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, 2000
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.)
One North Main Street
Coudersport, PA 16915-1141
(Address of principal executive offices) (Zip code)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 14, 2000, 121,561,056 shares of Class A Common Stock, par value $.01
per share, and 19,235,998 shares of Class B Common Stock, par value $.01 per
share, of the registrant were outstanding.
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ADELPHIA COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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Condensed Consolidated Balance Sheets - December 31, 1999 and
June 30, 2000.................................................................................. 3
Condensed Consolidated Statements of Operations - Three and Six Months Ended
June 30, 1999 and 2000......................................................................... 4
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1999 and 2000......................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 26
Item 2. Changes in Securities and Use of Proceeds..................................................... 27
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
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
December 31, June 30,
1999 2000
---------------- ---------------
ASSETS:
<S> <C> <C>
Property, plant and equipment - net $ 3,972,329 $ 4,532,032
Intangible assets - net 12,095,873 12,009,384
Cash and cash equivalents 186,874 139,239
Restricted cash - 75,785
U.S. government securities - pledged 29,899 15,167
Investments 280,874 321,763
Subscriber receivables - net 194,399 232,389
Prepaid expenses and other assets - net 328,675 384,549
Related party receivables - net 178,577 263,135
---------------- ---------------
Total $ 17,267,500 $ 17,973,443
================ ===============
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY:
Subsidiary debt $ 6,513,813 $ 7,200,203
Parent debt 2,777,919 2,778,572
Accounts payable 442,561 344,285
Subscriber advance payments and deposits 57,651 67,740
Accrued interest and other liabilities 495,564 553,731
Deferred income taxes 2,113,097 2,046,404
---------------- ---------------
Total liabilities 12,400,605 12,990,935
---------------- ---------------
Minority interests 736,497 685,598
---------------- ---------------
Adelphia Business Solutions redeemable exchangeable preferred stock 260,848 278,393
---------------- ---------------
13% Series B cumulative redeemable exchangeable preferred stock 148,363 148,449
---------------- ---------------
Commitments and contingencies (Note 8)
Convertible preferred stock, common stock and other stockholders' equity:
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 29
Class A common stock, $.01 par value, 1,200,000,000 shares authorized,
113,051,118 and 113,218,618 shares issued, respectively 1,131 1,132
Class B common stock, $.01 par value, 300,000,000 shares authorized,
10,834,476 and 16,735,998 shares issued and outstanding, respectively 108 167
Additional paid-in capital 5,863,633 6,212,744
Accumulated deficit (1,997,553) (2,170,268)
Accumulated other comprehensive income (loss) 3,239 (24,336)
Treasury stock, at cost, 1,091,524 shares of Class A common stock and
20,000 shares of 8 1/8% Series C convertible preferred stock, respectively (149,401) (149,401)
---------------- ---------------
Convertible preferred stock, common stock and
other stockholders' equity 3,721,187 3,870,068
---------------- ---------------
Total $ 17,267,500 $ 17,973,443
================ ===============
See notes to condensed consolidated financial statements.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- ---------------
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Revenues $ 218,786 $ 704,125 $ 420,390 $ 1,376,844
Operating expenses:
Direct operating and programming 72,635 260,371 139,930 501,367
Selling, general and administrative 61,616 171,003 110,727 340,391
Depreciation and amortization 63,736 210,327 120,551 410,806
Merger and integration costs - 695 - 1,913
--------------- --------------- ------------- --------------
Total 197,987 642,396 371,208 1,254,477
--------------- --------------- --------------- ---------------
Operating income 20,799 61,729 49,182 122,367
--------------- --------------- --------------- ---------------
Other income (expense):
Interest expense - net (52,215) (206,978) (119,679) (405,370)
Equity in loss of Olympus and other joint ventures (23,074) (3,805) (37,935) (7,114)
Equity in loss of Adelphia Business Solutions
joint ventures (3,291) (346) (7,094) (451)
Minority interest in net losses of subsidiaries 13,146 34,045 26,060 52,956
Adelphia Business Solutions preferred stock dividends (7,860) (8,909) (15,479) (17,545)
Priority investment income from Olympus 12,000 - 24,000 -
Gain on asset swap - 37,552 - 37,552
Other - (96) 2,354 (187)
--------------- --------------- --------------- ---------------
Total (61,294) (148,537) (127,773) (340,159)
--------------- --------------- --------------- ---------------
Loss before income taxes and extraordinary loss (40,495) (86,808) (78,591) (217,792)
Income tax benefit 1,149 15,899 4,046 45,388
--------------- --------------- --------------- ---------------
Loss before extraordinary loss (39,346) (70,909) (74,545) (172,404)
Extraordinary loss on early retirement of debt (1,438) - (10,027) -
--------------- --------------- --------------- ---------------
Net loss (40,784) (70,909) (84,572) (172,404)
Dividend requirements applicable to preferred stock (6,500) (14,406) (13,000) (28,812)
--------------- --------------- --------------- ---------------
Net loss applicable to common stockholders (47,284) (85,315) (97,572) (201,216)
Other comprehensive loss - unrealized loss on
available-for-sale securities (net of income tax
benefit of $12,100 and $16,079) - (22,476) - (27,575)
--------------- --------------- --------------- ---------------
Comprehensive loss $ (47,284) $ (107,791) $ (97,572) $ (228,791)
=============== =============== =============== ===============
Basic and diluted net loss per weighted average share of
common stock before extraordinary loss $ (0.79) $ (0.66) $ (1.61) $ (1.57)
Basic and diluted extraordinary loss on early retirement of
debt per weighted average share of common stock (0.02) - (0.18) -
--------------- --------------- --------------- ---------------
Basic and diluted net loss per weighted average share
of common stock $ (0.81) $ (0.66) $ (1.79) $ (1.57)
=============== =============== =============== ===============
Weighted average shares of common stock
outstanding (in thousands) 58,141 128,747 54,381 128,040
=============== =============== =============== ===============
See notes to condensed consolidated financial statements.
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ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended June 30,
------------------------------------
1999 2000
---------------- ----------------
Cash flows from operating activities:
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Net loss $ (84,572) $ (172,404)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 120,551 410,806
Noncash interest expense 16,376 69,379
Noncash dividends 15,479 17,545
Equity in loss of Olympus and other joint ventures 37,935 7,114
Equity in loss of Adelphia Business Solutions joint ventures 7,094 451
Gain on asset swap and other (2,354) (37,552)
Minority interest in losses of subsidiaries (26,060) (52,956)
Extraordinary loss on early retirement of debt 10,027 -
Decrease in deferred income taxes (4,311) (50,648)
Changes in operating assets and liabilities, net of effect
of acquisitions:
Subscriber receivables (20,997) (37,836)
Prepaid expenses and other assets (47,538) (95,429)
Accounts payable (7,362) (99,082)
Subscriber advance payments and deposits 1,059 10,889
Accrued interest and other liabilities 13,094 (9,120)
---------------- ----------------
Net cash provided by (used for) operating activities 28,421 (38,843)
---------------- ----------------
Cash flows from investing activities:
Acquisitions (182,265) (20,172)
Expenditures for property, plant and equipment (226,786) (745,468)
Adelphia Business Solutions investments in joint ventures and other (24,672) (7,125)
Investments in other joint ventures (7,755) (20,408)
Sale of U.S. government securities - pledged 15,322 15,312
Investments in restricted cash - (75,785)
Amounts invested in and advanced to related parties (590,134) (89,146)
Other (22,100) 2,158
---------------- ----------------
Net cash used for investing activities (1,038,390) (940,634)
---------------- ----------------
Cash flows from financing activities:
Proceeds from debt 1,050,000 2,089,695
Repayments of debt (861,582) (1,498,105)
Costs associated with financings (19,537) (15,206)
Premium paid on early retirement of debt (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 Class B common stock - 374,739
Payments to acquire treasury stock (149,213) -
Preferred stock dividends paid (13,000) (19,281)
---------------- ----------------
Net cash provided by financing activities 1,414,026 931,842
---------------- ----------------
Increase (decrease) in cash and cash equivalents 404,057 (47,635)
Cash and cash equivalents, beginning of period 398,644 186,874
---------------- ----------------
Cash and cash equivalents, end of period $ 802,701 $ 139,239
================ ================
See notes to condensed consolidated financial statements.
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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, 2000, and the results of operations for the
three and six months ended June 30, 1999 and 2000, have been included. These
condensed consolidated financial statements should be read in conjunction with
Adelphia's consolidated financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 1999. The results of operations for
the three and six months ended June 30, 2000 are not necessarily indicative of
the results to be expected for the year ending December 31, 2000.
1. Significant Events and Items Subsequent to December 31, 1999:
On January 10, 2000, Adelphia Business Solutions, a majority-owned
subsidiary of Adelphia, entered into an agreement with Williams Communications,
Inc. ("Williams") to purchase an indefeasible right of use ("IRU") for a total
of 4,543 route miles of fiber in the western United States at a cost of
approximately $23,000.
On January 21, 2000, Adelphia closed the previously announced direct
placement of 5,901,522 shares of Adelphia Class B common stock with Highland
2000, L.P., a limited partnership owned by the Rigas family. Adelphia used a
portion of the proceeds of approximately $375,000 from this direct placement to
repay borrowings under revolving credit facilities of its subsidiaries, which
may be reborrowed and used for general corporate purposes.
During January 2000, Adelphia Business Solutions entered into an IRU
agreement with Level 3 Communications ("Level 3") for approximately 3,100
long-haul route miles throughout much of the western United States. In addition,
Adelphia Business Solutions entered into an agreement with Level 3 to acquire
access to approximately 750 miles of metro duct in the following central
business districts: Chicago, Cincinnati, Dallas, Denver, Detroit, Los Angeles,
Orlando, Phoenix, San Diego, San Francisco, San Jose and Seattle. The total cost
of the agreement is approximately $54,600.
During April 2000, Adelphia Business Solutions was the successful
bidder, in the Federal Communications Commission ("FCC") auction, for 177
licenses in the 39 Ghz spectrum covering approximately 164,000,000 Points of
Presence ("POPS"). Adelphia Business Solutions has deposited $15,000 of the
total $77,605 purchase price with the remaining balance due at the time the
licenses are granted. On July 31, 2000, a petition to deny was filed against
Adelphia Business Solutions. This petition does not seek to deny the grant of
the licenses to Adelphia Business Solutions, but instead, seeks only to make
such grant subject to petitioners' previously dismissed applications seeking
spectrum covered by Adelphia Business Solutions licenses. Adelphia Business
Solutions believes the petition is without merit and intends to vigorously
oppose it and Adelphia Business Solutions currently believes its licenses will
be granted during the third or fourth quarter of 2000.
On April 14, 2000, Adelphia closed on a $2,250,000 bank credit
facility on behalf of certain subsidiaries and affiliates. The credit facility
consists of a $1,500,000 8 3/4 year reducing revolving credit loan and
a $750,000 9 year term loan.
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On May 1, 2000, Adelphia and AT&T completed a swap of cable systems
serving approximately 13,000 basic subscribers. As a result of this transaction,
the Company recorded a gain of approximately $37,600.
On May 3, 2000, Adelphia Business Solutions entered into a contract to
build an advanced technology infrastructure and to provide communication
services to the Commonwealth of Pennsylvania state government. As part of the
contract Adelphia Business Solutions was required to place $75,785 into a
restricted account to be used for completion of the technology infrastructure.
On June 13, 2000, Adelphia announced that it had entered into
agreements regarding the acquisition of cable systems, including GS
Communications, Inc., which will add approximately 155,000 basic subscribers to
its Virginia cluster for an aggregate purchase price of $836,000. It is
currently anticipated that these transactions, which are subject to customary
closing conditions and the receipt of regulatory approvals, will close in the
first quarter of 2001.
On July 3, 2000, Adelphia closed the previously announced direct
placement of 2,500,000 shares of Adelphia Class B common stock with Highland
2000, L.P., a limited partnership owned by the Rigas family. Adelphia used a
portion of the proceeds of approximately $145,000 from this direct placement to
repay borrowings under revolving credit facilities of its subsidiaries, which
may be reborrowed and used for general corporate purposes.
On July 5, 2000, Adelphia acquired Prestige Communications of NC, Inc.
These systems served approximately 118,250 subscribers in North Carolina,
Virginia and Maryland at the date of acquisition and were purchased for an
aggregate price of approximately $700,000. The acquisition was 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.
During July 2000, Adelphia Business Solutions consummated a purchase
agreement with a subsidiary of Allegheny Energy, Inc. ("Allegheny") to acquire
interests in a jointly owned network located in State College, Pennsylvania.
Consideration paid to Allegheny was 330,000 shares of Adelphia Business
Solutions' Class A common stock. The purchase increased Adelphia Business
Solutions' ownership in this network to 100%. The acquisition will be accounted
for under the purchase method of accounting. Accordingly, the financial results
of the acquired network will be included in the consolidated results of Adelphia
Business Solutions effective from the date acquired.
On August 2, 2000, 80,000 shares of Series C convertible preferred
stock held by Highland Holdings, a general partnership owned by the Rigas
family, were converted into 9,433,962 shares of Adelphia Class A common stock.
In addition to the acquisitions mentioned above, prior to
August 14, 2000, Adelphia completed certain other cable system acquisitions.
These acquisitions served approximately 16,000 basic subscribers at the date of
acquisitions primarily in Colorado, New York and Maine and were purchased for an
aggregate price of approximately $70,000, comprised of Adelphia Class A common
stock and cash. These acquisitions will be 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.
Adelphia completed several significant acquisitions during the quarter
ended December 31, 1999. Reference is made to Note 1 to the consolidated
financial statements contained in the Annual Report on Form 10-K for the year
ended December 31, 1999 for additional information regarding these acquisitions.
<PAGE>
The following unaudited pro forma financial information assumes that
the acquisitions that were consummated during the quarter ended
December 31, 1999 had occurred on January 1, 1999.
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Three Months Six Months
Ended Ended
June 30, June 30,
1999 1999
----------------- ------------------
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Revenues $ 614,710 $ 1,200,858
Loss before extraordinary loss (110,366) (180,760)
Net loss (118,250) (203,733)
Basic and diluted net loss per weighted average
share of common stock (1.03) (1.83)
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The above financial information excludes the gain on the sale of
discontinued operations of Centennial Cellular and the Australian operations of
Arahova Communications, Inc., of approximately $314,000 recognized by the
acquired business, during the six months ended June 30, 1999.
2. Debt:
Debt is summarized as follows:
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Subsidiary Debt:
December 31, June 30,
1999 2000
---------------- -----------------
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Notes to banks and institutions $ 3,088,477 $ 3,690,589
13% Senior Discount Notes of Adelphia Business
Solutions due 2003 253,860 272,212
12 1/4% Senior Secured Notes of Adelphia Business
Solutions due 2004 250,000 250,000
12% Senior Subordinated Notes of Adelphia Business
Solutions due 2007 300,000 300,000
10 5/8% Senior Notes of Olympus due 2006 203,537 203,278
11% Senior Subordinated Notes of FrontierVision
Due 2006 212,541 211,624
11 7/8% Senior Discount Notes Series A of
FrontierVision due 2007 205,979 216,839
11 7/8% Senior Discount Notes Series B of
FrontierVision due 2007 78,522 81,522
9 1/2% Senior Notes of Arahova due 2000 148,773 150,000
9 3/4% Senior Notes of Arahova due 2002 201,172 201,431
Zero Coupon Senior Discount Notes of Arahova due 2003 318,234 335,879
9 1/2% Senior Notes of Arahova due 2005 250,852 251,070
8 7/8% Senior Notes of Arahova due 2007 242,542 243,283
8 3/4% Senior Notes of Arahova due 2007 216,105 216,864
8 3/8% Senior Notes of Arahova due 2007 94,106 94,558
8 3/8% Senior Notes of Arahova due 2017 94,048 94,252
Senior Discount Notes of Arahova due 2008 267,105 282,633
Other subsidiary debt 87,960 104,169
---------------- -----------------
Total subsidiary debt $ 6,513,813 $ 7,200,203
================ =================
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The following information updates to June 30, 2000, unless otherwise
noted, certain disclosures included in Note 3 to Adelphia's consolidated
financial statements contained in the Annual Report on Form 10-K for the year
ended December 31, 1999.
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Weighted average interest rate payable by subsidiaries
under credit agreements with banks and institutions 8.37%
Percentage of total indebtedness that bears interest at
fixed rates for at least one year 71.4%
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Parent Debt:
December 31, June 30,
1999 2000
----------------- -----------------
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10 1/4% Senior Notes due 2000 $ 99,872 $ 99,987
9 1/4% Senior Notes due 2002 325,000 325,000
8 1/8% Senior Notes due 2003 149,419 149,489
10 1/2% Senior Notes due 2004 150,000 150,000
7 1/2% Senior Notes due 2004 100,000 100,000
9 7/8% Senior Notes due 2007 347,791 347,899
8 3/8% Senior Notes due 2008 299,259 299,291
7 3/4% Senior Notes due 2009 300,000 300,000
7 7/8% Senior Notes due 2009 350,000 350,000
9 3/8% Senior Notes due 2009 496,020 496,252
9 7/8% Senior Debentures due 2005 128,711 128,807
9 1/2% Pay-In-Kind Notes due 2004 31,847 31,847
----------------- -----------------
Total parent debt $ 2,777,919 $ 2,778,572
================= =================
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3. Investments:
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Adelphia's nonconsolidated investments are as follows:
December 31, June 30,
1999 2000
----------------- ------------------
Investments accounted for using the equity method:
--------------------------------------------------
Gross investment:
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Adelphia Business Solutions' joint ventures $ 61,400 $ 66,025
Mobile communications 19,865 21,302
Media venture 8,408 16,508
Other 3,649 4,803
----------------- ------------------
Total 93,322 108,638
----------------- ------------------
Investments accounted for using the cost method:
Niagara Frontier Hockey, L.P. 47,533 47,533
Benbow PCS Ventures, Inc. 17,192 -
Convertible preferred stock 87,433 87,433
Interactive ventures - 13,000
Other 12,972 14,626
----------------- ------------------
Total 165,130 162,592
----------------- ------------------
Investments accounted for as available-for-sale securities:
Common stock warrants 49,890 67,819
Common stock - 17,138
----------------- ------------------
Total investments before cumulative equity in net losses 308,342 356,187
Cumulative equity in net losses (27,468) (34,424)
----------------- ------------------
Total investments $ 280,874 $ 321,763
================= ==================
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In July 2000, certain members of the Rigas family closed on their
agreement to acquire all the voting interests of Niagara Frontier Hockey, L.P.
("NFHLP"). All necessary third party approvals of the agreement have been
received.
4. Related Party Receivables - Net:
Related party receivables - net represent advances to and management
fees and other fees from managed partnerships, the Rigas family and Rigas family
controlled entities. No related party advances are collateralized.
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 and outstanding stock options had an
antidilutive effect for the periods presented; however, the convertible
preferred stock and outstanding stock options could have a dilutive effect on
earnings per share in future periods.
<PAGE>
6. Supplemental Financial Information:
Cash payments for interest were $130,298 and $337,197 for the six
months ended June 30, 1999 and 2000, respectively. Accumulated depreciation of
property, plant and equipment amounted to $1,138,407 and $1,362,680 at December
31, 1999 and June 30, 2000, respectively. Accumulated amortization of intangible
assets amounted to $615,772 and $716,223 at December 31, 1999 and June 30, 2000,
respectively. Interest expense - net includes interest income of $35,449 and
$5,845 for the three months ended June 30, 1999 and 2000 and $48,117 and $10,792
for the six months ended June 30, 1999 and 2000, respectively. Interest income
includes interest income from affiliates on long-term loans and for
reimbursement of interest expense on revolving credit agreements related to
short-term borrowings by such affiliates.
7. Income Taxes:
Income tax benefit for the three and six months ended June 30, 1999 and
2000 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.
9. Reclassifications:
Certain prior period amounts have been reclassified to conform with
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. In June 2000, SFAS No. 138 was issued which amends
the accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and certain hedging activities. Management of the Company has not
completed its evaluation of the impact of SFAS No. 133 on the Company's
consolidated financial statements. The Company will be required to adopt such
standards effective January 1, 2001.
11. Business Segment Information:
Refer to Part I, Item 2 of this Quarterly Report on Form 10-Q for
information regarding business segments as of December 31, 1999 and June 30,
2000 and for the three and six months ended June 30, 1999 and 2000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands)
Results of Operations
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Quarterly Report on 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 effects of future regulation, future capital
commitments and the effects of competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
expected results in the future from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These "forward looking
statements" can be identified by the use of forward-looking terminology such as
"believes", "expects," "may," "will," "should," "intends" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology, or
by discussions of strategy that involve risks and uncertainties. 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, reliance
on vendors, technological developments and changes in the competitive
environment in which the Company operates. Persons reading this Quarterly Report
on Form 10-Q are cautioned that forward-looking statements herein are only
predictions, that no assurance can be given that the future results will be
achieved, and that actual events or results may differ materially as a result of
the risks and uncertainties facing the Company. For further information
regarding these risks and uncertainties and their potential impact on the
Company, see the prospectus and most recent prospectus supplement filed under
Registration Statement No. 333-78027, under the caption "Risk Factors." The
Company does not undertake to update any forward-looking statements in this
report or with respect to matters described herein.
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 Adelphia Business Solutions" or "Cable and Other Segment")
and competitive local exchange carrier ("CLEC") telephony ("Adelphia Business
Solutions" or "CLEC Segment"). The balance sheet data as of December 31, 1999
and June 30, 2000, and the other data for the three and six months ended June
30, 1999 and 2000, of Adelphia Business Solutions presented below have been
derived from the consolidated financial statements of Adelphia Business
Solutions not included herein.
A majority owned subsidiary of the Company, Adelphia Business
Solutions, together with its subsidiaries owns CLEC networks and investments in
CLEC joint ventures and manages those networks and joint ventures. Adelphia
Business Solutions is an unrestricted subsidiary for purposes of the Company's
indentures. For further information regarding Adelphia Business Solutions, which
also files reports pursuant to the Securities Exchange Act of 1934, see Adelphia
Business Solutions' Form 10-Q for the quarterly period ended June 30, 2000.
<PAGE>
Summarized unaudited financial information of Adelphia Consolidated,
Adelphia Business Solutions and Adelphia, excluding Adelphia Business Solutions
is as follows:
<TABLE>
<CAPTION>
Balance Sheet Data: December 31, June 30,
1999 2000
--------------------- --------------------
Adelphia Consolidated
<S> <C> <C>
Total assets $ 17,267,500 $ 17,973,443
Total debt 9,291,732 9,978,775
Cash and cash equivalents 186,874 139,239
Restricted cash - 75,785
Investments (a) 308,342 356,187
Redeemable preferred stock 409,211 426,842
Convertible preferred stock (liquidation preference) 675,000 675,000
Adelphia Business Solutions
Total assets (b) $ 1,171,074 $ 1,548,888
Total debt 845,178 967,100
Cash and cash equivalents 2,133 720
Restricted cash - 75,785
Investments (a) 61,400 68,525
Redeemable preferred stock 260,848 278,393
Adelphia, excluding Adelphia Business Solutions
Total assets $ 16,096,426 $ 16,424,555
Total debt 8,446,554 9,011,675
Cash and cash equivalents 184,741 138,519
Investments (a) 246,942 287,662
Redeemable preferred stock 148,363 148,449
Convertible preferred stock (liquidation preference) 675,000 675,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Other Data: Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------------
1999 2000 1999 2000
-------------- ------------- --------------- ----------------
Adelphia Consolidated
<S> <C> <C> <C> <C>
Revenues $ 218,780 $ 704,125 $ 420,390 $ 1,376,844
Priority investment income from Olympus 12,000 - 24,000 -
Operating expenses (c) 134,251 431,374 250,657 841,758
Depreciation and amortization expense 63,736 210,327 120,551 410,806
Operating income 20,799 61,729 49,182 122,367
Interest expense - net (52,215) (206,978) (119,679) (405,370)
Preferred stock dividends (14,360) (23,315) (28,479) (46,357)
Capital expenditures 145,234 361,086 226,786 745,468
Cash paid for acquisitions 70,893 10,135 182,265 20,172
Cash used for investments 11,019 10,723 32,427 27,533
Adelphia Business Solutions
Revenues $ 34,215 $ 80,214 $ 55,653 $ 149,515
Operating expenses (c) 44,308 105,009 73,821 197,587
Depreciation and amortization expense 13,586 26,689 27,121 46,127
Operating loss (23,679) (51,484) (45,289) (94,199)
Interest expense - net (d) (4,246) (12,985) (14,953) (20,488)
Preferred stock dividends (7,860) (8,909) (15,479) (17,545)
Capital expenditures 92,147 123,191 131,831 290,900
Cash paid for acquisitions 36,518 - 126,268 -
Cash used for investments 6,100 5,750 24,672 7,125
Adelphia, excluding Adelphia Business Solutions
Revenues $ 184,571 $ 623,911 $ 364,737 $ 1,227,329
Priority investment income from Olympus 12,000 - 24,000 -
Operating expenses (c) 89,943 326,365 176,836 644,171
Depreciation and amortization expense 50,150 183,638 93,430 364,679
Operating income 44,478 113,213 94,471 216,566
Interest expense - net (e) (47,969) (193,993) (104,726) (384,882)
Preferred stock dividends (6,500) (14,406) (13,000) (28,812)
Capital expenditures 53,087 237,895 94,955 454,568
Cash paid for acquisitions 34,375 10,135 55,997 20,172
Cash used for investments 4,919 4,973 7,755 20,408
<FN>
(a) Represents total investments before cumulative equity in net losses.
(b) Amounts exclude receivables from Adelphia of $392,629 as of December 31, 1999.
(c) Amounts exclude depreciation, amortization and merger and integration costs.
(d) Amounts include interest income from Adelphia of $2,779, $1,259, $5,607 and $6,282 for the respective periods.
(e) Amounts include interest expense to Adelphia Business Solutions of $2,779, $1,259, $5,607 and $6,282 for the respective
periods.
</FN>
</TABLE>
<PAGE>
Adelphia earned substantially all of its revenues in the three and six
months ended June 30, 1999 and 2000 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, 2000 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.
Adelphia expects to report net losses for the next several years.
Adelphia completed numerous acquisitions during the year ended December
31, 1999. The Company completed the acquisition of Olympus Communications, L.P.
("Olympus") partnerships interests held by FPL Group, Inc. and the acquisitions
of FrontierVision Partners, L.P. ("FrontierVision"), Harron Communication Corp.,
and Arahova Communications, Inc. ("Arahova") (formerly Century Communications
Corp.). These acquisitions occurred on October 1, 1999 and are collectively
referred to as the Acquisitions. Reference is made to Note 1 of the consolidated
financial statements contained in Adelphia's Annual Report on Form 10-K for the
year ended December 31, 1999 for additional information regarding these
acquisitions.
The following tables set forth certain cable television system data at
the dates indicated for Company Owned and Managed Systems. The "Managed Systems"
are affiliated systems managed by Adelphia.
<TABLE>
<CAPTION>
June 30, Percent
----------------------------------- Increase/
1999 2000 Decrease
------------------ --------------- ----------------
Homes Passed by Cable
<S> <C> <C> <C>
Company Owned Systems 3,224,314 7,827,395 142.8%
Managed Systems 178,615 181,039 1.4%
------------------ ---------------
Total Systems 3,402,929 8,008,434 135.3%
================== ===============
Basic Subscribers
Company Owned Systems 2,269,329 5,018,068 121.1%
Managed Systems 134,264 134,121 (0.1%)
------------------ ---------------
Total Systems 2,403,593 5,152,189 114.4%
================== ===============
</TABLE>
Data for the Olympus systems (which became wholly owned and
consolidated on October 1, 1999) is included under Company Owned Systems for all
periods presented.
<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,
--------------------- ----------------------
1999 2000 1999 2000
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct operating and programming 33.2% 37.0% 33.3% 36.4%
Selling, general and administrative 28.2% 24.3% 26.3% 24.7%
Depreciation and amortization 29.1% 29.9% 28.7% 29.8%
Merger and integration costs - 0.1% - 0.1%
--------- --------- ---------- ----------
Operating income 9.5% 8.7% 11.7% 9.0%
========= ========= ========== ==========
</TABLE>
Cable and Other Segment
Revenues. The primary revenue sources reflected as a percentage of
total revenues were as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
1999 2000
----------- ----------
<S> <C> <C>
Cable service and equipment 80% 76%
Premium programming 10% 10%
Advertising sales and other services 10% 14%
</TABLE>
Revenues increased approximately 238.0% and 236.5% for the three and
six months ended June 30, 2000, respectively, compared with the same periods of
the prior year. The increases are attributable to the following:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
2000 2000
---------------- ----------------
<S> <C> <C>
Acquisitions 97% 95%
Basic subscriber growth 1% 1%
Cable rate increases 4% 7%
Premium programming (8%) (9%)
Advertising sales and other services 6% 6%
</TABLE>
During the previous twelve months, certain rate increases related to
cable services were implemented in the majority of the Company's systems.
Advertising revenues and revenues derived from other strategic service offerings
such as high-speed data services, long distance services and paging also had a
positive impact on revenues for the three and six months ended June 30, 2000.
Direct Operating and Programming Expenses. Direct operating and
programming expenses, which are mainly basic and premium programming costs and
technical expenses, increased 258.8% and 255.7% to $218,710 and $425,974 for the
<PAGE>
three and six months ended June 30, 2000, respectively, from $60,964 and
$119,755 for the same periods of 1999. Acquisitions accounted for substantially
all of the increase for the quarter ended June 30, 2000, while being partially
offset by operational efficiencies recognized in connection with the
acquisitions.
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 271.5% and
282.3% to $107,655 and $218,197 for the three and six months ended June 30,
2000, respectively, from $28,979 and $57,081 for the same periods of 1999.
Acquisitions accounted for 95.4% and 92.6% of the increase for the three and six
months ended June 30, 2000, respectively. The remaining increase was due
primarily to subscriber growth, new services, and an increase in administrative
employees due to the recently completed acquisitions.
Depreciation and Amortization. Depreciation and amortization increased
266.2% and 290.3% to $183,638 and $364,679 for the three and six months ended
June 30, 2000, respectively, from $50,150 and $93,430 for the same periods of
1999. Acquisitions accounted for substantially all of the increase for the
quarter ended June 30, 2000.
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 prior
to the consolidation of Olympus effective October 1, 1999.
Interest Expense - Net. Interest expense - net increased 304.4% and
267.5% to $193,993 and $384,882 for the three and six months ended June 30,
2000, respectively, from $47,969 and $104,726 for the same periods of 1999.
Acquisitions accounted for 99.7% and 92.0% of the increase for the three and six
months ended June 30, 2000, respectively. The remaining increase was primarily
due to an increase in average debt outstanding and higher interest rates.
Equity in Loss of Olympus and Other Joint Ventures. The equity in loss
of Olympus and other joint ventures represents primarily (i) the Company's
pro-rata share of Olympus' losses and the accretion requirements of Olympus' PLP
interests, and (ii) Adelphia's pro-rata share of its less than majority owned
partnerships' operating losses. Equity in loss of joint ventures decreased in
the three months ended June 30, 2000, compared to the same period in 1999,
primarily due to the consolidation of Olympus effective October 1, 1999.
Preferred Stock Dividends. Preferred stock dividends increased 121.6%
to $14,406 and $28,812 for the three and six months ended June 30, 2000,
respectively, from $6,500 and $13,000 for the same periods of 1999. The increase
is due to the dividends on the Series D convertible preferred stock issued in
April 1999.
Minority Interest in Net Losses of Subsidiaries. Minority interest in
net losses of subsidiaries increased 159.0% and 103.2% to $34,045 and $52,956
for the three and six months ended June 30, 2000, respectively, from $13,146 and
$26,060 for the same periods for 1999. The increase was primarily due to
increased net losses of less than wholly-owned subsidiaries attributable to
minority interests, offset partially by net income of certain less than
wholly-owned subsidiaries of the Acquisitions.
Gain on Asset Swap. On May 1, 2000, Adelphia swapped certain cable
systems for certain cable systems owned by AT&T. The result of this transaction
was a gain of $37,552 for the three and six months ended June 30, 2000.
<PAGE>
CLEC Segment
Revenues. Revenues increased 134% and 169% to $80,214 and $149,515 for
the three and six months ended June 30, 2000, respectively, from $34,215 and
$55,653 for the same periods in the prior year.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
2000 2000
------------------- ------------------
The change is attributable to the following:
<S> <C> <C>
Growth in original markets $ 27,198 $ 52,366
Acquisition of local partner interests 4,225 17,280
New markets 14,471 24,589
Management fees 105 (373)
</TABLE>
The primary sources of revenues, reflected as a percentage of total
revenues were as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------ -------------------------
1999 2000 1999 2000
------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Local service 68.0% 70.9% 66.5% 72.2%
Dedicated access 27.7% 9.9% 26.0% 11.2%
Management fees 3.0% 1.4% 4.7% 1.5%
Enhanced services 1.0% 9.7% 0.6% 7.6%
Long distance and other 0.3% 8.1% 2.2% 7.5%
</TABLE>
Direct Operating and Programming. Direct operating and programming
increased 257% and 274% to $41,661 and $75,393 for the three and six months
ended June 30, 2000, respectively, from $11,671 and $20,175 for the same periods
in the prior year.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
2000 2000
----------------- -----------------
The increase is attributable to the following:
<S> <C> <C>
Growth in original markets $ 9,801 $ 15,274
Acquisition of local partner interests 2,550 7,498
New markets 17,548 30,741
Network Operations Control Center ("NOCC") 91 1,705
</TABLE>
The increase in direct operating and programming expense was due to
start up costs in Adelphia Business Solutions' new markets as regional switches
and network rings were activated, combined with start up costs in Adelphia
Business Solutions' original markets associated with Adelphia Business
<PAGE>
Solutions' data and internet access products. The increased number and size of
the operations of the networks resulted in increased employee related costs,
equipment maintenance costs and expansion costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 94% and 128% to $63,348 and $122,194 for the
three and six months ended June 30, 2000, respectively, from $32,637 and $53,646
for the same periods in the prior year, primarily reflecting expansion of the
original and new markets.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
2000 2000
----------------- -----------------
The increase is attributable to the following:
<S> <C> <C>
Growth in original markets $ 12,635 $ 16,308
Acquisition of local partner interests 1,820 7,891
New markets 9,570 21,171
Sales and marketing activities 480 4,242
Corporate overhead charges 5,780 10,730
Bell Atlantic settlement charges - 6,981
Non-cash stock compensation 426 1,225
</TABLE>
Depreciation and Amortization. Depreciation and amortization expense
increased 96% and 70% to $26,689 and $46,127 during the three and six months
ended June 30, 2000, respectively, from $13,586 and $27,121 for the same periods
in the prior year primarily as a result of increased depreciation resulting from
the higher depreciable asset base at the NOCC and the networks, amortization of
deferred financing costs and the acquisition of local partner interests.
Interest Expense - Net. Interest expense - net increased 206% and 37%
to $12,985 and $20,488 during the three and six months ended June 30, 2000,
respectively, from $4,246 and $14,953 for the same period in the prior year. The
increase was primarily attributable to a decrease in interest income.
Equity in Net Loss of Joint Ventures. Equity in net loss of joint
ventures decreased 90% and 94% to $346 and $451 during the three and six months
ended June 30, 2000, respectively, from $3,291 and $7,094 for the same periods
in the prior year as a result of the consolidation of several joint ventures
resulting from the purchase of the local partners' interests, and the maturing
of the remaining joint venture networks.
The number of joint ventures paying management fees to Adelphia
Business Solutions decreased from seven at June 30, 1999 to four at June 30,
2000 due to Adelphia Business Solutions' increased ownership in several joint
ventures. These non-consolidated joint ventures and networks under construction
paid management and monitoring fees to Adelphia Business Solutions, which are
included in revenues, aggregating approximately $1,136 and $2,236 for the three
and six months ended June 30, 2000, as compared with $1,032 and $2,609 for the
same periods in the prior fiscal year. The nonconsolidated joint ventures' net
losses, including networks under construction, for the three months ended June
30, 1999 and 2000, aggregated approximately $2,491 and $564, respectively and
for the six months ended June 30, 1999 and 2000 aggregated approximately $4,712
and $1,200, respectively.
<PAGE>
Adelphia Business Solutions' Preferred Stock Dividends. Preferred stock
dividends increased by 13% to $8,909 and $17,545 for the three and six months
ended June 30, 2000 from $7,860 and $15,479 for the same periods in the prior
year. The increase was due to a higher outstanding preferred stock base
resulting from the payments of dividends in additional shares of preferred
stock.
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 affiliates and other
entities. These expenditures were funded through long-term borrowings, the sale
of common and preferred stock 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.
For the six months ended June 30, 1999, cash provided by operating
activities totaled $28,421 and for the six months ended June 30, 2000, cash used
for operating activities totaled $38,843; for the six months ended June 30, 1999
and 2000, cash used for investing activities totaled $1,038,390 and $940,634,
respectively and cash provided by financing activities totaled $1,414,026 and
$931,842, respectively. See Note 1 to the condensed consolidated financial
statements, in Part I, Item 1 for a summary of significant transactions
affecting liquidity and capital resources subsequent to December 31, 1999, which
is incorporated by reference herein.
Capital Expenditures
Cable and Other Segment
Capital expenditures for the six months ended June 30, 1999 and 2000
were $94,955 and $454,568, respectively. This increase was primarily due to
acquisitions and cable plant rebuilds and upgrades to expand services. The
Company expects that capital expenditures for the Cable and Other Segment for
the year ending December 31, 2000 will be in a range of approximately $700,000
to $900,000.
CLEC Segment
Capital expenditures for the six months ended June 30, 1999 and 2000
were $131,831 and $290,900, respectively. This increase was primarily due to
expenditures necessary to develop its markets, as well as the fiber purchases to
interconnect the networks. Adelphia Business Solutions estimates that a total of
approximately $350,000 will be required to fund Adelphia Business Solutions
capital expenditures, working capital requirements, operating losses and pro
rata investments in the joint ventures through the year ending December 31,
2000.
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 Adelphia Business
Solutions, Olympus, FrontierVision and Arahova, their own public debt and/or
equity. The Company generally has funded its acquisitions, working capital
requirements, capital expenditures and investments in affiliates and other
entities through long-term borrowings, primarily from banks and insurance
companies, 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
<PAGE>
companies by refinancing the principal with new loans or through the issuance of
parent and subsidiary 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 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, 2000, the Company's total outstanding debt aggregated
$9,978,775, which included $2,778,572 of parent debt, $967,100 of Adelphia
Business Solutions debt, $203,278 of Olympus public debt, $509,985 of
FrontierVision public debt, $1,869,970 of Arahova public debt and $3,649,870 of
other subsidiary debt. The Company also had total redeemable preferred stock of
$426,842 outstanding as of June 30, 2000. As of June 30, 2000, Adelphia's
subsidiaries had an aggregate of $2,396,752 in unused credit lines and cash and
cash equivalents, which includes $547,363 also available to affiliates, part of
which is subject to achieving certain levels of operating performance.
On April 14, 2000, Adelphia closed on a $2,250,000 bank credit facility
on behalf of certain subsidiaries and affiliates.. The credit facility consists
of a $1,500,000 8 3/4 year reducing revolving credit loan and a $750,000 9 year
term loan. Proceeds from this credit facility were used to complete the
July 5, 2000 acquisition of Prestige Communications of NC, Inc.
The Company's weighted average interest rate on notes payable to banks
and institutions was approximately 8.78% at June 30, 1999 compared to 8.37% at
June 30, 2000. Approximately 71% of the Company's total indebtedness was at
fixed interest rates as of June 30, 2000, after giving effect to certain
interest rate swaps, caps and collars.
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, 2000:
<TABLE>
<S> <C>
Six months ending December 31, 2000 $ 316,329
Year ending December 31, 2001 204,642
Year ending December 31, 2002 888,192
Year ending December 31, 2003 1,326,816
Year ending December 31, 2004 853,268
</TABLE>
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.
<PAGE>
The Company believes that cash and cash equivalents, internally
generated funds, borrowings under the existing credit facilities, and future
financing sources will be sufficient to meet its short-term and long-term
liquidity and capital requirements. Although in the past the Company has been
able to refinance its indebtedness or obtain new financing, there can be no
assurance that the Company will be able to do so in the future or that the terms
of such financings would be favorable.
Management believes that the telecommunications industry, including the
cable television and telephone industries, continues to be in a period of
consolidation characterized by mergers, joint ventures, acquisitions, sales of
all or part of cable or telephone companies or their assets, and other
partnering and investment transactions of various structures and sizes involving
cable or other telecommunications companies. The Company continues to evaluate
new opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity to
its existing regional markets or in locations that can serve as a basis for new
market areas. The Company, like other cable television companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore potential
transactions of various types with other cable and telecommunications companies.
However, no assurances can be given as to whether any such transaction may be
consummated or, if so, when, or that additional competition from this industry
consolidation will not have an adverse effect on the Company.
Regulatory and Competitive Matters
The cable television operations of the Company may be adversely
affected by changes and developments in governmental regulation, competitive
forces and technology. The cable television industry and the Company are subject
to extensive regulation at the federal, state and local levels. The 1992 Cable
Act significantly expanded the scope of regulation of certain subscriber rates
and a number of other matters in the cable industry, such as mandatory carriage
of local broadcast stations and retransmission consent, and increased the
administrative costs of complying with such regulations. The FCC 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 and certain cable programming services are set pursuant
to a benchmark formula. Alternatively, a cable operator may elect to use a
cost-of-service methodology to show that rates for basic and cable programming
services are reasonable. Refunds with interest will be required to be paid by
cable operators who are required to reduce regulated rates. The FCC has reserved
the right to reduce or increase the benchmarks it has established. The rate
regulations also limit increases in regulated rates to an inflation indexed
amount plus increases in certain costs such as taxes, franchise fees, costs
associated with specific franchise requirements and increased programming costs.
Cost-based adjustments to these capped rates can also be made in the event a
cable operator adds or deletes channels or completes a significant system
rebuild or upgrade. Because of the limitation on rate increases for regulated
services, future revenue growth from cable services will rely to a much greater
extent than has been true in the past on increased revenues from unregulated
services and new subscribers than from increases in previously unregulated
rates.
<PAGE>
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.
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. 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 direct broadcast satellite ("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. Congress passed the Satellite Home Viewer
Act in 1999 which allows DBS providers to begin offering local broadcast
channels. DBS companies have since added a limited number of local channels in
some regions, a trend that will continue, thus lessening the distinction between
cable television and DBS service. 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 June 30,
2000, the Company had interest rate swap agreements covering notional principal
of $90,000 that expire through 2008 and that fix the interest rate at an average
of 6.12%. 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 June 30, 2000, the Company had interest
rate swap agreements covering notional principal of $80,000 that expire through
2003 and that have a variable rate at an average of 6.74%. The Company enters
into interest rate cap agreements to reduce the risk of incurring higher
interest costs due to rising interest rates. As of June 30, 2000, the Company
had interest rate cap agreements covering a notional amount of $400,000, which
expire in 2002 and cap rates at an average rate of 7.25%. As of June 30, 2000,
the Company had interest rate collar agreements covering a notional amount of
$200,000, with $100,000 expiring in each of 2001 and 2002. The interest rate
collar agreements have average floor rates of 5.95% and 6.30% and average cap
rates of 5.95% and 6.30%, respectively. These agreements also have maximum cap
rates of 6.64% and minimum floor rates of 4.65% and 4.95%, respectively. The
Company does not enter into any interest rate swap, cap or collar 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, 2000.
<TABLE>
<CAPTION>
Expected Maturity
----------------------------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------------ ---------- ----------- ------------ ---------- ---------- ------------ -----------------
Debt and Redeemable
Preferred Stock:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate $ 282,375 $ 23,000 $ 545,000 $ 897,840 $ 531,847 $ 4,917,051 $ 7,197,113 $ 6,686,234
Average Interest Rate 9.87% 9.87% 9.88% 9.88% 9.87% 9.79%
Variable Rate 33,954 181,642 343,192 428,976 321,421 2,406,554 3,715,739 3,715,739
Average Interest Rate 8.39% 8.37% 8.38% 8.35% 8.37% 8.25%
Interest Rate Swaps,
Caps and Collars:
Variable to Fixed $ 15,000 $ - $ - $ - $ - $ 75,000 $ 90,000 $ 5,409
Average Pay Rate 6.12% - - - - 6.12%
Average Receive Rate 6.78% - - - - 7.29%
Fixed to Variable - - 35,000 45,000 - - 80,000 (2,299)
Average Pay Rate - - 6.74% 6.74% - -
Average Receive Rate - - 7.20% 7.21% - -
Interest Rate Caps - - 400,000 - - - 400,000 2,407
Average Cap Rate - - 7.25% - - -
Interest Rate Collars - 100,000 100,000 - - - 200,000 (35)
Maximum Cap Rates - 6.64% 6.64% - - -
Average Cap and Floor Rate - 5.95% 6.30% - - -
Minimum Floor Rate - 4.65% 4.95% - - -
</TABLE>
<PAGE>
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, 2000, plus the borrowing
margin in effect at June 30, 2000. 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, 2000.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On or about March 24, 2000, ML Media Partners, L.P. ("ML Media")
commenced an action by filing a Verified Complaint (the "Complaint") in the
Supreme Court of the State of New York, New York County, against Arahova
Communications, Inc. ("Arohova"), Century Communications Corp., a Texas
subsidiary of Arahova ("Century"), and Adelphia. In the nine count Complaint, ML
Media alleges that it entered into a joint venture agreement (the "Agreement")
with Century which, as subsequently modified, governed the ownership, operation
and disposition of cable television systems in Puerto Rico (the "Joint
Venture"). The Complaint alleges that Adelphia and its affiliates took over
Century's interest in the Joint Venture on or around October 1, 1999, and have,
according to the Complaint, breached their fiduciary obligations to the Joint
Venture and violated certain provisions of the Agreement. The Complaint further
alleges that ML Media gave Century notice that ML Media was exercising its
rights under the Agreement to require that Century elect to (A) purchase ML
Media's interest in the Joint Venture at an appraised fair value, or (B) seek to
sell the cable systems to one or more third parties. Century, according to the
Complaint, elected to pursue the sale of the cable systems and indicated that it
was evaluating whether it or an affiliate thereof would make an offer for the
cable systems. The Complaint alleges that Century or its affiliates' potential
participation in the sale process is improper. The Complaint asks for, among
other things, the dissolution of the Joint Venture and the appointment of a
receiver to effect a prompt sale of the Joint Venture. The parties completed
discovery in the action and each filed motions for partial summary judgment. On
July 10, 2000, Justice Gammerman granted ML Media's motion for partial summary
judgment on the fourth cause of action and declared that neither Century nor any
of its affiliates may bid on or attempt to purchase the assets and business of
the Joint Venture. Justice Gammerman also dismissed the fourth count of the
counterclaim and required Century to proceed diligently with ML Media in
locating one or more third parties to complete the sale and prohibited any
defendant from interfering with the sale. On July 26, 2000, the Justice also
ordered that the sale may be a sale of either the assets of the Joint Venture or
the partnership interests in the Joint Venture. The Justice did not address
other issues concerning the motion for summary judgment and did not schedule a
full hearing on the merits. On August 7, 2000, Arahova and the other defendants
filed a notice of appeal with respect to the above described orders and judgment
of the Court. The management of Adelphia and Arahova intend to vigorously defend
this action. Management believes that this matter will not have a material
adverse effect on the Company.
In November, 1999, Arahova, a subsidiary of Adelphia, has been sued in
a class-action case, Galley vs. American Telephone & Telegraph Corp. et al.,
where the plaintiffs allege, that by requiring customers to purchase the @Home
service, rather than offering the option of access alone, Arahova and the other
defendant MSO's are illegally "tying" internet content to internet access,
thereby violating both the federal antitrust laws and California unfair trade
practice statutes. The plaintiffs also allege that the defendants have entered
into an illegal conspiracy to require all MSO's providing, or desiring to
provide, the @Home service to enter into contracts precluding them from offering
any competing internet service. The plaintiffs have recently filed an amended
complaint alleging that the violations are national in scope (rather than merely
local). Arahova is vigorously defending this case. Due to the preliminary nature
of the litigation, the outcome cannot be predicted.
Adelphia and certain subsidiaries are defendants in several putative
subscriber class action suits in state courts in Pennsylvania and Mississippi
initiated during 1999. The suits all challenge the propriety of late fees
charged by the subsidiaries to customers who fail to pay for services in a
timely manner. The suits seek injunctive relief and various formulations of
damages under various claimed causes of action under various bodies of state
law. These actions are in various stages of defense and are being defended
vigorously. The outcome of these matters cannot be predicted at this time. In
<PAGE>
May 2000, Adelphia settled similar litigation in the state courts of Vermont.
The settlement of this matter did not have a material adverse effect.
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
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
27.01 Financial Data Schedule (supplied for the information of the
Commission).
(b) Reports on Form 8-K:
A Form 8-K was filed for the event dated June 13, 2000, which reported
information under item 5.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADELPHIA COMMUNICATIONS CORPORATION
(Registrant)
Date: August 14, 2000 By: /s/ Timothy J. Rigas
----------------------
Timothy J. Rigas
Executive Vice President
(authorized officer), Chief
Financial Officer, Chief
Accounting Officer and Treasurer
