UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2001 __ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to _____________ Commission File Number: 0-16899 ARAHOVA COMMUNICATIONS, INC.* (Successor by Merger to Century Communications Corp.) (Exact name of registrant as specified in its charter) Delaware 25-1844576 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One North Main Street Coudersport, PA 16915-1141 (Address of principal executive offices) (Zip code) 814-274-9830 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ -- Adelphia Communications Corporation is the holder of all shares of outstanding common stock, par value $.01, of Arahova Communications, Inc. consisting of 1,000 shares as of May 15, 2001. *Arahova meets the conditions set forth in General Instruction H(1)(a) and (b) to the Form 10-Q and is therefore filing with the reduced disclosure format. ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page ----- Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 2000 and March 31, 2001 (Unaudited)..................................................................... 3 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - Three Months Ended March 31, 2000 and 2001 (Unaudited)......................................... 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 2001 (Unaudited)............................................................ 5 Notes to Condensed Consolidated Financial Statements (Unaudited)................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................ 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings............................................................................ 15 Item 6. Exhibits and Reports on Form 8-K.............................................................. 17 SIGNATURE.............................................................................................. 18 SAFE HARBOR STATEMENT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, is forward-looking, such as information relating to the 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, Arahova Communications, Inc. and subsidiaries ("Arahova" or the "Company"). These "forward looking statements" can be identified by the use of forward-looking terminology such as "believes", "expects," "may," "will," "should," "intends" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These risks and uncertainties include, but are not limited to, uncertainties relating to general business and economic conditions, acquisitions and divestitures, risks associated with the Company's growth and financings, the availability and cost of capital, government and regulatory policies, the pricing and availability of equipment, materials, inventories and programming, product acceptance, the Company's ability to execute on its various business plans and to construct, expand and upgrade its networks, risks associated with reliance on the performance and financial condition of vendors and customers, technological developments, and changes in the competitive environment in which the Company operates. Persons reading this Form 10-Q are cautioned that forward-looking statements herein are only predictions, that no assurance can be given that the future results will be achieved, and that actual events or results may differ materially as a result of the risks and uncertainties facing the Company. For further information regarding those risks and uncertainties and their potential impact on the Company, see the prospectus and most recent prospectus supplement filed under Adelphia's Registration Statement No. 333-78027, under the caption "Risk Factors." PART I. FINANCIAL INFORMATION Item 1. Financial Statements ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) December 31, March 31, 2000 2001 ------------------ ----------------- ASSETS Cable systems, at cost, net of accumulated depreciation and amortization: Property, plant and equipment $ 1,887,809 $ 2,361,795 Intangible assets 9,204,228 10,755,732 ------------------ ----------------- Total cable systems 11,092,037 13,117,527 Cash and cash equivalents 91,556 91,405 Investments 115,883 106,130 Subscriber receivables - net 77,493 77,395 Prepaid expenses and other assets - net 114,734 133,890 ------------------ ----------------- Total $ 11,491,703 $ 13,526,347 ================== ================= LIABILITIES AND COMMON STOCKHOLDER'S EQUITY Parent debt $ 1,753,377 $ 1,771,349 Subsidiary debt 2,560,448 3,546,837 Accounts payable 262,205 235,130 Subscriber advance payments and deposits 27,769 31,586 Accrued interest and other liabilities 235,229 225,667 Related party payables - net 621,710 165,551 Deferred income taxes 1,762,728 2,213,108 ------------------ ----------------- Total 7,223,466 8,189,228 Minority interests 609,212 615,872 Commitments and contingencies (Note 6) Common stockholder's equity Common stock, par value $.01 per share: 1,000 shares authorized, issued and outstanding - - Additional paid-in-capital 3,816,075 4,744,143 Accumulated (deficit) retained earnings (157,050) (22,896) ------------------ ----------------- Total common stockholder's equity 3,659,025 4,721,247 ------------------ ----------------- Total $ 11,491,703 $ 13,526,347 ================== ================= <FN> See the accompanying notes to condensed consolidated financial statements. </FN> ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (Dollars in thousands) Three Months Ended March 31, 2000 2001 --------------- --------------- Revenues $ 211,694 $ 386,500 Operating expenses: Direct operating and programming 67,272 136,838 Selling, general and administrative 35,855 64,596 Depreciation and amortization 69,408 128,434 Management fees to managing affiliate - 1,688 Merger costs - 874 --------------- --------------- Total 172,535 332,430 --------------- --------------- Operating income 39,159 54,070 Other (expense) income: Interest expense - net (50,121) (97,840) Minority interest in income of subsidiaries (5,226) (731) Gain on cable systems exchange - 217,189 Other - (1,257) --------------- --------------- Total (55,347) 117,361 --------------- --------------- (Loss) income before income taxes (16,188) 171,431 Income tax benefit (expense) 2,829 (37,277) --------------- --------------- Net (loss) income (13,359) 134,154 Other comprehensive loss - net of income taxes (4,997) - --------------- --------------- Comprehensive (loss) income $ (18,356) $ 134,154 =============== =============== <FN> See the accompanying notes to condensed consolidated financial statements. </FN> ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Three Months Ended March 31, 2000 2001 ---------------- ---------------- Cash flows from operating activities: Net (loss) income $ (13,359) $ 134,154 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 69,408 128,434 Minority interest in income of subsidiaries 5,226 731 (Decrease)Increase in deferred taxes, net of effects of acquisitions and cable systems contributed by Adelphia (3,382) 34,581 Non-cash interest expense 22,141 17,551 Other - 1,257 Gain on cable systems exchange - (217,189) Changes in operating assets and liabilities, net of effects of acquisitions and cable systems contributed by Adelphia: Subscriber receivables 6,563 6,833 Prepaid expenses and other assets (13,568) (14,256) Accounts payable and accrued liabilities (25,210) (73,779) ---------------- ---------------- Net cash provided by operating activities 47,819 18,317 ---------------- ---------------- Cash flows from investing activities: Capital expenditures (39,510) (243,875) Amounts invested in and advanced to related parties (31,434) (389,222) ---------------- ---------------- Net cash used for investing activities (70,944) (633,097) ---------------- ---------------- Cash flows from financing activities: Proceeds from debt - 2,838,192 Repayments of debt - (2,212,165) Costs associated with debt financings - (15,526) Contribution of cash by parent - 4,128 ---------------- ---------------- Net cash provided by financing activities - 614,629 ---------------- ---------------- Net decrease in cash and cash equivalents (23,125) (151) Cash and cash equivalents, beginning of period 128,028 91,556 ---------------- ---------------- Cash and cash equivalents, end of period $ 104,903 $ 91,405 ================ ================ <FN> See the accompanying notes to condensed consolidated financial statements. </FN> 1. Company and Basis of Presentation On October 1, 1999, Adelphia Communications Corporation ("Adelphia") and Century Communications Corp. ("Century") consummated a merger ("the Merger") whereby Century was merged with and into Adelphia Acquisition Subsidiary, Inc. ("Merger Sub"), a wholly owned subsidiary of Adelphia, pursuant to an Agreement and Plan of Merger ("the Merger Agreement"), dated as of March 5, 1999, as amended as of July 12, 1999 and July 29, 1999 by and among Adelphia, Century and Merger Sub. As a result of the Merger, Century has become a wholly owned subsidiary of Adelphia. The Merger Sub is sometimes referred to herein as the "Successor Corporation". The name of the Successor Corporation was changed to Arahova Communications, Inc. and subsidiaries ("Arahova" or the "Company") on October 1, 1999. The Company is primarily engaged in the ownership and operation of cable television systems in the United States and earns its revenues primarily from subscriber fees for basic, satellite, premium and ancillary services (such as installations and equipment rental), local and national advertising sales, digital and high speed data services and pay-per-view programming. Effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These standards require the Company to recognize all derivatives as either assets or liabilities at fair value in its balance sheet. The accounting for changes in the fair value of a derivative depends on the use of the derivative. To the extent that a derivative is effective as a hedge of a future exposure to changes in value, the fair value of the derivative is deferred in other comprehensive income. Any portion considered to be ineffective is reported in the statement of operations immediately. The adoption of these standards did not have a material impact on the Company's financial statements and therefore, the transition adjustment is not separately presented. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X. Such principles are applied on a basis consistent with those reflected in the December 31, 2000 Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission. The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and related notes contained in the Company's 2000 Annual Report on Form 10-K. In the opinion of management, the unaudited condensed consolidated financial statements contained herein include all adjustments (consisting of only recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. These interim results of operations are not necessarily indicative of results for future periods. 2. Significant Events Subsequent to December 31, 2000 On January 1, 2001, Adelphia and certain subsidiaries, including the Company, closed on a cable systems exchange with Comcast Corporation. As a result of this transaction, the Company added approximately 168,000 basic subscribers in the Los Angeles, CA and West Palm/Fort Pierce, FL areas in exchange for approximately 178,000 basic subscribers in New Jersey, New Mexico and Indiana. The cable systems exchange has been recorded at fair value and purchase accounting has been applied as of the date of the transaction. As a result of this transaction, the Company recorded a gain of approximately $217,000, and an increase of property, plant and equipment and intangibles of approximately $15,000 and $202,000, respectively. The Company has made a preliminary allocation of the purchase accounting, which is subject to final allocation. On January 3, 2001, Arahova and certain subsidiaries of Adelphia closed on a new short term secured revolving credit facility. The facility is scheduled to expire November 30, 2001 and provides for initial lending commitments of $1,300,000, subject to reductions over time and upon the occurrence of certain events, including certain debt financings and asset sales. During April 2001 the commitment under this facility was reduced to $900,000. Subject to compliance with the terms of this new credit facility, proceeds are available for general corporate purposes. Proceeds were used to repay subsidiary bank debt of Adelphia subsidiaries, including certain Arahova subsidiaries. In connection with the closing of the January 3, 2001 credit facility, Adelphia contributed cable systems serving approximately 352,000 subscribers to Arahova. Financial results of the contributed systems are included in the consolidated results of Arahova from the date of contribution. Arahova recorded the contribution of these cable systems and related assets and liabilities at historical cost as follows: Cable systems, net $ 1,680,532 Other assets 82,561 Debt 360,608 Deferred tax liability 415,799 Other liabilities 58,618 Net equity 928,068 The following unaudited financial information for the three months ended March 31, 2000 has been presented as if the Comcast cable systems exchange, the January 2001 contribution of cable systems from Adelphia, and the contribution of cable systems and acquisitions that were consummated during the year ended December 31, 2000 had occurred on January 1, 2000. Three Months Ended March 31, 2000 ----------------- Revenues $ 376,441 Net loss (34,097) The above financial information excludes the gain on the cable systems exchange of $217,189. On April 25, 2001, and in a related transaction on May 11, 2001, Adelphia completed an offering of $575,000 of 3.25% convertible subordinated notes due 2021. Net proceeds from this offering, after deducting offering expenses were approximately $563,000. Adelphia used the proceeds from the offering to repay subsidiary bank debt of Adelphia subsidiaries, including certain Arahova subsidiaries, a portion of which may be borrowed and used for general corporate purposes. 3. Debt Debt is summarized as follows: Parent Debt: December 31, March 31, 2000 2001 ----------------- ----------------- 9 3/4% Senior Notes due 2002 $ 201,005 $ 200,792 Senior Discount Notes due 2003 354,392 363,627 9 1/2% Senior Notes due 2005 250,950 250,890 8 7/8% Senior Notes due 2007 243,805 244,066 8 3/4% Senior Notes due 2007 217,440 217,728 8 3/8% Senior Notes due 2017 94,420 94,504 8 3/8% Senior Notes due 2007 94,930 95,116 Senior Discount Notes due 2008 296,435 304,626 ----------------- ----------------- Total parent debt $ 1,753,377 $ 1,771,349 ================= ================= Subsidiary Debt: December 31, March 31, 2000 2001 ----------------- ----------------- Notes to banks $ 2,487,317 $ 3,480,027 9.47% Senior Secured Notes due 2002 42,805 42,385 Other debt 30,326 24,425 ---------------- ----------------- Total subsidiary debt $ 2,560,448 $ 3,546,837 ================ ================= 4. Supplemental Financial Information Cash payments for interest were $47,251 and $97,396 for the three months ended March 31, 2000 and 2001, respectively. Accumulated depreciation of property, plant and equipment amounted to $304,027 and $260,237 at December 31, 2000 and March 31, 2001, respectively. Accumulated amortization of intangible assets amounted to $311,607 and $392,607 at December 31, 2000 and March 31, 2001, respectively. Adelphia's contribution of cable systems to Arahova included accumulated depreciation of property, plant and equipment totaling $38,047 and accumulated amortization of intangible assets totaling $46,994. Interest expense - net includes interest income of $12,796 and $8,097 for the three months ended March 31, 2000 and 2001, respectively. Interest income includes interest income from affiliates of $8,582 and $5,976 on related party receivables balances for the three months ended March 31, 2000 and 2001, respectively. 5. Income Taxes Income tax benefit for the three months ended March 31, 2000 and 2001, respectively was primarily comprised of deferred tax. 6. Commitments and Contingencies Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations and Legal Proceedings for a discussion of material commitments and contingencies. 7. Derivative Financial Instruments The Company is exposed to certain risks arising from transactions that are entered into in the normal course of business. The Company may enter into derivative financial instrument transactions in order to manage or reduce these risks. The Company's policies do not permit active trading of, or speculation in, derivative financial instruments. The Company has an investment in stock purchase warrants which can be net share settled and is considered to be a derivative under the provisions of SFAS No. 133. The Company has received these stock purchase warrants from a vendor in connection with various agreements. The change in the fair value of these instruments is recorded in "Other" in the condensed consolidated statement of operations. On January 1, 2001, no transition adjustment was required in conjunction with the adoption of this standard, as the fair value was equal to the investment's carrying value. During the quarter ended March 31, 2001 a period loss of $3,400 was recorded in "Other" in the condensed consolidated statement of operations. At January 1, 2001 and March 31, 2001, the aggregate fair value of stock purchase warrants considered to be derivatives was $9,300 and $5,900, respectively. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands) See Safe Harbor Statement following the table of contents, which section is incorporated by reference herein. Introduction On October 1, 1999, Adelphia Communications Corporation ("Adelphia") and Century Communications Corp. ("Century") consummated a merger (the "Merger") whereby Century was merged with and into Adelphia Acquisition Subsidiary, Inc. ("Merger Sub"), a wholly owned subsidiary of Adelphia, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of March 5, 1999, as amended as of July 12, 1999 and July 29, 1999, by and among Adelphia, Century and Merger Sub. As a result of the Merger, Century has become a wholly owned subsidiary of Adelphia. Merger Sub is sometimes referred to herein as the "Successor Corporation." The name of the Successor Corporation was changed to Arahova Communications, Inc. ("Arahova") on October 1, 1999. The Company is primarily engaged in the ownership and operation of cable television systems in the United States and earns its revenues primarily from subscriber fees for basic, satellite, premium and ancillary services (such as installations and equipment rental), local and national advertising sales, digital and high speed data services and pay-per-view programming. As of March 31, 2001, the Company owned systems with broadband networks that served approximately 2,843,000 basic subscribers. On January 1, 2001, Adelphia and certain subsidiaries, including the Company, closed on a cable systems exchange with Comcast Corporation. As a result of this transaction, the Company added approximately 168,000 basic subscribers in the Los Angeles, CA and West Palm/Fort Pierce, FL areas in exchange for approximately 178,000 basic subscribers in New Jersey, New Mexico and Indiana. The cable systems exchange has been recorded at fair value and purchase accounting has been applied as of the date of the transaction. As a result of this transaction, the Company recorded a gain of approximately $217,000, and an increase of property, plant and equipment and intangibles of approximately $15,000 and $202,000, respectively. The Company has made a preliminary allocation of the purchase accounting, which is subject to final allocation. On January 3, 2001, Arahova and certain subsidiaries of Adelphia closed on a new short term secured revolving credit facility. The facility is scheduled to expire November 30, 2001 and provides for initial lending commitments of $1,300,000, subject to reductions over time and upon the occurrence of certain events, including certain debt financings and asset sales. Subject to compliance with the terms of this new credit facility, proceeds are available for general corporate purposes. Proceeds were used to repay subsidiary bank debt of Adelphia subsidiaries, including certain Arahova subsidiaries. In connection with the closing of the January 3, 2001 credit facility, Adelphia contributed cable systems serving approximately 352,000 subscribers to Arahova. Financial results of the contributed systems are included in the consolidated results of Arahova from the date of contribution. Results of Operations Three Months Ended March 31, 2000 and 2001 The following table is derived from Arahova's Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) that are included in this Form 10-Q and sets forth the historical percentage relationship to revenues of the components of operating income for the periods indicated. Three Months Ended March 31, ------------------------ 2000 2001 --------- ---------- Revenues 100.0% 100.0% Expenses: Direct operating and programming 31.8% 35.4% Selling, general and administrative 16.9% 16.7% Depreciation and amortization 32.8% 33.2% Management fees to managing affiliate - .4% Merger costs - .2% --------- ---------- Operating income 18.5% 14.1% ========= ========== Revenues Revenues increased approximately 82.6% for the three months ended March 31, 2001 compared with the same period of the prior year. The increase is attributable to the contributions of cable systems by Adelphia, acquisitions and new services. Direct Operating and Programming Expenses These expenses, which are mainly basic and premium programming costs and technical expenses, increased 103.4% for the three months ended March 31, 2001 compared with the same period of the prior year. The increase was primarily due to incremental costs associated with increased subscribers due to the contributions of cable systems by Adelphia and acquisitions partially offset by operational efficiencies recognized in connection with the acquisitions. Selling, General and Administrative Expenses These expenses, which are mainly comprised of costs related to system offices, customer service representatives and sales and administrative employees, increased 80.2% for the three months ended March 31, 2001 compared with the same period of the prior year. The increase was primarily due to incremental costs associated with increased subscribers due to the contributions of cable systems by Adelphia, acquisitions and the roll-out of new services. Depreciation and Amortization Expenses Depreciation and amortization increased 85.0% for the three months ended March 31, 2001 from $69,408 for the same period of the prior year. The increase was primarily due to acquisitions, the contributions of cable systems by Adelphia and increased capital expenditures. Interest Expense - Net Interest expense - net increased 95.2% for the three months ended March 31, 2001 compared with the same period of the prior year. The increase is primarily due to the effects of the contributions of cable systems by Adelphia, incremental debt related to acquisitions, the amortization of debt discount recorded as a result of the Merger and an increase in the average debt outstanding. Gain on Cable Systems Swap On January 1, 2001, Arahova swapped certain cable systems for certain cable systems owned by Comcast. The result of this transaction was a gain of $217,189 for the three months ended March 31, 2001. Liquidity and Capital Resources The cable television business is capital intensive and typically requires continual financing for the construction, modernization, maintenance, expansion and acquisition of cable and other telecommunications systems. The Company has made a substantial commitment to the technological development of its systems and is aggressively investing in the upgrade of the technical capabilities of its cable plant in a cost efficient manner. The Company's internally-generated cash, along with third party financings, have enabled it to fund its working capital requirements, capital expenditures for property, plant and equipment, acquisitions, investments and debt service. The Company has funded the principal obligations on its long-term borrowings by refinancing the principal with the issuance of new loans and debt securities in the public market and through private institutions as well as internally generated cash flow and the sale of certain business segments. The debt instruments to which the Company and its subsidiaries are a party impose restrictions on the incurrence of additional indebtedness. Financing Activities The subsidiaries' credit facilities and the Company's public debt instruments, among other things, require the maintenance of certain financial and operating covenants, restrict the use of proceeds from such borrowing, limit the incurrence of additional indebtedness, restrict the purchase or redemption of its capital stock and limit the ability to pay dividends and management fees and make capital expenditures. On January 3, 2001, Arahova and certain subsidiaries of Adelphia closed on a new short term secured revolving credit facility. The facility is scheduled to expire November 30, 2001 and provides for initial lending commitments of $1,300,000, subject to reductions over time and upon the occurrence of certain events, including certain debt financings and asset sales. During April 2001 the commitment under this facility was reduced to $900,000. Subject to compliance with the terms of this new credit facility, proceeds are available for general corporate purposes. Proceeds were used to repay subsidiary bank debt of Adelphia subsidiaries, including certain Arahova subsidiaries. In connection with the closing of the January 3, 2001 credit facility, Adelphia contributed cable systems serving approximately 352,000 subscribers to Arahova. Financial results of the contributed systems are included in the consolidated results of Arahova from the date of contribution. At March 31, 2001, the Company's total outstanding debt aggregated $5,318,186, which included $1,771,349 of parent debt and $3,546,837 of subsidiary debt. As of March 31, 2001, after giving effect to application of the proceeds of Adelphia's April 2001 convertible debt offering, the Company had an aggregate of $619,013 in unused credit lines and cash and cash equivalents, all of which was also available to affiliates and part of which is subject to achieving certain levels of operating performance. The Company's weighted average interest rate on subsidiary debt was approximately 7.27% at March 31, 2001. The following table sets forth the mandatory reductions in principal under all debt agreements for each of the next four years and nine months based on amounts outstanding at March 31, 2001: Nine months ending December 31, 2001 $ 1,346,600 Year ending December 31, 2002 222,400 Year ending December 31, 2003 489,200 Year ending December 31, 2004 158,700 Year ending December 31, 2005 525,800 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 Arahova, 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 its 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, including Adelphia, will be sufficient to meet its short-term and long-term liquidity and capital requirements. Although in the past the Company has been able to refinance its indebtedness or obtain new financing, there can be no assurance that the Company will be able to do so in the future or that the terms of such financings would be favorable. Management believes that the telecommunications industry, including the cable television and telephone industries, continues to be in a period of consolidation characterized by mergers, joint ventures, acquisitions, sales of all or part of cable or telephone companies or their assets, and other partnering and investment transactions of various structures and sizes involving cable or other telecommunications companies. The Company continues to evaluate new opportunities that allow for the expansion of its business through the acquisition of additional cable television systems in geographic proximity to its existing regional markets or in locations that can serve as a basis for new market areas. The Company, like other cable television companies, has participated from time to time and is participating in preliminary discussions with third parties regarding a variety of potential transactions, and the Company has considered and expects to continue to consider and explore potential transactions of various types with other cable and telecommunications companies. However, no assurances can be given as to whether any such transaction may be consummated or, if so, when. Capital expenditures for the three months ended March 31, 2000 and 2001 were $39,510 and $243,875 respectively. This increase was primarily due to acquisitions, cable plant rebuilds and upgrades to expand services. The Company expects that capital expenditures from April 1, 2001 through December 31, 2001 will be in a range of approximately $400,000 to $500,000. 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 programming services 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. 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. Arahova cannot predict the effect of 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 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 direct broadcast satellite ("DBS") service providers. DBS has been available to consumers since 1994. A single DBS satellite can provide more than 100 channels of programming. DBS service can be received virtually anywhere in the United States through the installation of a small outdoor antenna. DBS service is being heavily marketed on a nationwide basis by several service providers, some of which are now offering local programming channels. At this time, any impact of DBS competition on the Company's future results is not known or estimable. PART II - OTHER INFORMATION Item 1. Legal Proceedings On or about March 24, 2000, ML Media Partners, L.P. ("ML Media") commenced an action by filing a Verified Complaint (the "Complaint") in the Supreme Court of the State of New York, New York County, against Arahova Communications, Inc. ("Arahova"), Century Communications Corp., a Texas subsidiary of Arahova ("Century"), and Adelphia. In the nine count Complaint, ML Media alleges that it entered into a joint venture agreement (the "Agreement") with Century which, as subsequently modified, governed the ownership, operation and disposition of cable television systems in Puerto Rico (the "Joint Venture"). The Complaint alleges that Adelphia and its affiliates took over Century's interest in the Joint Venture on or around October 1, 1999, and have, according to the Complaint, breached their fiduciary obligations to the Joint Venture and violated certain provisions of the Agreement. The Complaint further alleges that ML Media gave Century notice that ML Media was exercising its rights under the Agreement to require that Century elect to (A) purchase ML Media's interest in the Joint Venture at an appraised fair value, or (B) seek to sell the cable systems to one or more third parties. Century, according to the Complaint, elected to pursue the sale of the cable systems and indicated that it was evaluating whether it or an affiliate thereof would make an offer for the cable systems. The Complaint alleges that Century or its affiliates' potential participation in the sale process is improper. The Complaint asks for, among other things, the dissolution of the Joint Venture and the appointment of a receiver to effect a prompt sale of the Joint Venture. The parties completed discovery in the action and each filed motions for partial summary judgment. On July 10, 2000, Justice Gammerman granted ML Media's motion for partial summary judgment on the fourth cause of action and declared that neither Century nor any of its affiliates may bid on or attempt to purchase the assets and business of the Joint Venture. Justice Gammerman also dismissed the fourth count of the counterclaim and required Century to proceed diligently with ML Media in locating one or more third parties to complete the sale and prohibited any defendant from interfering with the sale. On July 26, 2000, the Justice also ordered that the sale may be a sale of either the assets of the Joint Venture or the partnership interests in the Joint Venture. The Justice did not address other issues concerning the motion for summary judgment and did not schedule a full hearing on the merits. On August 7, 2000, Adelphia and the other defendants filed a notice of appeal with respect to the above described orders and judgment of the Court. On January 23, 2001, the Appellate Division affirmed the decision of Justice Gammerman. On February 26, 2001, the defendants filed with the Appellate Division a Motion for Leave to Appeal to the Court of Appeals, which was denied by the Appellate Division on or about April 17, 2001. The management of Adelphia and Arahova intend to vigorously defend this action. Management believes that this matter will not have a material adverse effect on the Company. Arahova has been sued in a class-action case, Galley vs. American Telephone & Telegraph Corp. et al., where the plaintiffs allege, that by requiring customers to purchase the @Home service, rather than offering the option of access alone, Arahova and the other defendant MSO's are illegally "tying" internet content to internet access, thereby violating both the federal antitrust laws and California unfair trade practice statutes. The plaintiffs also allege that the defendants have entered into an illegal conspiracy to require all MSO's providing, or desiring to provide, the @Home service to enter into contracts precluding them from offering any competing internet service. The plaintiffs have recently filed an amended complaint alleging that the violations are national in scope (rather than merely local). Arahova is vigorously defending this case. Due to the preliminary nature of the litigation, the outcome cannot be predicted. Adelphia and certain subsidiaries, including Arahova, are defendants in several putative subscriber class action suits in state courts in Pennsylvania and Mississippi initiated during 1999. The suits all challenge the propriety of late fees charged by the subsidiaries to customers who fail to pay for services in a timely manner. The suits seek injunctive relief and various formulations of damages under various claimed causes of action under various bodies of state law. These actions are in various stages of defense and are being defended vigorously. The outcome of these matters cannot be predicted at this time. In May 2000, Adelphia settled similar litigation in the state courts of Vermont. The settlement of this matter did not have a material adverse effect on the financial statements of Adelphia. There is no other material pending legal proceeding, other than routine litigation incidental to the business, to which the Company is a part of or which any of its property is subject. Item 6. Exhibits and Reports on Form 8-K Each exhibit identified below is filed as part of this report. a) Exhibits b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARAHOVA COMMUNICATIONS, INC. (Registrant) Date: May 15, 2001 By: /s/ Timothy J. Rigas --------------------------------- Timothy J. Rigas Executive Vice President (authorized officer), Chief Financial Officer, Chief Accounting Officer and Treasurer