<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
ADELPHIA COMMUNICATIONS CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
COLIN H. HIGGIN, ESQ.
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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Note
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION
One North Main Street
Coudersport, Pennsylvania 16915
----------------
Notice of Annual Meeting of Stockholders
to be held on July 31, 2000
----------------
To the Stockholders of
Adelphia Communications Corporation:
The Annual Meeting of Stockholders of Adelphia Communications Corporation
will be held at the Coudersport Theater, Main Street, Coudersport, Pennsylvania
on Monday, July 31, 2000 at 10:00 a.m., for the following purposes:
1. To elect one (1) Director by vote of the holders of Class A Common
Stock voting as a separate class.
2. To elect eight (8) Directors by vote of the holders of Class A Common
Stock and Class B Common Stock, voting together.
3. To consider and act upon such other matters as may properly come before
the meeting.
The Board of Directors has fixed the close of business on June 20, 2000 as
the record date for determination of stockholders entitled to notice of and to
vote at the Annual Meeting.
IF YOU ARE UNABLE TO ATTEND THE MEETING AND YOU WISH TO VOTE YOUR STOCK, IT
IS REQUESTED THAT YOU COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
AS PROMPTLY AS POSSIBLE IN THE ENCLOSED ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
John J. Rigas
Chairman and Chief Executive Officer
July 7, 2000
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION
One North Main Street
Coudersport, Pennsylvania 16915
----------------
PROXY STATEMENT FOR ANNUAL MEETING
OF STOCKHOLDERS
July 31, 2000
----------------
This proxy statement is being furnished to the stockholders of Adelphia
Communications Corporation, a Delaware corporation (the "Company"), in
connection with the solicitation by the Board of Directors of the Company of
proxies to be voted at the annual meeting of stockholders (the "Annual
Meeting") scheduled to be held on Monday, July 31, 2000 at 10:00 a.m., at the
Coudersport Theater, Main Street, Coudersport, Pennsylvania. The address of the
principal executive offices of the Company is One North Main Street,
Coudersport, Pennsylvania 16915, and the date this proxy statement was first
mailed to stockholders was on or about July 7, 2000. A copy of the Annual
Report to Stockholders for the year ended December 31, 1999 is being furnished
with this proxy statement.
Only stockholders of record as of the close of business on June 20, 2000 are
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof. The outstanding common stock of the Company on that date consisted of
112,176,301 shares of Class A Common Stock, $.01 par value ("Class A Common
Stock"), and 16,735,998 shares of Class B Common Stock, $.01 par value ("Class
B Common Stock"). With respect to the matters described in this proxy
statement, other than the election of the Class A director as described below,
the holders of Class A Common Stock and of Class B Common Stock vote together
as a single class, and each holder of Class A Common Stock is entitled to cast
one (1) vote for each share of Class A Common Stock standing in their name on
the books of the Company and each holder of Class B Common Stock is entitled to
cast ten (10) votes for each share of Class B Common Stock standing in their
name on the books of the Company. The presence, in person or by proxy, of
holders of a majority of the votes of all outstanding shares of the Company's
common stock entitled to vote is necessary to constitute a quorum at the Annual
Meeting. A majority of the votes of all outstanding shares of the Company's
common stock entitled to vote and represented at the Annual Meeting is required
for the adoption of the proposals described below, except that for proposal 1 a
majority of the votes of all outstanding shares of Class A Common Stock
entitled to vote and represented at the Annual Meeting is required.
All shares represented by valid proxies received by the Company prior to the
Annual Meeting will be voted at the Annual Meeting as specified in the proxy,
unless such proxies previously have been revoked. If no specification is made,
the shares will be voted FOR the election of each of the Board's nominees to
the Board of Directors. Unless otherwise indicated by the stockholder, the
proxy card also confers discretionary authority on the Board-appointed proxies
to vote the shares represented by the proxy on any matter that is properly
presented for action at the Annual Meeting. A stockholder giving a proxy has
the power to revoke it any time prior to its exercise by delivering to the
Secretary of the Company a written revocation or a duly executed proxy bearing
a later date, or by attendance at the meeting and voting his shares in person.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining whether a quorum is present. Abstentions will count as
shares entitled to vote and represented at the Annual Meeting and not voting in
favor of the proposals. Broker non-votes will not count as shares entitled to
vote and represented at the Annual Meeting and will not be included in
calculating the number of votes necessary for approval of the proposals
described below.
1
<PAGE>
PROPOSALS 1 AND 2
ELECTION OF DIRECTORS
Description of Board of Directors
The Certificate of Incorporation of the Company provides for the Board of
Directors to be elected as follows: a majority of the votes cast by the holders
of Class A Common Stock, voting as a separate class, are entitled to elect one
(1) director; and a majority of the votes cast by the holders of Class A Common
Stock and the holders of Class B Common Stock, voting together as a single
class, are entitled to elect the remaining directors, with each share of Class
A Common Stock entitled to one (1) vote and each share of Class B Common Stock
entitled to ten (10) votes. Stockholders of the Company are not entitled to
cumulate their votes in the election of directors.
The Bylaws of the Company provide that the Board of Directors shall
establish the number of directors, which shall not be less than five (5) nor
more than twenty-five (25). The resolutions of the Board of Directors currently
set the size of the Board at ten (10) directors, consisting of nine (9) active
directors, nine (9) of whom are also nominees for director and one (1) vacancy.
The vacancy was created as a result of the death of Perry S. Patterson, a
director of Adelphia since September 9, 1986. Mr. Patterson passed away on May
8, 2000. The Board of Directors elected not to appoint Mr. Patterson's
successor and the Nominating Committee has not selected an individual to fill
that vacancy. The Board of Directors has set the size of the Board to be nine
(9) directors at the time of the Annual Meeting.
Each director is to hold office until the next annual meeting of
stockholders and until his successor is duly elected and qualified, subject to
the right of the stockholders to remove any director as provided in the Bylaws.
Any vacancy in the office of a director elected by the holders of Class A
Common Stock voting as a separate class may be filled by such holders voting as
a separate class, and any vacancy in the office of a director elected by the
holders of Class A Common Stock and the holders of Class B Common Stock voting
as a single class may be filled by such holders voting as a single class. In
the absence of a stockholder vote, a vacancy in the office of a director
elected by the holders of Class A Common Stock voting as a separate class or by
the holders of Class A Common Stock and the holders of Class B Common Stock
voting as a single class, as the case may be, may be filled by the remaining
directors then in office, even if less than a quorum, or by the sole remaining
director. Any director elected by the Board of Directors to fill a vacancy
shall serve until the next annual meeting of stockholders and until his
successor has been duly elected and qualified. If the Board of Directors
increases the number of directors, any vacancy so created may be filled by the
Board of Directors.
The persons named as proxies in the enclosed form of proxy were selected by
the Board of Directors and have advised the Board of Directors that, unless
authority is withheld, they intend to vote the shares represented by them at
the Annual Meeting for the election of Pete J. Metros, on behalf of the Class A
Common Stockholders, and for the election of John J. Rigas, Michael J. Rigas,
Timothy J. Rigas, James P. Rigas, Dennis P. Coyle, Leslie J. Gelber, Peter L.
Venetis and Erland E. Kailbourne, on behalf of all of the common stockholders
of the Company. All nominees except Mr. Coyle, Mr. Gelber, Mr. Kailbourne and
Mr. Venetis were first elected or appointed as directors of the Company in
1986. Mr. Coyle was first elected as a director of the Company in 1995. Mr.
Gelber, Mr. Venetis and Mr. Kailbourne were first elected in 1999.
The Board of Directors knows of no reason why any nominee for director would
be unable to serve as director. If at the time of the Annual Meeting any of the
named nominees are unable or unwilling to serve as directors of the Company,
the persons named in the proxy intend to vote for such substitutes as may be
nominated by the Board of Directors.
2
<PAGE>
The following sets forth certain information concerning each nominee for
election as a director of the Company. All of the current directors of the
Company are nominees for reelection as directors.
Proposal 1--Nominee for Election by Holders of Class A Common Stock
Pete J. Metros
Age 60
Pete J. Metros became a director of Adelphia on November 4, 1986. Mr. Metros
has been President and a member of the Board of Directors of Rapistan Demag
Corporation, a subsidiary of Mannesmann AG, since December 1991. From August
1987 to December 1991, he was President of Rapistan Corp., the predecessor of
Rapistan Demag Corporation, and of Truck Products Corp., both of which were
major subsidiaries of Lear Siegler Holdings Corp. From 1980 to August 1987, Mr.
Metros was President of the Steam Turbine, Motor & Generator Division of
Dresser-Rand Company. From 1964 to 1980, he held various positions at the
General Electric Company, the last of which was Manager Manufacturing for the
Large Gas Turbine Division. Mr. Metros is also on the Board of Directors of
Adelphia Business Solutions, Inc. ("Adelphia Business Solutions") and Borroughs
Corporation of Kalamazoo, Michigan. Mr. Metros received a BS degree from the
Georgia Institute of Technology in 1962.
Proposal 2--Nominees for Election by Holders of Class A Common Stock and Class
B Common Stock
John J. Rigas
Age 75
John J. Rigas is the founder, Chairman, President and Chief Executive
Officer of Adelphia and is President of its subsidiaries. He is also Chairman
and a director of Adelphia Business Solutions. Mr. Rigas has served as
President or general partner of most of the constituent entities which became
wholly owned subsidiaries of Adelphia upon its formation in 1986, as well as
the cable television operating companies acquired by the Company which were
wholly or partially owned by members of the John J. Rigas family or entities
controlled by them ("the Rigas Family"). Mr. Rigas has owned and operated cable
television systems since 1952. Among business and community service activities,
Mr. Rigas is Chairman of the Board of Directors of Citizens Bancorp., Inc.,
Coudersport, Pennsylvania, and a member of the Board of Directors of Charles
Cole Memorial Hospital. He is a director of the National Cable Television
Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the Board of Directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company, and is the father-in-law of Peter Venetis who also currently
serves as a director of the Company.
Michael J. Rigas
Age 46
Michael J. Rigas is Executive Vice President, Operations and Secretary of
Adelphia and is a Vice President of its subsidiaries. He is also Vice Chairman,
Secretary and a director of Adelphia Business Solutions. Since 1981, Mr. Rigas
has served as a Senior Vice President, Vice President, general partner or other
officer of the constituent entities which became wholly owned subsidiaries of
Adelphia upon its formation in 1986, as well as the cable television operating
companies acquired by the Company which were wholly or partially owned by
members of the Rigas Family. From 1979 to 1981, he worked for Webster,
Chamberlain & Bean, a Washington, D.C. law firm. Mr. Rigas graduated from
Harvard University (magna cum laude) in 1976 and received his Juris Doctor
degree from Harvard Law School in 1979.
3
<PAGE>
Timothy J. Rigas
Age 44
Timothy J. Rigas is Executive Vice President, Chief Financial Officer, Chief
Accounting Officer and Treasurer of Adelphia and its subsidiaries. He is also
Vice Chairman, Chief Financial Officer, Treasurer and a director of Adelphia
Business Solutions. Since 1979, Mr. Rigas has served as Senior Vice President,
Vice President, general partner or other officer of the constituent entities
which became wholly owned subsidiaries of Adelphia upon its formation in 1986,
as well as the cable television operating companies acquired by the Company
which were wholly or partially owned by members of the Rigas Family. Mr. Rigas
graduated from the University of Pennsylvania, Wharton School, with a B.S.
degree in Economics (cum laude) in 1978.
James P. Rigas
Age 42
James P. Rigas is Executive Vice President, Strategic Planning of Adelphia
and is a Vice President of its subsidiaries. He also serves as Vice Chairman,
President, Chief Executive Officer, Chief Operating Officer and a director of
Adelphia Business Solutions. Since February 1986, Mr. Rigas has served as a
Senior Vice President, Vice President or other officer of the constituent
entities which became wholly owned subsidiaries of Adelphia upon its formation
in 1986, as well as the cable television operating companies acquired by the
Company which were wholly or partially owned by members of the Rigas Family.
Among his business activities, Mr. Rigas is a member of the Board of Directors
of Cable Labs. Mr. Rigas graduated from Harvard University (magna cum laude) in
1980 and received a Juris Doctor degree and an M.A. degree in Economics from
Stanford University in 1984. From June 1984 to February 1986, he was a
consultant with Bain & Co., a management consulting firm.
Dennis P. Coyle
Age 61
Dennis P. Coyle became a director of the Company on September 26, 1995. Mr
Coyle is General Counsel and Secretary of FPL Group, Inc. and Florida Power &
Light Company. Mr. Coyle has held the positions of General Counsel of these
companies since 1989 and Secretary since 1991. He is also a director of Florida
Power & Light Company. Mr. Coyle graduated from Dartmouth College in 1960 and
received his law degree from Columbia University in 1964.
Leslie J. Gelber
Age 44
Leslie J. Gelber became a director of the Company on October 25, 1999. Mr.
Gelber has been President and Chief Operating Officer of Caithness Corporation
since January 1, 1999. Prior to this position, Mr. Gelber was President of
Cogen Technologies, Inc. from July 1998 until December 1998. From 1993 until
July 1998, Mr. Gelber was the President of ESI Energy, Inc., a former
subsidiary of FPL Group, Inc. Prior to joining ESI, Mr. Gelber was the Director
of Corporate Development for FPL Group and was Chairman of FPL Group's cable
television subsidiary and President of its information services subsidiary. Mr.
Gelber received a B.A. degree from Alfred University in 1977 and a Master's
degree in business administration from the University of Miami in 1978.
Peter L. Venetis
Age 42
Peter L. Venetis became a director of the Company on October 25, 1999. Mr.
Venetis currently is a private investor. From 1992 until March 31, 2000, Mr.
Venetis was the President and Chief Executive Officer of the
4
<PAGE>
Atlantic Bank of New York. Prior to his position at Atlantic Bank, he was a
Director in the Leveraged Finance Group at Salomon Brothers, Inc. in New York
from 1986 to 1992. Mr. Venetis also serves as a member of Atlantic Bank's Board
of Directors, as a member of the Board of Directors of Adelphia Business
Solutions, as a member of the Board of Directors of NBG International and as a
Trustee of the Churchill School and Center in Manhattan. Mr. Venetis graduated
from Columbia University (cum laude) in 1979 and received his MBA in Finance
and International Business from the Columbia University Graduate School of
Business in 1981.
Erland E. Kailbourne
Age 58
Erland E. Kailbourne became a director of the Company on October 25, 1999.
Mr. Kailbourne is the retired Chairman and Chief Executive Officer of Fleet
National Bank. He served with the Fleet organization or its predecessors for 37
years prior to his retirement on December 31, 1998. Mr. Kailbourne is currently
Vice Chairman of the State University of New York Board of Trustees, Chairman
of the Jon R. Oishei Foundation, a director of the New York ISO Utilities
Board, a director of Albany International Corporation, Bush Industries, Inc.
Jaran Aerospace Corporation, Rand Capital Corporation and Statewide Zone
Capital Corporation and is a member of the Trooper Foundation. He is a past
director of the New York Business Development Corporation, the Business Council
of New York State, Inc., Fleet National Bank, Security New York State Corp.,
Fleet Trust Company, Robert Morris Associates, the Buffalo and Rochester
Chambers of Commerce, the SUNY Albany Foundation, the SUNY Buffalo Foundation,
WXXI-Public Television, WNED-Public Television, WMHT-Public Television and a
member of the Advisory Board of Chautauqua Airlines. Mr. Kailbourne graduated
with a degree in business administration from Alfred State College in 1961.
Audit, Compensation and Nominating Committees and Meetings of the Board of
Directors
The Board of Directors has a Compensation Committee, which as of December
31, 1999 consisted of Perry S. Patterson and Pete J. Metros. The Compensation
Committee reviews and has authority to approve the compensation of the key
officers and employees of the Company. The Compensation Committee met once
during the year ended December 31, 1999. The Board of Directors also has an
Audit Committee, which as of December 31, 1999 was comprised of Perry S.
Patterson, Pete J. Metros and Timothy J. Rigas. The Audit Committee is
responsible for monitoring the financial reporting of the Company on behalf of
the Board of Directors and the investing public, the approval of the selection
of the Company's independent auditors, the review of the scope and results of
the annual audit and determining the objectivity and independence of the
Company's auditors. The Audit Committee met once to review the Company's
financial condition and results of operations for the year ended December 31,
1999. The Board of Directors also has a Nominating Committee, comprised of John
J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P. Rigas, which is
responsible for selecting the candidates to be nominated to the Board of
Directors of the Company. The Nominating Committee met once during the year
ended December 31, 1999. The Board of Directors met or acted by written consent
in lieu of meeting 18 times during the year ended December 31, 1999. Each
director attended at least 75% of the meetings of the Board of Directors and
the respective committees of which each is a member.
Recommendation of the Board of Directors
The Board of Directors of the Company recommends a vote FOR each of the
nominees named above for election as directors.
5
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the Company's twelve months
ended December 31, 1999 and 1998, nine months ended December 31, 1998 and the
fiscal year ended March 31, 1998 to the Company's Chief Executive Officer and
the four most highly compensated executive officers whose compensation exceeded
$100,000 in salary and bonus during the twelve months ended December 31, 1999:
Annual Compensation
<TABLE>
<CAPTION>
Long-Term
Compensation
---------------------
Compensation($) Restricted Securities
--------------- Stock Underlying All Other
Name and Principal Awards (d) Options Compensation
Position Period Ended (a) Salary Bonus ($) (d) (#) (b)(c) ($)
------------------ --------------------- --------- ----- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John J. Rigas........... 12 months ended 12/99 1,354,953 -- 1,575,000 100,000 461,940
Chairman, President and 12 months ended 12/98 1,367,399 -- -- -- 461,061
Chief Executive Officer 9 months ended 12/98 1,018,789 -- -- -- 200,750
12 months ended 3/98 1,271,939 -- -- -- 461,378
Michael J. Rigas........ 12 months ended 12/99 223,856 -- 1,575,000 100,000 10,950
Executive Vice
President, 12 months ended 12/98 229,866 -- -- -- 10,950
Operations and Secretary 9 months ended 12/98 171,484 -- -- -- 10,950
12 months ended 3/98 213,011 -- -- -- 10,950
Timothy J. Rigas........ 12 months ended 12/99 223,856 -- 1,575,000 100,000 10,950
Executive Vice
President, Chief 12 months ended 12/98 229,866 -- -- -- 10,950
Financial Officer, Chief 9 months ended 12/98 171,484 -- -- -- 10,950
Accounting Officer and
Treasurer 12 months ended 3/98 213,089 -- -- -- 10,950
James P. Rigas.......... 12 months ended 12/99 223,856 -- 1,575,000 100,000 11,669
Executive Vice
President, 12 months ended 12/98 229,385 -- -- -- 11,431
Strategic Planning 9 months ended 12/98 171,003 -- -- -- 11,431
12 months ended 3/98 213,011 -- -- -- 11,410
Daniel R. Milliard (e).. 12 months ended 12/99 235,364 -- -- 81,250 5,340
Senior Vice President
and 12 months ended 12/98 238,191 -- 760,500 -- 5,340
Secretary 9 months ended 12/98 176,438 -- 760,500 -- 5,340
12 months ended 3/98 229,810 -- 27,000 -- 5,340
</TABLE>
--------
(a) On March 30, 1999, the Company changed its fiscal year end from March 31
to December 31. The twelve months ended December 31, 1998 includes three
months of compensation from the fiscal year ended March 31, 1998.
(b) The twelve months ended December 31, 1999 and 1998, nine months ended
December 31, 1998 and fiscal year ended March 31, 1998 amounts include:
(i) life insurance premiums paid during each respective period by the
Company under employment agreements with John J. Rigas, Michael J. Rigas,
Timothy J. Rigas, James P. Rigas and Daniel R. Milliard, in premium
payment amounts of $200,000, $10,200, $10,200, $10,919 and $4,590,
respectively, during the twelve months ended December 31, 1999, $200,000,
$10,200, $10,200, $10,681 and $4,590, respectively, during the nine and
twelve months ended December 31, 1998, $200,000, $10,200, $10,200, $10,660
and $4,590, respectively, during the fiscal year ended March 31, 1998 on
policies owned by the respective named executive officers; (ii) $216,270,
$227,805, $0 and $230,746 for John J. Rigas which represents the dollar
value of the benefit of the whole-life portion of the premiums paid by the
Company during the twelve months ended December 31, 1999 and 1998,
respectively, the nine months ended December 31, 1999 and the fiscal year
ended March 31, 1998,
6
<PAGE>
respectively, pursuant to a split-dollar life insurance arrangement
projected on an actuarial basis; (iii) $44,920, $32,506, $0 and $29,882
for John J. Rigas which represents payments by the Company during the
twelve months ended December 31, 1999 and 1998, respectively, the nine
months ended December 31, 1998 and the fiscal year ended March 31, 1998,
respectively, pursuant to a split-dollar life insurance arrangement that
is attributable to term life insurance coverage; and (iv) $750 in Company
matching contributions for each executive officer under the Company's
401(k) savings plan for the twelve months ended December 31, 1999 and
1998, the nine months ended December 31, 1998 and the fiscal year ended
March 31, 1998, respectively. The amounts shown above do not include
transactions between the Company and certain executive officers or certain
entities which are privately owned in whole or in part by the executive
officers named in the table. See "Certain Transactions."
In accordance with an agreement related to the split-dollar life insurance
arrangement referred to above, the Company will be reimbursed for all
premiums paid related to such arrangement upon the earlier of the death of
both the insured and his spouse or termination of the insurance policies
related to such arrangement.
(c) Does not include the value of certain non-cash compensation to each
respective named individual which did not exceed the lesser of $50,000 or
10% of such individual's total annual salary shown in the table.
(d) The respective amounts set forth represent restrictive stock awards of
Adelphia Business Solutions Class A common stock, and stock options to
purchase Adelphia Business Solutions Class A common stock, which were
granted to the named executive officers by Adelphia Business Solutions
under its 1996 Long-Term Incentive Compensation Plan (the "1996 Plan").
(e) Mr. Milliard served in the indicated positions for Adelphia, and as
President, Vice Chairman and Secretary of Adelphia Business Solutions
pursuant to an employment agreement with Adelphia Business Solutions,
until September 1999 when he resigned his positions with both companies.
Amounts shown for Mr. Milliard represent amounts paid under his employment
agreement, including (i) restricted stock bonus awards under the 1996 Plan
of 58,500 and 58,500 shares of Adelphia Business Solutions Class A common
stock which had a value of approximately $27,000 and $760,500 as of April
1, 1997 and April 1, 1998 (the dates of grant), respectively, and (ii) an
option to purchase 81,250 shares of Adelphia Business Solutions Class A
common stock granted April 1, 1999. The 117,000 restricted stock award
shares are not subject to vesting and will fully participate in dividends
and distributions.
All of the executive officers are eligible to receive stock options or stock
bonuses of Class A common stock under the Company's 1998 Long-Term Incentive
Compensation Plan (the "1998 Plan"), to be awarded or granted at the discretion
of the Plan Administrator (as defined therein), subject to certain limitations
on the number of shares that may be awarded to each executive officer under the
1998 Plan. No awards were made to executive officers under the 1998 Plan during
the twelve months ended December 31, 1999.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Number of
Securities
Underlying % of Total Grant Date
Options Options Exercise or Present
Granted(1) Granted in Base Price Expiration Value(2)
Name (#) Fiscal Year ($/share) Date ($)
---- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
John J. Rigas......... 100,000 16.7% 16.00 8/9/2009 809,000
Michael J. Rigas...... 100,000 16.7% 16.00 8/9/2009 809,000
Timothy J. Rigas...... 100,000 16.7% 16.00 8/9/2009 809,000
James P. Rigas........ 100,000 16.7% 16.00 8/9/2009 809,000
Daniel R. Milliard.... 81,250 13.6% 12.125 9/20/2000 891,313
</TABLE>
--------
(1) All options granted were with respect to the Class A common stock of
Adelphia Business Solutions, with an exercise price equal to the fair
market value of such stock on the date of grant. These options, other
7
<PAGE>
than those for Mr. Millard, all vest in three equal, annual amounts on the
third, fourth and fifth anniversaries of the date of grant.
(2) The grant date present value of each option was calculated using the
Black-Scholes option pricing model using the following assumptions:
expected dividend yield--0%; risk free interest rate--6.93%; and expected
volatility--50%. The expected life used in the calculation of the Black-
Scholes option pricing model for the options relating to John J. Rigas,
Michael J. Rigas, Timothy J. Rigas, James P. Rigas and Daniel R. Milliard
were as follows: 10 years, 10 years, 10 years, 10 years and 1.47 years,
respectively.
Aggregate Option Exercises In Last Fiscal Year
and December 31, 1999 Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-The-Money
Unexercised Options at Options at
December 31, 1999 December 31, 1999
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable(#) (1) Unexercisable($) (1)
---- --------------- ------------ ---------------------- --------------------
<S> <C> <C> <C> <C>
John J. Rigas........... 0 0 0/100,000 0/3,200,000
Michael J. Rigas........ 0 0 0/100,000 0/3,200,000
Timothy J. Rigas........ 0 0 0/100,000 0/3,200,000
James P. Rigas.......... 0 0 0/100,000 0/3,200,000
Daniel R. Milliard...... 0 0 81,250/0 2,914,843/0
</TABLE>
--------
(1) All options granted were with respect to the Class A common stock of
Adelphia Business Solutions, with an exercise price equal to the fair
market value of such stock on the date of grant. These options, other than
those for Mr. Milliard, all vest in three equal, annual amounts on the
third, fourth and fifth anniversaries of the date of grant.
Employment Contracts and Termination of Employment
During the year ended December 31, 1999, each of the named executive
officers (except for Mr. Milliard) had an employment agreement with the Company
which is automatically renewable each year unless one party gives the other
prior notice and which provides among other things for compensation review by
the Compensation Committee, the insurance premium payments listed in note
(a)(i) to the Summary Compensation Table above, and benefits. In addition,
under such employment agreements, upon termination of such employment for any
reason other than "for cause," each of the executive officers will be entitled
to receive severance pay equal to three months of his salary plus the amount of
insurance premiums payable under such officer's employment agreement which, as
of January 1, 2000, in the aggregate in the case of John J. Rigas would be
approximately $334,137.
The Company pays the annual premiums related to a split-dollar life
insurance arrangement for joint and survivor life insurance coverage for John
J. Rigas and his spouse. Upon the earlier of the death of Mr. Rigas and the
death of his spouse or the termination of the arrangement, the Company will
recover all of the premiums previously paid by the Company. The compensation
related to such arrangement is derived as described in notes (b)(ii) and (iii)
to the Summary Compensation Table above.
Mr. Milliard served as President and Vice Chairman of Adelphia Business
Solutions. Mr. Milliard's employment agreement with Adelphia Business Solutions
provided for base salary, annual cash bonuses based on achievement, stock
options and stock bonuses, certain employee benefits and certain change-in-
control and other provisions, and was set to expire on March 31, 2001. Mr.
Milliard resigned as senior vice president and secretary of the Company and as
president and secretary of Adelphia Business Solutions effective as of
8
<PAGE>
September 20, 1999 although he continued to serve as a director of both
companies until the 1999 annual stockholders meeting on October 25, 1999. Mr.
Milliard will continue to receive payments under his employment agreement
through March 31, 2001 at the rate of his base salary at the time of his
resignation, which will total approximately $282,000 from January 1, 2000
through March 31, 2001, and under his employment agreement is to receive an
option to purchase 81,250 shares of Adelphia Business Solutions Class A common
stock at fair market value on April 1, 2000. Certain other matters under Mr.
Milliard's employment agreement remain under discussion and negotiation by Mr.
Milliard and Adelphia Business Solutions.
Board of Directors Compensation
Directors who are not also employees of the Company each receive
compensation from the Company for services as a director at a rate of $750 plus
reimbursement of expenses for each Board of Directors and committee meeting
attended. Directors who are employees of the Company do not receive any
compensation for services as a director or as a member of a committee of the
Board of Directors.
Audit Committee Charter
On June 12, 2000, the Board of Directors of the Company adopted a written
charter for the Audit Committee of the Board.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors addresses issues
relating to the compensation of the Company's executive officers. During the
year ended December 31, 1999, the Compensation Committee was composed of two
independent, non-employee directors, Pete J. Metros and Perry S. Patterson.
Currently the Compensation Committee consists only of Mr. Metros.
The Compensation Committee recognizes that the compensation of executive
officers should be established at levels which are consistent with the
Company's objectives and achievements. However, no part of executive
compensation is strictly tied to statistical operating performance criteria.
Each of the executive officers of the Company, including the Chief Executive
Officer, entered into an employment agreement with the Company in July of 1986,
which fixed the initial annual base salary of each executive and provided the
Compensation Committee with the ability to increase the base salary as the
Compensation Committee deems appropriate to adequately reflect the scope and
success of the Company's operations, as well as to reflect increases in the
Consumer Price Index. The agreements also provide for bonus compensation in
amounts to be determined by the Compensation Committee from time to time, and
for certain de minimis fringe benefits. The agreements are renewable and have
been renewed at the end of each year, except in the case of Mr. Milliard, whose
agreement with the Company was terminated when he entered into a new employment
agreement with Adelphia Business Solutions, a majority owned subsidiary of the
Company of which Mr. Milliard was President, until his resignation from both
companies in September 1999.
With respect to compensation of executive officers other than the Chief
Executive Officer (the "Principal Executives"), the Compensation Committee
receives and accords significant weight to the input of the Chief Executive
Officer. Based on a review of public filings by other publicly-held cable
system operators and other independent compensation survey data, the
Compensation Committee believes that the annual base salaries and bonuses of
the Company's Principal Executives historically have been materially lower than
the annual base salaries and bonuses paid to corresponding Principal Executives
of most other publicly-held cable system operators and other telecommunications
firms, and remain relatively constant compared to increases made in the annual
base salaries of Principal Executives of such other corporations over the past
five years. The Compensation Committee believes that the annual base salaries
and overall compensation packages of the Principal Executives continue to be
set materially lower than those paid to corresponding Principal Executives of
other publicly-held cable system operators and telecommunications firms.
9
<PAGE>
The Compensation Committee has recognized the success of the Principal
Executives in accomplishing the Company's various strategic objectives. During
1999, the Company made several significant and strategic acquisitions of
existing cable systems and other telecommunications facilities resulting in
increased operating efficiencies, increased cash flow and retaining the ability
to compete in an increasingly consolidating industry. The Company has also
continued to refinance its shorter-term debt at the level of the operating
subsidiaries with longer-term fixed rate debt and new equity infusions at the
parent Company level, and with new revolving credit facilities and public fixed
rate debt at the subsidiary level. These actions extend the maturities of the
Company's long-term debt and increase the Company's overall longer-term
liquidity and flexibility to obtain financing, which in turn will assist the
Company to meet the challenges of achieving growth while facing increased
competition and regulation within the telecommunications industry. In addition,
the Company has continued to develop and expand its other telecommunications
product and service offerings, such as competitive local exchange services,
residential telephone services, Internet and cable data services. The Company
has also continued to focus its efforts on other methods of increasing cash
flow and on providing superior customer service while realizing operating
efficiencies and cost-savings. Based upon its evaluation of these and other
relevant factors, the Compensation Committee is satisfied that the Principal
Executives have contributed positively to the Company's long-term financial
performance, and the Compensation Committee, in consultation with the Chief
Executive Officer of the Company, has set compensation under the employment
agreements accordingly.
The annual base salary of John J. Rigas, the Chief Executive Officer, is
determined by the Compensation Committee in accordance with Mr. Rigas's
employment agreement. Over the past several years, the Compensation Committee
has recognized Mr. Rigas's success in achieving the strategic objectives
mentioned above with respect to the Principal Executives, and has also
recognized Mr. Rigas's leadership and vision in formulating strategies for
responding to the challenges of increased regulation and increasing
competition, and for positioning the Company for growth in a regulated
environment. Additionally, the Compensation Committee recognizes Mr. Rigas's
crucial role in the Company's significant acquisitions. Based on compensation
data for other companies, the Compensation Committee believes that Mr. Rigas's
annual base salary and overall compensation package is lower than the
compensation packages (including salary, bonus, options and deferred
compensation) paid to chief executive officers of many other publicly-held
cable system operators and other telecommunications firms.
To date, the Company has not granted bonuses to its Chief Executive Officer
or its Principal Executives (with the exclusion of the bonuses paid to Mr.
Milliard by Adelphia Business Solutions), but may in its discretion grant
bonuses from time to time as it deems appropriate. Stock option awards and
restricted stock grants were separately awarded during 1999 to the Chief
Executive Officer and the Principal Executives by the Compensation Committee
for Adelphia Business Solutions, Inc.
COMPENSATION COMMITTEE
Pete J. Metros, Chairman
Compensation Committee Interlocks and Insider Participation
As of December 31, 1999, Perry S. Patterson and Pete J. Metros served as
members of the Compensation Committee of the Board of Directors. Neither Mr.
Patterson nor Mr. Metros is or has been an officer or employee of the Company.
Currently the Compensation Committee consists solely of Mr. Metros.
10
<PAGE>
Stock Performance Graph
The following graph compares the percentage change for the periods
presented, in the cumulative total stockholder return on the weighted average
of the Company's Class A Common Stock ("Adelphia Class A Common Stock") during
the four years ended March 31, 1998, the nine months ended December 31, 1998
and the year ended December 31, 1999 with the cumulative total return on the
Standard & Poor's 500 Stock Index, and with a selected peer group of four
companies engaged in the cable communications industry (the "Peer Group"):
Cablevision Systems Corporation (Class A); Comcast Corporation (Class A);
Charter Communications Inc.; and Cox Communications Inc. (Class A). The returns
of each component issuer in the foregoing peer group have been weighted
according to the respective issuer's market capitalization. The comparison
assumes $100 was invested on March 31, 1994 in the Company's Class A common
stock and in each of the foregoing indices, and also assumes reinvestment of
dividends. The points marked on the horizontal axis correspond to March 31 of
each year and December 31, 1998 and 1999.
Comparison of 69 Month Cumulative Total Return*
Among Adelphia Communications Corporation,
The S&P 500 Index and a Peer Group**
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG ADELPHIA COMMUNICATIONS, PEER GROUP INDEX AND S&P 500 INDEX
<TABLE>
<CAPTION>
Measurement period Adelphia Peer Group S&P 500
(Fiscal year Covered) Communications Index Index
<S> <C> <C> <C>
Measurement PT_
03/94 $100.00 $100.00 $100.00
FYE 03/95 $ 76.92 $ 91.58 $115.59
FYE 03/96 $ 53.85 $115.08 $152.67
FYE 03/97 $ 41.35 $103.55 $182.94
FYE 03/98 $227.88 $226.92 $270.75
FYE 12/98 $351.92 $370.03 $320.73
FYE 12/99 $504.81 $535.20 $369.80
</TABLE>
* $100 invested on 3/31/94 in Stock of Index--including Reinvestment of
Dividends.
** The peer group in the above stock performance graph differs from the peer
group in the Company's 1999 proxy statement as a result of our acquisition
of Century Communications Corp., and the acquisitions of TCA Cable TV, Inc.
and Tele-Communications, Inc. by third parties. Due in large part to these
acquisitions and other consolidation in the cable communications industry,
the Company added Charter Communications Inc. and Cox Communications Inc.
to the peer group in this proxy statement.
11
<PAGE>
CERTAIN TRANSACTIONS
Management Services
During the year ended December 31, 1999, the Company provided management
services for certain cable television systems not owned by the Company,
including managed partnerships ("Managed Partnerships") in which John J. Rigas,
Michael J. Rigas, Timothy J. Rigas, James P. Rigas and Ellen K. Rigas had
varied ownership interests. These services included supervision of technical
and business operations, accounting, marketing, programming, purchasing, field
engineering and other technical and administrative nonfield services. During
this period, the Managed Partnerships paid the Company up to five percent of
system revenues for such services. Other fees were charged by the Company to
the Managed Partnerships during this period for goods and services including
mark-ups on the Company's pay programming, placement fees associated with
pending acquisitions, and other goods and services. In addition, the Managed
Partnerships charged the Company for system and corporate costs during this
period. The net fees and expenses charged by the Company to Managed
Partnerships amounted to $5,136,000 for the year ended December 31, 1999. In
addition, the Company paid $11,227,000 to other entities owned by members of
the Rigas family, primarily for property, plant and equipment.
Loans to and from Affiliates
Certain loans to and from the Company by or to affiliates as of December 31,
1999 are summarized below. Interest is charged on such loans to affiliates at
rates which ranged from 9.00% to 11.31% for the year ended December 31, 1999.
Total interest income on loans to managed affiliates aggregated $10,781,000
for the year ended December 31, 1999.
Net receivables due from the Managed Partnerships for advances made by the
Company for the construction and acquisition of cable television systems and
for working capital purposes, including accrued interest thereon, were
$144,217,000 at December 31, 1999.
During the year ended December 31, 1999 the Company made net advances of
$5,042,000 to Dorellenic. At December 31, 1999, net receivables from Dorellenic
(including accrued interest) were $34,360,000. Amounts advanced to Dorellenic
were primarily used for working capital purposes.
During fiscal 1990 and 1991, the Company loaned an aggregate $255,000 to
Daniel R. Milliard, a former officer and director, and an unaffiliated third
party, pursuant to several revolving term and term notes, for capital
expenditures and working capital purposes. As of December 31, 1999, the
outstanding amount of these loans was $152,500 including accrued interest.
On an end-of-quarter basis, the largest aggregate amount of net outstanding
loans and advances receivable from affiliates (directors, executive officers
and five-percent shareholders) or entities they control, including John J.
Rigas, Michael J. Rigas, Timothy J. Rigas, James P. Rigas, Ellen K. Rigas,
Dorellenic and/or the Managed Partnerships during the year ended December 31,
1999 was $178,577,000. No related party advances are collateralized.
As of December 31, 1999, the Company had capital funding notes with Niagara
Frontier Hockey, L.P. ("NFHLP") of approximately $47,533,000. These amounts
represent advances to NFHLP plus accrued return of 14.0%. The return on these
capital funding notes amounted to approximately $3,800,000 for the year ended
December 31, 1999. The Rigas family is an affiliate of NFHLP and has entered
into an agreement to acquire all the voting interests of NFHLP.
12
<PAGE>
Co-Borrowing Agreements
On March 29, 1996, a subsidiary of the Company entered into a $200,000,000
loan agreement with a Managed Partnership and an Olympus subsidiary, as co-
borrowers, which agreement remained in effect during the year ended December
31, 1999.
On May 6, 1999, certain subsidiaries and affiliates of Adelphia and Olympus,
including Hilton Head Communications, L.P., a Rigas family partnership, closed
on an $850,000,000 credit facility with several banks. The credit facility
consists of a $600,000,000 8 1/2 year reducing revolving credit loan and a
$250,000,000 9 year term loan, and remained in effect during the year ended
December 31, 1999.
Business Opportunities
The Company's executive officers are parties to a Business Opportunity
Agreement, dated July 1, 1986 (the "Business Opportunity Agreement"), under
which they have agreed not to acquire an interest (except that such persons
may, individually for their own account, engage in regular portfolio trading of
publicly traded securities of companies in the cable television industry) in
any cable television system except: cable television systems which they or
their affiliates (excluding the Company) owned, in whole or in part, operated
or had agreed to acquire as of July 1, 1986; any expansions of such systems
within the same county or an adjacent county (except for systems which are also
contiguous to Company-owned systems); and systems which the Company elects not
to acquire under its right of first refusal described below and any expansions
of such systems within the same county or an adjacent county (except for
systems which are also contiguous to Company-owned systems). Otherwise, the
executive officers will first offer to the Company the opportunity to acquire
or invest in any cable television system or franchise therefor or interest
therein that is offered or available to them. If a majority of the Company's
Board of Directors, including a majority of the independent directors, rejects
such offer, the executive officers may acquire or invest in all of such cable
television systems or franchises therefor or interest therein or with others on
terms no more favorable to them than those offered to the Company.
The Company's executive officers may from time to time evaluate and, subject
to the Company's rights and covenants in the Company's loan agreements and
indentures, may acquire cable television systems or interests therein for their
own accounts separately or along with the Company and/or other joint venture
parties.
Except for the limitations on the ownership of cable television systems as
described herein, the executive officers of Adelphia and their affiliates are
not subject to limitations with respect to their other business activities and
may engage in other businesses related to cable television or other
telecommunications media. The executive officers will devote as much of their
time to the business of the Company as is reasonably required to fulfill the
duties of their offices.
In the event that any executive officer (or his affiliate) decides to offer
for sale (other than to another executive officer or his or another executive
officer's family member, trust or family controlled entity) for his account,
his ownership interest in any cable television system or franchise, he or it
will (subject to the rights of third parties existing at such time) first offer
such interests to the Company. Such selling person or entity has a unilateral
option to elect to require that, if the Company accepts such offer, up to one
half of the consideration for his or its interest would consist of shares of
Class B common stock, which shares will be valued at the prevailing market
price of the Class A common stock, and the remainder would consist of shares of
Class A common stock and/or cash. If a majority of the Company's independent
directors rejects such offer, the executive officer (or his affiliate) may sell
such interest to third parties on terms no more favorable to such third parties
than those offered to the Company.
Registration Rights, Stock Purchase and Other Matters
Pursuant to a Registration Rights Agreement, as amended, between the Company
and the holders of Class B common stock, John J. Rigas has the right, subject
to certain limitations, to require the Company to register shares of the
Company's common stock owned by him for sale to the public and pay the expenses
13
<PAGE>
(except for Mr. Rigas' counsel fees) of such registration on five occasions
selected by him (subject to certain limitations intended to prevent undue
interference with the Company's ability to distribute its securities) during a
fourteen-year period which began in December 1986. The other holders of Class B
common stock have the right to participate, at the option of John J. Rigas, as
selling stockholders in any such registration initiated by John J. Rigas. The
holders of Class B common stock also have unlimited rights to participate as
selling stockholders in any registered public offering initiated by the Company
and require the Company to pay their expenses (except counsel fees). Such
rights of participation are subject to limitation at the discretion of the
managing underwriter of such offering.
In addition, substantially all of the Class A common stock and Series C
Cumulative Convertible preferred stock owned by the Rigas family or entities
they own or control has been registered by the Company on shelf registration
statements which remain in effect.
On January 14, 1999, Adelphia completed offerings totaling 8,600,000 shares
of Class A common stock. In those offerings, Adelphia sold 4,600,000 newly
issued shares, including an overallotment option for 600,000 shares, to
Goldman, Sachs & Co. at $43.25 per share and it also sold 4,000,000 shares at
$43.25 per share to Highland Holdings II, an entity controlled by members of
the Rigas family.
On January 29, 1999, Adelphia purchased from Telesat Cablevision, Inc.,
("Telesat") a subsidiary of FPL Group, Inc., shares of Adelphia stock owned by
Telesat for a price of $149,213,000. In the transaction, Adelphia purchased
1,091,524 shares of its Class A common stock and 20,000 shares of its Series C
Cumulative convertible preferred stock which are convertible into an additional
2,358,490 shares of Class A common stock. These shares represent 3,450,014
shares of Class A common stock on a fully converted basis. On October 1, 1999,
the redemption of Telesat's interests in Olympus Communications, L.P. was
completed. The redemption was made for non-cash assets of Olympus of
approximately $100,000,000 pursuant to a January 1999 redemption agreement.
Prior to these transactions, Mr. Dennis Coyle was the nominee of Telesat to
Adelphia's Board of Directors.
On March 2, 1999, Adelphia Business Solutions issued $300,000,000 of 12%
Senior Subordinated Notes due 2007. Highland Holdings, an entity controlled by
members of the Rigas family, purchased $100,000,000 of the $300,000,000 of
Senior Subordinated Notes directly from Adelphia Business Solutions at a price
equal to the aggregate principal amount less the discount to the initial
purchasers of the other $200,000,000 of Senior Subordinated Notes.
On April 9, 1999, Adelphia entered into a stock purchase agreement with
Highland Holdings in which Adelphia agreed to sell to Highland Holdings, and
Highland Holdings agreed to purchase $375,000,000 of Adelphia Class B common
stock. The purchase price per share for the Class B common stock was equal to
$60.76 (the public offering price in Adelphia's April 28, 1999 public offering,
less the underwriting discount), plus an interest factor. This transaction
closed on January 21, 2000. In addition, the Rigas family waived their rights
under the Business Opportunity Agreement to acquire certain basic subscribers
in the Philadelphia area in connection with Adelphia's acquisition, on October
1, 1999, of the cable television systems owned by Harron Communications Corp.
On October 1, 1999, Adelphia entered into a stock purchase agreement with
Highland Holdings in which Adelphia agreed to sell to Highland Holdings and
Highland Holdings agreed to purchase $137,500,000 of Adelphia's Class B common
stock. The purchase price for the Class B common stock will be $55.00 per
share, which is equal to the public offering price less the underwriting
discount in the October 6, 1999 public offering of Class A common stock, plus
an interest factor. Closing under this stock purchase agreement is to occur by
July 2, 2000 as determined by Highland Holdings at its discretion.
The Company and Adelphia Business Solutions and members of or entities
controlled by the Rigas family have entered into various registration rights
agreements regarding the common stock and Senior Subordinated Notes owned by
the Rigas family.
14
<PAGE>
From time to time, the Company makes announcements regarding proposed
transactions that may involve affiliates of the Company. No assurance can be
given that these transactions will be consummated.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's
directors, executive officers and persons who beneficially own more than ten
percent of a class of the Company's registered equity securities to file with
the Securities and Exchange Commission and deliver to the Company initial
reports of ownership and reports of changes in ownership of such registered
equity securities.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company or written representations that no other
reports were required, the Company's directors, executive officers and more
than ten percent stockholders filed on a timely basis all reports due under
Section 16(a) for the year ended December 31, 1999, except that an initial
report of ownership was filed late by Mr. Gelber, Mr. Kailbourne and Mr.
Venetis, and one report was filed late by Mr. Patterson.
15
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, based on information available to the
Company as of June 20, 2000, certain information with respect to the beneficial
ownership of Class A common stock and Class B common stock by each director or
nominee for director, all executive officers and directors of Adelphia as a
group, and each person known to Adelphia to own beneficially more than 5% of
either class of common stock, based on 112,176,301 shares of Class A common
stock and 16,735,998 shares of Class B common stock outstanding, respectively,
as of such date. Unless otherwise noted, each of the stockholders in the table
has sole voting and investment power. The business address of each 5%
beneficial owner named below, unless otherwise noted, is One North Main Street,
Coudersport, Pennsylvania 16915.
<TABLE>
<CAPTION>
Shares of Percent of Shares of Percent of
Class A Class A Class B Class B
Common Common Common Common
Stock Stock Stock Stock
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
John J. Rigas............. (a) (b) 11,818,658(c) 70.6%
Michael J. Rigas.......... (a) (b) 7,633,442(c) 45.6%
Timothy J. Rigas.......... (a) (b) 7,633,442(c) 45.6%
James P. Rigas............ (a) (b) 7,069,106(c) 42.2%
Pete J. Metros............ 500 (d) -- --
Dennis P. Coyle........... 1,000 (d) -- --
Leslie J. Gelber.......... 3,000 (d) -- --
Erland E. Kailbourne...... 500 (d) -- --
Peter L. Venetis (e)...... (e) (e) 6,163,760(c) 36.8%
All executive officers and
directors as a group
(nine persons).......... 41,705,579(a)(c) (b) 16,735,998(c) 100.0%
Ellen K. Rigas............ (f) (g) 6,163,760(c) 36.8%
Doris Holdings, L.P. (h).. 2,398,151 2.1% -- --
Highland Holdings II (i).. 4,000,000 3.6% -- --
Highland Communications,
L.L.C. (i)............... 9,056,268 8.1% -- --
Highland Preferred
Communications, L.L.C.
(i)...................... 9,433,962 7.7% -- --
Highland Holdings (i)..... 18,490,230 15.2% -- --
Highland 2000, L.P........ (j) (j) 5,901,522(c) 35.3%
Leonard Tow............... 26,169,467(k) 23.3% -- --
50 Locust Avenue
New Canaan, CT 06840
Claire L. Tow............. 26,169,467(1) 23.3% -- --
50 Locust Avenue
New Canaan, CT 06840
David Z. Rosensweig....... 21,021,298(m) 18.7% -- --
162 Brite Avenue
Scarsdale, NY 10583
</TABLE>
--------
(a) The holders of Class B common stock are deemed to be beneficial owners of
an equal number of shares of Class A common stock because Class B common
stock is convertible into Class A common stock on a one-to-one basis. See
note (c) below. In addition, the following persons own or have the power
to direct the voting of shares of Class A common stock in the following
amounts: John J. Rigas, 431,800 shares--71,700 shares directly and 360,100
shares through Doris Holdings, L.P. ("Doris"); Michael J. Rigas, 193,500
shares--200 shares directly and 193,300 shares through Doris; Timothy J.
Rigas, 193,500 shares--200 shares directly and 193,300 shares through
Doris; James P. Rigas, 193,300 shares through Doris. John J. Rigas shares
voting power with his spouse with respect to 106,300 of such shares held
through Doris. Each of John J. Rigas, Michael J. Rigas, Timothy J. Rigas
and James P. Rigas also shares voting and dispositive power with respect
to the 5,901,522 shares of Class B common stock owned by Highland
16
<PAGE>
2000, L.P., the 18,490,230 shares of Class A common beneficially owned by
Highland Holdings and subsidiaries ("Highland"), the 4,000,000 shares of
Class A common held by Highland Holdings II ("Highland II") and the other
1,458,151 shares of Class A common held by Doris. See notes (h) and (i).
(b) After giving effect to the conversion solely by each individual holder of
all of his Class B common stock into Class A common stock and including
all shares of Class A common stock, and the conversion into Class A common
stock of Series C Cumulative Convertible Preferred Stock, currently held
by such individual holder or over which such individual holder has or
shares voting or investment power as disclosed in notes (a) above or (h)
and (i) below, the percentage of Class A common stock owned by John J.
Rigas, Michael J. Rigas, Timothy J. Rigas and James P. Rigas would be
27.6%, 25.3%, 25.3% and 24.8%, respectively. Further, after giving effect
to an additional 4,919,340 shares of Class A common stock of which John J.
Rigas has the right to direct the voting in the election of directors
pursuant to a Class B Stockholders Agreement (and assuming the parties to
such agreement converted their Class B common stock into Class A common
stock), as to all of which additional shares John J. Rigas disclaims
beneficial ownership, the percentage of Class A common stock owned by John
J. Rigas would be 30.1%.
(c) The respective amounts shown include 97,949 of the same shares of Class B
common stock which are owned of record by Dorellenic, a general
partnership in which the five named individual Rigas family members are
general partners and 5,901,522 of the same shares of Class B common stock
which are owned by Highland 2000, L.P., a limited partnership in which the
five named individual Rigas family members are limited partners, and such
shares are only included once for "all executive officers and directors as
a group." The named Rigas individuals have shared voting and investment
power with respect to these shares. The shares of Class B common stock
shown for Peter L. Venetis represent the shares beneficially owned by his
wife, Ellen K. Rigas. The amounts shown do not include any of the
2,500,000 shares of Class B common stock that Highland has agreed to
purchase from Adelphia on or before July 2, 2000, pursuant to an agreement
between Adelphia and Highland dated October 1, 1999.
(d) Less than 1%.
(e) Peter L. Venetis is the husband of Ellen K. Rigas. As a result, he is
deemed to beneficially own indirectly the shares beneficially owned by
Ellen K. Rigas. Based upon 2,500 shares of Class A common stock owned
directly by Mr. Venetis and the shares of Class A common stock owned or
deemed to be owned beneficially by Ellen K. Rigas, the percentage of Class
A common stock owned or deemed to be beneficially owned by Mr. Venetis
would be 22.4%. See notes (c), (f), (g) and (i).
(f) As a holder of Class B common stock, Ellen K. Rigas is deemed to be the
beneficial owner of an equal number of shares of Class A common stock
because Class B common stock is convertible into Class A common stock on a
one-to-one basis. In addition, Ellen K. Rigas owns 1,600 shares of Class A
common stock directly and shares voting and investment power with respect
to 18,490,230 shares of Class A common stock held by Highland and
4,000,000 shares of Class A common stock held by Highland II. See also
notes (c) and (i). Ellen K. Rigas is the daughter of John J. Rigas.
(g) After giving effect to the conversion of all of Ellen K. Rigas' Class B
common stock into shares of Class A common stock and including all shares
of Class A common stock, and the conversion into Class A common stock of
Series C Cumulative Convertible Preferred Stock held by Ellen K. Rigas or
over which Ellen K. Rigas has or shares voting or investment power as
discussed in note (i) below, the percentage of Class A common stock owned
by Ellen K. Rigas would be 22.4%.
(h) Doris and Eleni Acquisition, Inc., the general partner of Doris, are
affiliates of John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom has shared voting and investment power with respect
to the shares held by Doris. In addition, through irrevocable proxies,
each of the above-named individuals shares with Doris the power to vote or
direct the vote of such number of shares of Class A common stock held as
is described in note (a).
(i) Each of Highland and Highland II is a general partnership, the general
partners of which are John J. Rigas, Michael J. Rigas, Timothy J. Rigas,
James P. Rigas and Ellen K. Rigas. These Rigas family members may be
deemed to share voting and investment power with respect to the shares
held by Highland's wholly
17
<PAGE>
owned subsidiaries, Highland Communications, L.L.C. and Highland Preferred
Communications, L.L.C., and also with respect to the shares held by
Highland II. The amount shown for Highland Preferred Communications,
L.L.C. includes, and the percentage shown reflects, 9,433,962 shares of
Class A common stock into which the 80,000 shares of Adelphia's Series C
Cumulative Convertible preferred stock held by Highland Preferred
Communications, L.L.C. is convertible. The amount shown for Highland
Communications, L.L.C. includes 9,006,268 shares of Class A common stock
held directly by it and 50,000 shares of Class A common stock held by
Bucktail Broadcasting Corporation, another subsidiary of Highland.
(j) After giving effect to the conversion of all of Highland 2000, L.P.'s
Class B common stock into shares of Class A common stock, the percentage
of Class A common stock owned by Highland 2000, L.P. would be 5.0%.
(k) Includes 6,328,804 shares as to which Mr. Tow has sole voting and
investment power. Also includes 19,729,016 shares held by trusts and
foundations (17,307,308 of which are held by the Claire Tow Trust, 50
Locust Avenue, New Canaan, CT 06840) as to which he shares voting and
investment power with his wife, Claire L. Tow, and David Z. Rosensweig.
Also includes 111,647 shares described in note (l) as to which Mrs. Tow
has sole voting and investment power, as to which shares Mr. Tow disclaims
beneficial ownership.
(l) Includes 111,647 shares as to which Mrs. Tow has sole voting and
investment power, comprised of 111,647 shares of which she is the record
and beneficial owner. Also includes the 19,729,016 shares described in
note (k) as to which she shares voting and investment power with Mr. Tow
and Mr. Rosensweig. Also includes the 6,328,804 shares described in note
(k) as to which Mr. Tow has sole voting and investment power, as to which
shares Mrs. Tow disclaims beneficial ownership.
(m) Includes 15,000 shares as to which Mr. Rosensweig has sole voting and
investment power. Also includes the 19,729,016 shares described in note
(k) as to which he shares voting and investment power with Mr. and Mrs.
Tow and 1,277,282 shares held in trust over which he is the sole trustee,
as to all of which shares he disclaims beneficial ownership.
John J. Rigas, Michael J. Rigas, Timothy J. Rigas, James P. Rigas, Ellen K.
Rigas, Dorellenic and the Company are parties to a Class B Stockholders
Agreement providing that such stockholders shall vote their shares of common
stock for the election of directors designated by a majority of voting power
(as defined in the Agreement) of the shares of common stock held by them. The
Class B Stockholders Agreement also provides that, in the absence of the
consent of the holders of a majority of the voting power of the shares of
common stock owned by the parties to the Agreement, (i) none of the stockholder
parties may sell, assign or transfer all or any part of their shares of common
stock in a public sale (as defined in the Agreement) without first offering the
shares to the other parties to the Agreement and (ii) no stockholder party may
accept a bona fide offer from a third party to purchase shares of such
stockholder without first offering the shares to the Company and then to the
other parties to the Class B Stockholders Agreement. In addition, each party
has certain rights to acquire the shares of common stock of the others under
certain conditions.
18
<PAGE>
ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION
A COPY OF THE ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS) OF THE COMPANY
FOR THE PERIOD FROM JANUARY 1, 1999 TO DECEMBER 31, 1999, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WILL BE FURNISHED FREE OF CHARGE, UPON
WRITTEN REQUEST, TO STOCKHOLDERS WHO HAVE NOT PREVIOUSLY RECEIVED A COPY FROM
THE COMPANY. WRITTEN REQUESTS MAY BE DIRECTED TO THE SECRETARY, ADELPHIA
COMMUNICATIONS CORPORATION, ONE NORTH MAIN STREET, COUDERSPORT, PENNSYLVANIA
16915.
OTHER MATTERS
The Company knows of no other matters to be presented for action at the
Annual Meeting. If any other matters should properly come before the Annual
Meeting, however, it is intended that votes will be cast pursuant to the proxy
in respect thereto in accordance with the best judgment of the persons acting
as proxies.
The Company will pay the expense in connection with the printing, assembling
and mailing to the holders of capital stock of the Company the notice of
meeting, this proxy statement and the accompanying form of proxy. In addition
to the use of the mails, proxies may be solicited by directors, officers or
regular employees of the Company personally or by telephone or telegraph. The
Company may request the persons holding stock in their names, or in the names
of their nominees, to send proxy material to and obtain proxies from their
principals, and will reimburse such persons for their expense in so doing.
The Company's certified public accountants during the year ended December
31, 1999 were, and for fiscal 2000 will be, Deloitte & Touche LLP. Such
accountants are not expected to attend the Annual Meeting.
Stockholder Proposals
Proposals of stockholders submitted for consideration at the 2001 Annual
Meeting must be received by the Company no later than March 9, 2001, in order
to be considered for inclusion in the Company's proxy materials for that
meeting. Such proposals must also comply with the requirements set forth in the
rules and regulations of the Securities and Exchange Commission in order to be
eligible for inclusion in the 2001 Annual Meeting proxy materials. Similarly,
under the Company's Amended and Restated By-laws, stockholders who wish to make
a proposal at the 2001 Annual Meeting other than by inclusion in the Company's
proxy materials, must also notify the Company of the matter no later than March
9, 2001. Notwithstanding the fact that the Company may at its discretion
exclude any untimely proposal that is not submitted or presented by March 9,
2001, if a stockholder submits or presents a proposal after March 9, 2001 and
that proposal is accepted by the Company, then the proxies that management
solicits for the meeting will have discretionary authority to vote on the
stockholder's proposal if the proposal is otherwise properly brought before the
meeting. Any stockholder wishing to submit a proposal at the 2001 Annual
Meeting must also comply with the other provisions of the Company's Amended and
Restated By-laws. A copy of the applicable provisions of its Amended and
Restated By-laws can be obtained by writing to the Secretary of the Company.
19
<PAGE>
APPENDIX A
TABLE OF CONTENTS
<TABLE>
<S> <C>
Selected Financial Data................................................... A-2
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... A-5
Quantitative and Qualitative Disclosure About Market Risk............... A-21
Financial Statements and Supplementary Data............................. A-22
Independent Auditors' Report............................................ A-23
Adelphia Communications Corporation and Subsidiaries Consolidated
Balance Sheets......................................................... A-24
Adelphia Communications Corporation and Subsidiaries Consolidated
Statements of Operations............................................... A-25
Adelphia Communications Corporation and Subsidiaries Consolidated
Statements of Convertible Preferred Stock, Common Stock and Other
Stockholders' Equity (Deficiency)...................................... A-26
Adelphia Communications Corporation and Subsidiaries Consolidated
Statements of Cash Flows............................................... A-28
Adelphia Communications Corporation and Subsidiaries Notes to
Consolidated Financial Statements...................................... A-29
</TABLE>
A-1
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
The selected consolidated financial data as of and for each of the three
years in the period ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 1999 have been derived from the audited
consolidated financial statements of Adelphia Communications Corporation and
subsidiaries ("Adelphia" or the "Company"). The selected consolidated financial
data for the twelve months ended December 31, 1998 have been derived from
unaudited condensed consolidated financial statements of the Company not
included herein; however, in the opinion of management, such data reflect all
adjustments (consisting only of normal and recurring adjustments) necessary to
fairly present the data for such period. This data should be read in
conjunction with the consolidated financial statements and related notes
thereto as of December 31, 1998 and 1999 and the year ended March 31, 1998, the
nine months ended December 31, 1998 and the year ended December 31, 1999 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this proxy statement. The statement of
operations data with respect to fiscal years ended March 31, 1996 and 1997, and
the balance sheet data at March 31, 1996, 1997 and 1998, have been derived from
audited consolidated financial statements of the Company not included herein.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
Year Ended March 31, December 31, December 31,
------------------------------- ------------ ----------------------
1996 1997 1998 1998 1998 1999
--------- --------- --------- ------------ ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 403,597 $ 472,778 $ 524,889 $ 496,014 $ 630,999 $1,287,968
Direct operating and
programming expense.... 124,116 148,982 167,288 167,963 213,327 432,612
Selling, general and
administrative
expense................ 68,357 81,763 95,731 107,249 132,895 340,579
Depreciation and
amortization expenses.. 111,031 124,066 145,041 140,823 181,294 370,836
Merger and integration
costs.................. -- -- -- -- -- 4,736
Rate regulation charge.. 5,300 -- -- -- -- --
--------- --------- --------- --------- --------- ----------
Operating income........ 94,793 117,967 116,829 79,979 103,483 139,205
--------- --------- --------- --------- --------- ----------
Priority investment
income from Olympus.... 28,852 42,086 47,765 36,000 48,000 36,000
Cash interest expense--
net.................... (183,780) (190,965) (206,124) (156,789) (205,554) (307,517)
Noncash interest
expense................ (16,288) (41,360) (37,430) (23,663) (31,112) (52,068)
Equity in loss of joint
ventures............... (46,257) (59,169) (79,056) (58,471) (78,193) (68,376)
Adelphia Business
Solutions preferred
stock dividends........ -- -- (12,682) (21,536) (28,230) (32,173)
Minority interest in net
losses of
subsidiaries........... -- -- -- 25,772 25,772 38,699
Other................... -- 12,151 2,538 1,113 2,633 1,865
--------- --------- --------- --------- --------- ----------
Loss before income taxes
and extraordinary
loss................... (122,680) (119,290) (168,160) (117,595) (163,201) (244,365)
Income tax benefit...... 2,786 358 5,606 6,802 12,967 14,493
--------- --------- --------- --------- --------- ----------
Loss before
extraordinary loss..... (119,894) (118,932) (162,554) (110,793) (150,234) (229,872)
Extraordinary loss on
early retirement of
debt................... -- (11,710) (11,325) (4,337) (4,337) (10,658)
--------- --------- --------- --------- --------- ----------
Net loss................ (119,894) (130,642) (173,879) (115,130) (154,571) (240,530)
Dividend requirements
applicable to
preferred stock........ -- -- (18,850) (20,718) (27,570) (41,963)
--------- --------- --------- --------- --------- ----------
Net loss applicable to
common stockholders.... $(119,894) $(130,642) $(192,729) $(135,848) $(182,141) $ (282,493)
========= ========= ========= ========= ========= ==========
Basic and diluted loss
per weighted average
share of common stock
before extraordinary
loss................... $ (4.56) $ (4.50) $ (6.07) $ (3.63) $ (5.10) $ (3.73)
Basic and diluted net
loss per weighted
average share of common
stock.................. (4.56) (4.94) (6.45) (3.75) (5.23) (3.88)
Cash dividends declared
per common share....... -- -- -- -- -- --
</TABLE>
Business Segment Information:
As more fully described in the Company's Annual Report on Form 10-K,
Adelphia operates primarily in two operating segments within the
telecommunications industry: cable television and related investments
A-2
<PAGE>
("Adelphia, excluding Adelphia Business Solutions" or "Cable and Other
Segment") and competitive local exchange carrier telephony ("Adelphia Business
Solutions" or "CLEC Segment"). The balance sheet data and other data as of and
for each of the three years in the period ended March 31, 1998, the nine months
ended December 31, 1998 and the year ended December 31, 1999 of Adelphia
Business Solutions have been derived from audited consolidated financial
statements of Adelphia Business Solutions not included herein. The selected
consolidated financial data for the twelve months ended December 31, 1998 have
been derived from unaudited condensed consolidated financial statements of
Adelphia Business Solutions not included herein; however, in the opinion of
management, such data reflect all adjustments (consisting only of normal and
recurring adjustments) necessary to fairly present the data for such period.
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Adelphia Consolidated
Total assets.......... $1,367,579 $1,643,826 $2,304,671 $3,294,457 $17,267,500
Total debt............ 2,175,473 2,544,039 2,909,745 3,527,452 9,291,732
Cash and cash
equivalents.......... 10,809 61,539 276,895 398,644 186,874
Investments (a)....... 74,961 130,005 150,787 229,494 308,342
Redeemable preferred
stock................ -- -- 355,266 376,865 409,211
Convertible preferred
stock (liquidation
preference).......... -- -- 100,000 100,000 675,000
Adelphia Business
Solutions
Total assets.......... $ 35,269 $ 174,601 $ 639,992 $ 836,342 $ 1,171,074(b)
Total debt............ 50,855 215,675 528,776 494,109 845,178
Cash and cash
equivalents.......... -- 59,814 230,750 242,570 2,133
Investments (a)....... 27,900 56,695 69,596 138,614 61,400
Redeemable preferred
stock................ -- -- 207,204 228,674 260,848
Adelphia, excluding
Adelphia Business
Solutions
Total assets.......... $1,332,310 $1,469,225 $1,664,679 $2,458,115 $16,096,426
Total debt............ 2,124,618 2,328,364 2,380,969 3,033,343 8,446,554
Cash and cash
equivalents.......... 10,809 1,725 46,145 156,074 184,741
Investments (a)....... 47,061 73,310 81,191 90,880 246,942
Redeemable preferred
stock................ -- -- 148,062 148,191 148,363
Convertible preferred
stock (liquidation
preference).......... -- -- 100,000 100,000 675,000
</TABLE>
See "Other Data" on next page.
A-3
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended Three Months Ended
Year Ended March 31, December 31, December 31, December 31,
------------------------------- ------------ ---------------------- -----------------------
1996 1997 1998 1998 1998 1999 1998 1999
--------- --------- --------- ------------ ----------- ---------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Adelphia Consolidated
Revenues............... $ 403,597 $ 472,778 $ 524,889 $ 496,014 $ 630,999 $1,287,968 $188,301 $ 635,273
Priority income........ 28,852 42,086 47,765 36,000 48,000 36,000 12,000 --
Operating expenses
(c)................... 192,473 230,745 263,019 275,212 346,222 773,191 107,725 367,608
Depreciation and
amortization
expenses.............. 111,031 124,066 145,041 140,823 181,294 370,836 56,181 184,646
Operating income....... 94,793 117,967 116,829 79,979 103,483 139,205 24,395 78,283
Interest expense--net.. (200,068) (232,325) (243,554) (180,452) (236,666) (359,585) (60,820) (187,945)
Preferred stock
dividends............. -- -- (31,532) (42,254) (55,800) (74,136) (14,330) (23,217)
Capital expenditures... 100,089 129,609 183,586 255,797 321,823 819,197 76,945 415,188
Cash paid for
acquisitions--net of
cash acquired......... 60,804 143,412 146,546 403,851 462,180 2,178,037 -- 1,988,249
Cash used for
investments........... 24,333 51,415 86,851 81,558 106,219 56,365 56,570 14,342
Adelphia Business
Solutions
Revenues............... $ 3,322 $ 5,088 $ 13,510 $ 34,776 $ 39,596 $ 154,575 15,043 55,575
Operating expenses
(c)................... 5,774 10,212 22,118 54,050 61,806 201,140 23,182 71,485
Depreciation and
amortization
expenses.............. 1,184 3,945 11,477 26,671 31,121 65,244 10,708 19,955
Operating loss......... (3,636) (9,069) (20,085) (45,945) (53,331) (111,809) (18,847) (35,865)
Interest expense--net
(d)................... (5,889) (22,401) (36,030) (20,010) (28,057) (45,898) (6,994) (16,103)
Preferred stock
dividends............. -- -- (12,682) (21,536) (28,230) (32,173) (7,424) (8,586)
Capital expenditures... 6,084 36,127 68,629 146,752 180,547 453,206 35,057 220,788
Cash paid for
acquisitions--net of
cash acquired......... -- 5,040 65,968 -- 58,329 129,118 -- --
Cash used for
investments........... 12,815 34,769 64,260 69,018 87,159 24,496 54,258 (2,925)
Adelphia, excluding
Adelphia Business
Solutions
Revenues............... $ 400,275 $ 467,690 $ 511,379 $ 461,238 $ 591,403 $1,133,393 173,258 579,698
Priority income........ 28,852 42,086 47,765 36,000 48,000 36,000 12,000 --
Operating expenses
(c)................... 186,699 220,533 240,901 221,162 284,416 572,051 84,543 296,123
Depreciation and
amortization
expenses.............. 109,847 120,121 133,564 114,152 150,173 305,592 45,473 164,691
Operating income....... 98,429 127,036 136,914 125,924 156,814 251,014 43,242 114,148
Interest expense--net
(e)................... (194,179) (209,924) (207,524) (160,442) (208,609) (313,687) (53,826) (171,842)
Preferred stock
dividends............. -- -- (18,850) (20,718) (27,570) (41,963) (6,906) (14,631)
Capital expenditures... 94,005 93,482 114,957 109,045 141,276 365,991 41,888 194,400
Cash paid for
acquisitions--net of
cash acquired......... 60,804 138,372 80,578 403,851 403,851 2,048,919 -- 1,988,249
Cash used for
investments........... 11,518 16,646 22,591 12,540 19,060 31,869 2,312 17,267
</TABLE>
--------
(a) Represents total investments before cumulative equity in net losses.
(b) Amount excludes receivables from Adelphia of $392,629 as of December 31,
1999.
(c) Amount excludes depreciation and amortization expenses and merger and
integration costs.
(d) Amounts include interest income from Adelphia of $0, $0, $0, $8,395,
$11,223, $8,483, $3,576 and $1,540 for the respective periods.
(e) Amounts include interest expense to Adelphia Business Solutions of $0, $0,
$0, $8,395, $11,223, $8,483, $3,576 and $1,540 for the respective periods.
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Introduction
During the year ended December 31, 1999, the Company completed the
acquisition of the Olympus Communications, L.P. ("Olympus") partnership
interests held by FPL Group, Inc., and the acquisitions of FrontierVision
Partners, L.P., Century Communications Corp. and Harron Communications Corp.
(collectively, the "Acquisitions"). The Acquisitions were all completed on
October 1, 1999 and were accounted for under the purchase method of accounting.
Accordingly, the financial results of the Acquisitions have been included in
the results of Adelphia effective from October 1, 1999. The Company had
additional acquisitions during the year ended December 31, 1999 which are
disclosed in Note 1 to the Adelphia consolidated financial statements that are
included in Adelphia's results of operations effective from the dates acquired.
In addition, during the year ended December 31, 1999, the Company entered into
several financing transactions, the proceeds of which were partially used to
fund one or more of the Acquisitions or for other general corporate purposes.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
proxy statement, 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," "estimates," "continue" 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,
developments and changes in the competitive environment in which the Company
operates. Persons reading this proxy statement are cautioned that forward-
looking statement 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 those 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."
Results of Operations
General
On March 30, 1999, the Board of Directors of Adelphia changed its fiscal
year from March 31 to December 31. The decision was made to conform to general
industry practice and for administrative purposes. The change became effective
for the nine months ended December 31, 1998. Management's discussion and
analysis of financial condition and results of operations compares the twelve
months ended December 31, 1998 and 1999 and the nine months ended December 31,
1997 and 1998.
Adelphia earned substantially all of its revenues in the year ended March
31, 1998, the nine months ended December 31, 1998 and the year ended December
31, 1999 from monthly subscriber fees for basic, satellite, premium and
ancillary services (such as installations and equipment rentals), local and
national advertising sales, pay-per-view programming, high speed data services
and CLEC telecommunications services.
The changes in Adelphia's results of operations for the nine months ended
December 31, 1998 and the year ended December 31, 1999, compared to the
respective prior periods, were primarily the result of acquisitions, expanding
existing cable television operations and the impact of increased advertising
sales and other service offerings as well as increases in cable rates,
effective October 1, 1998, January 1, 1999 and August 1, 1999.
A-5
<PAGE>
The high level of depreciation and amortization associated with the
significant number of acquisitions in recent years, the continued upgrade and
expansion of systems, interest costs associated with financing activities and
Adelphia Business Solutions' continued investment in the CLEC business 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 Business Solutions, together with its subsidiaries, operates
certain wholly owned CLEC telecommunications systems and owns certain
investments in CLEC joint ventures and manages those ventures. Adelphia
Business Solutions is an unrestricted subsidiary for purposes of the Company's
indentures.
The information below for the year ended March 31, 1998, the nine months
ended December 31, 1998 and the year ended December 31, 1999 is derived from
Adelphia's consolidated financial statements that are included in this proxy
statement. Information for the nine months ended December 31, 1997 and the
twelve months ended December 31, 1998 is derived from unaudited condensed
consolidated financial statements of the Company not included herein; however,
in the opinion of management, such data reflect all adjustments (consisting
only of normal and recurring adjustments) necessary to fairly present the data
for such periods.
This table sets forth the percentage relationship to revenues of the
components of operating income contained in such financial statements for the
periods indicated.
<TABLE>
<CAPTION>
Percentage of Revenues
-----------------------------------
Year Ended
Year Nine Months December
Ended Ended 31,
March 31, December 31, ------------
1998 1998 1998 1999
--------- ------------ ----- -----
<S> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Direct operating and programming......... 31.9% 33.9% 33.8% 33.6%
Selling, general and administrative...... 18.2% 21.6% 21.1% 26.4%
Depreciation and amortization............ 27.6% 28.4% 28.7% 28.8%
Merger and integration costs............. -- -- -- 0.4%
------ ----- ----- -----
Operating Income........................... 22.3% 16.1% 16.4% 10.8%
====== ===== ===== =====
</TABLE>
The information below separately discusses the operating results of
Adelphia's two operating segments: Cable and Other Segment and CLEC Segment.
Cable and Other Segment
Comparison of the Years Ended December 31, 1998 and 1999
Revenues. The primary revenue sources reflected as a percentage of total
revenues for the cable and other segment were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1998 1999
------ ------
<S> <C> <C>
Regulated service and equipment............................... 79% 79%
Premium programming........................................... 10% 10%
Advertising sales and other services.......................... 11% 11%
</TABLE>
A-6
<PAGE>
Revenues increased approximately 91.6% for the year ended December 31, 1999
compared with the prior year. The increase is attributable to the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Acquisitions....................................................... 91%
Basic subscriber growth............................................ 2%
Rate increases..................................................... 12%
Premium programming................................................ (8%)
Advertising sales and other services............................... 3%
</TABLE>
Effective August 1, 1999, certain rate increases related to regulated cable
services were implemented in substantially all of the Company's systems.
Advertising revenues and revenues derived from other strategic service
offerings such as paging, high-speed data and long distance services also had a
positive impact on revenues for the year ended December 31, 1999. The Company
expects to implement rate increases related to certain regulated cable services
in substantially all of the Company's systems during 2000.
Direct Operating and Programming Expenses. Direct operating and programming
expenses, which are mainly basic and premium programming costs and technical
expenses, increased 94.8% for the year ended December 31, 1999 compared with
the prior year. Acquisitions accounted for 91.0% of the increase in 1999. The
remaining increase was due primarily to 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 114.4% for
the year ended December 31, 1999 compared with prior year. Acquisitions
accounted for 77.8% of the increase in 1999. 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 for the cable
and other segment increased 103.5% for the year ended December 31, 1999,
compared with the prior year. Acquisitions accounted for 84.3% of the increase
in 1999. The remaining increase was due primarily to increased capital
expenditures made during the past several years.
Priority Investment Income. Priority investment income is comprised of
payments received from Olympus of accrued priority return on the Company's
investment in 16.5% preferred limited partner ("PLP") interests in Olympus
prior to the consolidation of Olympus effective October 1, 1999.
Interest Expense--net. Interest expense--net increased 50.4% for the year
ended December 31, 1999, compared with the prior year. Acquisitions accounted
for 114.7% of the increase in 1999. This increase was partially offset by
paying down debt for a portion of the year due to financing transactions and
increased interest income.
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 prior to the consolidation
of Olympus, and (ii) Adelphia's pro-rata share of its less than majority owned
partnerships' operating losses. Equity in loss of joint ventures decreased in
1999 as compared to 1998, primarily due to the consolidation of Olympus.
Minority Interest in Net Losses of Subsidiaries. Minority interest in net
losses of subsidiaries increased 50.2% for the year ended December 31, 1999
compared with the prior year. Acquisitions accounted for 45.4% of the increase
in 1999. The remaining increase was primarily due to increased net losses of
less than wholly owned subsidiaries attributable to minority interests.
A-7
<PAGE>
Extraordinary Loss on Early Retirement of Debt. During the year ended
December 31, 1999, Adelphia redeemed $154,500 of its 9 1/2% Senior Pay-in-Kind
due 2004 at 103.56% of principal, $125,000 of its 11 7/8% Senior Debentures at
104.50% of principal and repaid certain institutional indebtedness. As a result
of these transactions, Adelphia recognized an extraordinary loss on retirement
of debt, net of income tax benefit, of $10,658 for the year ended December 31,
1999.
Comparison of the Nine Months Ended December 31, 1997 and 1998
Revenues. The primary revenue sources reflected as a percentage of total
revenues for the cable and other segment were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
---------------
1997 1998
------ ------
<S> <C> <C>
Regulated service and equipment fees....................... 78% 79%
Premium programming fees................................... 12% 10%
Advertising sales and other services....................... 10% 11%
</TABLE>
Revenues increased approximately 21.0% for the nine months ended December
31, 1998 compared with the same period of the prior year. The increase is
attributable to the following:
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
1998
------------
<S> <C>
Acquisitions....................................................... 65%
Basic subscriber growth............................................ 5%
Rate increases..................................................... 27%
Premium programming................................................ (7%)
Advertising sales and other services............................... 10%
</TABLE>
Effective August 1, 1998, certain rate increases related to regulated cable
services were implemented in substantially all of the Company's Systems.
Advertising revenues and revenues derived from other strategic service
offerings such as paging, high speed data services and long distance services
also had a positive impact on revenues for the nine months ended December 31,
1998.
Direct Operating and Programming Expenses. Direct operating and programming
expenses, which are mainly basic and premium programming costs and technical
expenses, increased 27.9% for the nine months ended December 31, 1998, compared
with the same period of the prior year. The increase was primarily due to
increased operating expenses from acquired systems, increased programming costs
and incremental costs associated with increased subscribers.
Selling, General and Administrative Expenses. These expenses, which are
mainly comprised of costs related to system offices, customer service
representatives, and sales and administrative employees, increased 17.9% for
the nine months ended December 31, 1998, compared with the same period of the
prior year. The increase was primarily due to incremental costs associated with
acquisitions and subscriber growth.
Depreciation and Amortization. Depreciation and amortization increased 17.0%
for the nine month period ended December 31, 1998, compared with the same
period of the prior year. The increase is primarily due to increased
depreciation and amortization related to acquisitions, as well as increased
capital expenditures made during the past several years.
Priority Investment Income. Priority investment income is comprised of
payments received from Olympus of accrued priority return on the Company's
investment in 16.5% PLP interests in Olympus.
A-8
<PAGE>
Interest Expense--net. Interest expense--net increased approximately 0.7%
for the nine months ended December 31, 1998, compared with the same period of
the prior year. This increase is primarily due to incremental debt related to
acquisitions. These increases were partially offset by (i) utilization of the
proceeds from the convertible preferred stock and the redeemable preferred
stock offerings to repay outstanding debt, (ii) the refinancing of outstanding
borrowings and (iii) interest income on cash balances.
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) Adelphia's pro
rata share of its less than majority owned subsidiaries' operating losses.
Extraordinary Loss on Early Retirement of Debt. During the nine months ended
December 31, 1998, $69,838 of 12 1/2% Senior Notes due 2002 were redeemed at
103% of principal and subsidiary debt in the amount of $52,000 was repaid prior
to its maturity at a premium. As a result of these transactions, Adelphia
recognized an extraordinary loss on early retirement of debt of $4,574.
CLEC Segment
Comparison of the Years Ended December 31, 1998 and 1999
Revenues. Revenues increased 290% to $154,600 for the year ended December
31, 1999, from $39,600 in the prior year.
The increase is attributable to the following:
<TABLE>
<S> <C>
Growth in Original Markets............................................. $75,978
Acquisition of local partner interests................................. 27,955
New markets............................................................ 9,798
Management fees........................................................ 1,247
</TABLE>
The primary sources of revenues, reflected as a percentage of total revenue
were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Local service................................................... 53.0% 69.1%
Dedicated access................................................ 37.5 21.1
Management fees................................................. 9.3 3.2
Enhanced services............................................... -- 3.1
Long distance................................................... 0.1 1.1
Other........................................................... 0.1 2.3
</TABLE>
Network Operations Expense. Network operations expense increased 175% to
$58,500 for the year ended December 31, 1999, from $21,300 in the year.
The increase is attributable to the following:
<TABLE>
<S> <C>
Growth in Original Markets............................................. $17,270
Acquisition of local partner interests................................. 8,381
New markets............................................................ 10,888
Network operating control center ("NOCC").............................. 701
</TABLE>
The increased number and size of the operations of the networks resulted in
increased employee related costs, equipment maintenance costs and expansion
costs.
A-9
<PAGE>
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 251% to $142,600 for the year ended December
31, 1999, from $40,600 in the prior year.
The increase is attributable to the following:
<TABLE>
<S> <C>
Growth in Original Markets............................................. $28,406
Acquisition of local partner interests................................. 12,242
New markets............................................................ 42,609
Sales and marketing activities......................................... 6,865
Corporate overhead charges............................................. 11,830
</TABLE>
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 110% to $65,200 during the year ended December 31, 1999, from $31,100
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 63% to $45,900 for
the year ended December 31, 1999, from $28,100 in the prior year as a result of
the issuance of the 12% Senior Subordinated Notes due 2007 partially offset by
an increase in the amount of interest capitalized on projects under
construction in 1999.
Equity in Net Loss of Joint Ventures. Equity in net loss of joint ventures
decreased by 41% to $7,800 for the year ended December 31, 1999, from $13,300
in the prior year as a result of the consolidation of several joint ventures
resulting from the purchase of the local partners' interests, and to the
maturing of the remaining joint venture networks. The decreased net losses of
the joint ventures were primarily the result of increased revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks.
The number of non-consolidated joint venture networks paying management fees
to Adelphia Business Solutions decreased from eight at December 31, 1998 to
four at December 31, 1999. These networks paid management and monitoring fees
to Adelphia Business Solutions, which are included in revenues, aggregating
approximately $4,900 for the twelve months ended December 31, 1999, an increase
of approximately $1,200 over the prior twelve-month period. The non-
consolidated networks' net losses, including networks under construction, for
the twelve months ended December 31, 1998 and 1999 aggregated approximately
$28,400 and $15,200 respectively.
Preferred Stock Dividends. Preferred stock dividends increased 14% to
$32,200 during the year ended December 31, 1999 from $28,200 during the prior
year. The increase was due to a higher outstanding preferred stock base
resulting from the payment of dividends in additional shares of preferred
stock.
Comparison of the Nine Months Ended December 31, 1997 and 1998
Revenues. Revenues increased 300% to $34,800 for the nine months ended
December 31, 1998, from $8,700 for the same period in the prior year. Growth in
revenues of $26,100 resulted from an increase in revenues from majority and
wholly-owned networks of approximately $27,200 as compared to the same period
in the prior fiscal year due to the continued expansion of Adelphia Business
Solutions' customer base, its success in the roll out of switched services and
the consolidation of the Buffalo, Syracuse, New Jersey, Louisville, Lexington
and Harrisburg networks. Management fees from non-consolidated subsidiaries
decreased $1,100 as compared to the same period in the prior fiscal year
primarily due to the consolidation of the above mentioned networks.
Network Operations Expense. Network operations expense increased 255% to
$18,700 for the nine months ended December 31, 1998 from $5,300 for the same
period in the prior year. The increase was attributable to the expansion of
operations at the NOCC, and the increased number and size of the operations of
the networks which resulted in increased employee related costs and equipment
maintenance costs and the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks.
A-10
<PAGE>
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 288% to $35,300 for the nine months ended
December 31, 1998 from $9,100 for the same period in the prior year. The
increase was due primarily to increased expense associated with the network
expansion plan, an increase in the sales force in the Original Markets and an
increase in corporate overhead costs to accommodate the growth in the number,
size and operations of networks managed and monitored by Adelphia Business
Solutions, as well as the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 280% to $26,700 during the nine months ended December 31, 1998 from
$7,100 for the same period in the prior year primarily as a result of increased
amortization of deferred financing costs and increased depreciation resulting
from the higher depreciable asset base at the NOCC and the majority and wholly
owned networks and the consolidation of the Buffalo, Syracuse, New Jersey,
Louisville, Lexington and Harrisburg networks.
Interest Expense--net. Interest expense--net decreased 29% to $20,000 during
the nine months ended December 31, 1998 from $28,200 for the same period in the
prior year. The increase was attributable to interest income related to
increased cash and cash equivalents and U.S. Government Securities related to
proceeds of various offerings, partially offset by interest on the 12 1/4%
Senior Secured Notes.
Equity in Net Loss of Joint Ventures. Equity in net loss of joint ventures
increased to $9,600 during the nine months ended December 31, 1998 from $9,300
for the same period in the prior fiscal year. The net losses of the
nonconsolidated networks for the nine months ended December 31, 1998 were
primarily the result of increased revenues only partially offsetting startup
and other costs and expenses associated with design, construction, operation
and management of the networks and the effect of the typical lag time between
the incurrence of such costs and expenses and the subsequent generation of
revenues by a network. The increase was partially offset by the consolidation
of the Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg
networks for the current period.
The number of non-consolidated networks paying management fees to Adelphia
Business Solutions was eight at December 31, 1998. These networks and networks
under construction paid management and monitoring fees to Adelphia Business
Solutions, which are included in revenues, aggregating approximately $2,700 for
the nine months ended December 31, 1998, as compared with $3,800 for the same
period in the prior fiscal year. The non-consolidated networks' net losses,
including networks under construction, for the nine months ended December 31,
1997 and 1998 aggregated approximately $13,700 and $22,300, respectively.
Preferred Stock Dividends. Preferred stock dividends increased by 271% to
$21,500 for the nine months ended December 31, 1998 from $5,800 for the same
period in the prior fiscal year. The increase is due to the preferred stock
which was issued in October 1997.
Liquidity and Capital Resources
Cable television and other telecommunications businesses are capital
intensive and typically require continual financing for the construction,
modernization, maintenance, expansion and acquisition of cable and other
telecommunications systems. During the nine months ended December 31, 1997 and
1998 and the year ended December 31, 1998 and 1999, the Company committed
substantial capital resources for these purposes and for investments in Olympus
and other affiliates and entities. These expenditures were funded through the
sale of common and preferred stock, long-term borrowings and internally
generated funds. The Company's ability to generate cash to meet its future
needs will depend generally on its results of operations and the continued
availability of external financing.
For information regarding significant events and financings subsequent to
December 31, 1999, see Note 13 to Adelphia's Consolidated Financial Statements.
A-11
<PAGE>
For the year ended December 31, 1998 and 1999, cash provided by operating
activities totaled $145,592 and $332,139, respectively; cash used for investing
activities totaled $1,155,245 and $3,522,222, respectively and cash provided by
financing activities totaled $1,029,894 and $2,978,313, respectively. The
Company's aggregate outstanding borrowings as of December 31, 1999 were
$9,291,732. The Company also had total redeemable preferred stock of $409,211
outstanding as of December 31, 1999.
For the nine months ended December 31, 1997 and 1998, cash provided by
operating activities totaled $62,038 and $138,360, respectively; cash used for
investing activities totaled $423,965 and $1,015,690, respectively and cash
provided by financing activities totaled $681,791 and $999,079, respectively.
The Company's aggregate outstanding borrowings as of December 31, 1998 were
$3,527,452. The Company also had total redeemable preferred stock of $376,865
outstanding as of December 31, 1998.
Capital Expenditures
Cable and Other Segment
Capital expenditures for the years ended December 31, 1998 and 1999 were
$141,276 and $365,991, 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 $800,000.
Capital expenditures for the nine months ended December 31, 1997 and 1998
were $82,726 and $109,045, respectively. The increase in capital expenditures
for the nine months ended December 31, 1998, compared to the nine months ended
December 31, 1997, was primarily due to acquisitions and cable plant rebuilds
and upgrades to expand services.
CLEC Segment
Capital expenditures for the years ended December 31, 1998 and 1999 were
$180,547 and $453,206, respectively. This increase was primarily due to
expenditures necessary to develop the Original Markets and the new markets, as
well as the fiber purchases to interconnect the networks. Adelphia Business
Solutions estimates that a total of approximately $500,000 will be required to
fund Adelphia Business Solutions capital expenditures, working capital
requirements, operating losses and pro rata investments in the joint ventures
for the year ending December 31, 2000.
Capital expenditures for Adelphia Business Solutions for the nine months
ended December 31, 1997 and 1998 were $34,834 and $146,752, respectively. The
increase in capital expenditures for the nine months ended December 31, 1998,
compared to the nine months ended December 31, 1997, was primarily due to
expenditures necessary to develop the original markets and the new markets and
Adelphia Business Solutions' introduction of switching services.
Financing Activities
The Company's financing strategy has been to maintain its public long-term
debt at the parent holding company level while the Company's consolidated
subsidiaries have their own senior and subordinated credit arrangements with
banks and insurance companies, or for Adelphia Business Solutions, its own
public debt and equity. As a result of the Acquisitions, Adelphia has four
other wholly owned subsidiaries with public long-term debt: Olympus, Arahova,
FrontierVision Holdings, L.P. and FrontierVision Operating Partners, L.P. The
Company's ability to generate cash adequate to meet its future needs will
depend generally on its results of operations and the continued availability of
external financing. During the year ended March 31, 1998, the nine months ended
December 31, 1998 and the year ended December 31, 1999, the Company generally
funded its acquisitions, working capital requirements, capital expenditures,
and investments in Olympus, CLEC joint ventures and other affiliates and
entities through long-term borrowings primarily from banks, short-term
A-12
<PAGE>
borrowings, internally generated funds and the issuance of public debt or
equity. The Company generally has funded the principal and interest obligations
on its long-term borrowings from banks and insurance companies by refinancing
the principal with new loans or through the issuance of parent and subsidiary
company debt securities, and by paying the interest out of internally generated
funds. Adelphia has generally funded the interest obligations on its public
borrowings from internally generated funds.
Most of Adelphia's wholly or majority-owned subsidiaries have their own
senior credit agreements with banks and/or insurance companies. Typically,
borrowings under these agreements are collateralized by the stock and, in some
cases, by the assets of the borrowing subsidiary and its subsidiaries and, in
some cases, are guaranteed by such subsidiary's subsidiaries. At December 31,
1999, an aggregate of $3,088,477 in borrowings was outstanding under these
agreements. These agreements contain certain provisions which, among other
things, provide for limitations on borrowings of and investments by the
borrowing subsidiaries, transactions between the borrowing subsidiaries and
Adelphia and its other subsidiaries and affiliates, and the payment of
dividends and fees by the borrowing subsidiaries. Several of these agreements
also contain certain cross-default provisions relating to Adelphia or other
subsidiaries. These agreements also require the maintenance of certain
financial ratios by the borrowing subsidiaries. See Note 3 to the Adelphia
Communications Corporation consolidated financial statements. Management
believes the Company is in compliance with the financial covenants and related
financial ratio requirements contained in its various credit agreements.
At December 31, 1999, Adelphia's subsidiaries had an aggregate of $1,456,620
in unused credit lines with banks, part of which is subject to achieving
certain levels of operating performance. In addition, the Company had an
aggregate $186,874 in cash and cash equivalents at December 31, 1999 which
combined with the Company's unused credit lines with banks aggregated to
$1,643,494. Based upon the results of operations of subsidiaries for the
quarter ended December 31, 1999, approximately $1,262,472 of available assets
could have been transferred to Adelphia at December 31, 1999, under the most
restrictive covenants of the subsidiaries' credit agreements. In addition,
subsequent to December 31, 1999, certain subsidiaries and affiliates of
Adelphia have received commitments and subscriptions for a new $2,500,000 bank
credit facility. This bank credit facility will consist of both reducing
revolving credit portion and a term loan portion and is expected to close in
April 2000. The subsidiaries also have the ability to sell, dividend or
distribute certain assets to other subsidiaries or Adelphia, which would have
the net effect of increasing availability. At December 31, 1999, the Company's
unused credit lines were provided by reducing revolving credit facilities whose
revolver periods expire through December 31, 2007. As of December 31, 1999, the
Company's scheduled maturities of debt were $390,746 for the year ending
December 31, 2000.
At December 31, 1999, the Company's total outstanding debt aggregated
$9,291,732, which included $2,777,919 of parent debt and $6,513,813 of
subsidiary debt. Bank debt interest rates are based upon one or more of the
following rates at the option of Adelphia: prime rate plus 0% to 1.5%;
certificate of deposit rate plus 1.25% to 2.75%; or LIBOR plus .625% to 2.5%.
The Company's weighted average interest rate on notes payable to banks and
institutions was approximately 7.89% at December 31, 1998, compared to 7.72% at
December 31, 1999. At December 31, 1999, approximately 26.2% of subsidiary debt
with banks and institutions was subject to fixed interest rates for at least
one year under the terms of such debt or applicable interest rate swap, cap and
collar agreements. Approximately 75.0% of the Company's total indebtedness was
at fixed interest rates as of December 31, 1999 after giving effect to certain
interest rate swaps and caps.
Adelphia has entered into interest rate swap, cap and collar agreements with
banks and affiliates to reduce the impact of changes in interest rates on its
debt. Adelphia enters into pay-fixed agreements to effectively convert a
portion of its variable-rate debt to fixed-rate debt. Adelphia enters into
receive-fixed agreements to effectively convert a portion of its fixed-rate
debt to variable-rate debt which is indexed to LIBOR. Interest rate cap and
collar agreements are used to reduce the impact of increases in interest rates
on variable rate debt. Adelphia is exposed to market risk in the event of
nonperformance by the banks and the affiliates. The Company does not expect any
such nonperformance. At December 31, 1999, Adelphia would have received
approximately $6,603 to settle its interest rate swap, cap and collar
agreements, representing the excess of fair market value over carrying value of
these agreements.
A-13
<PAGE>
Financing Transactions
Adelphia, Excluding Adelphia Business Solutions (Cable and Other Segment)
During the nine months ended December 31, 1998, Adelphia issued a total of
$300,000 of Senior Notes.
Also, during the nine months ended December 31, 1998, Adelphia issued
8,190,315 shares of Class A common stock to the public and to the Rigas family
(principal shareholders and executive officers of Adelphia). Of this total,
4,100,000 shares were sold to the public. The remaining 4,090,315 shares were
sold to entities controlled by the Rigas family. In a related transaction on
September 14, 1998, the Company issued and sold 615,000 shares of Class A
common stock pursuant to the underwriters' over-allotment option. Net proceeds
to the Company for these transactions was approximately $268,000.
Proceeds from the sale of the Senior Notes and the Class A common stock
were used to repay subsidiaries' senior notes and revolving credit facility
borrowings.
On May 15, 1998, Adelphia redeemed the remaining $69,838 of the 12 1/2%
Senior Notes due 2002 at 103% of principal.
During the nine months ended December 31, 1998, Adelphia redeemed $137,200
aggregate principal amount of subsidiary notes to banks and institutions. As a
result of these transactions, Adelphia recognized an extraordinary loss on
early retirement of debt of $1,970.
During the nine months ended December 31, 1998, a majority owned subsidiary
closed on a $700,000, 8 1/2 year credit facility. The credit facility consists
of a $350,000 reducing revolving credit portion and a $350,000 term loan
portion. Proceeds from initial borrowings were used to repay existing
indebtedness.
During the year ended December 31, 1999, Adelphia issued a total of
$1,250,000 of Senior Notes.
During the year ended December 31, 1999, Adelphia issued 22,600,000 shares
of Class A common stock for cash to the public and the Rigas family. Of this
total, 18,600,000 shares were sold to the public. The remaining 4,000,000
shares were sold to entities controlled by the Rigas family. Net proceeds from
these transactions to the Company were approximately $1,188,000.
Also, during the year ended December 31, 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 to the Company for
this transaction were approximately $557,000.
On April 9, 1999 and October 1, 1999, Adelphia entered into stock purchase
agreements with Highland Holdings, a general partnership controlled by the
Rigas Family, pursuant to which Adelphia agreed to sell to Highland Holdings
and Highland Holdings agreed to purchase $375,000 and $137,500, of Adelphia's
Class B common stock, respectively. Closing under the April 9, 1999 agreement
occurred on January 21, 2000. The October 1, 1999 agreement is expected to
close by July 2, 2000.
Proceeds from the sale of the Senior Notes, the Class A common stock and
the convertible preferred stock were used to repay subsidiaries' revolving
credit facilities of which a portion was reborrowed to fund the Acquisitions
which closed on October 1, 1999.
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 Class A common stock on a fully converted basis.
A-14
<PAGE>
On February 16, 1999, Adelphia redeemed $154,500 of its 9 1/2% Senior Pay-
In-Kind Notes due 2004 at 103.56% of principal. As a result of this
transaction, Adelphia recognized an extraordinary loss on early retirement of
debt of $6,676.
On May 6, 1999, certain subsidiaries and affiliates of Adelphia 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 acquisitions, capital
expenditures, investments, and other general corporate purposes.
On December 15, 1999, Adelphia redeemed the entire $125,000 of its 11 7/8%
Senior Debentures due 2004 at 104.5% of principal amount plus accrued interest.
As a result of this transaction, Adelphia recognized an extraordinary loss on
early retirement of debt of $7,302.
Also, on December 7, 1999, a majority-owned joint venture of Adelphia closed
on a $1,000,000 credit facility. The credit facility consists of a $500,000, 8
year reducing revolving credit loan and a $500,000, 8 year term loan. Proceeds
from the initial borrowings were used to pay existing indebtedness.
Adelphia Business Solutions (CLEC Segment)
During the nine months ended December 31, 1998, Adelphia Business Solutions
successfully completed an IPO of Adelphia Business Solutions Class A common
stock ("ABIZ Stock"). As part of the offering, Adelphia purchased an
incremental 3,324,001 shares of ABIZ Stock for $49,900 and converted
indebtedness owed to the Company by Adelphia Business Solutions into 3,642,666
shares of ABIZ Stock. In addition, Adelphia purchased warrants issued by
Adelphia Business Solutions to MCI Metro Access Transmission Services, Inc.,
and purchased shares of Adelphia Business Solutions Class B common stock from
certain executive officers of Adelphia Business Solutions for a total purchase
price of approximately $12,580 and $3,000, respectively. Additional net
proceeds of $191,411 to Adelphia Business Solutions were received as a result
of the sale of 12,500,000 shares of ABIZ Stock to the public. In a related
transaction on June 5, 1998, Adelphia Business Solutions issued and sold
350,000 shares of ABIZ Stock at the $16.00 IPO price pursuant to the
underwriters' over allotment option in the IPO. As a result of the IPO,
Adelphia's additional paid-in capital increased approximately $147,000 and
minority interests increased approximately $45,000. Net proceeds from this
transaction have been used primarily to fund capital expenditures, working
capital, increases in ownership interests in existing networks and for general
corporate purposes.
On March 2, 1999 Adelphia Business Solutions 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 Adelphia Business Solutions at a price equal to the aggregate
principal amount less the discount to the initial purchasers. The net proceeds
of approximately $295,000 were used to fund Adelphia Business Solutions'
acquisition of interests held by local partners in certain of its markets and
were used to fund capital expenditures and investments in its networks and for
general corporate and working capital purposes.
During November 1999, Adelphia Business Solutions issued and sold 8,750,000
shares of ABIZ Stock at a price to the public of $30.00 per share, prior to the
exercise of any underwriters' over-allotment option. Simultaneously, Adelphia
purchased 5,181,350 shares of Adelphia Business Solutions Class B Common Stock
at a price equal to the public offering price less the underwriting discount in
the public offering. These transactions raised approximately $403,000 of net
proceeds to continue the expansion of Adelphia Business Solutions' existing
markets and to build new markets. At December 31, 1999, Adelphia owned
approximately 60% of the Adelphia Business Solutions' outstanding common stock
and approximately 90% of the total voting power. As a result of this offering,
Adelphia's additional paid-in-capital increased approximately $109,015 and
minority interests increased approximately $144,000.
For additional information regarding Adelphia's and Adelphia Business
Solutions' financing transactions, see Notes 3, 4 and 6 to Adelphia's
Consolidated Financial Statements.
A-15
<PAGE>
Acquisitions
Adelphia, excluding Adelphia Business Solutions (Cable and Other Segment)
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 October 1, 1999, the redemption of the partnership interests in Olympus
held by Telesat Cablevision, Inc., a subsidiary of FPL Group, Inc. was
completed. The redemption was made in exchange for non cash assets of Olympus
of approximately $100,000.
On October 1, 1999, Adelphia acquired Century through a merger whereby
Century was merged with and into a wholly owned subsidiary of Adelphia,
Arahova, pursuant to an agreement and plan of merger, dated as of March 5,
1999, and as amended on July 12, 1999 and as further amended on July 29, 1999.
In connection with the closing of the Century acquisition, Adelphia issued
approximately 47,800,000 new shares of Adelphia Class A common stock and paid
approximately $811,900 to the stockholders of Century, and assumed
approximately $1,700,000 of debt. This transaction was approved by Century and
Adelphia stockholders at their respective stockholders' meetings on October 1,
1999. As of August 31, 1999, Century had approximately 1,610,000 basic
subscribers after giving effect to Century's pending joint venture with AT&T,
which closed on December 7, 1999. At the effective time of the merger, Adelphia
also purchased Citizens Cable Company's 50% interest in the Citizens/Century
Cable Television Joint Venture, one of Century's 50% owned joint ventures, for
a purchase price of approximately $131,900, comprised of approximately $27,700
in cash, approximately 1,850,000 shares of Adelphia Class A common stock and
the assumption of indebtedness. This joint venture serves approximately 92,300
basic subscribers in California and was jointly owned by Century and Citizens
Cable Company, a subsidiary of Citizens Utilities Company. Accordingly, the
financial results of the acquired systems are included in the consolidated
results of Adelphia effective from the date acquired.
On October 1, 1999, Adelphia acquired FrontierVision. As of October 1, 1999,
FrontierVision served approximately 710,000 basic subscribers primarily in
Ohio, Kentucky, New England and Virginia. In connection with the acquisition,
Adelphia issued 7,000,000 shares of its Class A common stock, assumed debt of
approximately $1,150,000 and paid cash of approximately $543,300. Accordingly,
the financial results of the acquired systems are included in the consolidated
results of Adelphia effective from the date acquired.
On October 1, 1999, Adelphia acquired Harron Communications Corp.
("Harron"). As of October 1, 1999, Harron served approximately 296,000 basic
subscribers primarily in Southeastern Pennsylvania, Michigan, Massachusetts and
New Hampshire and were purchased for an aggregate purchase price of
approximately $1,211,704. Accordingly, the financial results of the acquired
systems are included in the consolidated results of Adelphia effective from the
date acquired.
On December 7, 1999, subsidiaries of Arahova consummated a transaction with
AT&T to form a joint venture limited partnership in the Los Angeles, CA area.
Pursuant to this agreement, the Company, Arahova and AT&T contributed cable
systems that served approximately 800,000 basic subscribers. Arahova and
Adelphia hold a combined interest of 75% and AT&T holds a 25% interest in the
partnership. As part of this transaction, Arahova and AT&T exchanged cable
systems owned by Arahova in certain communities in northern California for
certain cable systems owned by AT&T in southern California, allowing each of
them to unify operations in existing service areas. AT&T exchanged its East San
Fernando Valley cable system serving approximately 103,500 basic subscribers
for Arahova's northern California cable systems (San Pablo, Benecia, Fairfield
and Rohnert Park, California), which serve approximately 96,500 basic
subscribers. No gain or loss was recognized on this system swap due to the
Company's application of purchase accounting in connection with the Arahova
merger.
A-16
<PAGE>
In addition to the acquisitions mentioned above, for the year ended December
31, 1999, Adelphia completed several other acquisitions. These acquisitions
served approximately 136,700 basic subscribers at the date of acquisition
primarily in Ohio, Virginia, Kentucky, Pennsylvania, California and West
Virginia and were purchased for an aggregate price of approximately $539,200.
Accordingly, the financial results of the acquired systems are included in the
consolidated results of Adelphia effective from the date acquired.
Adelphia Business Solutions (CLEC Segment)
During March 1999, Adelphia Business Solutions consummated purchase
agreements with subsidiaries of Multimedia, Inc. and MediaOne of Colorado Inc.
to acquire their respective interests in jointly owned networks located in the
Wichita, KS, Jacksonville, FL and Richmond, VA markets for an aggregate of
approximately $89,800. The agreements increased Adelphia Business Solutions'
ownership interest in each of these networks to 100%. Accordingly, the
financial results of the acquired networks are included in the consolidated
results of Adelphia Business Solutions effective from the date acquired.
During June 1999, Adelphia Business Solutions consummated a purchase
agreement with Entergy Corporation ("Entergy"), the parent of its local partner
in the Baton Rouge, LA, Little Rock, AR, and Jackson, MS markets, whereby
Entergy received approximately $36,500 for its ownership interests in these
markets. The agreements increased Adelphia Business Solutions' ownership
interest in each of these networks to 100%. Accordingly, the financial results
of the acquired networks are included in the consolidated results of Adelphia
Business Solutions effective from the date acquired.
Resources
The Company plans to continue to explore and consider new commitments,
arrangements or transactions to refinance existing debt, increase the Company's
liquidity or decrease the Company's leverage. These could include, among other
things, the future issuance by Adelphia, or its subsidiaries, of public or
private equity or debt and the negotiation of new or amended credit facilities.
These could also include entering into acquisitions, joint ventures or other
investment or financing activities, although no assurance can be given that any
such transactions will be consummated. The Company's ability to borrow under
current credit facilities and to enter into refinancings and new financings is
limited by covenants contained in Adelphia's indentures and its subsidiaries'
credit agreements, including covenants under which the ability to incur
indebtedness is in part a function of applicable ratios of total debt to cash
flow.
The Company believes that cash and cash equivalents, internally generated
funds, borrowings under existing credit facilities, and future financing
sources will be sufficient to meet its short-term and long-term liquidity and
capital requirements. Although in the past the Company has been able to
refinance its indebtedness or obtain new financing, there can be no assurance
that the Company will be able to do so in the future or that the terms of such
financings would be favorable.
Management believes that the telecommunications industry, including the
cable television and telephone industries, continues to be in a period of
consolidation characterized by mergers, joint ventures, acquisitions, sales of
all or part of cable companies or their assets, and other partnering and
investment transactions of various structures and sizes involving cable or
other telecommunications companies. The Company continues to evaluate new
opportunities that allow for the expansion of its business through the
acquisition of additional cable television systems in geographic proximity to
its existing regional markets or in locations that can serve as a basis for new
market areas. The Company, like other telecommunications companies, has
participated from time to time and is participating in preliminary discussions
with third parties regarding a variety of potential transactions, and the
Company has considered and expects to continue to consider and explore
potential transactions of various types with other cable and telecommunications
companies. However, no assurances can be given as to whether any such
transaction may be consummated or, if so, when.
A-17
<PAGE>
Affiliates
Olympus. On October 1, 1999, the remaining 50% partnership interest in
Olympus was redeemed and Olympus became a consolidated, wholly owned subsidiary
of Adelphia as of that date. Therefore, all intercompany accounts and
transactions have been eliminated subsequent to October 1, 1999. Prior to
October 1, 1999, the Company served as the managing general partner of Olympus
and held $5 of voting general partnership interests representing, in the
aggregate, 50% of the voting interests of Olympus. The Company also held
nonvoting PLP interests in Olympus, which entitled the Company to a 16.5% per
annum priority return. The remaining equity in Olympus consisted of voting and
non-voting partnership interests held by Telesat, which were redeemed on
October 1, 1999.
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 Class A common stock on a fully converted basis. Adelphia
and Telesat also agreed to a redemption of Telesat's interests in Olympus for
approximately $100,000. The redemption occurred on October 1, 1999.
During the year ended March 31, 1998, the nine months ended December 31,
1998 and the nine months ended September 30, 1999, the Company made net
investments in and advances to Olympus totaling $11,466, $222,610 and $350,053,
respectively. The increase in the investments and advances to Olympus for the
nine months ended September 30, 1999 is due primarily to advances used to pay
down subsidiary credit facilities with banks and institutions. During the year
ended March 31, 1998, the nine months ended December 31, 1998, and the nine
months ended September 30, 1999, the Company received priority investment
income from Olympus of $47,765, $36,000 and $36,000, respectively.
During the year ended March 31, 1998 and the nine months ended December 31,
1998, Olympus acquired several cable and security systems, adding approximately
128,000 subscribers for approximately $269,900. No significant acquisitions
occurred during the year ended December 31, 1999. For additional information
regarding Olympus acquisitions and financings, see Olympus' Annual Report on
Form 10-K for the year ended December 31, 1999, also filed with the SEC.
Managed Partnerships. During the years ended March 31, 1998 and December 31,
1999, the Company made advances in the net amounts of $21,458 and $134,469,
respectively, to these and other related parties, primarily for capital
expenditures and working capital purposes. During the nine months ended
December 31, 1998, the Managed Partnerships and other related parties repaid
advances in the net amount of $8,150.
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.
At its January 2000 meeting, the Emerging Issues Task Force ("EITF") reached
consensus with respect to issues related to EITF 98-3, "Determining Whether a
Transaction is an Exchange of Similar Productive Assets or a Business
Combination." As a result of this consensus, Adelphia will be required to
account for cable system swaps as a purchase and a disposition of a business at
fair value. Management of the Company will monitor the impact of EITF 98-3 as
it relates to future transactions of the Company.
A-18
<PAGE>
Inflation
In the year ended March 31, 1998, the nine months ended December 31, 1998
and the year ended December 31, 1999, inflation did not have a significant
effect on the Company. Periods of high inflation could have an adverse effect
to the extent that increased borrowing costs for floating-rate debt may not be
offset by increases in subscriber rates. At December 31, 1999, after giving
effect to interest rate hedging agreements, approximately $2,348,470 of the
Company's total debt was subject to floating interest rates.
Regulatory and Competitive Matters
The cable television operations of the Company may be adversely affected by
changes and developments in governmental regulation, competitive forces and
technology. The cable television industry and the Company are subject to
extensive regulation at the federal, state and local levels. The 1992 Cable Act
significantly expanded the scope of regulation of certain subscriber rates and
a number of other matters in the cable industry, such as mandatory carriage of
local broadcast stations and retransmission consent, and increased the
administrative costs of complying with such regulations. The FCC has adopted
rate regulations that establish, on a system-by-system basis, maximum allowable
rates for (i) basic and cable programming services (other than programming
offered on a per-channel or per-program basis), based upon a benchmark
methodology, and (ii) associated equipment and installation services based upon
cost plus a reasonable profit. Under the FCC rules, franchising authorities are
authorized to regulate rates for basic services and associated equipment and
installation services, and the FCC will regulate rates for regulated cable
programming services in response to complaints filed with the agency. The 1996
Act ended FCC regulation of cable programming service tier rates on March 31,
1999.
Rates for basic services are set pursuant to a benchmark formula.
Alternatively, a cable operator may elect to use a cost-of-service methodology
to show that rates for basic services are reasonable. Refunds with interest
will be required to be paid by cable operators who are required to reduce
regulated rates. The FCC has reserved the right to reduce or increase the
benchmarks it has established. The rate regulations also limit increases in
regulated rates to an inflation indexed amount plus increases in certain costs
such as taxes, franchise fees, costs associated with specific franchise
requirements and increased programming costs. Cost-based adjustments to these
capped rates can also be made in the event a cable operator adds or deletes
channels or completes a significant system rebuild or upgrade. Because of the
limitation on rate increases for regulated services, future revenue growth from
cable services will rely to a much greater extent than has been true in the
past on increased revenues from unregulated services and new subscribers than
from increases in previously unregulated rates.
The FCC has adopted regulations implementing all of the requirements of the
1992 Cable Act. The FCC is also likely to continue to modify, clarify or refine
the rate regulations. Adelphia cannot predict the effect of the 1996 Act or
future rulemaking proceedings or changes to the rate regulations.
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
Because such franchises are generally non-exclusive, there is a potential for
competition with the systems from other operators of cable television systems,
including public systems operated by municipal franchising authorities
themselves, and from other distribution systems capable of delivering
television programming to homes. The 1992 Cable Act and the 1996 Act contain
provisions which encourage competition from such other sources. The Company
cannot predict the extent to which competition will materialize from other
cable television operators, local telephone companies, other distribution
systems for delivering television programming to the home, or other potential
competitors, or, if such competition materializes, the extent of its effect on
the Company.
The 1996 Act repealed the prohibition on CLECs from providing video
programming directly to customers within their local exchange areas other than
in rural areas or by specific waiver of FCC rules. The 1996 Act also authorized
CLECs to operate "open video systems" ("OVS") without obtaining a local cable
franchise,
A-19
<PAGE>
although CLECs operating such a system can be required to make payments to
local governmental bodies in lieu of cable franchise fees. Where demand exceeds
capacity, up to two-thirds of the channels on an OVS must be available to
programmers unaffiliated with the CLEC. The statute states that the OVS scheme
supplants the FCC's "video dialtone" rules. The FCC has promulgated rules to
implement the OVS concept, and New Jersey Bell Telephone Company has been
granted permission to convert its video dialtone authorization in Dover
Township, New Jersey to an OVS authorization.
The Company believes that the provision of video programming by telephone
companies in competition with the Company's existing operations could have an
adverse effect on the Company's financial condition and results of operations.
At this time, the impact of any such effect is not known or estimable.
The Company also competes with DBS service providers. DBS has been available
to consumers since 1994. A single DBS satellite can provide more than 100
channels of programming. DBS service can be received virtually anywhere in the
United States through the installation of a small outdoor antenna. DBS service
is being heavily marketed on a nationwide basis by several service providers.
At this time, any impact of DBS competition on the Company's future results is
not known or estimable.
A-20
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(Dollars in thousands)
The Company uses fixed and variable rate debt to fund its working capital
requirements, capital expenditures and acquisitions. These debt arrangements
expose the Company to market risk related to changes in interest rates. The
Company enters into pay-fixed agreements to effectively convert a portion of
its variable-rate debt to fixed-rate debt to reduce the risk of incurring
higher interest costs due to rising interest rates. As of December 31, 1999,
the Company had interest rate swap agreements covering notional principal of
$115,000 that expire through 2008 and that fix the interest rate at an average
of 6.68%. The Company also enters into receive-fixed agreements to effectively
convert a portion of its fixed-rate debt to a variable-rate debt which is
indexed to LIBOR to reduce the risk of incurring higher interest costs in
periods of falling interest rates. As of December 31, 1999, 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 5.86%. The
Company enters into interest rate caps to reduce the risk of incurring higher
interest costs due to rising interest rates. As of December 31, 1999, 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 6.88%. As of
December 31, 1999, 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 maximum floor rates of 4.65% and 4.95%,
respectively. The Company does not enter into any interest rate swaps, caps or
collars 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 December
31, 1999.
<TABLE>
<CAPTION>
Expected Maturity Fair
------------------------------------------------ Fair
2000 2001 2002 2003 2004 Thereafter Total Value
-------- -------- -------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt and Redeemable
Preferred Stock:
Fixed Rate.............. $282,375 $ 23,000 $545,000 $897,840 $531,847 $4,899,506 $7,179,506 $6,625,411
Average Interest Rate.. 9.86% 9.87% 9.88% 9.87% 9.86% 9.78%
Variable Rate........... 108,371 262,401 341,571 443,350 387,300 1,553,574 3,096,567 3,096,567
Average Interest Rate.. 7.97% 8.50% 8.62% 8.62% 8.64% 8.45%
Interest Rate Swaps,
Caps and Collars:
Variable to Fixed Swaps $ 40,000 $ -- $ -- $ -- $ -- $ 75,000 $ 115,000 $ 5,287
Average Pay Rate........ 6.68% -- -- -- -- 6.68%
Average Receive Rate.... 6.24% -- -- -- -- 7.32%
Fixed to Variable
Swaps.................. -- -- 35,000 45,000 -- -- 80,000 (2,113)
Average Pay Rate........ -- -- 5.86% 5.86% -- --
Average Receive Rate.... -- -- 7.08% 7.10% -- --
Interest Rate Caps...... -- -- 400,000 -- -- -- 400,000 3,470
Average Cap Rate........ -- 6.88% -- --
Interest Rate Collars... -- 100,000 100,000 -- -- -- 200,000 (41)
Maximum Cap Rate........ -- 6.64% 6.64% -- -- --
Average Cap and Floor
Rate................... -- 5.95% 6.30% -- -- --
Minimum Floor Rate...... -- 4.65% 4.95% -- -- --
</TABLE>
Interest rates on variable debt are estimated by us using the average
implied forward London Interbank Offer Rate ("LIBOR") rates for the year of
maturity based on the yield curve in effect at December 31, 1999, plus the
borrowing margin in effect at December 31, 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
December 31, 1999.
A-21
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Adelphia and related notes thereto
and independent auditors' report follow.
A-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Adelphia Communications Corporation:
We have audited the accompanying consolidated balance sheets of Adelphia
Communications Corporation and subsidiaries as of December 31, 1998 and 1999,
and the related consolidated statements of operations, of convertible preferred
stock, common stock and other stockholders' equity (deficiency), and of cash
flows for the year ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Adelphia Communications
Corporation and subsidiaries at December 31, 1998 and 1999, and the results of
their operations and their cash flows for the year ended March 31, 1998, the
nine months ended December 31, 1998 and the year ended December 31, 1999 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 29, 2000
A-23
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS:
Property, plant and equipment--net.................. $ 1,207,655 $ 3,972,329
Intangible assets--net.............................. 1,029,159 12,095,873
Cash and cash equivalents........................... 398,644 186,874
U.S. government securities--pledged................. 58,054 29,899
Investments......................................... 196,893 280,874
Subscriber receivables--net......................... 53,911 194,399
Prepaid expenses and other assets--net.............. 114,625 328,675
Investment in and amounts due from Olympus (Note
1)................................................. 191,408 --
Related party receivables--net...................... 44,108 178,577
----------- -----------
Total............................................. $ 3,294,457 $17,267,500
=========== ===========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
Subsidiary debt..................................... $ 1,717,240 $ 6,513,813
Parent debt......................................... 1,810,212 2,777,919
Accounts payable.................................... 96,985 442,561
Subscriber advance payments and deposits............ 19,377 57,651
Accrued interest and other liabilities.............. 137,131 495,564
Deferred income taxes............................... 109,609 2,113,097
----------- -----------
Total liabilities................................. 3,890,554 12,400,605
----------- -----------
Minority interests.................................. 48,784 736,497
----------- -----------
Adelphia Business Solutions redeemable exchangeable
preferred stock.................................... 228,674 260,848
----------- -----------
13% Series B cumulative redeemable exchangeable
preferred stock.................................... 148,191 148,363
----------- -----------
Commitments and contingencies (Note 5)
Convertible preferred stock, common stock and other
stockholders' equity (deficiency):
8 1/8% Series C convertible preferred stock
($100,000 liquidation preference).................. 1 1
5 1/2% Series D convertible preferred stock
($575,000 liquidation preference).................. -- 29
Class A common stock, $.01 par value, 200,000,000
and 1,200,000,000 shares authorized, 31,258,843 and
113,051,118 shares outstanding, respectively....... 313 1,131
Class B common stock, $.01 par value, 25,000,000 and
300,000,000 shares authorized, respectively,
10,834,476 shares outstanding...................... 108 108
Additional paid-in capital.......................... 738,102 5,863,633
Accumulated other comprehensive income.............. -- 3,239
Accumulated deficit................................. (1,760,270) (1,997,553)
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........................ -- (149,401)
----------- -----------
Convertible preferred stock, common stock and other
stockholders' equity (deficiency).................. (1,021,746) 3,721,187
----------- -----------
Total............................................. $ 3,294,457 $17,267,500
=========== ===========
</TABLE>
See notes to consolidated financial statements.
A-24
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Revenues.................................. $ 524,889 $ 496,014 $1,287,968
--------- --------- ----------
Operating expenses:
Direct operating and programming........ 167,288 167,963 432,612
Selling, general and administrative..... 95,731 107,249 340,579
Depreciation and amortization........... 145,041 140,823 370,836
Merger and integration costs............ -- -- 4,736
--------- --------- ----------
Total................................. 408,060 416,035 1,148,763
--------- --------- ----------
Operating income.......................... 116,829 79,979 139,205
--------- --------- ----------
Other income (expense):
Priority investment income from
Olympus................................ 47,765 36,000 36,000
Interest expense--net (Note 1).......... (243,554) (180,452) (359,585)
Equity in loss of Olympus and other
joint ventures......................... (66,089) (48,891) (60,618)
Equity in loss of Adelphia Business
Solutions joint ventures............... (12,967) (9,580) (7,758)
Minority interest in net losses of
subsidiaries........................... -- 25,772 38,699
Adelphia Business Solutions preferred
stock dividends........................ (12,682) (21,536) (32,173)
Other................................... 2,538 1,113 1,865
--------- --------- ----------
Total................................... (284,989) (197,574) (383,570)
--------- --------- ----------
Loss before income taxes and extraordinary
loss..................................... (168,160) (117,595) (244,365)
Income tax benefit........................ 5,606 6,802 14,493
--------- --------- ----------
Loss before extraordinary loss............ (162,554) (110,793) (229,872)
Extraordinary loss on early retirement of
debt (net of income taxes of $7,200 in
1999).................................... (11,325) (4,337) (10,658)
--------- --------- ----------
Net loss.................................. (173,879) (115,130) (240,530)
Dividend requirements applicable to
preferred stock.......................... (18,850) (20,718) (41,963)
--------- --------- ----------
Net loss applicable to common
stockholders............................. (192,729) (135,848) (282,493)
Other comprehensive income--unrealized
gain on available-for-sale securities
(net of income taxes of $2,237)........ -- -- 3,239
--------- --------- ----------
Comprehensive income...................... $(192,729) $(135,848) $ (279,254)
========= ========= ==========
Basic and diluted loss per weighted
average share of common stock before
extraordinary loss....................... $ (6.07) $ (3.63) $ (3.73)
Basic and diluted extraordinary loss on
early retirement of debt per weighted
average share of common stock............ (0.38) (0.12) (0.15)
Basic and diluted net loss per weighted
average share of common stock............ $ (6.45) $ (3.75) $ (3.88)
========= ========= ==========
Weighted average shares of common stock
outstanding (in thousands)............... 29,875 36,226 72,824
========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
A-25
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK, COMMON STOCK
AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Series C Series D Class Class Other
Convertible Convertible A B Additional Compre-
Preferred Preferred Common Common Paid-In hensive Accumulated Treasury
Stock Stock Stock Stock Capital Income Deficit Stock Total
----------- ----------- ------ ------ ---------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1997................... $-- $-- $161 $109 $219,408 $-- $(1,473,559) $-- $(1,253,881)
Issuance of Class A
common stock for cable
television assets..... -- -- 39 -- 33,792 -- -- -- 33,831
Issuance of Series C
convertible preferred
stock................. 1 -- -- -- 96,999 -- -- -- 97,000
Dividend requirements
applicable to
exchangeable preferred
stock................. -- -- -- -- (14,246) -- -- -- (14,246)
Dividend requirements
applicable to
convertible preferred
stock................. -- -- -- -- (4,604) -- -- -- (4,604)
Other.................. -- -- -- -- (86) -- -- -- (86)
Net loss............... -- -- -- -- -- -- (173,879) -- (173,879)
--- --- ---- ---- -------- --- ----------- --- -----------
Balance, March 31,
1998................... 1 -- 200 109 331,263 -- (1,647,438) -- (1,315,865)
--- --- ---- ---- -------- --- ----------- --- -----------
Adelphia Business
Solutions issuance of
Class A common stock.. -- -- -- - 146,440 -- -- -- 146,440
Issuance of Class A
common stock.......... -- -- 88 -- 267,838 -- -- -- 267,926
Dividend requirements
applicable to
exchangeable preferred
stock................. -- -- -- -- (14,625) -- -- -- (14,625)
Dividend requirements
applicable to
convertible preferred
stock................. -- -- -- -- (6,093) -- -- -- (6,093)
Issuance of Class A
common stock for
affiliate cable
television assets..... -- -- 23 -- 77,085 -- -- -- 77,108
Excess of purchase
price over carrying
value of cable
television assets
purchased from
affiliate............. -- -- -- -- (63,676) -- -- -- (63,676)
Conversion of Class B
common stock into
Class A common stock.. -- -- 1 (1) -- -- -- -- --
Other.................. -- -- 1 -- (130) -- 2,298 -- 2,169
Net loss............... -- -- -- -- -- -- (115,130) -- (115,130)
--- --- ---- ---- -------- --- ----------- --- -----------
Balance, December 31,
1998................... $ 1 $-- $313 $108 $738,102 $-- $(1,760,270) $-- $(1,021,746)
=== === ==== ==== ======== === =========== === ===========
</TABLE>
See notes to consolidated financial statements.
A-26
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK, COMMON STOCK
AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY) (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Series C Series D Class Class Accumulated
Convertible Convertible A B Additional Other
Preferred Preferred Common Common Paid-In Comprehensive Accumulated Treasury
Stock Stock Stock Stock Capital Income Deficit Stock Total
----------- ----------- ------ ------ ---------- ------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1998.......... $ 1 $-- $ 313 $108 $ 738,102 $ -- $(1,760,270) $ -- $(1,021,746)
--- --- ------ ---- ---------- ------ ----------- --------- -----------
Net proceeds from
issuance of Class
A common stock.... -- -- 225 -- 1,186,290 -- -- -- 1,186,515
Net proceeds from
issuance of Series
D Convertible
Preferred stock... -- 29 -- -- 557,430 -- -- -- 557,459
Adelphia Business
Solutions Issuance
of Class A common
stock............. -- -- -- -- 109,015 -- -- -- 109,015
Treasury stock
purchase.......... -- -- -- -- -- -- -- (149,401) (149,401)
Dividend
requirements
applicable to
exchangeable
preferred stock... -- -- -- -- (19,500) -- -- -- (19,500)
Dividend
requirements
applicable to
convertible
preferred stock... -- -- -- -- (22,239) -- -- -- (22,239)
Issuance of Class A
common stock in
connection with
acquisitions...... -- -- 593 -- 3,336,145 -- -- -- 3,336,738
Net unrealized gain
on available-for-
sale securities... -- -- -- -- -- 3,239 -- -- 3,239
Other.............. -- -- -- -- (21,610) -- 3,247 -- (18,363)
Net loss........... -- -- -- -- -- -- (240,530) -- (240,530)
--- --- ------ ---- ---------- ------ ----------- --------- -----------
Balance, December
31, 1999.......... $ 1 $29 $1,131 $108 $5,863,633 $3,239 $(1,997,553) $(149,401) $ 3,721,187
=== === ====== ==== ========== ====== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
A-27
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $ (173,879) $ (115,130) $ (240,530)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........... 145,041 140,823 370,836
Noncash interest expense................ 37,430 23,663 52,068
Noncash dividends....................... 12,682 21,536 32,173
Equity in loss of Olympus and other
joint ventures......................... 66,089 48,891 60,618
Equity in loss of Adelphia Business
Solutions joint ventures............... 12,967 9,580 7,758
Gain on sale of investments............. (2,538) -- (2,354)
Minority interest in losses of
subsidiaries........................... -- (25,772) (38,699)
Extraordinary loss on early retirement
of debt--net of income tax benefit..... 11,325 4,337 10,658
Decrease in deferred taxes, net of
effects of acquisitions................ (6,305) (6,510) (18,179)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Subscriber receivables................. (4,351) (19,874) (70,110)
Prepaid expenses and other............. (23,437) (6,942) 210,381
Accounts payable....................... 4,282 31,029 232,991
Subscriber advance payments and
deposits.............................. 658 1,678 (14,594)
Accrued interest and other............. (13,694) 31,051 (260,878)
---------- ---------- ----------
Net cash provided by operating
activities.............................. 66,270 138,360 332,139
---------- ---------- ----------
Cash flows used for investing activities:
Acquisitions, net of cash acquired...... (146,546) (403,851) (2,178,037)
Expenditures for property, plant and
equipment.............................. (183,586) (255,797) (819,197)
Investments in Adelphia Business
Solutions joint ventures............... (64,260) (69,018) (24,496)
Investments in other joint ventures..... (22,591) (12,540) (31,869)
Purchase of minority interest in
Adelphia Business Solutions............ -- (15,580) --
Investment in U.S. government
securities--pledged.................... (83,400) -- --
Sale of U.S. government securities--
pledged................................ 15,653 15,312 30,626
Amounts invested in and advanced to
Olympus and related parties............ (91,468) (274,216) (521,649)
Proceeds from sale of investments....... 12,678 -- --
Other................................... -- -- 22,400
---------- ---------- ----------
Net cash used for investing activities... (563,520) (1,015,690) (3,522,222)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from debt...................... 1,298,137 836,176 3,184,579
Repayments of debt...................... (977,591) (269,778) (1,971,534)
Costs associated with debt financings... (20,498) (7,125) (35,562)
Premium paid on early retirement of
debt................................... (12,153) (3,634) (13,566)
Issuance of Adelphia Business Solutions
Class A common stock................... -- 205,599 262,413
Issuance of Class A common stock........ -- 275,880 1,215,999
Costs associated with issuances of
common stock........................... -- (22,196) (30,366)
Issuance of redeemable exchangeable
preferred stock........................ 147,976 -- --
Issuance of convertible preferred
stock.................................. 97,000 -- 557,649
Issuance of Adelphia Business Solutions
redeemable exchangeable preferred
stock.................................. 194,522 -- --
Payments to acquire treasury stock...... -- -- (149,401)
Preferred stock dividends paid.......... (14,787) (15,843) (41,898)
---------- ---------- ----------
Net cash provided by financing
activities.............................. 712,606 999,079 2,978,313
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents............................. 215,356 121,749 (211,770)
Cash and cash equivalents, beginning of
period.................................. 61,539 276,895 398,644
---------- ---------- ----------
Cash and cash equivalents, end of
period.................................. $ 276,895 $ 398,644 $ 186,874
========== ========== ==========
Supplemental disclosure of cash flow
activity--cash payments for interest.... $ 220,888 $ 162,113 $ 331,427
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
A-28
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. The Company and Summary of Significant Accounting Policies:
The Company and Basis for Consolidation
Adelphia Communications Corporation and subsidiaries ("Adelphia") owns,
operates and manages cable television systems and other related
telecommunications businesses. Adelphia's operations consist primarily of
selling video programming which is distributed to subscribers for a monthly fee
through a network of fiber optic and coaxial cables. These services are offered
in the respective franchise areas under the name Adelphia. Adelphia Business
Solutions, Inc. (formerly Hyperion Telecommunications, Inc.) and subsidiaries
("Adelphia Business Solutions" or "ABIZ") is a consolidated subsidiary of
Adelphia which owns, operates and manages entities which provide competitive
local exchange carrier ("CLEC") telecommunications services under the name
Adelphia Business Solutions.
On March 30, 1999, the Board of Directors of Adelphia changed Adelphia's
fiscal year from March 31 to December 31. The decision was made to conform to
general industry practice and for administrative purposes. The change became
effective for the nine months ended December 31, 1998.
On October 25, 1999, the stockholders of Hyperion Telecommunications, Inc.
elected to change the name Hyperion to Adelphia Business Solutions, Inc. The
name change was effective October 25, 1999.
The consolidated financial statements include the accounts of Adelphia, its
majority owned subsidiaries and subsidiaries that are 50% owned and controlled
by Adelphia. All significant intercompany accounts and transactions have been
eliminated in consolidation.
During the year ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 1999, Adelphia consummated several
acquisitions, each of which was accounted for using the purchase method.
Accordingly, the financial results of each acquisition have been included in
the consolidated results of Adelphia effective from the date acquired.
On September 12, 1997, Adelphia Business Solutions consummated an agreement
with Time Warner Entertainment-Advance/Newhouse ("TWEAN") to exchange interests
in four New York CLEC networks. As a result of the transaction, Adelphia
Business Solutions paid TWEAN $7,638 and increased its ownership in the
networks serving Buffalo and Syracuse, New York to 60% and 100%, respectively,
and eliminated its interest in the Albany and Binghamton networks, which became
wholly owned by TWEAN.
On December 3, 1997, Adelphia exchanged its interest in Oxford, North
Carolina, a system which served approximately 4,400 subscribers, for TWEAN's
interest in its DuBois, Pennsylvania system, which served approximately 3,800
subscribers.
On February 12, 1998, Adelphia Business Solutions issued a warrant for
731,624 shares of Adelphia Business Solutions Class A Common Stock to its 50%
partner in Adelphia Business Solutions of Harrisburg in exchange for such
partnership interest.
On February 12, 1998, Adelphia Business Solutions acquired the remaining
partnership interests in its Buffalo, NY, Louisville, KY and Lexington, KY
networks for approximately $18,300.
On February 12, 1998, Adelphia Business Solutions acquired the remaining
partnership interests in its Morristown and New Brunswick, NJ networks for
approximately $26,328.
A-29
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
On March 6, 1998, Adelphia exercised its option to purchase the remaining
15% of its Northeast Cable, Inc. system. Adelphia issued 341,220 shares of
Class A common stock to the sellers in connection with this purchase.
In addition to the acquisitions mentioned above, during the year ended March
31, 1998, Adelphia completed several other acquisitions. Systems acquired
served approximately 65,500 basic subscribers at the date of acquisition
primarily in Virginia, western New York, Pennsylvania, Maryland and West
Virginia and were purchased for an aggregate price of approximately $107,000 in
cash and 3,571,428 shares of Adelphia Class A common stock.
On April 1, 1998, Adelphia exchanged its interest in its Mansfield, Ohio
area systems, which served approximately 64,400 subscribers, and approximately
$11,000 cash for Time Warner Entertainment's interests in systems adjacent to
systems owned or managed by Adelphia in Virginia, New England and New York,
which served approximately 70,200 subscribers.
On July 31, 1998, Adelphia consummated its transaction with AT&T to form a
joint venture limited partnership in the Western New York region (the "Western
New York Partnership"). Pursuant to this agreement, Adelphia contributed its
Western New York and Lorain, Ohio systems totaling approximately 298,000
subscribers and certain programming assets and $440,000 in debt. Subsidiaries
of AT&T contributed their cable systems in Buffalo, New York; Erie,
Pennsylvania; and Ashtabula and Lake County, Ohio, totaling approximately
171,000 subscribers and $228,000 in debt. Adelphia and AT&T hold a 66.7% and
33.3% interest, respectively, in the partnership. Adelphia manages the
partnership.
On September 30, 1998, Adelphia merged one of its subsidiaries with the
subsidiary of AT&T that held an interest in Syracuse Hilton Head Holdings, L.P.
("SHHH, L.P."), an Adelphia managed partnership controlled by the Rigas family,
principal stockholders of Adelphia. Pursuant to the merger agreement, AT&T
received 2,250,000 newly issued shares of Adelphia's Class A common stock.
Simultaneously, SHHH, L.P. distributed certain cable systems, which served
approximately 34,100 subscribers, in Virginia and North Carolina to Adelphia,
in exchange for the interest acquired by Adelphia from AT&T as described above,
Adelphia's preferred equity investment in Managed Partnership and certain
affiliate receivables owed to Adelphia.
In addition to the acquisitions mentioned above, for the nine months ended
December 31, 1998, Adelphia completed several other acquisitions. These
acquisitions served approximately 75,250 basic subscribers at the date of
acquisition primarily in southern New York, western Pennsylvania, Connecticut
and Vermont and were purchased for an aggregate price of approximately
$163,500.
On January 21, 1999, Adelphia acquired Verto Communications, Inc. ("Verto")
pursuant to a merger agreement among 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.
On March 31, 1999, Adelphia Business Solutions 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, Adelphia Business Solutions 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, Adelphia Business Solutions' ownership interest in each of these
networks increased to 100%.
A-30
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
On October 1, 1999, the partnership interests of Olympus held by Telesat
Cablevision, Inc., a subsidiary of FPL Group, Inc. were redeemed. The
redemption was made in exchange for noncash assets of Olympus of approximately
$100,000. As a result of this transaction, Adelphia's ownership in Olympus
increased to 100% and Adelphia began to consolidate Olympus into its financial
statements effective October 1, 1999.
On October 1, 1999, Adelphia acquired Century Communications Corp.,
("Century") through a merger whereby Century was merged with and into a wholly
owned subsidiary of Adelphia, Arahova Communications, Inc., ("Arahova")
pursuant to an agreement and plan of merger, dated as of March 5, 1999, and as
amended on July 12, 1999 and as further amended on July 29, 1999. In connection
with the closing of the Century acquisition, Adelphia issued approximately
47,800,000 new shares of Adelphia Class A common stock and paid approximately
$811,900 to the stockholders of Century, and assumed approximately $1,700,000
of debt. This transaction was approved by Century and Adelphia stockholders at
their respective stockholders' meetings on October 1, 1999. As of October 1,
1999, Century had approximately 1,610,000 basic subscribers primarily in
California, Puerto Rico, and throughout the United States after giving effect
to Century's pending joint venture with AT&T, which closed on December 7, 1999.
At the effective time of the merger, Adelphia also purchased Citizens Cable
Company's 50% interest in the Citizens/Century Cable Television Joint Venture,
one of Century's 50% owned joint ventures, for a purchase price of
approximately $131,900, comprised of approximately $27,700 in cash,
approximately 1,850,000 shares of Adelphia Class A common stock and the
assumption of indebtedness. This joint venture serves approximately 92,300
basic subscribers in California and was jointly owned by Century and Citizens
Cable Company, a subsidiary of Citizens Utilities Company.
On October 1, 1999, Adelphia acquired FrontierVision Partners, L.P.
("FrontierVision"). As of October 1, 1999, FrontierVision served approximately
710,000 basic subscribers primarily in Ohio, Kentucky, New England and
Virginia. In connection with the acquisition, Adelphia issued 7,000,000 shares
of its Class A common stock, assumed debt of approximately $1,150,000 and paid
cash of approximately $543,300.
On October 1, 1999, Adelphia acquired Harron Communications Corp.
("Harron"). As of October 1, 1999, Harron served approximately 296,000 basic
subscribers primarily in southeastern Pennsylvania, Michigan, Massachusetts and
New Hampshire and were purchased for an aggregate price of approximately
$1,211,704.
On December 7, 1999, subsidiaries of Arahova consummated a transaction with
AT&T to form a joint venture limited partnership in the Los Angeles, CA area.
Pursuant to this agreement, Arahova, Adelphia and AT&T contributed cable
systems that served approximately 800,000 basic subscribers. Arahova and
Adelphia hold a combined interest of 75% and AT&T holds a 25% interest in the
partnership. As part of this transaction, Arahova and AT&T exchanged cable
systems owned by Arahova in certain communities in northern California for
certain cable systems owned by AT&T in southern California, allowing each of
them to unify operations in existing service areas. AT&T exchanged its East San
Fernando Valley cable system serving approximately 103,500 basic subscribers
for Arahova's northern California cable systems (San Pablo, Benecia, Fairfield
and Rohnert Park, California), serving approximately 96,500 basic subscribers.
No gain or loss was recognized on this system swap due to the Company's
application of purchase accounting in connection with the Arahova merger.
In addition to the acquisitions mentioned above, for the year ended December
31, 1999, Adelphia completed several other acquisitions. These acquisitions
served approximately 136,700 basic subscribers at the date of acquisition
primarily in Ohio, Virginia, Kentucky, Pennsylvania, California and West
Virginia and were purchased for an aggregate price of approximately $539,200.
A-31
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
The approximate aggregate purchase price for the significant 1999
acquisitions was comprised of the following:
<TABLE>
<S> <C>
Cash, net of cash acquired.......................................... $1,992,000
Assumed debt........................................................ 4,530,000
Adelphia Class A common stock....................................... 3,337,000
----------
$9,859,000
==========
</TABLE>
The value assigned to the Adelphia Class A common stock was based on the
average closing price of Adelphia Class A common stock a few days before and
after the respective acquisitions were agreed to and announced.
The Company has made a preliminary allocation of the purchase price based on
estimated fair values. A final allocation of the purchase price will be made
upon receipt of final third party appraisals. The preliminary allocation was as
follows:
<TABLE>
<S> <C>
Property, plant and equipment...................................... $ 1,983,000
Intangible assets (primarily franchise)............................ 10,473,000
Other.............................................................. (2,597,000)
-----------
$ 9,859,000
===========
</TABLE>
The following unaudited financial information assumes that the acquisitions
that were consummated during the year ended December 31, 1999 had occurred on
April 1, 1997.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Revenues................................... $1,875,023 $1,583,431 $2,486,645
Loss before extraordinary loss............. 522,659 369,721 351,858
Net loss................................... 553,385 439,229 405,083
Basic and diluted net loss per weighted
average share of common stock............. 6.21 4.60 3.51
</TABLE>
Investment in Olympus Joint Venture Partnership
As described above, Adelphia's ownership in Olympus increased to 100%
effective October 1, 1999, at which time Adelphia began to consolidate Olympus
into its financial statements. Prior to October 1, 1999, Adelphia's investment
in the partnership comprised both limited and general partner interests. The
general partner interest represented a 50% voting interest in Olympus and was
being accounted for using the equity method. Under this method, Adelphia's
investment, initially recorded at the historical cost of contributed property,
was adjusted for subsequent capital contributions and its share of the losses
of the partnership as well as its share of the accretion requirements of the
partnership's interests. The limited partner interest represented a preferred
interest ("PLP interests") entitled to a 16.5% annual return. At March 31, 1998
and December 31, 1998, Adelphia owned $325,911 and $366,861 in Olympus PLP
interests, respectively.
A-32
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
The PLP interests were nonvoting, were senior to claims of certain other
partner interests, and provided for an annual priority return of 16.5%. Olympus
was not required to pay the entire 16.5% return currently and priority return
on PLP interests was recognized as income by Adelphia when received.
Correspondingly, equity in net loss of Olympus excludes accumulated unpaid
priority return (Note 2). After October 1, 1999, all such investments and
returns eliminate in the consolidation of Adelphia.
Subscriber Revenues
Subscriber revenues are recorded in the month the service is provided.
Property, Plant and Equipment
Property, plant and equipment, at cost, are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Operating plant and equipment.......................... $1,317,467 $ 3,427,724
Telecommunications networks............................ 59,764 139,248
Network monitoring..................................... 165,697 431,078
Real estate and improvements........................... 81,934 194,983
Support equipment...................................... 30,533 92,438
Construction in progress............................... 283,133 825,265
---------- -----------
1,938,528 5,110,736
Accumulated depreciation............................... (730,873) (1,138,407)
---------- -----------
$1,207,655 $ 3,972,329
========== ===========
</TABLE>
Depreciation is computed on the straight-line method using estimated useful
lives of 5 to 12 years for operating plant and equipment and 3 to 20 years for
support equipment and real estate. Additions to property, plant and equipment
are recorded at cost which includes amounts for material, applicable labor and
overhead, and interest. Depreciation expense amounted to $93,688, $98,699 and
$222,158 for the year ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 1999, respectively. Capitalized interest
amounted to $5,985, $11,285 and $25,135 for the year ended March 31, 1998, the
nine months ended December 31, 1998 and the year ended December 31, 1999,
respectively.
Intangible Assets
Intangible assets, at cost, net of accumulated amortization, are comprised
of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- -----------
<S> <C> <C>
Purchased franchises.................................... $ 828,410 $ 9,480,123
Goodwill................................................ 119,012 2,390,050
Non-compete agreements.................................. 8,922 15,383
Purchased subscribers lists............................. 72,815 210,317
---------- -----------
$1,029,159 $12,095,873
========== ===========
</TABLE>
A-33
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
A portion of the aggregate purchase price of systems acquired has been
allocated to purchased franchises, purchased subscriber lists, goodwill and
non-compete agreements. Purchased franchises and goodwill are amortized on the
straight-line method over 40 years. Purchased subscriber lists are amortized on
the straight-line method over periods which range from 5 to 10 years. Non-
compete agreements are amortized on the straight-line method over their
contractual lives which range from 4 to 12 years. Accumulated amortization of
intangible assets amounted to $249,618 and $615,772 at December 31, 1998 and
1999, respectively.
Cash and Cash Equivalents
Adelphia considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Interest income on liquid
investments was $13,383, $10,752 and $31,809 for the year ended March 31, 1998,
the nine months ended December 31, 1998 and the year ended December 31, 1999,
respectively. Book overdrafts of $7,855 and $35,000 existed at December 31,
1998 and 1999, respectively. These book overdrafts were reclassified as accrued
interest and other liabilities and accounts payable.
U.S. Government Securities--Pledged
U.S. Government Securities--Pledged consist of highly liquid investments
which will be used to pay the first six semi-annual interest payments of the
Adelphia Business Solutions 12 1/4% Senior Secured Notes. Such investments are
classified as held-to-maturity and the carrying value approximates market
value.
Investments
The equity method of accounting is generally used to account for investments
which are greater than 20% but not more than 50% owned. Under this method,
Adelphia's initial investment is recorded at cost and subsequently adjusted for
the amount of its equity in the net income or losses of its investees.
Dividends or other distributions are recorded as a reduction of Adelphia's
investment. Investments accounted for using the equity method generally reflect
Adelphia's equity in the investee's underlying assets.
Investments in entities in which Adelphia's ownership is 20% or less are
generally accounted for using the cost method. Under the cost method,
Adelphia's initial investment is recorded at cost and subsequently adjusted for
the excess, if any, of dividends or other distributions received over its share
of cumulative earnings. Dividends received in excess of earnings subsequent to
the date the investment was made are recorded as reductions of the cost of the
investment.
A-34
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Adelphia's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Investments accounted for
using the equity method:
Gross investment:
Adelphia Business
Solutions' joint
ventures................. $138,614 $ 61,400
Mobile communications..... 18,249 19,865
Programming ventures...... 1,469 10,627
Other..................... 2,308 1,430
-------- --------
Total................... 160,640 93,322
-------- --------
Investments accounted for
using the cost method:
Niagara Frontier Hockey,
L.P...................... 44,897 47,533
Benbow PCS Ventures,
Inc...................... 17,170 17,192
Convertible preferred
stock.................... -- 87,433
Other..................... 6,787 12,972
-------- --------
Total................... 68,854 165,130
-------- --------
Investments accounted for as
available-for-sale
securities:
Common stock warrants..... -- 49,890
-------- --------
Total investments before
cumulative equity in net
losses..................... 229,494 308,342
Cumulative equity in net
losses..................... (32,601) (27,468)
-------- --------
Total investments........... $196,893 $280,874
======== ========
</TABLE>
As a result of the acquisition of Arahova, Adelphia obtained approximately
113,983 shares of United International Holdings, Inc. ("UIH") Series B
convertible preferred stock. Each share of this stock is convertible into
approximately 21 shares of UIH Class A common stock, at a conversion price of
$10.625 per share. This equity instrument was recorded at its fair value of
$87,433 on October 1, 1999 in connection with purchase accounting.
As a result of a contract between Arahova and At Home Corporation ("@Home")
to provide @Home high speed internet access on certain systems, Adelphia has
received a warrant contract to purchase up to 5,260,000 shares of @Home Series
A common stock at $5.25 per share. Deferred revenue is recorded for the fair
value of the warrants when earned with corresponding revenue recognized over
the remaining life of the contract, which expires in May 2004. The investment
in @Home warrants is classified as an available-for-sale security. During 1999,
Adelphia recognized revenue of $1,500 related to these warrants. Adelphia's
investment in @Home warrants of $34,366 at December 31, 1999 includes $2,354 of
unrealized loss.
Adelphia received warrants to purchase 325,000 shares of common stock in
connection with the purchase of digital converters. These warrants are recorded
at fair value as a reduction of the cost of such converters when earned. This
investment is classified as an available-for-sale security. Adelphia has 18
months to exercise these warrants once they are earned. Approximately 108,000
of these warrants must be exercised by June 30, 2000 or they expire. As of
December 31, 1999, Adelphia's investment in these warrants totaled $15,524 and
includes an unrealized gain of $7,830.
Certain members of the Rigas family have entered into an agreement to
acquire all the voting interests of Niagara Frontier Hockey, L.P. ("NFHLP").
Closing of the agreement is subject to third party approvals.
A-35
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Adelphia has capital funding notes of NFHLP of $44,897 and $47,533 as of
December 31, 1998 and 1999, respectively. The capital funding notes are
convertible into non-voting preferred equity of NFHLP at the option of
Adelphia. These amounts represent advances to NFHLP plus accrued return of
11.5% to 14.0%. The return on these capital funding notes amounted to
approximately $5,100, $4,400 and $3,800 for the year ended March 31, 1998, the
nine months ended December 31, 1998 and the year ended December 31, 1999,
respectively. Adelphia advanced approximately $7,500 and $14,700, respectively,
during the nine months ended December 31, 1998 to fund working capital
requirements of NFHLP. These amounts could be repaid by NFHLP in the future or
converted into programming rights to air future Buffalo Sabres hockey games.
NFHLP continues to generate net losses and working capital deficiencies and is
attempting to re-negotiate the terms of certain of its operating and financial
agreements. The ability of NFHLP to re-negotiate the terms of certain operating
and financial agreements will impact the ability of NFHLP to generate positive
operating cash flow in the future. Adelphia is unable to predict the ability of
NFHLP to successfully re-negotiate these agreements on terms that are favorable
to NFHLP. Management believes that all amounts advanced to NFHLP and the
related accrued return are recoverable.
On September 30, 1999, the FCC granted Adelphia Business Solutions' request
to transfer, and Adelphia Business Solutions transferred 195 31-Ghz licenses
from Baker Creek Communications (an equity method investment) to a wholly owned
subsidiary of Adelphia Business Solutions. At December 31, 1999, $44,605
related to the licenses are included in prepaid expenses and other assets--net
on the Consolidated Balance Sheet at December 31, 1999.
Subscriber Receivables
An allowance for doubtful accounts of $2,853 and $17,796 is recorded as a
reduction of subscriber receivables at December 31, 1998 and 1999,
respectively.
Amortization of Other Assets and Debt Discounts
Deferred debt financing costs, included in prepaid expenses and other
assets, and debt discounts, a reduction of the carrying amount of the debt, are
amortized over the term of the related debt. The unamortized amounts of
deferred debt financing costs included in prepaid expenses and other assets
were $47,542 and $117,838 at December 31, 1998 and 1999, respectively. The
aggregate amount by which fair value assigned in purchase accounting to debt
and interest rate swaps exceeded or was less than carrying value at the
acquisition date is being amortized over the respective remaining 1 to 18 year
lives of the underlying debt obligations.
Franchise Expense
The typical term of Adelphia's franchise agreements upon renewal is 10
years. Franchise fees range from 3% to 5% of certain subscriber revenues and
are expensed currently.
Basic and Diluted Net Loss Per Weighted Average Share of Common Stock
Basic net loss per weighted average share of common stock is computed based
on the weighted average number of common shares outstanding after giving effect
to dividend requirements on Adelphia's preferred stock. Diluted net loss per
weighted average common share is equal to basic net loss per weighted average
common share because Adelphia's convertible preferred stock had an antidilutive
effect for the periods presented; however, the convertible preferred stock
could have a dilutive effect on earnings per share in future periods.
A-36
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Asset Impairments
Adelphia periodically reviews the carrying value of its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying value of assets may not be recoverable. Measurement of any impairment
would include a comparison of estimated future operating cash flows anticipated
to be generated during the remaining life of the assets with their net carrying
value. An impairment loss would be recognized as the amount by which the
carrying value of the assets exceeds their fair value.
Noncash Financing and Investing Activities
Capital leases entered into during the year ended March 31, 1998, the nine
months ended December 31, 1998 and the year ended December 31, 1999 totaled
$2,842, $15,522 and $10,034, respectively, for Adelphia, excluding Adelphia
Business Solutions. Adelphia Business Solutions entered into capital leases
totaling $24,500, $1,156 and $5,772, respectively, during the year ended March
31, 1998, the nine months ended December 31, 1998 and the year ended December
31, 1999. Reference is made to Notes 1 and 6 for descriptions of additional
noncash financing and investing activities.
Interest Expense--Net
Interest expense--net includes interest income of $23,949, $20,952 and
$97,797 for the year ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 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 (Note 11).
Interest Rate Swaps, Caps and Collar Agreements
Net settlement amounts under interest rate swaps, caps and collar agreements
are recorded as adjustments to interest expense during the period incurred
(Note 3).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income (Loss)
Comprehensive income is required to be presented when a company has items of
other comprehensive income during the periods presented. In 1999, other
comprehensive income consisted of net unrealized gains on available-for-sale
securities. Items of other comprehensive income are excluded from net loss and
are included in arriving at comprehensive income (loss).
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
A-37
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
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.
At its January 2000 meeting, the Emerging Issues Task Force ("EITF") reached
consensus with respect to issues related to EITF 98-3, "Determining Whether a
Transaction is an Exchange of Similar Productive Assets or a Business
Combination." As a result of this consensus, Adelphia will be required to
account for cable system swaps as a purchase and a disposition of a business at
fair value. Management of the Company will monitor the impact of EITF 98-3 as
it relates to future transactions of the Company.
Reclassifications
Certain March 31, 1998 and December 31, 1998 amounts have been reclassified
to conform with the December 31, 1999 presentation.
2. Related Party Investments and Receivables:
Related party receivables--net represent advances to managed partnerships
(Note 11), John J. Rigas and certain members of his immediate family
(collectively, the "Rigas family"), including entities they own or control (the
"Managed Partnerships"). No related party advances are collateralized.
As described in Note 1, effective October 1, 1999, Adelphia's ownership
interest in Olympus increased to 100%. The information below is as of and for
the year ended December 31, 1998, when Adelphia accounted for Olympus under the
equity method. Investment in and amounts due from Olympus is comprised of the
following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Cumulative equity in loss over investment in Olympus............... $(102,888)
Amounts due from Olympus........................................... 294,296
---------
$ 191,408
=========
</TABLE>
The major components of the financial position of Olympus as of December 31,
1998 and its results of operations for the years ended December 31, 1997 and
1998 were as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Balance Sheet Data:
Property, plant and equipment--net............................... $ 355,470
Total assets..................................................... 1,011,999
Subsidiary debt.................................................. 519,443
Parent debt...................................................... 200,000
Total liabilities................................................ 1,147,946
Limited partners' interests...................................... 570,298
General partners' equity (deficiency)............................ (706,245)
</TABLE>
A-38
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Statement of Operations Data:
Revenues................................................. $176,363 $ 215,642
Operating income......................................... 34,392 38,944
Net loss................................................. (19,802) (16,074)
Net loss of general and limited partners
after priority return................................... (95,695) (105,530)
</TABLE>
On October 6, 1993, Adelphia purchased the preferred Class B Limited
Partnership Interest in SHHH, L.P., a managed partnership, for a price of
$18,338 from Robin Media Group. The Class B Limited Partnership Interest had a
preferred return annually which was payable on a current basis at the option of
SHHH, L.P., and was senior in priority to the partnership interests of the
Rigas family and TCI. Preferred return on the Class B Limited Partner Interest
in SHHH, L.P. totaled $3,750 and $2,017 and is included in revenues for the
year ended March 31, 1998 and the nine months ended December 31, 1998,
respectively. On September 30, 1998, the Class B Limited Partner Interest was
redeemed (Note 1).
3. Debt:
Subsidiary Debt
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Notes to banks and institutions........................... $1,200,970 $3,088,477
Subsidiary public debt.................................... 470,784 3,337,376
Other debt................................................ 45,486 87,960
---------- ----------
Total subsidiary debt..................................... $1,717,240 $6,513,813
========== ==========
</TABLE>
Notes to Banks and Institutions
The amount of borrowings available to Adelphia under its revolving credit
agreements is generally based upon the subsidiaries achieving certain levels of
operating performance. Adelphia had an aggregate of $1,456,620 in unused credit
lines with banks, part of which is subject to achieving certain levels of
operating performance, at December 31, 1999 which expire through December 31,
2007. Adelphia pays commitment fees of up to 0.5% of unused principal.
Borrowings under most of these credit arrangements of subsidiaries are
collateralized by a pledge of the stock in their respective subsidiaries, and,
in some cases, by other assets. These agreements limit, among other things,
additional borrowings, investments, transactions with affiliates and other
subsidiaries, and the payment of dividends and fees by the subsidiaries. The
agreements also require maintenance of certain financial ratios by the
subsidiaries. Several of the subsidiaries' agreements, along with the notes of
the parent company, contain cross default provisions. At December 31, 1999,
approximately $1,262,472 of the net assets of subsidiaries would be permitted
to be transferred to the parent company in the form of dividends, priority
return and loans without the prior approval of the lenders based upon the
results of operations of such subsidiaries for the quarter ended December 31,
1999. The subsidiaries are permitted to pay management fees to the parent
company or other subsidiaries. Such fees are limited to a percentage of the
subsidiaries' revenues.
Certain subsidiaries of Adelphia are co-borrowers with Managed Partnerships
under credit facilities for borrowings of up to $1,025,000. Each of the co-
borrowers is liable for all borrowings under the credit
A-39
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
agreements, although the lenders have no recourse against Adelphia other than
against Adelphia's interest in such subsidiaries.
Notes to banks and institutions mature at various dates through 2007. Bank
debt interest rates are based upon one or more of the following rates at the
option of Adelphia: prime rate plus 0% to 1.5%; certificate of deposit rate
plus 1.25% to 2.75%; or LIBOR plus .625% to 2.5%. Total bank debt with interest
rates under these options was approximately $1,173,220 and $3,073,102 at
December 31, 1998 and 1999, respectively. At December 31, 1998 and 1999, the
weighted average interest rate on notes payable to banks and institutions was
7.89% and 7.72%, respectively. At December 31, 1998 and 1999, the rates on
35.9% and 26.2%, respectively, of Adelphia's notes payable to banks and
institutions were fixed for at least one year through the terms of the notes or
interest rate swap, cap or collar agreements.
During the nine months ended December 31, 1998 and the year ended December
31, 1999, Adelphia redeemed $137,200 and $37,815 aggregate principal amount of
subsidiary notes to banks and institutions. As a result of these transactions,
Adelphia recognized an extraordinary loss on early retirement of debt of $1,970
and $2,441, respectively.
Subsidiary Public Debt
Interest on subsidiary public debt is due semi-annually. The subsidiary
public debt is effectively subordinated to all liabilities of subsidiary notes
to banks and institutions and is senior to the parent debt. The subsidiary
public debt agreements contain restrictions on, among other things, the
incurrence of indebtedness, mergers and sale of assets, certain restricted
payments, investments in affiliates and certain other affiliate transactions.
The agreements also require maintenance of certain financial ratios.
The following table summarizes the subsidiary public debt:
<TABLE>
<CAPTION>
Outstanding as of
-------------------------
Interest Issue Amount December 31, December 31, Maturity First Call First Call
Subsidiary Rate Date Issued 1998 1999 (a) Date Date Rate
---------- ----------- -------- ------- ------------ ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ABIZ 13.000% 04/15/96 329,000 $220,784 $ 253,860 04/15/03 04/15/01 106.500%
ABIZ 12.250% 08/27/97 250,000 250,000 250,000 09/01/04 09/01/01 106.125%
ABIZ 12.000% 03/02/99 300,000 -- 300,000 11/01/07 11/01/03 106.000%
Olympus 10.625% 11/12/96 200,000 -- 203,537 11/15/06 11/15/01 105.313%
FrontierVision 11.000% 10/02/96 200,000 -- 212,541 10/15/06 10/15/01 105.500%
FrontierVision 11.875% 09/16/97 237,650 -- 205,979 09/15/07 09/15/01 107.917%
FrontierVision 11.875% 12/02/98 91,298 -- 78,522 09/15/07 09/15/01 107.917%
Arahova 9.500% 08/14/92 150,000 -- 148,773 08/15/00 N/A N/A
Arahova 9.750% 02/15/92 200,000 -- 201,172 02/15/02 N/A N/A
Arahova Zero coupon 04/01/93 444,000 -- 318,234 03/15/03 N/A N/A
Arahova 9.500% 03/06/95 250,000 -- 250,852 03/01/05 N/A N/A
Arahova 8.875% 01/17/97 250,000 -- 242,542 01/15/07 N/A N/A
Arahova 8.750% 09/23/97 225,000 -- 216,105 10/01/07 N/A N/A
Arahova 8.375% 11/07/97 100,000 -- 94,048 11/15/17 N/A N/A
Arahova 8.375% 12/04/97 100,000 -- 94,106 12/15/07 N/A N/A
Arahova Discount 01/08/98 605,000 -- 267,105 01/15/08 N/A N/A
-------- ----------
$470,784 $3,337,376
======== ==========
</TABLE>
--------
(a) Amounts outstanding include discounts or premiums recorded as a result of
purchase accounting, as applicable.
A-40
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Other Subsidiary Debt
As of December 31, 1998 and 1999, other debt consists primarily of capital
leases incurred in connection with the acquisition of, and are collateralized
by, certain equipment. The interest rate on such debt is based on the Federal
Funds rate plus 1.4% or the U.S. Treasury rate plus 2.8%.
Parent Debt
Interest on the Parent Debt is due semi-annually. The Parent Debt is
effectively subordinated to all liabilities of the subsidiaries and the
agreements contain restrictions on, among other things, the incurrence of
indebtedness, mergers and sale of assets, certain restricted payments by
Adelphia, investments in affiliates and certain other affiliate transactions.
The agreements further require that Adelphia maintain a ratio of debt to
annualized operating cash flow not greater than 8.75 to 1.00, based on the
latest fiscal quarter. Net proceeds from the issuance of notes during the nine
months ended December 31, 1998 and the year ended December 31, 1999 were used
to reduce amounts outstanding on Adelphia's subsidiaries' notes payable to
banks and to purchase, redeem or otherwise retire all or a portion of the 9
1/2% Senior Notes Paid-In-Kind due 2004 and 11 7/8% Senior Debentures due 2004.
<TABLE>
<CAPTION>
Outstanding as of
-------------------------
Interest Issue Amount December 31, December 31, Maturity First Call First Call
Rate Date Issued 1998 1999 Date Date Rate
-------- -------- -------- ------------ ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
10 1/4% 07/28/93 $110,000 $ 99,653 99,872 07/15/00 Non-call N/A
9 1/4% 09/25/97 325,000 325,000 325,000 10/01/02 Non-call N/A
9 1/2%(a) 02/15/94 150,000 186,347 31,847 02/15/04 2/15/99 103.56%
10 1/2% 07/07/97 150,000 150,000 150,000 07/15/04 Non-call N/A
11 7/8%(b) 09/10/92 125,000 124,613 -- 09/15/04 9/15/99 104.50%
9 7/8% 03/11/93 130,000 128,531 128,711 03/01/05 Non-call N/A
9 7/8% 02/26/97 350,000 347,586 347,791 03/01/07 Non-call N/A
8 3/8% 01/21/98 150,000 149,197 149,259 02/01/08 Non-call N/A
8 3/8% 11/12/98 150,000 150,000 150,000 02/01/08 Non-call N/A
8 1/8% 07/02/98 150,000 149,285 149,419 07/15/03 Non-call N/A
7 1/2% 01/13/99 100,000 -- 100,000 01/15/04 Non-call N/A
7 3/4% 01/13/99 300,000 -- 300,000 01/15/09 Non-call N/A
7 7/8% 04/28/99 350,000 -- 350,000 05/01/09 Non-call N/A
9 3/8% 11/16/99 500,000 -- 496,020 11/15/09 Non-call N/A
---------- ----------
$1,810,212 $2,777,919
========== ==========
</TABLE>
--------
(a) These Senior Notes are Pay-in-Kind with respect to interest payments at
the option of Adelphia. On February 15, 1999, Adelphia redeemed $154,500
aggregate principal amount of notes at 103.56% of principal. As a result,
Adelphia recognized an extraordinary loss on early retirement of debt of
$6,676.
(b) On December 15, 1999, Adelphia redeemed $125,000 aggregate principal
amount of 11 7/8%Senior Debentures at 104.5% of principal. As a result,
Adelphia recognized an extraordinary loss on early retirement of debt of
$7,302.
A-41
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Maturities of Debt
The following table sets forth the mandatory reductions in principal under
all debt agreements for each of the next five years based on amounts
outstanding at December 31, 1999:
<TABLE>
<S> <C>
Year ending December 31:
2000.......................................................... $ 390,746
2001.......................................................... 285,401
2002.......................................................... 886,571
2003.......................................................... 1,341,190
2004.......................................................... 919,147
</TABLE>
Adelphia intends to fund its requirements for maturities of debt through
borrowings under new and existing credit arrangements and internally generated
funds. Changing conditions in the financial markets may have an impact on how
Adelphia will refinance its debt in the future.
Interest Rate Swaps, Caps and Collar Agreements
Adelphia has entered into interest rate swaps, caps and collar agreements
with banks, Olympus (prior to October 1, 1999) and Managed Partnerships (Note
11) to reduce the impact of changes in interest rates on its debt. Several of
Adelphia's credit arrangements include provisions which require interest rate
protection for a portion of its debt. Adelphia enters into pay-fixed agreements
to effectively convert a portion of its variable-rate debt to fixed-rate debt
to reduce the risk of incurring higher interest costs due to rising interest
rates. Adelphia enters into receive-fixed agreements to effectively convert a
portion of its fixed-rate debt to variable-rate debt which is indexed to LIBOR
to reduce the risk of incurring higher interest costs in periods of falling
interest rates. Interest rate cap and collar agreements are used to reduce the
impact of increases in interest rates on variable-rate debt. Adelphia is
exposed to market risk in the event of nonperformance by the banks or by the
Managed Partnerships. Adelphia does not expect any such nonperformance.
A-42
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
The following table summarizes the notional amounts outstanding and weighted
average interest rate data, based on variable rates in effect at December 31,
1998 and 1999, for these swaps, caps and collar agreements, which expire
through 2008.
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Pay Fixed Swaps:
Notional amount.......................................... $650,000 $115,000
Average receive rate..................................... 5.33% 6.24%
Average pay rate......................................... 6.55% 6.68%
Receive Fixed Swaps:
Notional amount.......................................... $ 45,000 $ 80,000
Average receive rate..................................... 5.98% 6.35%
Average pay rate......................................... 5.32% 5.86%
Interest Rate Caps:
Notional amount.......................................... $140,000 $400,000
Average cap rate......................................... 7.82% 6.88%
Interest Rate Collars:
Notional amount.......................................... $ -- $200,000
Average cap and floor rate............................... -- 6.13%
Maximum cap rate......................................... -- 6.64%
Maximum floor rate....................................... -- 4.80%
</TABLE>
On September 17, 1999, a subsidiary of Adelphia terminated a $400,000
interest rate swap agreement with a financial institution, which resulted in a
$15,200 gain that has been deferred and included in accrued interest and other
liabilities in the accompanying 1999 consolidated balance sheet. The
amortization of the deferred gain, which amounted to $558 in 1999, is being
recognized as an adjustment to interest expense over the term of the related
debt.
4. Redeemable Preferred Stock:
12 7/8% Adelphia Business Solutions Redeemable Exchangeable Preferred Stock
On October 9, 1997, Adelphia Business Solutions issued $200,000 aggregate
liquidation preference of 12 7/8% Senior Exchangeable Redeemable Preferred
Stock due October 15, 2007. Dividends are payable quarterly commencing January
15, 1998 at 12 7/8% of the liquidation preference of outstanding preferred
stock. Through October 15, 2002, dividends are payable in cash or additional
shares of preferred stock at Adelphia Business Solutions' option. Subsequent to
October 15, 2002, dividends are payable in cash. The preferred stock ranks
junior in right of payment to all indebtedness of Adelphia Business Solutions,
its Subsidiaries and Joint Ventures. On or before October 15, 2000, and subject
to certain restrictions, Adelphia Business Solutions may redeem, at it option,
up to 35% of the initial aggregate liquidation preference of the preferred
stock originally issued with the net cash proceeds of one or more Qualified
Equity Offerings (as defined in the Certificate of Designation) at a redemption
price equal to 112.875% of the liquidation preference per share of the
preferred stock, plus, without duplication, accumulated and unpaid dividends to
the date of redemption; provided that, after any such redemption, there are
remaining outstanding shares of preferred stock having an aggregate liquidation
preference of at least 65% of the initial aggregate liquidation preference of
the preferred stock originally issued. On or after October 15, 2002, Adelphia
Business Solutions may redeem, at its option, all or a
A-43
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
portion of the preferred stock at 106.438% of the liquidation preference
thereof declining to 100% of the liquidation preference in 2005. Adelphia
Business Solutions is required to redeem all of the shares of preferred stock
outstanding on October 15, 2007 at a redemption price equal to 100% of the
liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the date of redemption. Preferred stock contains
restrictions and covenants similar to subsidiary public debt.
Adelphia Business Solutions may, at its option, on any dividend payment
date, exchange in whole, but not in part, the then outstanding shares of
preferred stock for 12 7/8% Senior Subordinated Debentures due October 15, 2007
which have provisions consistent with the provisions of the preferred stock.
Adelphia Business Solutions may satisfy, and has to date satisfied, the
dividend requirements on this preferred stock by issuing additional shares.
13% Redeemable Exchangeable Preferred Stock
On July 7, 1997, Adelphia issued $150,000 aggregate liquidation preference
of 13% Cumulative Exchangeable Preferred Stock due July 15, 2009. Dividends are
payable semi-annually commencing January 15, 1998 at 13% of the liquidation
preference of outstanding preferred stock. Dividends are payable in cash with
any accumulated unpaid dividends bearing interest at 13% per annum. The
preferred stock ranks junior in right of payment to all indebtedness of
Adelphia. On or before July 15, 2000, Adelphia may redeem, at its option, up to
33% of the initial aggregate liquidation preference of the preferred stock
originally issued with the net cash proceeds of one or more common equity
offerings at a redemption price equal to 113% of the liquidation preference per
share of the preferred stock, plus, without duplication, accumulated and unpaid
dividends to the date of redemption; provided that, after any such redemption,
there are remaining outstanding shares of preferred stock having an aggregate
liquidation preference of at least 67% of the initial aggregate liquidation
preference of the preferred stock originally issued. On or after July 15, 2002,
Adelphia may redeem, at its option, all or a portion of the preferred stock at
106.500% of the liquidation preference thereof declining to 100% of the
liquidation preference in 2008. Adelphia is required to redeem all of the
shares of preferred stock outstanding on July 15, 2009 at a redemption price
equal to 100% of the liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of redemption. The preferred stock
contains restrictions and covenants similar to Adelphia's parent debt.
Adelphia may, at its option, on any dividend payment date, exchange in whole
or in part (subject to certain restrictions), the then outstanding shares of
preferred stock for 13% Senior Subordinated Exchange Debentures due July 15,
2009 which have provisions consistent with the provisions of the preferred
stock. Adelphia paid cash dividends on this preferred stock of $10,183, $9,750
and $19,500 during the year ended March 31, 1998, the nine months ended
December 31, 1998 and the year ended December 31, 1999, respectively.
No mandatory redemptions of redeemable preferred stock of Adelphia are
required for the next five years as of December 31, 1999.
5. Commitments and Contingencies:
Adelphia rents office and studio space, tower sites, and space on utility
poles under leases with terms which are generally less than one year or under
agreements that are generally cancelable on short notice. Total rental expense
under all operating leases aggregated $7,420, $8,054 and $27,713 for the year
ended March 31, 1998, the nine months ended December 31, 1998 and the year
ended December 31, 1999, respectively.
A-44
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
In connection with certain obligations under franchise agreements, Adelphia
obtains surety bonds guaranteeing performance to municipalities and public
utilities. Payment is required only in the event of nonperformance. Management
believes Adelphia has fulfilled all of its obligations such that no payments
under surety bonds have been required.
As of December 31, 1999, Adelphia has purchase commitments for certain
digital convertors aggregating $105,000.
Adelphia Business Solutions has entered into a series of agreements with
several local and long-haul fiber optic network providers that will allow
Adelphia Business Solutions to accelerate its national expansion. These
agreements, totaling approximately $288,867, provide Adelphia Business
Solutions with ownership or an IRU to over 25,000 route miles of local and
long-haul fiber optic cable. Through December 31, 1999, Adelphia Business
Solutions has paid $108,903 of the total due under the agreements, which was
included in property, plant and equipment. Management of Adelphia Business
Solutions believes this will allow it to expand its business strategy to
include on-net provisioning of regional, local and long distance, internet and
data communications and to cost- effectively further interconnect most of its
53 existing markets and to enter and interconnect approximately 150 new markets
by the end of 2001.
The estimated obligations under these arrangements as of December 31, 1999
are approximately:
<TABLE>
<S> <C>
Period ending December 31,
2000............................................................ $149,911
2001............................................................ 16,039
2002............................................................ 453
2003............................................................ 453
2004............................................................ 453
Thereafter...................................................... 12,655
</TABLE>
The cable television industry and Adelphia are subject to extensive
regulation at the federal, state and local levels. Pursuant to the 1992 Cable
Act, which significantly expanded the scope of regulation of certain subscriber
rates and a number of other matters in the cable industry the FCC adopted rate
regulations that establish, on a system-by-system basis, maximum allowable
rates for (i) basic and cable programming services (other than programming
offered on a per-channel or per-program basis), based upon a benchmark
methodology, or, in the alternative, a cost of service showing, and (ii)
associated equipment and installation services based upon cost plus a
reasonable profit. Under the FCC rules, franchising authorities are authorized
to regulate rates for basic services and associated equipment and installation
services, and the FCC will regulate rates for regulated cable programming
services in response to complaints filed with the agency. The original rate
regulations became effective on September 1, 1993. Several amendments to the
rate regulations have subsequently been added.
The FCC has adopted regulations implementing all of the requirements of the
1992 Cable Act. The FCC is also likely to continue to modify, clarify or refine
the rate regulations. The Telecommunications Act of 1996 (the "1996 Act")
deregulated the rates for cable programming services on March 31, 1999.
Adelphia cannot predict the effect or outcome of the future rulemaking
proceedings, changes to the rate regulations, or litigation.
In February 2000, the Company settled all disputes and claims arising out of
a summons and complaint filed in the United States District Court for the
Northern District of New York, Case Number 99-CV-268, against the Company by
Hyperion Solutions Corporation ("Solutions"), which is described in the
complaint as
A-45
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
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 alleged,
among other matters, that the Company's use of the name "Hyperion" in its
business infringed upon various trademarks and service marks of Solutions in
violation of federal trademark laws and violated various New York business
practices, advertising and business reputation laws. Management of the Company
believes that the Company had meritorious defenses to the complaint and has
vigorously defended this lawsuit including filing a counterclaim against
Solutions. As part of the settlement, Solutions' complaint and the Company's
counterclaim were dismissed with prejudice and both the Company and Solutions
entered into mutual releases regarding the complaint and counterclaim.
Management believes that this matter will not have a material adverse effect
upon the Company.
On or about March 10, 1999, Robert Lowinger, on behalf of himself and all
others similarly situated (the "Plaintiff") commenced an action by filing a
Class Action Complaint (the "Complaint") in the Superior Court of Connecticut,
Judicial District of Stamford/Norwalk against Century, all of its directors,
and Adelphia Communications Corporation ("Adelphia"). The Plaintiff, claiming
that he owns shares of Class A Common Stock of Century, alleged that in
connection with the proposed merger of Century with Adelphia, holders of Class
B Common Stock of Century (which has superior voting rights to the Class A
Common Stock of Century) will receive consideration for their shares that
exceeds by $4.00 per share the consideration to be paid to Century's Class A
shareholders resulting in the Century's Class B shareholders receiving
approximately $170,000 more than if they held the equivalent number of the
Century's Class A shares. The Plaintiff claimed that the individual defendants
breached their fiduciary duties of loyalty, good faith, and due care to
Century's Class A shareholders by approving the higher payment to Century's
Class B shareholders and that Century and Adelphia aided and abetted these
alleged breaches of fiduciary duty. The Plaintiff seeks certification of a
class of Century's Class A shareholders and seeks recovery on behalf of himself
and the class of unspecified damages, profits, and special benefits alleged to
have been wrongfully obtained by the defendants, as well as all costs, expenses
and attorney's fees. On October 21, 1999, Adelphia and Century filed motions to
strike the Complaint, and several of the individual defendants moved to dismiss
all counts in the Complaint against them for lack of personal jurisdiction over
each of them. On January 3, 2000, the court dismissed all counts in the
Complaint as to two of the individual defendants. On January 13, 2000, the
court granted defendants' motions to strike and dismissed Plaintiff's complaint
in its entirety for failure to state a claim upon which relief can be granted.
The court entered judgment on February 16, 2000. To the Company's knowledge the
Plaintiff has not filed an appeal in this action within the time provided by
local court rules for the filing of an appeal.
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 or managed 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.
In December 1999, the Company entered into definitive agreements under which
Cablevision Systems Corporation will sell its cable systems in the greater
Cleveland metropolitan area to Adelphia for approximately $1,530,000 in cash
and securities. As of December 31, 1999, these systems served approximately
307,350 basic subscribers. The transaction is subject to customary closing
conditions and regulatory approval and is expected to close by mid-2000.
A-46
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Adelphia expects to close its October 1, 1999 direct placement of 2,500,000
shares of Adelphia Class B common stock with Highland Holdings, a general
partnership controlled by the Rigas family, by mid-2000. The offering price is
$55 per share, plus an interest factor.
Adelphia and certain subsidiaries are defendants in several putative
subscriber class action suits in state courts in Vermont, 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, in one case, the
Company was required to refund the late fees, however, Adelphia has appealed
this decision. All of these actions are being defended vigorously. The outcome
of these matters cannot be predicted at this time.
During July 1999, Adelphia Business Solutions purchased the naming rights to
the NFL Football Tennessee Titans stadium in Nashville, Tennessee. The term of
the naming rights contract is for 15 years and requires Adelphia Business
Solutions to pay $2,000 per year.
There are no other material pending legal proceedings, other than routine
litigation incidental to the business, to which Adelphia is a part of or which
any of its property is subject.
6. Convertible Preferred Stock, Common Stock and Other Stockholders' Equity
(Deficiency):
Series C Convertible Preferred Stock
On July 7, 1997, Adelphia issued 100,000 shares of 8 1/8% Series C
Cumulative Convertible Preferred Stock with a par value of $.01 per share and
an aggregate liquidation preference of $100,000 of which $80,000 was sold to a
Rigas family affiliate and the remainder was sold to Telesat. The preferred
stock accrues dividends at the rate of 8 1/8% of the liquidation preference per
annum, and is convertible at $8.48 per share into an aggregate of 11,792,450
shares of Class A common stock of Adelphia. The preferred stock is redeemable
at the option of Adelphia on or after August 1, 2000 at 104% of the liquidation
preference declining to 100% of the liquidation preference in 2002. Adelphia
paid cash dividends on this preferred stock of $4,605, $6,093 and $6,500 during
the year ended March 31, 1998, the nine months ended December 31, 1998 and the
year ended December 31, 1999, respectively. On January 29, 1999, Adelphia
purchased from Telesat the 20,000 shares of Series C cumulative convertible
preferred stock.
Series D Convertible Preferred Stock
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, a
portion of which the Company reborrowed to fund the acquisitions which closed
on October 1, 1999.
Adelphia Common Stock Issued
On June 20, 1997, Adelphia issued 3,571,428 shares of Class A common stock
in connection with an acquisition (Note 1).
A-47
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
On March 6, 1998, Adelphia issued 341,220 shares of Class A common stock in
connection with exercising its option to purchase the remaining 15% of its
Northeast Cable, Inc. system (Note 1).
On August 18, 1998, Adelphia issued 8,190,315 shares of Class A common stock
to the public and to the Rigas family. Of this total, 4,100,000 shares were
sold to the public at a price of $32.00 per share, with an underwriter discount
of $1.44 per share. The remaining 4,090,315 shares were sold to entities
controlled by the Rigas family at the public offering price less the
underwriters discount. In a related transaction on September 14, 1998, the
Company issued and sold 615,000 shares of Class A common stock at the offering
price of $32.00, with an underwriter discount of $1.44 per share pursuant to
the underwriters' over-allotment option. Adelphia realized aggregate net
proceeds of $267,926 after deducting underwriter and other fees.
On September 30, 1998, Adelphia issued 2,250,000 shares of Class A common
stock in connection with the acquisition of AT&T interests in SHHH, L.P. (Note
1).
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.
On January 21, 1999, Adelphia issued 2,561,024 shares of Class A common
stock in connection with the acquisition of Verto (Note 1).
On April 28, 1999, Adelphia sold 8,000,000 shares of its Class A common
stock to the public. 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, a portion of which the Company
reborrowed to fund the acquisitions which closed on October 1, 1999.
On October 1, 1999, Adelphia issued 47,800,000, 1,850,000 and 7,000,000
shares of Class A common stock in connection with the acquisitions of Century,
the remaining 50% of the Citizens/Century Joint Venture and FrontierVision,
respectively. (Note 1).
On October 6, 1999, Adelphia sold 6,000,000 shares of its Class A common
stock. Net proceeds of the offering, after deducting offering expenses, were
approximately $330,000. Adelphia initially invested the net proceeds in cash
equivalents and advanced or contributed a portion of the remaining net proceeds
to certain subsidiaries to repay borrowings under subsidiary credit agreements.
The Certificate of Incorporation of Adelphia authorizes two classes of
common stock, Class A and Class B. Holders of Class A common stock and Class B
common stock vote as a single class on all matters submitted to a vote of the
stockholders, with each share of Class A common stock entitled to one vote and
each share of Class B common stock entitled to ten votes, except (i) for the
election of directors and (ii) as otherwise provided by law. In the annual
election of directors, the holders of Class A common stock voting as a separate
class, are entitled to elect one of Adelphia's directors. In addition, each
share of Class B common stock is automatically convertible into a share of
Class A common stock upon transfer, subject to certain limited exceptions. In
the event a cash dividend is paid, the holders of Class A common stock will be
paid 105% of the amount payable per share for each share of Class B common
stock.
Upon liquidation, dissolution or winding up of Adelphia, the holders of
Class A common stock are entitled to a preference of $1.00 per share. After
such amount is paid, holders of Class B common stock are entitled to receive
$1.00 per share. Any remaining amount would then be shared ratably by both
classes.
A-48
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Treasury Stock
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 Business Solutions Common Stock Issued
On May 8, 1998, Adelphia Business Solutions completed an IPO of its Class A
common stock ("ABIZ Stock"). As part of the offering, Adelphia purchased an
incremental 3,324,001 shares of ABIZ Stock for $49,900 and converted
indebtedness owed to the Company by Adelphia Business Solutions into 3,642,666
shares of ABIZ Stock. In addition, Adelphia purchased warrants issued by
Adelphia Business Solutions to MCI Metro Access Transmission Services, Inc.,
and purchased shares of Adelphia Business Solutions Class B common stock from
certain executive officers of Adelphia Business Solutions for a total purchase
price of approximately $12,580 and $3,000, respectively. Additional net
proceeds of $191,411 to Adelphia Business Solutions were received as a result
of the sale of 12,500,000 shares of ABIZ Stock to the public. In a related
transaction on June 5, 1998, Adelphia Business Solutions issued and sold
350,000 shares of its Class A common stock at the $16.00 IPO price pursuant to
the underwriters' over allotment option in the IPO. As a result of the IPO,
Adelphia's additional paid-in capital increased approximately $147,000 and
minority interests increased approximately $45,000.
On November 30, 1999, Adelphia Business Solutions issued and sold 8,750,000
shares of Class A common stock at a price to the public of $30.00 per share.
Simultaneously with the closing of this transaction, Adelphia Business
Solutions issued and sold 5,181,350 shares of its Class B common stock to
Adelphia at a price equal to the public offering price less the underwriting
discount for the Class A common stock (collectively "the Secondary Offering").
The Secondary Offering raised net proceeds of approximately $403,000 to
continue the expansion of Adelphia Business Solutions' existing markets and to
build new markets. At December 31, 1999, Adelphia owned approximately 60% of
the Adelphia Business Solutions' outstanding common stock and approximately 88%
of the total voting power. As a result of the Secondary Offering, Adelphia's
additional paid-in-capital increased approximately $109,015 and minority
interests increased approximately $144,000.
7. Employee Benefit Plans:
Savings Plan
Adelphia has a 401(k) and stock value plan (the "Plan") which provides that
eligible full-time employees may contribute from 2% to 16% of their pre-tax
compensation subject to certain limitations. The Plan also provides for certain
stock incentive awards on an annual basis. Adelphia makes matching
contributions not exceeding 1.5% of each participant's pre-tax compensation.
Adelphia's contributions amounted to $687, $605 and $1,732 for the year ended
March 1998, the nine months ended December 31, 1998, and the year ended
December 31, 1999, respectively.
Adelphia Long-Term Incentive Compensation Plan
On October 6, 1998, Adelphia adopted its 1998 Long-Term Incentive
Compensation Plan (the "1998 Plan"). The 1998 Plan provides for the granting of
(i) options which qualify as "incentive stock options"
A-49
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, (ii) options which do not so qualify, (iii) share awards (with or
without restrictions on vesting), (iv) stock appreciation rights and (v) stock
equivalent or phantom units. The number of shares of Adelphia Class A common
stock available for issuance under the 1998 Plan is 3,500,000. Options, awards
and units may be granted under the 1998 Plan to directors, officers, employees
and consultants of Adelphia. The 1998 Plan provides that incentive stock
options must be granted with an exercise price of not less than the fair market
value of the underlying Adelphia common stock on the date of the grant. Options
outstanding under the Plan may be exercised by paying the exercise price per
share through various alternative settlement methods. During 1999, Adelphia
granted phantom units to certain management employees which represent
compensation bonuses based on Adelphia Class A common stock performance. Such
awards vest over three years from the date of grant. During the year ended
December 31, 1999, Adelphia recorded compensation expense of $2,621 related to
these grants.
The following table summarizes Adelphia stock option activity as a result of
the Century acquisition:
<TABLE>
<CAPTION>
Weighted
Number of average
shares subject exercise price
to options per share
-------------- --------------
<S> <C> <C>
Outstanding, December 31, 1998................. -- $ --
Granted........................................ 337,922 11.68
Exercised...................................... 77,942 12.02
------- ------
Outstanding, December 31, 1999................. 259,980 $11.58
======= ======
</TABLE>
The following table summarizes information about the Adelphia stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Weighted average Weighted
Exercise Number remaining average
price per of contractual life exercise price
share shares (years) per share
--------- ------- ---------------- --------------
<S> <C> <C> <C>
$5.15--$31.99 259,980 6.49 $11.58
</TABLE>
Adelphia Business Solutions Long-Term Incentive Compensation Plan
On October 3, 1996, the Board of Directors and stockholders of Adelphia
Business Solutions approved its 1996 Long-Term Incentive Compensation Plan (the
"1996 Plan"). The 1996 Plan provides for the grant of (i) options which qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (ii) options which do not so qualify, (iii)
share awards (with or without restrictions on vesting), (iv) stock appreciation
rights and (v) stock equivalent or phantom units. The number of shares of
Adelphia Business Solutions' Class A common stock available for issuance
initially was 5,687,500. Such number is to increase each year by 1% of
outstanding shares of all classes of Adelphia Business Solutions' common stock,
up to a maximum of 8,125,000 shares. Options, awards and units may be granted
under the 1996 Plan to directors, officers, employees and consultants. The 1996
Plan provides the incentive stock options must be granted with an exercise
price of not less than the fair market value of the underlying common stock on
the date of grant. Options outstanding under the Plan may be exercised by
paying the exercise price per share through various alternative settlement
methods.
In August 1999, Adelphia Business Solutions issued under the 1996 Plan to
each of John J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P. Rigas
(i) stock options (the "Rigas Options") covering 100,000 shares of Adelphia
Business Solutions' Class A common stock, which options will vest in equal one-
third amounts on the third, fourth and fifth year anniversaries of grant
(vesting conditioned on continued service
A-50
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
as an employee or director) and which shall be exercisable at $16.00 per share
and (ii) stock awards (the "Rigas Grants") covering 100,000 shares of Adelphia
Business Solutions' Class A common stock, which stock awards will vest in equal
one-third amounts on the third, fourth and fifth year anniversaries of grant
(vesting conditioned on continued service as an employee or director).
In addition to the Rigas Options, certain employees have been granted
options to purchase shares of ABIZ Class A common stock at prices equal to the
fair market value of the shares on the date the option was granted. Options are
exercisable beginning from immediately after granting and have a maximum term
of ten years.
The following table summarizes stock option activity under Adelphia Business
Solutions:
<TABLE>
<CAPTION>
Weighted
Number of average
shares subject exercise price
to options per share
-------------- --------------
<S> <C> <C>
Outstanding, December 31, 1998................. -- $ --
Granted........................................ 600,417 15.13
Outstanding, December 31, 1999................. 600,417 $15.13
</TABLE>
The following table summarizes information about Adelphia Business
Solutions' stock options outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------------------------------------------------------------------
Weighted Weighted
average Weighted average
remaining average remaining Weighted
Number of contractual life exercise price per Number contractual life average exercise
Exercise price per share shares (years) share of shares (years) price per share
------------------------ --------- ---------------- ------------------ --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$12.125--$16.00 600,417 5.2 $15.13 200,417 6.3 $13.38
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
requires the Company to disclose pro forma information regarding option grants
made to its employees. SFAS 123 specifies certain valuation techniques that
produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's statement
of operations, because Adelphia applies the provisions of APB 25, "Accounting
for Stock Issued to Employees," which specifies that no compensation charge
arises when the exercise price of the employees' stock options equals or
exceeds the market value of the underlying stock at the grant date, as in the
case of options granted to Adelphia employees.
SFAS 123 pro forma numbers are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Net loss-as reported.......................................... (282,493)
Net loss-Pro forma applying SFAS 123.......................... (284,827)
Basic and diluted net loss per common share-as reported under
ABP 25 ...................................................... (3.88)
Basic and diluted net loss per common share-pro forma under
SFAS 123 .................................................... (3.91)
</TABLE>
A-51
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Under SFAS 123, the fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Employee
Stock Options
Year Ended
December 31,
1999
-------------
<S> <C>
Expected dividend yield........................................ 0%
Risk-free interest rate........................................ 6.93%
Expected volatility............................................ 50%
Expected life (in years)....................................... 5.2
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because Adelphia Business Solutions' employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of Adelphia
Business Solutions' options.
In addition to the stock options and Rigas Grants, Adelphia Business
Solutions issued 58,500 shares of Adelphia Business Solutions' Class A common
stock to certain employees for both the year ended March 31, 1998 and the nine
months ended December 31, 1998 resulting in the recognition of $27 and $761 of
compensation expense, respectively.
8. Taxes on Income:
Adelphia and its corporate subsidiaries file federal income tax returns,
which include their share of the subsidiary partnerships and joint venture
partnership results of operations. At December 31, 1999, Adelphia and its
corporate subsidiaries had net operating loss carryforwards for federal income
tax purposes of approximately $2,000,000 expiring through 2019. Depreciation
and amortization expense differs for tax and financial statement purposes due
to the use of prescribed periods rather than useful lives for tax purposes and
also as a result of differences between tax basis and book basis of certain
acquisitions.
The tax effects of significant items comprising Adelphia's net deferred tax
liability are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of
property, plant and equipment and intangible
assets........................................... $ 251,289 $2,738,740
--------- ----------
Deferred tax assets:
Tax credits and other assets...................... 102,472 23,911
Operating loss carryforwards...................... 478,488 855,377
--------- ----------
580,960 879,288
Valuation allowance............................... (439,280) (253,645)
--------- ----------
Subtotal.......................................... 141,680 625,643
--------- ----------
Net deferred tax liability.......................... $ 109,609 $2,113,097
========= ==========
</TABLE>
A-52
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
The net change in the valuation allowance from operations for the nine
months ended December 31, 1998 and the year ended December 31, 1999 was an
increase of $31,220 and $71,133, respectively. There was also a decrease in the
valuation allowance of $256,768 due to acquisitions during the period ended
December 31, 1999.
Income tax benefit is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Current................................. $ (699) $ 60 $(1,950)
Deferred................................ 6,305 6,742 16,443
------ ------ -------
Total................................. $5,606 $6,802 $14,493
====== ====== =======
</TABLE>
A reconciliation of the statutory federal income tax rate and Adelphia's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate..... 35% 35% 35%
Change in federal valuation
allowance............................ (30) (26) (23)
Preferred stock dividends of
subsidiary........................... (3) (6) (5)
State taxes, net of federal benefit... (2) 1 --
Goodwill.............................. -- -- (2)
Other................................. 3 2 1
--- --- ---
Effective income tax rate............. 3% 6% 6%
=== === ===
</TABLE>
9. Disclosures about Fair Value of Financial Instruments:
Included in Adelphia's financial instrument portfolio are cash, U.S.
government securities, investments in marketable securities, fixed and variable
rate notes payable to banks and institutions, debentures, redeemable preferred
stock and interest rate swaps, caps and collars. The carrying values of
variable rate notes payable to banks and institutions and investments in
marketable securities approximate their fair values at December 31, 1998 and
1999. The carrying value of the fixed rate notes payable to banks and
institutions publicly traded notes, debentures and redeemable preferred stock
at December 31, 1998 and 1999 were $2,657,861 and $6,604,376, respectively. At
December 31, 1998 and 1999, the fair value exceeded the carrying value by
$139,970 and $21,035, respectively. At December 31, 1998, Adelphia would have
been required to pay approximately $27,227 to settle its interest rate swap and
cap agreements, representing the excess of carrying cost over fair value of
these agreements. At December 31, 1999, Adelphia would have received
approximately $6,603 to settle its interest rate swaps, caps and collars
agreements, representing the excess of fair value over carrying values of these
agreements. The fair values of the debt, redeemable preferred stock and
interest rate swaps, caps and collars were based upon quoted market prices of
similar instruments or on rates available to Adelphia for instruments of the
same remaining maturities.
A-53
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
10. Business Segment Information:
Refer to page A-3 of this proxy statement for information regarding business
segments as of and for the year ended March 31, 1998, as of and for the nine
months ended December 31, 1998 and as of and for the year ended December 31,
1999.
11. Other Related Party Transactions:
Adelphia currently manages cable television systems which are principally
owned by limited partnerships in which certain of Adelphia's principal
shareholders who are executive officers have equity interests.
Adelphia has agreements with Olympus and the Managed Partnerships which
provide for the payment of fees to Adelphia. The aggregate fee revenues from
Olympus and the Managed Partnerships amounted to $3,960, $2,022 and $5,033 for
the year ended March 31, 1998, the nine months ended December 31, 1998 and the
year ended December 31, 1999, respectively. In addition, Adelphia was
reimbursed by Olympus and the Managed Partnerships for allocated corporate
costs of $6,436, $7,548 and $7,785 for the year ended March 31, 1998, the nine
months ended December 31, 1998 and the year ended December 31, 1999,
respectively, which have been recorded as a reduction of selling, general and
administrative expenses. After October 1, 1999, any fees received from Olympus
eliminate in Adelphia's consolidation.
Interest expense--net includes interest income from affiliates for long term
borrowings of $7,129, $5,221 and $41,148 for the year ended March 31, 1998, the
nine months ended December 31, 1998 and the year ended December 31, 1999,
respectively, and for short term borrowings of $9,340, $9,339 and $15,571 for
the year ended March 31, 1998, the nine months ended December 31, 1998 and the
year ended December 31, 1999, respectively.
At March 31, 1998, Adelphia had interest rate swaps with affiliates for a
notional amount of $175,000, which expired during the nine months ended
December 31, 1998. The net effect of these interest rate swaps was to increase
interest expense by $128 and $2,049 for the year ended March 31, 1998 and the
nine months ended December 31, 1998, respectively.
During the years ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 1999, Adelphia paid $2,485, $3,422 and
$11,227, respectively, to entities owned by certain shareholders of Adelphia
primarily for property, plant and equipment and services.
12. Quarterly Financial Data (Unaudited):
The following tables summarize the financial results of Adelphia for each of
the quarters in the nine months ended December 31, 1998 and the year ended
December 31, 1999. In the opinion of management, such financial results reflect
all adjustments (consisting only of normal and recurring adjustments) necessary
to fairly present the data for such interim period.
A-54
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
June 30 September 30 December 31
-------- ------------ -----------
<S> <C> <C> <C>
Nine Months Ended December 31, 1998:
Revenues.................................... $141,791 $165,922 $188,301
-------- -------- --------
Operating expenses:
Direct operating and programming.......... 48,738 56,595 62,630
Selling, general and administrative....... 29,111 33,043 45,095
Depreciation and amortization............. 38,559 46,083 56,181
-------- -------- --------
Total................................... 116,408 135,721 163,906
-------- -------- --------
Operating income............................ 25,383 30,201 24,395
-------- -------- --------
Other income (expense):
Priority investment income from Olympus... 12,000 12,000 12,000
Interest expense--net..................... (59,780) (59,852) (60,820)
Equity in loss of Olympus and other joint
ventures................................. (18,316) (14,803) (15,772)
Equity in loss of Adelphia Business
Solutions joint ventures................. (3,190) (2,614) (3,776)
Minority interest in losses of
subsidiaries............................. 5,460 8,543 11,769
Adelphia Business Solutions preferred
stock dividends.......................... (6,946) (7,166) (7,424)
Other income.............................. 1,000 113 --
-------- -------- --------
Total................................... (69,772) (63,779) (64,023)
-------- -------- --------
Loss before income taxes and extraordinary
loss....................................... (44,389) (33,578) (39,628)
Income tax benefit (expense)................ 5,614 (852) 2,040
-------- -------- --------
Loss before extraordinary loss.............. (38,775) (34,430) (37,588)
Extraordinary loss on early retirement of
debt....................................... (2,604) (1,733) --
-------- -------- --------
Net loss.................................... (41,379) (36,163) (37,588)
Dividend requirements applicable to
preferred stock............................ (6,906) (6,906) (6,906)
-------- -------- --------
Net loss applicable to common stockholders.. $(48,285) $(43,069) $(44,494)
======== ======== ========
Basic and diluted loss per weighted average
share of common stock before extraordinary
loss....................................... $ (1.48) $ (1.16) $ (1.06)
Basic and diluted extraordinary loss per
weighted average share on early retirement
of debt.................................... (0.08) (0.05) --
-------- -------- --------
Basic and diluted net loss per weighted
average share of common stock.............. $ (1.56) $ (1.21) $ (1.06)
======== ======== ========
Weighted average shares of common stock
outstanding (in thousands)................. 30,988 35,533 42,093
======== ======== ========
</TABLE>
A-55
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Revenues.......................... $201,604 $218,786 $232,305 $ 635,273
-------- -------- -------- ---------
Operating expenses:
Direct operating and
programming.................... 67,295 72,635 79,623 213,059
Selling, general and
administrative................. 49,111 61,616 75,303 154,549
Depreciation and amortization... 56,815 63,736 65,639 184,646
Merger and integration costs.... -- -- -- 4,736
-------- -------- -------- ---------
Total......................... 173,221 197,987 220,565 556,990
-------- -------- -------- ---------
Operating income.................. 28,383 20,799 11,740 78,283
-------- -------- -------- ---------
Other income (expense):
Priority investment income from
Olympus........................ 12,000 12,000 12,000 --
Interest expense--net........... (67,464) (52,215) (51,961) (187,945)
Equity in loss of Olympus and
other joint ventures........... (14,861) (23,074) (22,305) (378)
Equity in loss of Adelphia
Business Solutions
joint ventures................. (3,803) (3,291) (246) (418)
Minority interest in losses of
subsidiaries................... 12,914 13,146 12,755 (116)
Adelphia Business Solutions
preferred stock dividends...... (7,619) (7,860) (8,108) (8,586)
Other........................... 2,354 -- -- (489)
-------- -------- -------- ---------
Total......................... (66,479) (61,294) (57,865) (197,932)
-------- -------- -------- ---------
Loss before income taxes and
extraordinary loss............... (38,096) (40,495) (46,125) (119,649)
Income tax (expense) benefit...... 2,897 1,149 3,580 6,867
-------- -------- -------- ---------
Loss before extraordinary loss.... (35,199) (39,346) (42,545) (112,782)
Extraordinary loss on early
retirement of debt, net of
income taxes..................... (8,589) (1,438) -- (631)
-------- -------- -------- ---------
Net loss.......................... (43,788) (40,784) (42,545) (113,413)
Dividend requirements applicable
to preferred stock............... (6,500) (6,500) (14,332) (14,631)
-------- -------- -------- ---------
Net loss applicable to common
stockholders..................... $(50,288) $(47,284) $(56,877) $(128,044)
======== ======== ======== =========
Basic and diluted loss per
weighted average share of common
stock before extraordinary loss.. $ (0.80) $ (0.79) $ (0.95) $ (1.05)
Basic and diluted extraordinary
loss per weighted average share
on early retirement of debt...... (0.17) (0.02) -- --
-------- -------- -------- ---------
Basic and diluted net loss per
weighted average share of common
stock............................ $ (0.97) $ (0.81) $ (0.95) $ (1.05)
======== ======== ======== =========
Weighted average shares of common
stock outstanding
(in thousands)................... 52,019 58,141 60,163 121,769
======== ======== ======== =========
</TABLE>
A-56
<PAGE>
ADELPHIA COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
13. Subsequent Events:
The Company has entered into a definitive agreement under which Prestige
Communications of NC, Inc. will sell its cable systems in Virginia, North
Carolina and Maryland to Adelphia for approximately $700,000. These systems
serve approximately 120,000 basic subscribers. This transaction is subject to
customary closing conditions and regulatory approval and is expected to close
by mid-2000.
Subsequent to December 31, 1999, certain subsidiaries and affiliates of
Adelphia have received commitments and subscriptions for a new $2,500,000 bank
credit facility. This bank credit facility will consist of both a reducing
revolving credit portion and a term loan portion and is expected to close in
April 2000.
On January 21, 2000, Adelphia closed the April 9, 1999 direct placement of
$375,000 of Adelphia Class B common stock with Highland Holdings, a general
partnership controlled by the Rigas family.
A-57
<PAGE>
PROXY
ADELPHIA COMMUNICATIONS CORPORATION
This Proxy is Solicited On Behalf Of The Board of Directors Of The Company
The undersigned hereby appoints John J. Rigas, Timothy J. Rigas,
Michael J. Rigas and James P. Rigas, or any one or more of them, with power of
substitution to each, as proxies to represent and to vote as designated on the
reverse all the shares of Class A Common Stock held of record at the close of
business on June 20, 2000 by the undersigned at the annual meeting of the
stockholders of Adelphia Communications Corporation to be held at the
Coudersport Theater, Main Street, Coudersport, Pennsylvania on July 31, 2000 at
10:00 a.m. and at any adjournment thereof.
(Please sign on reverse side and return promptly)
<PAGE>
Please Detach and Mail in the Envelope Provided
[X] Please mark your votes as
in this example.
The Board of Directors recommends a vote "FOR" proposals numbered 1, 2 and 3.
WITHHOLD
AUTHORITY
FOR to vote for
all nominees all nominees
listed at right listed at right Nominees:
Pete J. Metros as
1. Election of director to be elected
Director - by the Class A Common
Class A [ ] [ ] Stockholders
Class A and B
Dennis P. Coyle, John J.
Rigas, James P. Rigas,
Michael J. Rigas, Timothy
J. Rigas, Peter L. Venetis,
Erland E. Kailbourne and
Leslie J. Gelber
2. Election of Directors - Class A and B
(Instruction: To withhold authority to vote for any individual nominee, strike
a line through that nominee's name.)
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. In their discretion vote upon such other matters
as may properly come before the meeting or any
adjournment thereof.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. Unless otherwise specified in the
squares provided, the proxies shall vote in the election of directors for the
nominees listed at left, and shall have discretionary power to vote upon such
other matters as may properly come before the meeting or any adjournment
thereof.
A majority of such proxies who shall be present and shall act at the meeting
(or if only one shall be present and act, then that one) may exercies all
powers hereunder.
______________________________________________________________________________
NOTE: Stockholder sign here exactly as name appears hereon.
Dated___________________________________, 2000
