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 September 30, 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 November 14, 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 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
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. Readers 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. 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.
333-64224 of Adelphia Communications Corporation ("Adelphia"), under the caption
"Risk Factors."
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
December 31, September 30,
2000 2001
------------------ -----------------
ASSETS
Cable systems, at cost, net of accumulated depreciation and amortization:
Property, plant and equipment $ 1,697,550 $ 2,189,519
Intangible assets 7,705,195 8,176,348
------------------ -----------------
Total cable systems 9,402,745 10,365,867
Cash and cash equivalents 90,145 89,693
Investments 115,883 29,118
Subscriber receivables - net 71,984 79,456
Prepaid expenses and other assets - net 116,451 136,129
------------------ -----------------
Total $ 9,797,208 $ 10,700,263
================== =================
LIABILITIES AND COMMON STOCKHOLDER'S EQUITY
Parent debt $ 1,753,377 $ 1,808,329
Subsidiary debt 2,692,985 1,667,620
Accounts payable 220,628 244,711
Subscriber advance payments and deposits 24,348 32,950
Accrued interest and other liabilities 238,533 225,345
Related party payables - net 428,353 1,912,458
Deferred income taxes 1,509,674 1,498,199
------------------ -----------------
Total liabilities 6,867,898 7,389,612
Minority interests 609,212 600,857
Commitments and contingencies (Note 9)
Common stockholder's equity:
Common stock, par value $.01 per share:
1,000 shares authorized, issued and outstanding - -
Additional paid-in-capital 2,406,579 2,795,024
Accumulated deficit (86,481) (85,230)
------------------ -----------------
Total common stockholder's equity 2,320,098 2,709,794
------------------ -----------------
Total $ 9,797,208 $ 10,700,263
================== =================
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
3
ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 2001 2000 2001
--------------- --------------- ------------------------------
Revenues $ 259,980 $ 342,503 $ 746,622 $ 1,001,855
Operating expenses:
Direct operating and programming 85,792 122,162 248,209 359,716
Selling, general and administrative 49,333 66,330 135,734 180,880
Depreciation and amortization 72,912 121,776 214,941 352,774
Management fees to managing affiliate 242 1,973 2,531 4,770
Merger costs - - - 1,130
--------------- --------------- --------------- --------------
Total 208,279 312,241 601,415 899,270
--------------- --------------- --------------- --------------
Operating income 51,701 30,262 145,207 102,585
Other (expense) income:
Interest expense - net (84,512) (66,786) (222,573) (234,992)
Minority interest in (income) loss of subsidiaries (4,004) 390 (3,852) (4,272)
Other-than-temporary impairment of investment - - - (72,115)
Gain on cable systems exchange - - - 217,189
Other - (1,073) - (7,250)
--------------- --------------- --------------- --------------
Total (88,516) (67,469) (226,425) (101,440)
--------------- --------------- --------------- --------------
(Loss) income before income taxes (36,815) (37,207) (81,218) 1,145
Income tax benefit 4,117 4,015 12,642 106
--------------- --------------- --------------- --------------
Net (loss) income (32,698) (33,192) (68,576) 1,251
Other comprehensive loss - net of income taxes (15,186) - (36,378) -
--------------- --------------- --------------- --------------
Comprehensive (loss) income $ (47,884) $ (33,192) $ (104,954) $ 1,251
=============== =============== =============== ==============
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
4
ARAHOVA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
2000 2001
---------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (68,576) $ 1,251
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 214,941 352,774
Minority interest in income of subsidiaries 3,852 4,272
Decrease in deferred taxes, net of effects of acquisitions
and cable systems exchange (25,031) (5,350)
Non-cash interest expense 51,534 53,691
Other-than-temporary impairment of investment - 72,115
Gain on cable systems exchange - (217,189)
Other - 7,250
Changes in operating assets and liabilities, net of effects
of acquisitions and cable systems exchange
Subscriber receivables 1,298 (7,421)
Prepaid expenses and other assets (53,343) (41,142)
Accounts payable and accrued liabilities (26,320) 22,535
---------------- ----------------
Net cash provided by operating activities 98,355 242,786
---------------- ----------------
Cash flows from investing activities:
Acquisitions (698,223) -
Expenditures for property, plant and equipment (212,977) (543,190)
---------------- ----------------
Cash used for investing activities (911,200) (543,190)
---------------- ----------------
Cash flows from financing activities:
Proceeds from debt 2,434,999 2,370,433
Repayments of debt (1,695,704) (3,527,547)
Costs associated with debt financings (17,645) -
Amounts advanced from related parties 54,011 1,457,066
---------------- ----------------
Net cash provided by financing activities 775,661 299,952
---------------- ----------------
Net decrease in cash and cash equivalents (37,184) (452)
Cash and cash equivalents, beginning of period 141,247 90,145
---------------- ----------------
Cash and cash equivalents, end of period $ 104,063 $ 89,693
================ ================
<FN>
See the accompanying notes to condensed consolidated financial statements.
</FN>
5
ARAHOVA COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
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 became 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 Form 8-K filed August 14, 2001. 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
6
preliminary allocation of the purchase accounting, which is subject to final
allocation and appraisals.
On January 3, 2001, Arahova and certain subsidiaries of Adelphia closed
on a short term secured revolving credit facility. The facility, originally
scheduled to expire November 30, 2001, provided 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 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 (the "January
2001 Contribution"), of which approximately 131,000 subscribers were acquired by
Adelphia in the January 1, 2001 Comcast cable systems exchange. In a similar
transaction in April 2000, Adelphia contributed cable systems serving
approximately 460,000 subscribers to Arahova (the "April 2000 Contribution").
On September 28, 2001, certain subsidiaries and affiliates of Adelphia
and Arahova closed on a new $2,030,000 secured revolving term facility. Proceeds
from the initial borrowing under the new long-term facility of approximately
$1,500,000 were used to repay subsidiary credit agreements, including the
Arahova short term credit facility which was scheduled to mature in November
2001. The balance of the facility is available for general corporate purposes.
The facility also provides for additional borrowing facilities of up to
$750,000, all of which would be discretionary with the lenders if requested by
Adelphia.
In conjunction with the repayment of the Arahova short term credit
facility on September 28, 2001, Arahova distributed cable systems serving
approximately 470,000 subscribers to a subsidiary of Adelphia (the "September
2001 Distribution"). As the cable systems distributed and contributed
constituted businesses contained within separate legal entities under common
control, the January 2001 Contribution, the April 2000 Contribution and the
September 2001 Distribution have been reported as a change in reporting entity.
As a result, the condensed consolidated financial statements included herein
have been recast for periods that the distributed and contributed systems were
under the common control of Adelphia.
The following shows the effects on the historical periods of the change
in reporting entity:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2000 2001 2000 2001
--------------- --------------- --------------- ---------------
(Increase) decrease in loss before
extraordinary items $ (3,648) $ 18,330 $ (11,473) $ 40,957
(Increase) decrease in net loss $ (3,648) $ 18,330 $ (11,473) $ 40,957
7
The following unaudited financial information for the three and nine
months ended September 30, 2000 has been presented as if the Comcast cable
systems exchange and the acquisitions that were consummated during the year
ended December 31, 2000 had occurred on January 1, 2000.
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
----------------------------------
Revenues $ 321,635 $ 967,499
Net loss (32,134) (78,179)
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. On June 12, 2001, Adelphia completed an
offering of $1,000,000 of 10 1/4% senior notes due 2011. Net proceeds from this
offering, after deducting offering expenses, were approximately $980,000.
Adelphia used the proceeds from these offerings to repay subsidiary bank debt of
Adelphia subsidiaries, including certain Arahova subsidiaries, a portion of
which may be reborrowed and used for general corporate purposes.
On October 25, 2001, Adelphia completed an offering of $500,000 of 10
1/4% Senior Notes due 2006, (the "Adelphia October 2001 Debt Offering.") Net
proceeds from this offering, after deducting offering expenses and original
issue discount, were approximately $485,000. Adelphia used the proceeds from the
offering to repay subsidiary bank debt, including certain Arahova subsidiaries,
a portion of which may be reborrowed and used for general corporate purposes.
3. Debt
Debt is summarized as follows:
Parent Debt:
December 31, September 30,
2000 2001
----------------- -----------------
9 3/4% Senior Notes due 2002 $ 201,005 $ 200,366
Senior Discount Notes due 2003 354,392 382,644
9 1/2% Senior Notes due 2005 250,950 250,770
8 7/8% Senior Notes due 2007 243,805 244,588
8 3/4% Senior Notes due 2007 217,440 218,304
8 3/8% Senior Notes due 2017 94,420 94,672
8 3/8% Senior Notes due 2007 94,930 95,488
Senior Discount Notes due 2008 296,435 321,497
----------------- -----------------
Total parent debt $ 1,753,377 $ 1,808,329
================= =================
8
Subsidiary Debt:
December 31, September 30,
2000 2001
----------------- ------------------
Notes to banks $ 2,626,218 $ 1,607,676
9.47% Senior Secured Notes due 2002 42,805 41,545
Other debt 23,962 18,399
---------------- -----------------
Total subsidiary debt $ 2,692,985 $ 1,667,620
================ =================
4. Investments
The Company recognized a loss of $72,115 during the nine months ended
September 30, 2001, which resulted from the write-down of an investment which
experienced a decline in value that was deemed other-than-temporary.
5. Supplemental Financial Information
Cash payments for interest were $202,314 and $237,656 for the nine
months ended September 30, 2000 and 2001, respectively. Accumulated depreciation
of property, plant and equipment amounted to $311,251 and $328,785 at December
31, 2000 and September 30, 2001, respectively. Accumulated amortization of
intangible assets amounted to $260,009 and $407,429 at December 31, 2000 and
September 30, 2001, respectively.
Interest expense - net includes interest income of $7,830 and $17,516
for the three months ended September 30, 2000 and 2001, respectively and $40,698
and $39,188 for the nine months ended September 30, 2000 and 2001, respectively.
Interest expense - net includes net interest income from affiliates of $5,025
and $16,796 on related party receivables balances for the three months ended
September 30, 2000 and 2001, respectively, and $30,416 and $35,469 for the nine
months ended September 30, 2000 and 2001, respectively.
Arahova recorded the contribution of cable systems acquired by Adelphia
in the January 1, 2001 Comcast cable systems exchange and the related assets and
liabilities at Adelphia's historical cost as follows:
Cable systems, net $ 494,757
Related party receivables 23,912
Other assets 2,519
Debt 132,744
Net equity 388,444
6. Income Taxes
Income tax benefit for the three and nine months ended September 30,
2000 and 2001, respectively was comprised of current tax expense and a deferred
tax benefit.
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
9
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 three and nine months ended
September 30, 2001, a period loss of $1,000 and $9,300, respectively, was
recorded in "Other" in the condensed consolidated statement of operations. At
January 1, 2001 and September 30, 2001, the aggregate fair value of stock
purchase warrants considered to be derivatives was $9,300 and $0 respectively.
8. Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations with limited exceptions for combinations
initiated prior to July 1, 2001. In addition, it further clarifies the criteria
for recognition of intangible assets separately from goodwill. This statement is
effective for business combinations completed after June 30, 2001.
SFAS No. 142 discontinues the practice of amortizing goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Intangible assets with a determinable useful life will continue to
be amortized over their useful lives. SFAS No. 142 applies to goodwill and
intangible assets acquired after June 30, 2001. Goodwill and intangible assets
existing prior to July 1, 2001 will be affected when the Company adopts the
statement. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. At September 30, 2001, the carrying value of goodwill and
indefinite-lived intangible assets that will no longer be amortized approximated
$8,175,000. Amortization of such assets was approximately $55,000 and $156,000
for the three and nine months ended September 30, 2001, respectively. The
Company has not yet completed its impairment assessment of goodwill and
indefinite-lived intangible assets which will be required upon implementation of
the standard.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144, which addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of, supercedes SFAS No. 121 and is
effective for fiscal years beginning after December 15, 2001. While the Company
is currently evaluating the impact the adoption of SFAS No. 144 will have on its
financial position and results of operations, it does not expect such impact to
be material.
9. Commitments and Contingencies
Reference is made to Note 2 and to Management's Discussion and Analysis
of Financial Condition and Results of Operations and Legal Proceedings for a
discussion of material commitments and contingencies.
10
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
September 30, 2001, the Company owned systems with broadband networks that
served approximately 2,251,000 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 and appraisals.
On January 3, 2001, Arahova and certain subsidiaries of Adelphia closed
on a short term secured revolving credit facility. The facility, originally
scheduled to expire November 30, 2001, provided 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 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, of which
approximately 131,000 subscribers were acquired by Adelphia in the January 1,
2001 Comcast cable systems exchange. In a similar transaction in April 2000,
Adelphia contributed cable systems serving approximately 460,000 subscribers to
Arahova.
On September 28, 2001, certain subsidiaries and affiliates of Adelphia
and Arahova closed on a new $2,030,000 secured revolving term facility. Proceeds
from the initial borrowing under the new long-term facility of approximately
$1,500,000 were used to repay subsidiary credit agreements, including the
Arahova short term credit facility which was scheduled to mature in November
2001. The balance of the facility is available for general corporate purposes.
The facility also provides for additional borrowing facilities of up to
$750,000, all of which would be discretionary with the lenders if requested by
Adelphia.
11
In conjunction with the repayment of the Arahova short term credit
facility on September 28, 2001, Arahova distributed cable systems serving
approximately 470,000 subscribers to a subsidiary of Adelphia. As the cable
systems distributed and contributed constituted businesses contained within
separate legal entities under common control, the January 2001 Contribution, the
April 2000 Contribution and the September 2001 Distribution have been reported
as a change in reporting entity. As a result, the condensed consolidated
financial statements included herein have been recast for periods that the
distributed and contributed systems were under the common control of Adelphia.
Results of Operations
Three and Nine Months Ended September 30, 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 2001 2000 2001
----------- ---------- ---------- ----------
Revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Direct operating and programming 33.0% 35.7% 33.2% 35.9%
Selling, general and administrative 19.0% 19.4% 18.2% 18.1%
Depreciation and amortization 28.0% 35.5% 28.8% 35.2%
Management fees to managing affiliate 0.1% 0.6% 0.3% 0.5%
Merger costs - - - 0.1%
---------- ---------- ---------- ----------
Operating income 19.9% 8.8% 19.5% 10.2%
========== ========== ========== ==========
Revenues
Revenues increased approximately 31.7% and 34.2% for the three and nine
months ended September 30, 2001 compared with the same periods of the prior
year, respectively. The increases are attributable to acquisitions, new services
and the impact of rate increases.
Direct Operating and Programming Expenses
These expenses, which are mainly basic and premium programming costs and
technical expenses, increased 42.4% and 44.9% for the three and nine months
ended September 30, 2001 compared with the same periods of the prior year,
respectively. The increases are primarily due to incremental costs associated
with increased subscribers due to acquisitions and programming rate increases,
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 34.5% and 33.3% for the three and nine months ended
September 30, 2001 compared with the same periods of the prior year,
respectively. The increases are primarily due to incremental costs associated
with increased subscribers due to acquisitions and the roll-out of new services.
12
Depreciation and Amortization Expenses
Depreciation and amortization increased 67.0% and 64.1% for the three
and nine months ended September 30, 2001 compared with the same periods of the
prior year, respectively. The increases are primarily due to acquisitions, the
cable systems exchange and increased capital expenditures.
Interest Expense - Net
Interest expense - net decreased 21.0% and increased 5.6% for the three
and nine months ended September 30, 2001 compared with the same periods of the
prior year, respectively. The three month decrease is primarily due to an
increase in interest income and the decrease in the average debt outstanding as
compared to the prior year and the nine month increase is primarily due to the
incremental debt related to acquisitions and an increase in the average debt
outstanding.
Other-Than-Temporary Impairment of Investment
During 2001, the Company recognized a loss of $72,115, which resulted
from the write-down of an investment which experienced a decline in value that
was deemed other-than-temporary.
Gain on Cable Systems Exchange
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
$161,047 (net of tax of $56,142) for the nine months ended September 30, 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.
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.
Financing Activities
On January 3, 2001, Arahova and certain subsidiaries of Adelphia closed
on a short term secured revolving credit facility. The facility, originally
scheduled to expire November 30, 2001, provided 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 credit facility, proceeds are available for
general corporate purposes. Proceeds were used to repay subsidiary bank debt of
Adelphia subsidiaries, including certain Arahova subsidiaries. On September 28,
2001, Adelphia closed on a new $2,030,000 secured revolving term facility.
Proceeds from the initial borrowing under the new long-term facility of
approximately $1,500,000 were used to repay subsidiary credit agreements,
including the Arahova short term credit facility.
13
At September 30, 2001, the Company's total outstanding debt aggregated
$3,475,949, which included $1,808,329 of parent debt and $1,667,620 of
subsidiary debt. As of September 30, 2001, after giving effect to the
application of the proceeds of the Adelphia October 2001 Debt Offering, the
Company had an aggregate of $974,693 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 5.38% at
September 30, 2001.
The following table sets forth the mandatory reductions in principal
under all debt agreements for each of the next four years and three months based
on amounts outstanding at September 30, 2001:
Three months ending December 31, 2001 $ 20,500
Year ending December 31, 2002 221,800
Year ending December 31, 2003 503,200
Year ending December 31, 2004 155,100
Year ending December 31, 2005 512,200
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 nine months ended September 30, 2000 and
2001 were $212,977 and $543,190, respectively. This increase was primarily due
to acquisitions, cable plant rebuilds and upgrades to expand services. The
Company expects that capital expenditures from October 1, 2001 through December
31, 2001 will be in a range of approximately $150,000 to $175,000.
14
Regulatory and Competitive Matters
The operations of the Company are 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.
Cable television companies operate under franchises granted by local
authorities. Because such franchises are non-exclusive, the Company is subject
to competition with other cable operators and, in some cases, systems operated
by the municipal franchising authorities themselves. The Company is also subject
to competition from DBS and wireless service providers, which are not subject to
regulation on the local level, since they do not utilize the public rights of
way. These providers are also exempt from many of the federal regulations
applicable to the cable industry. This difference in regulatory schemes hinders
the Company's ability to compete on a level playing field.
The Company is subject to rate regulation by certain franchising
authorities that have petitioned the FCC for certification to regulate the
Company's rates. Such rate regulation, however, is limited to the basic, or
lowest level, service tier.
Federal regulations also limit the Company's discretion to select
certain programming services, by mandating the carriage of local broadcast
television stations, franchise-required public, educational and governmental
channels, and unaffiliated commercial leased access programming services. Such
mandatory carriage obligations could increase if the FCC decides to extend such
mandatory carriage rules to the digital level of service, which issue is
currently pending before the FCC. These mandatory carriage requirements limit
the capacity available to the Company for revenue-generating programming
services.
Additionally, the FCC is currently considering a rulemaking to determine
the regulatory status of Internet service. Specifically, the FCC is reviewing
whether Internet service is a cable service and, therefore, subject to
regulation at the local level, or a telecommunications service and, therefore,
subject to regulation at the state level. The outcome of the decision could have
an impact on such factors as the rates the Company may charge for such service,
the extent to which the Company would have to make its Internet facilities
available to the franchising authorities and unaffiliated service providers, and
the rates the Company must pay utilities for pole attachments. For further
information regarding regulatory and competitive matters and their affect on the
Company, see the Company's most recent Annual Report on Form 10-K.
15
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, Arahova 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.
In November, 1999, Arahova, a subsidiary of Adelphia, was sued in a
class-action case, Galley vs. American Telephone & Telegraph Corp. et al., where
plaintiffs allege that by requiring customers to purchase the @Home service,
rather than offering the option of access alone, Arahova and the other defendant
MSOs are illegally "tying" Internet content to Internet access, thereby
allegedly 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 MSOs providing, or desiring to
provide, the @Home service to enter into contracts precluding them from offering
any competing Internet service. The plaintiffs filed an amended complaint
alleging that the violations are national in scope (rather than restricted to
California). In January 2001, the court denied plaintiffs' motion to certify a
nationwide class. The plaintiffs filed an appeal of such denial, which was
rejected by the Court of Appeals. This case was dismissed on November 5, 2001.
16
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 damages under various
causes of action under state law. The Company is continuing to vigorously defend
these actions, though the outcome cannot be predicted at this time.
Arahova and its subsidiaries are parties to various other legal
proceedings and claims which arise in the ordinary course of, and are incidental
to, their businesses. Management does not expect that any of these other
currently pending legal proceedings will have a material impact on the Company's
financial position, results of operations or cash flow.
17
Item 6. Exhibits and Reports on Form 8-K
Each exhibit identified below is filed as part of this report.
a) Exhibits
Exhibit No. Description
10.01 Credit Agreement dated as of September 28, 2001 among Olympus Cable
Holdings, LLC, Adelphia Company of Western Connecticut, Highland Video
Associates, L.P., Coudersport Television Cable Company, Adelphia
Holdings 2001, LLC, and Bank of Montreal, as the Administrative Agent,
and the other Agents and Lenders party thereto (incorporated herein by
reference to Exhibit 10.01 to Form 8-K of Adelphia filed on October 12,
2001).
b) Reports on Form 8-K
A Form 8-K was filed on August 14, 2001, which reported
information under items 5 and 7.
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SIGNATURE
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: November 14, 2001 By: /s/ Timothy J. Rigas
Timothy J. Rigas
Executive Vice President (authorized
officer), Chief Financial Officer, Chief
Accounting Officer and Treasurer
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