83%
</TABLE>
<TABLE>
<CAPTION>
Parent Debt:
December 31, June 30,
1998 1999
----------- -----------
<S> <C> <C>
10 1/4% Senior Notes due 2000 $ 99,653 $ 99,760
9 1/4% Senior Notes due 2002 325,000 325,000
8 1/8% Senior Notes due 2003 149,285 149,350
10 1/2% Senior Notes due 2004 150,000 150,000
7 1/2% Senior Notes due 2004 -- 100,000
9 7/8% Senior Notes due 2007 347,586 347,686
8 3/8% Senior Notes due 2008 299,197 299,227
7 3/4% Senior Notes due 2009 -- 300,000
7 7/8% Senior Notes due 2009 -- 350,000
11 7/8% Senior Debentures due 2004 124,613 124,638
9 7/8% Senior Debentures due 2005 128,531 128,619
9 1/2% Pay-In-Kind Notes due 2004 186,347 31,847
----------- -----------
Total parent debt $ 1,810,212 $ 2,406,127
</TABLE>
=========== ===========
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3. Investments:
<TABLE>
<CAPTION>
Adelphia's nonconsolidated investments are as follows:
December 31, June 30,
1998 1999
----------- -----------
Investments accounted for using the equity method:
Gross investment:
<S> <C> <C>
Hyperion investments in joint ventures $ 138,614 $ 106,214
Benbow PCS Ventures, Inc. 17,170 17,227
Mobile communications 18,249 18,875
Other 2,308 3,407
----------- -----------
Total 176,341 145,723
----------- -----------
Investments accounted for using the cost method:
Niagara Frontier Hockey, L.P. 44,897 48,675
SuperCable ALK International 3,190 3,190
Programming ventures 1,469 3,470
Mobile communications 2,925 3,069
Other 672 668
----------- -----------
Total 53,153 59,072
----------- -----------
Total investments before cumulative equity in net losses 229,494 204,795
Cumulative equity in net losses (32,601) (24,890)
----------- -----------
Total investments $ 196,893 $ 179,905
=========== ===========
</TABLE>
4. Related Party Investments and Receivables:
Related party receivables - net represent advances to managed
partnerships, the Rigas family and Rigas family controlled entities. No related
party advances are collateralized.
<TABLE>
<CAPTION>
Investment in and amounts due from Olympus is comprised of the
following:
December 31, June 30,
1998 1999
-------------- --------------
<S> <C> <C>
Cumulative equity in loss over investment in Olympus $ (102,888) $ (111,586)
Amounts due from Olympus 294,296 815,340
-------------- --------------
$ 191,408 $ 703,754
============== ==============
</TABLE>
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The investment in Olympus represents a 50% voting interest in such
partnership and is being accounted for using the equity method. Summarized
unaudited results of operations of Olympus are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Revenues $ 102,116 $ 128,217
Net loss (8,908) (23,931)
Net loss of general and limited partners after priority return (51,623) (74,497)
</TABLE>
5. Net Loss Per Weighted Average Share of Common Stock:
Basic net loss per weighted average share of common stock is computed
based on the weighted average number of common shares outstanding after giving
effect to dividend requirements on the Company's preferred stock. Diluted net
loss per common share is equal to basic net loss per common share because the
Company's convertible preferred stock had an antidilutive effect for the periods
presented; however, the convertible preferred stock could have a dilutive effect
on earnings per share in future periods.
6. Supplemental Financial Information:
Cash payments for interest were $118,134 and $130,298 for the six
months ended June 30, 1998 and 1999, respectively. Accumulated depreciation of
property, plant and equipment amounted to $730,873 and $805,330 at December 31,
1998 and June 30, 1999, respectively. Accumulated amortization of intangible
assets amounted to $249,618 and $282,898 at December 31, 1998 and June 30, 1999,
respectively. Interest expense - net includes interest income of $8,080 and
$27,935 for the three months ended June 30, 1998 and 1999 and $16,887 and
$36,013 for the six months ended June 30, 1998 and 1999, 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.
On February 15, 1999, Adelphia issued 1,000,000 shares of Class A
common stock to an escrow account as a deposit for the acquisition of
FrontierVision.
7. Income Taxes:
Income tax benefit for the three and six months ended June 30, 1998 and
1999 was substantially comprised of deferred tax.
8. Commitments and Contingencies:
Reference is made to Note 1 and to Management's Discussion and Analysis
of Financial Condition and Results of Operations and Legal Proceedings for a
discussion of material commitments and contingencies.
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9. Reclassifications:
Certain prior period amounts have been reclassified to conform with the
current period presentation.
10. Recent Accounting Pronouncements:
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," 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 the Company has not completed its
evaluation of the impact of SFAS No. 133 on the Company's consolidated financial
statements. In July 1999, SFAS No. 137 was issued to delay the effective date of
SFAS No. 133 to fiscal quarters of fiscal years beginning after June 15, 2000.
11. Business Segment Information:
Refer to Item 2 of this Quarterly Report on Form 10-Q for information
regarding business segments as of December 31, 1998 and June 30, 1999 and for
the three and six months ended June 30, 1998 and 1999.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(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"). See Note 1 to the Condensed Consolidated Financial
Statements contained in this Form 10-Q. As of the time of filing of this Form
10-Q, all of these transactions were pending and therefore are not reflected in
the results of operations of the Company for the three and six months ended June
30, 1999. After the completion of the quarter ended March 31, 1999, 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. 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 1 to the Condensed Consolidated
Financial Statements contained in this Form 10-Q.
Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q, including Management's Discussion and Analysis of Financial Condition
and Results of Operations, is forward-looking, such as information relating to
the effect of future regulation, future capital commitments and the effects of
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect expected results in the future
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic conditions, acquisitions and divestitures,
the availability and cost of capital, government and regulatory policies, the
pricing and availability of equipment, materials, inventories and programming,
product acceptance, technological developments, year 2000 issues and changes in
the competitive environment in which the Company operates.
Adelphia Communications Corporation and its subsidiaries ("Adelphia" or
the "Company") operate primarily in two lines of business within the
telecommunications industry: cable television and related investments
("Adelphia, excluding Hyperion") and competitive local exchange carrier ("CLEC")
telephony ("Hyperion"). The balance sheet data as of December 31, 1998 and June
30, 1999, and the other data for the three and six months ended June 30, 1998
and 1999, of Hyperion presented below have been derived from the consolidated
financial statements of Hyperion not included herein.
A majority owned subsidiary of the Company, Hyperion, together with its
subsidiaries owns CLEC networks and investments in CLEC joint ventures and
manages those networks and joint ventures. Hyperion is an unrestricted
subsidiary for purposes of the Company's indentures. For further information
regarding Hyperion, which also files reports pursuant to the Securities Exchange
Act of 1934, see Hyperion's Form 10-Q for the quarterly period ended June 30,
1999.
-13-
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
Summarized unaudited financial information of Adelphia, Hyperion and
Adelphia, excluding Hyperion is as follows:
<TABLE>
<CAPTION>
Balance Sheet Data: December 31, June 30,
1998 1999
------------ ------------
<S> <C> <C>
Adelphia Consolidated
Total assets $ 3,294,457 $ 4,841,462
Total debt 3,527,452 3,794,539
Cash 398,644 802,701
Investments (a) 229,494 204,795
Redeemable preferred stock 376,865 392,430
Convertible preferred stock - net (liquidation preference) 100,000 675,000
Hyperion
Total assets $ 836,342 $ 1,113,091
Total debt 494,109 830,842
Cash 242,570 261,460
Investments (a) 138,614 106,214
Redeemable preferred stock 228,674 244,153
Adelphia, excluding Hyperion
Total assets $ 2,458,115 $ 3,728,371
Total debt 3,033,343 2,963,697
Cash 156,074 541,241
Investments (a) 90,880 98,581
Redeemable preferred stock 148,191 148,277
Convertible preferred stock - net (liquidation preference) 100,000 675,000
</TABLE>
-14-
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
Other Data: Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Adelphia Consolidated
Revenues $ 144,756 $ 226,300 $ 283,293 $ 432,494
Priority investment income from Olympus 12,000 12,000 24,000 24,000
Operating expenses (b) 77,849 134,251 148,859 250,657
Depreciation and amortization expense 38,559 63,736 79,030 120,551
Operating income 28,348 28,313 55,404 61,286
Interest expense - net (62,745) (59,729) (122,511) (131,783)
Preferred stock dividends (13,852) (14,360) (27,398) (28,479)
Capital expenditures 74,255 145,234 140,280 226,786
Cash paid for acquisitions 22,769 70,893 81,099 182,265
Cash used for investments 9,966 11,019 34,627 32,427
Hyperion
Revenues $ 7,635 $ 34,215 $ 12,455 $ 55,653
Operating expenses (b) 13,421 44,308 21,177 73,821
Depreciation and amortization expense 6,120 13,586 10,570 27,121
Operating loss (11,906) (23,679) (19,292) (45,289)
Interest expense - net (7,645) (4,246) (15,692) (14,953)
Preferred stock dividends (6,946) (7,860) (13,640) (15,479)
Capital expenditures 43,464 92,147 77,259 131,831
Cash paid for acquisitions -- 36,518 58,330 126,268
Cash used for investments 2,905 6,100 21,539 24,672
Adelphia, excluding Hyperion
Revenues $ 137,121 $ 192,085 $ 270,838 $ 376,841
Priority investment income from Olympus 12,000 12,000 24,000 24,000
Operating expenses (b) 64,428 89,943 127,682 176,836
Depreciation and amortization expense 32,439 50,150 68,460 93,430
Operating income 40,254 51,992 74,696 106,575
Interest expense - net (55,100) (55,483) (106,819) (116,830)
Preferred stock dividends (6,906) (6,500) (13,758) (13,000)
Capital expenditures 30,791 53,087 63,021 94,955
Cash paid for acquisitions 22,769 34,375 22,769 55,997
Cash used for investments 7,061 4,919 13,088 7,755
<FN>
(a) Represents total investments before cumulative equity in net losses.
(b) Amount excludes depreciation and amortization.
</FN>
</TABLE>
-15-
<PAGE>
Adelphia earned substantially all of its revenues in the three and six
months ended June 30, 1998 and 1999 from monthly subscriber fees for basic,
satellite, premium and ancillary services (such as installations and equipment
rentals), CLEC telecommunications services, local and national advertising
sales, high speed data services and pay-per-view programming.
The changes in Adelphia's operating results for the three and six
months ended June 30, 1999 compared to the same period of the prior year, were
primarily the result of acquisitions, rate increases and expansion of existing
operations.
The high level of depreciation and amortization associated with the
significant number of acquisitions in recent years, the continued upgrade and
expansion of systems and interest costs associated with financing activities
will continue to have a negative impact on the reported results of operations.
Also, significant charges for depreciation, amortization and interest are
expected to be incurred in the future by Olympus, which will adversely impact
Adelphia's future results of operations. Adelphia expects to report net losses
for the next several years.
The following tables set forth certain cable television system data at
the dates indicated for Company Owned, Olympus and Managed Systems. The "Olympus
Systems" are systems currently owned by Olympus. The "Managed Systems" are
affiliated systems managed by Adelphia.
<TABLE>
<CAPTION>
June 30, Percent
----------------------- Increase
1998 1999 (Decrease)
---------- ---------- --------
<S> <C> <C> <C>
Homes Passed by Cable
Company Owned Systems 1,696,294 2,259,151 33.2%
Olympus Systems 752,012 965,163 28.3%
Managed Systems 348,441 178,615 (48.7%)
--------- ---------
Total Systems 2,796,747 3,402,929 21.7%
========= =========
Basic Subscribers
Company Owned Systems 1,244,310 1,628,101 30.8%
Olympus Systems 493,258 641,228 30.0%
Managed Systems 260,843 134,264 (48.5%)
--------- ---------
Total Systems 1,998,411 2,403,593 20.3%
========= =========
</TABLE>
Managed Systems' data, as of June 30, 1999, reflect the sales of
systems consisting of approximately 64,900 and 75,900 homes passed and
approximately 44,000 and 62,100 basic subscribers to Adelphia and Olympus,
respectively.
-16-
<PAGE>
The following table is derived from Adelphia's Condensed Consolidated
Statements of Operations that are included in this Form 10-Q and sets forth the
historical percentage relationship to revenues of the components of operating
income contained in such financial statements for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1999 1998 1999
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct operating and programming 33.7% 32.1% 33.2% 32.4%
Selling, general and administrative 20.1% 27.2% 19.3% 25.6%
Depreciation and amortization 26.6% 28.2% 27.9% 27.9%
---------- --------- --------- ---------
Operating income 19.6% 12.5% 19.6% 14.1%
========== ========= ========= =========
</TABLE>
Revenues. The primary revenue sources reflected as a percentage of
total revenues were as follows for the three months ended June 30, 1998 and
1999:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Regulated service and equipment 74% 66%
Premium programming 10% 8%
Advertising sales and other services 11% 11%
Competitive local exchange carrier services 5% 15%
</TABLE>
Revenues increased approximately 56.3% and 52.7% for the three and six
months ended June 30, 1999 compared with the same periods of 1998. The increases
are attributable to the following:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1999
---------------- --------------
<S> <C> <C>
Acquisitions 67% 64%
Basic subscriber growth 2% 3%
Cable rate increases 12% 13%
Premium programming (2%) (2%)
Competitive local exchange carrier services 13% 14%
Advertising sales and other services 8% 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 CLEC services, high-speed data services, long distance and paging also
-17-
<PAGE>
had a positive impact on revenues for the three and six months ended June 30,
1999. 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 49.0% and 48.7% for the three and six months ended
June 30, 1999 compared with the same period of 1998. 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 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 111.7% and
102.2% for the three and six months ended June 30, 1999 compared with the same
period of 1998. 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. 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 54.6% and 36.5% for the three and six months ended June 30,
1999, compared with the same period of 1998 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 122.0% and 156.6% for the three and six
months ended June 30, 1999 compared with the same period of 1998. 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, 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 0.7% and 9.4% for the three and six months ended June 30, 1999
compared with the same period of 1998. Interest expense - net, including
Hyperion, decreased 4.8% for the three months ended June 30, 1999, as compared
with the same period of 1998 due to increased interest income from affiliates.
Interest expense-net including Hyperion increased 7.6% for the six months ended
June 30, 1999, as compared with the same period of 1998. The increases were
primarily due to incremental debt related to acquisitions and other new debt
issuances. Interest expense includes noncash accretion of original issue
discount on the Hyperion 13% Senior Discount Notes and other noncash interest
expense totaling $8,424 and $16,376 for the three and six months ended June 30,
1999 compared with $7,895 and $15,344 for the same period of 1998.
Equity in Loss of Joint Ventures. The equity in loss of joint ventures
represents primarily (i) the Company's pro-rata share of Olympus' losses and the
accretion requirements of Olympus' PLP interests, and (ii) Hyperion's pro-rata
share of its less than majority owned partnerships' operating losses.
Minority Interest in 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 six months
ended June 30, 1999, Adelphia redeemed $154,500 of its 9 1/2% Senior Pay-In-Kind
Notes due 2004 at 103.56% of principal and repaid certain institutional
-18-
<PAGE>
indebtedness. As a result of these transactions, Adelphia recognized an
extraordinary loss of $10,027 for the six months ended June 30, 1999.
Liquidity and Capital Resources
The cable television and other telecommunication businesses are capital
intensive and typically require continual financing for the construction,
modernization, maintenance, expansion and acquisition of cable and other
telecommunication systems. The Company historically has committed significant
capital resources for these purposes and for investments in Olympus and other
affiliates and entities. These expenditures were funded through long-term
borrowings, stock offerings and, to a lesser extent, internally generated funds.
The Company's ability to generate cash to meet its future needs will depend
generally on its results of operations and the continued availability of
external financing.
The Company has made a substantial commitment to the technological
development of its systems and is aggressively investing in the upgrade of the
technical capabilities of its cable plant in a cost efficient manner. The
Company continues to deploy fiber optic cable and to upgrade the technical
capabilities of its broadband networks in order to increase network capacity,
digital capability, two-way communication and network reliability.
The design of the current system upgrade, when completed, will deploy
on average one fiber optic node for every two system plant miles or
approximately one fiber node for every 180 homes passed compared to the industry
norm of 500 to 1,000 homes passed per fiber optic node. Approximately 75% of the
system will be upgraded to 750 Mhz. Approximately 25% of the plant will remain
at 550 Mhz. The upgraded system will be completely addressable and provide
two-way communication capability. The additional bandwidth will enable the
Company to offer additional video programming and data services. A portion of
the bandwidth will be allocated to new service offerings such as two-way data,
telephony and video-on-demand.
Capital expenditures for Adelphia, excluding Hyperion for the six
months ended June 30, 1998 and 1999 were $63,021 and $94,955, respectively.
Capital expenditures, including Hyperion, for the six months ended June 30, 1998
and 1999 were $140,280 and $226,786, respectively. Capital expenditures for
Hyperion for the six months ended June 30, 1999 compared with the six months
ended June 30, 1998, increased 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 excluding Hyperion and recently announced acquisitions, for the
year ending December 31, 1999 will be in the range of approximately $172,000 to
$192,000. Hyperion estimates that it will require approximately $400,000 to fund
capital expenditures, working capital requirements, operating losses and pro
rata investments in its existing and its planned new networks from July 1, 1999
through December 31, 2000.
The Company generally has funded its working capital requirements,
capital expenditures and investments in Olympus and other affiliates and
entities through long-term borrowings, primarily from banks and insurance
companies, short-term borrowings, internally generated funds and the issuance of
parent company public debt and equity and Hyperion public debt and equity. The
Company generally has funded the principal and interest obligations on its
long-term borrowings from banks and insurance companies by refinancing the
principal with new loans or through the issuance of parent company debt or
equity securities, and by paying the interest out of internally generated funds.
Adelphia has funded the interest obligations on its public borrowings from
internally generated funds.
The Company's financing strategy has generally been to maintain its
public long-term debt at the parent holding company level while the Company's
consolidated subsidiaries have their own senior and subordinated credit
-19-
<PAGE>
arrangements with banks and insurance companies or, for Hyperion, its own public
debt and equity. The Company's public indentures and subsidiary credit
agreements contain covenants that, among other things, require the maintenance
of certain financial ratios (including compliance with certain debt to cash flow
ratios in order to incur additional indebtedness); place limitations on
borrowings, investments, affiliate transactions, dividends and distributions;
and contain certain cross default provisions relating to Adelphia or its
subsidiaries.
At June 30, 1999, the Company's total outstanding debt aggregated
$3,794,539, which included $2,406,127 of parent debt, $830,842 of Hyperion debt
and $557,570 of other subsidiary debt. As of June 30, 1999, Adelphia's
subsidiaries had an aggregate of $2,230,821 in unused credit lines and cash and
cash equivalents, which includes $600,000 also available to affiliates, part of
which is subject to achieving certain levels of operating performance. During
the quarter ended June 30, 1999, the Company made investments in and advances to
Olympus of approximately $362,000, most of which was used to repay Olympus
subsidiary debt, all of which may be reborrowed.
The Company's weighted average interest rate on notes payable to banks
and institutions was approximately 7.32% at June 30, 1998 compared to 8.78% at
June 30, 1999. At June 30, 1999, approximately 84.83% of such debt was subject
to fixed interest rates for at least one year under the terms of such debt or
applicable interest rate swap agreements.
The following table sets forth the mandatory reductions in principal
under all debt agreements for each of the next four years and six months based
on amounts outstanding at June 30, 1999:
<TABLE>
<S> <C>
Six months ending December 31, 1999 $ 20,178
Year ending December 31, 2000 127,950
Year ending December 31, 2001 50,706
Year ending December 31, 2002 381,809
Year ending December 31, 2003 523,024
</TABLE>
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.
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 1 to the
Condensed Consolidated Financial Statements contained in this Form 10-Q.
The Company believes that cash and cash equivalents, internally
generated funds, borrowings under the existing credit facilities, and future
financing sources will be sufficient to meet its short-term and long-term
liquidity and capital requirements. Although in the past the Company has been
able to refinance its indebtedness or obtain new financing, there can be no
assurance that the Company will be able to do so in the future or that the terms
of such financings would be favorable.
-20-
<PAGE>
Management believes that the telecommunications industry, including the
cable television and telephone industries, continues to be in a period of
consolidation characterized by mergers, joint ventures, acquisitions, sales of
all or part of cable or telephone companies or their assets, and other
partnering and investment transactions of various structures and sizes involving
cable or other telecommunications companies. The Company continues to evaluate
new opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity to
its existing regional markets or in locations that can serve as a basis for new
market areas. The Company, like other cable television companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore potential
transactions of various types with other cable and telecommunications companies.
However, no assurances can be given as to whether any such transaction may be
consummated or, if so, when, or that additional competition from this industry
consolidation will not have an adverse effect on the Company.
Regulatory and Competitive Matters
The cable television operations of the Company may be adversely
affected by changes and developments in governmental regulation, competitive
forces and technology. The cable television industry and the Company are subject
to extensive regulation at the federal, state and local levels. The 1992 Cable
Act significantly expanded the scope of regulation of certain subscriber rates
and a number of other matters in the cable industry, such as mandatory carriage
of local broadcast stations and retransmission consent, and increased the
administrative costs of complying with such regulations. The FCC has adopted
rate regulations that establish, on a system-by-system basis, maximum allowable
rates for (i) basic and cable programming services (other than programming
offered on a per-channel or per-program basis), based upon a benchmark
methodology, and (ii) associated equipment and installation services based upon
cost plus a reasonable profit. Under the FCC rules, franchising authorities are
authorized to regulate rates for basic services and associated equipment and
installation services, and the FCC will regulate rates for regulated cable
programming services in response to complaints filed with the agency. The
Telecommunications Act of 1996 (the "1996 Act") 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 legislative or rulemaking proceedings or changes to the rate
regulations. No assurance can be given as to what other future actions Congress,
the FCC or other regulatory authorities may take or the effects thereof on
Adelphia.
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
Because such franchises are generally non-exclusive, there is a potential for
-21-
<PAGE>
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. New Jersey Bell Telephone Company
terminated its OVS operation in Dover Township, New Jersey at the end of 1998.
Recently, RCN Telecom Services, Inc. has been granted permission to convert its
video dialtone authorization in the Philadelphia Region to an OVS authorization.
The Company believes that the provision of video programming or other
services by telephone companies in competition with the Company's existing
operations could have an adverse effect on the Company's financial condition and
results of operations. At this time, the impact of any such effect is not known
or estimable.
The Company also competes with DBS service providers. DBS has been
available to consumers since 1994. A single DBS satellite can provide more than
100 channels of programming. DBS service can be received virtually anywhere in
the United States through the installation of a small outdoor antenna. DBS
service is being heavily marketed on a nationwide basis by several service
providers. Although the impact to date has not been material, any future impact
of DBS competition on the Company's future results is not known or estimable.
Year 2000 Issue
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 more likely to be year 2000 ready. The Company's evaluation also
includes evaluating the potential impact of its reliance on third-party systems
that may have the year 2000 issue.
-22-
<PAGE>
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 completed its inventory and assessment of affected
computerized systems and technologies. The Company is in the final stages of its
year 2000 compliance program with respect to the remediation of 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 has certified six of
eight financial systems as year 2000 compliant. The Company expects its
financial reporting systems to be fully year 2000 compliant by September 1999.
A third-party billing vendor currently facilitates customer billing.
This third-party vendor has certified that it implemented and successfully
tested 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 has substantially completed 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 October 1999.
Costs incurred to date directly related to addressing the year 2000
issue have been approximately $868. The Company 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 $3,725. 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 is 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
-23-
<PAGE>
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, including
companies that the Company acquires, 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.
-24-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company uses fixed and variable rate debt and fixed rate redeemable
preferred stock 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 interest
rate swap 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 June 30, 1999, the Company had interest rate swap
agreements covering notional principal of $525,000 that expire through 2008 and
that fix the interest rate at an average of 6.52%. The Company also enters into
receive-fixed interest rate swap 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 June 30, 1999, 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 5.25%. The Company does not enter into any
interest rate swap or cap agreements for trading purposes. The Company is
exposed to market risk 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 June 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity Fair
--------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Value
---------- ---------- --------- --------- --------- ----------- ----------- -----------
Debt and Redeemable
Preferred Stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate $ 12,375 $ 112,375 $ 3,000 $ 325,000 $ 453,000 $ 2,781,000 $ 3,686,750 $ 3,626,673
Average Interest Rate 10.22% 10.22% 10.22% 10.24% 10.17% 10.14% -- --
Variable Rate $ 9,836 $ 15,637 $ 46,012 $ 49,823 $ 68,416 $ 384,193 $ 573,917 $ 573,917
Average Interest Rate 7.23% 7.44% 7.89% 7.89% 8.02% 7.76% -- --
Interest Rate Swaps:
Variable to Fixed $ 50,000 $ -- $ -- $ -- $ -- $ 475,000 $ 525,000 $ 14,054
Average Pay Rate 6.52% -- -- -- -- 6.52% -- --
Average Receive Rate 5.09% -- -- -- -- 6.99% -- --
Fixed to Variable -- -- -- -- 45,000 -- 45,000 780
Average Pay Rate -- -- -- -- 5.25% -- -- --
Average Receive Rate -- -- -- -- 6.85% -- -- --
</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 June 30, 1999, plus the borrowing
margin in effect at June 30, 1999. 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 June 30, 1999.
-25-
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 Hyperion, no assurance
can be given regarding the effect upon Hyperion if Solutions were to prevail in
this lawsuit.
On or about March 10, 1999, a lawsuit was commenced by the filing of a
class action complaint by one of Century's Class A common stockholders on behalf
of himself and all others similarly situated naming Century's Class B common
stockholders and all of Century's directors as defendants for alleged breaches
of fiduciary duty in connection with approval of the merger consideration. The
complaint was filed in the Superior Court in the State of Connecticut under the
caption Robert Lowinger v. Century Communications Corp., et. al. Century and
Adelphia were also named as defendants for allegedly aiding and abetting in the
foregoing alleged breaches of fiduciary duty. The complaint seeks damages in an
unspecified amount and such other relief as may be appropriate. On July 21,
1999, the court granted the defendants' motion for extension of time to answer
or otherwise respond to the complaint to the earlier of November 15, 1999 or
twenty days after the effective date of the merger.
There are no other material pending legal proceedings, other than
routine litigation incidental to the business, to which the Company is a part of
or which any of its property is subject.
Item 2. Changes in Securities and Use of Proceeds
On January 14, 1999, Adelphia sold 4,000,000 shares of Class A common
stock in a private placement under Section 4(2) of the Securities Act at $43.25
per share to Highland Holdings II, an entity controlled by the Rigas family.
On January 21, 1999, Adelphia issued 2,561,024 shares of Class A common
stock in a private placement under Section 4(2) of the Securities Act to the
former owners of the Verto cable system and assumed approximately $35 million in
net liabilities of Verto in connection with the acquisition of Verto
Communications, Inc. ("Verto") which served approximately 56,000 subscribers in
the greater Scranton, PA area at the date of acquisition.
On February 15, 1999, the Company issued 1,000,000 shares of Class A
common stock to FrontierVision, as a deposit to be held in escrow for the
acquisition of FrontierVision. This issuance was made in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act of
1933.
-26-
<PAGE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
2.01 First Amendment to Agreement and Plan of Merger dated as of
July 12, 1999 with respect to merger with Century
Communications Corp. (incorporated herein by reference is
Exhibit 2.01 to the Registrant's Current Report on Form 8-K
for the event dated July 12, 1999)
2.02 Second Amendment to Agreement and Plan of Merger dated as of
July 29, 1999 with respect to merger with Century
Communications Corp. (incorporated herein by reference is
Exhibit 2.02 to the Registrant's Current Report on Form 8-K
for the event dated July 12, 1999)
10.01 Registration Rights Agreement dated as of July 12, 1999, among
Adelphia, the Century Class B Holders and Ms. Claire Tow
(incorporated herein by reference is Exhibit 10.01 to the
Registrant's Current Report on Form 8-K for the event dated
July 12, 1999)
10.02 Tag-Along Rights Agreement dated as of July 12, 1999, among
Adelphia, the Century Class B Holders, Ms. Claire Tow and the
holders of Adelphia Class B Common Stock named therein
(incorporated herein by reference is Exhibit 10.02 to the
Registrant's Current Report on Form 8-K for the event dated
July 12, 1999)
10.03 Purchase Agreement dated as of July 12, 1999, between Adelphia
and Citizens Cable Company (incorporated herein by reference
is Exhibit 10.03 to the Registrant's Current Report on Form
8-K for the event dated July 12, 1999)
27.01 Financial Data Schedule (supplied for the information of the
Commission).
(b) Reports on Form 8-K:
Form 8-Ks were filed for events dated April 9, 1999, April 19, 1999,
April 21, 1999, April 23, 1999, April 27, 1999, April 28, 1999, May 26, 1999,
June 22, 1999 and July 12, 1999 which reported information under items 5 and 7
thereof. No financial statements were filed with such Form 8-Ks, other than the
financial statements and proforma financial information filed under Item 7 for
the Form 8-K for the event dated April 19, 1999 and June 22, 1999.
-27-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADELPHIA COMMUNICATIONS CORPORATION
(Registrant)
Date: August 16, 1999 By: /s/ Timothy J. Rigas
Timothy J. Rigas
Executive Vice President (authorized
officer), Chief Financial Officer, Chief
Accounting Officer and Treasurer
-28-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE FOR ADELPHIA COMMUNICATIONS CORP. FOR THE SIX MONTHS
ENDED JUNE 30, 1999.
</LEGEND>
<CIK> 0000796486
<NAME> ADELPHIA COMMUNICATIONS CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 802,701
<SECURITIES> 0
<RECEIVABLES> 79,886<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,748,544<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 4,841,462
<CURRENT-LIABILITIES> 0
<BONDS> 3,794,539
0
0
<COMMON> 622
<OTHER-SE> (267,110)
<TOTAL-LIABILITY-AND-EQUITY> 4,841,462
<SALES> 0
<TOTAL-REVENUES> 432,494
<CGS> 0
<TOTAL-COSTS> 371,208
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,783
<INCOME-PRETAX> (78,591)
<INCOME-TAX> (4,046)
<INCOME-CONTINUING> (74,545)
<DISCONTINUED> 0
<EXTRAORDINARY> (10,027)
<CHANGES> 0
<NET-INCOME> (84,572)
<EPS-BASIC> (1.79)
<EPS-DILUTED> (1.79)
<FN>
<F1>RECEIVABLES NET OF ALLOWANCE
<F2>PP&E NET OF DEPRECIATION
</FN>
</TABLE>
