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 BUSINESS SOLUTIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
JOHN GLICKSMAN, ESQ.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
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Note
ADELPHIA BUSINESS SOLUTIONS, INC.
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 Business Solutions, Inc.:
The Annual Meeting of Stockholders of Adelphia Business Solutions, Inc. will
be held at the Coudersport Theater, Main Street, Coudersport, Pennsylvania on
Monday, July 31, 2000, at 11:30 a.m., for the following purposes:
1. To elect eight (8) Directors by vote of the holders of Class A Common
Stock, Class B Common Stock and Preferred Stock, voting together.
2. 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 of the Board
July 7, 2000
ADELPHIA BUSINESS SOLUTIONS, INC.
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
Business Solutions, Inc., 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 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 capital stock of the Company on that date consisted of
35,319,670 shares of Class A Common Stock, $.01 par value (the "Class A Common
Stock"), 35,172,364 shares of Class B Common Stock, $.01 par value (the "Class
B Common Stock") and 275,107 shares of 12-7/8% Senior Exchangeable Redeemable
Preferred Stock due 2007 (the "Preferred Stock"). With respect to the matters
described in this proxy statement, the holders of Class A Common Stock, Class B
Common Stock and Preferred 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,
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, and each holder of Preferred Stock is entitled to cast one (1) vote
for each share of Preferred 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 capital stock entitled to vote
is necessary to constitute a quorum at the Annual Meeting. The Directors shall
be elected by a plurality of the votes of the shares of capital stock present
in person or represented by proxy at the Annual Meeting and entitled to vote on
the election of directors.
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
PROPOSAL 1
ELECTION OF DIRECTORS
Description of Board of Directors
The Bylaws of the Company provide for the Board of Directors to be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors by the
holders of Class A Common Stock, the holders of Class B Common Stock and the
holders of Preferred Stock, voting together as a single class, with each share
of Class A Common Stock entitled to one (1) vote, each share of Class B Common
Stock entitled to ten (10) votes and each share of Preferred Stock entitled to
one (1) vote. 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 seven (7) nor
more than twenty-one (21). The Board currently consists of eight (8) directors,
all of whom are also nominees for director.
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, the holders of Class B Common Stock and the holders of Preferred
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 on the Board of
Directors 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 John J. Rigas, James P. Rigas, Michael
J. Rigas, Timothy J. Rigas, Pete Metros, James L. Gray, Edward S. Mancini and
Peter L. Venetis on behalf of all of the stockholders of the Company. All
nominees except, Mr. Metros, Mr. Gray, Mr. Mancini and Mr. Venetis were first
elected or appointed as directors of the Company in 1991. Mr. Metros and Mr.
Gray were first elected as directors of the Company in 1997, and Mr. Mancini
and Mr. Venetis were first elected as directors of the Company 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.
The following sets forth certain information concerning each nominee for
election as a director of the Company.
Nominees for Election of Directors
John J. Rigas
Age 75
John J. Rigas is the Chairman of the Board of the Company. He also is the
founder, Chairman, Chief Executive Officer and President of Adelphia
Communications Corporation ("Adelphia Communications"). Mr. Rigas has owned and
operated cable television systems since 1952. Among his business and community
service activities, Mr. Rigas is Chairman of the Board of Directors of Citizens
Bank Corp., Inc., Coudersport,
2
Pennsylvania and a member of the Board of Directors of the Charles Cole
Memorial Hospital. He is a director of the National Cable Television
Association and a member of its Pioneer 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 L. Venetis who also serves as a
director of the Company.
James P. Rigas
Age 42
James P. Rigas is Vice Chairman, Chief Executive Officer, Chief Operating
Officer and a Director of the Company, Executive Vice President, Strategic
Planning and a Director of Adelphia Communications and a Vice President and
Director of Adelphia Communications' other subsidiaries. He has been with
Adelphia since 1986. 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.
Michael J. Rigas
Age 46
Michael J. Rigas is Vice Chairman and a Director of the Company, Executive
Vice President, Operations and a Director of Adelphia Communications and a Vice
President and Director of Adelphia Communications' other subsidiaries. He has
been with Adelphia since 1981. 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.
Timothy J. Rigas
Age 44
Timothy J. Rigas is Vice Chairman, Chief Financial Officer, Treasurer and a
Director of the Company, Executive Vice President, Treasurer and a Director of
Adelphia Communications, and a Vice President and Director of Adelphia
Communications' other subsidiaries. He has been with Adelphia since 1979. Mr.
Rigas graduated from the University of Pennsylvania, Wharton School, with a
B.S. degree in Economics (cum laude) in 1978.
Pete J. Metros
Age 60
Pete J. Metros became a director of the Company on April 1, 1997. Mr. Metros
is the Managing Director of Mannesmann Dematic Systems--worldwide. On February
1, 1998, he was appointed to the Board of Directors of Mannesmann Dematic AG,
headquartered in Wetter, Germany. He continues to be the President and a member
of the Board of Directors for Mannesmann Dematic Rapistan Corporation (since
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 Communications and Borroughs Corporation of
Kalamazoo, Michigan. Mr. Metros has served as a director of Adelphia since 1986
and received a BS degree from Georgia Institute of Technology in 1962.
3
James L. Gray
Age 65
James L. Gray became a director of the Company on April 1, 1997. Mr. Gray is
the retired chairman & CEO of PRIMESTAR Partners. Mr. Gray served as Chairman
and CEO of PRIMESTAR from 1995 to 1998. Mr. Gray has more than 20 years of
experience in the telecommunications, cable and satellite industries. He joined
Warner Cable in 1974, and advanced through several division operating posts
prior to being named president of Warner Cable in 1986. In 1992, after the
merger of Time Inc. and Warner Communications, Mr. Gray was appointed vice
chairman of Time Warner Cable where he served until his retirement in 1993. Mr.
Gray has served on the boards of several telecommunications companies and
associations, including the National Cable Television Association, where he
served as a director from 1986 to 1992, and Turner Broadcasting System, where
he served as a director from 1987 to 1991. He also served as chairman of the
executive committee and director of C-SPAN and as a director of E!
Entertainment Television, Cable in the Classroom and the Walter Kaitz
Foundation. Beginning in 1992, Mr. Gray began serving on PRIMESTAR's board of
directors. Since 1995, Mr. Gray has served as a director of Sea Pines
Associates, Inc. Mr. Gray received a bachelor's degree from Kent State
University in Kent, Ohio and a master's degree in business administration (MBA)
from the State University of New York at Buffalo.
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 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 Communications
Corporation, 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.
Edward S. Mancini
Age 40
Edward S. Mancini became a director of the Company on October 25, 1999. Mr.
Mancini is President/Owner of Artistic Stitches, Inc. From 1989 to 1993, Mr.
Mancini was Vice President--Media Lending at Canadian Imperial Bank of
Commerce. From 1986 to 1989, Mr. Mancini was in the corporate training program
at Chase Manhattan Bank. Mr. Mancini received has Masters of Science, Finance
and Accounting from Texas A&M University in 1986.
Audit and Compensation Committees and Meetings of the Board of Directors
In April 1998, the Board of Directors established a Compensation Committee,
consisting of James L. Gray and Pete J. Metros, which reviews and has authority
to approve the compensation of the key officers and employees of the Company.
The Compensation Committee met one time during 1999. The Board of Directors
also has an Audit Committee, comprised of James L. Gray, Pete J. Metros and
Timothy J. Rigas, which is responsible for monitoring the financial reporting
of the Company on behalf of the Board of Directors and the investing public.
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 met or acted by written consent in lieu of meeting four 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, except Mr. Metros who attended 67% such meetings.
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.
4
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the year ended March 31, 1998,
the nine and twelve months ended December 31, 1998, and the year ended December
31, 1999 to the Company's Chief Executive Officer and the three executive
officers whose compensation exceeded $100,000 in salary and bonus during the
year ended December 31, 1999:
Compensation
Long Term
Compensation
---------------------
Restricted Securities
Name and Stock Underlying All Other
Principal Position(a) Period(b) Salary Bonus Awards(f) Options(f) Compensation(c)(d)
- ------------------------ --------------------- ---------- ----- ---------- ---------- ------------------
John J. Rigas........... 12 months ended 12/99 $1,354,953 $-- $1,575,000 100,000 $461,940
Chairman and Director 12 months ended 12/98 1,367,399 -- -- -- 461,061
9 months ended 12/98 1,018,789 -- -- -- 200,750
12 months ended 3/98 1,271,939 -- -- -- 461,378
James P. Rigas(e)....... 12 months ended 12/99 223,856 -- 1,575,000 100,000 11,669
Vice Chairman, Chief 12 months ended 12/98 229,385 -- -- -- 11,431
Executive Officer, 9 months ended 12/98 171,003 -- -- -- 11,431
President and Director 12 months ended 3/98 213,011 -- -- -- 11,410
Michael J. Rigas........ 12 months ended 12/99 223,856 -- 1,575,000 100,000 10,950
Vice Chairman, Secretary 12 months ended 12/98 229,866 -- -- -- 10,950
and Director 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
Vice Chairman, Chief 12 months ended 12/98 229,866 -- -- -- 10,950
Financial Officer,
Treasurer 9 months ended 12/98 171,484 -- -- -- 10,950
and Director 12 months ended 3/98 213,089 -- -- -- 10,950
Daniel R. Milliard(g)... 12 months ended 12/99 230,774 -- -- 81,250 5,340
President, Vice Chairman 12 months ended 12/98 238,191 -- 760,500 -- 5,340
Secretary and Director 9 months ended 12/98 176,438 -- 760,500 -- 5,340
12 months ended 3/98 229,810 -- 27,000 -- 5,340
- --------
(a) John J. Rigas, Michael J. Rigas and Timothy J. Rigas are not employed by
the Company but are compensated by Adelphia Communications for services to
the Company pursuant to employment agreements with Adelphia
Communications. The Company does not reimburse Adelphia Communications
directly for the services they provide to the Company, although the
Company does make payments for shared corporate overhead services to
Adelphia Communications pursuant to a Management Services Agreement.
(b) The twelve months ended December 31, 1998 includes three months
compensation from the fiscal year ended March 31, 1998.
(c) The twelve months ended December 31, 1998 and 1999, 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 Adelphia
Communications under employment agreements with John J. Rigas, James P.
Rigas. Michael J. Rigas, Timothy J. Rigas and Daniel R. Milliard, in
premium payment amounts of $200,000, $10,919, $10,200, $10,200 and $4,590,
respectively, during the twelve months ended December 31, 1999 $200,000,
$10,681, $10,200, $10,200 and $4,590, respectively, during the nine and
twelve months ended December 31, 1998, $200,000, $10,660, $10,200, $10,200
and $4,590, respectively, during the fiscal year
5
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 Adelphia during the twelve months ended December 31,
1999 and 1998, respectively, and the nine months ended December 31, 19999
and the fiscal year ended March 31, 1998, 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 Adelphia Communications during the twelve months ended
December 31, 1999 and 1998, respectively, and 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 Adelphia Communications
matching contributions for each executive officer under the Company's
401(k) savings plan for the twelve months ended December 31, 1999 and 1998
and 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.
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 death of
both the insured and his spouse or termination of the insurance policies
related to such arrangement.
(d) 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 salary shown in the table.
(e) During the periods presented through December 31, 1998, James P. Rigas was
not employed by the Company, but was compensated by Adelphia
Communications for his services to the Company pursuant to an employment
agreement with Adelphia Communications. During such periods, the Company
did not directly reimburse Adelphia Communications for Mr. Rigas' base
salary, insurance premium payments and other benefits paid by Adelphia
Communications. Effective January 1, 1999, the Company employed Mr. Rigas
directly.
(f) The respective amounts set forth represent restrictive stock awards of the
Company's Class A common stock and stock options to purchase the Company's
Class A common stock, which were granted to the named executive officers
by the Company under its 1996 Long-Term Incentive Compensation Plan ("1996
Plan").
(g) Mr. Milliard served in the indicated positions for the Company, and as
Senior Vice President and Secretary of Adelphia pursuant to an employment
agreement with the Company, 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 the
Company's Class A common stock which had a value of approximately $27,000
and $760,500 as of April 1, 1997 and April 1, 1998 (the dates of grant),
respectively, and an option to purchase 81,250 shares of the Company's
Class A common stock granted April 1, 1999. The 117,000 restricted stock
award shares are not subject to vesting and will fully participate in
dividends and distributions.
Long-Term Incentive Compensation Plan
The Company's 1996 Plan provides for the grant of options which qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), options which do not so qualify,
share awards (with or without restrictions on vesting), stock appreciation
rights and stock equivalent or phantom units. The number of shares of Class A
common stock available for the issuance of such options, awards, rights and
phantom stock units under the 1996 Plan was initially 5,687,500. Such number is
to increase each year by a number of shares equal to one percent (1%) of
outstanding shares of all classes of common stock, up to a maximum of 8,125,000
shares. Options, awards and units may be granted under the 1996 Plan to
directors, officers, employees and consultants. The purposes of the 1996 Plan
are to
6
encourage ownership of Class A common stock by directors, executive officers,
employees and consultants; to induce them to remain employed or involved with
the Company; and to provide additional incentive for such persons to promote
the success of the Company. In 1999, the Company granted certain stock awards
and stock options to certain executive officers of the Company.
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------
% of
Total
Number of Options Exercise
Securities Granted or
Underlying in Base Grant Date
Options Fiscal Price Expiration Present
Name Granted(#)(a) Year ($/share) Date Value($)(b)
- ---- ------------- ------- --------- ---------- -----------
John J. Rigas............ 100,000 16.7 16.00 8/9/2009 809,000
James P. Rigas........... 100,000 16.7 16.00 8/9/2009 809,000
Michael J. Rigas......... 100,000 16.7 16.00 8/9/2009 809,000
Timothy J. Rigas......... 100,000 16.7 16.00 8/9/2009 809,000
Daniel R. Milliard....... 81,250 13.6 12.125 9/20/2000 891,313
- --------
(a) All options granted were with respect to the Class A common stock of the
Company, with an exercise price equal to the fair market value of such
stock on the date of grant. These options, other than those for Mr.
Milliard, all vest in three equal, annual amounts on the third, fourth and
fifth anniversaries of the date of grant.
(b) The grant date present value of each option was calculated using the
Black-Scholes option pricing model using the following assumptions:
expected dividend yield--0%; risk free interest rate--6.93%; and expected
volatility--50%. The expected life used in the calculation of the Black
Scholes option pricing model for the options relating to John J. Rigas,
James P. Rigas, Michael J. Rigas, Timothy J. Rigas and Daniel R. Milliard
were as follows: 10 years, 10 years, 10 years, 10 years and 1.47 years,
respectively.
Aggregate Option Exercises In Last Fiscal Year
And December 31, 1999 Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised Options In-The-Money
Shares at Options at
Acquired December 31, 1999 December 31, 1999
on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable(#)(1) Unexercisable($)(a)
- ---- ----------- ----------- ------------------- -------------------
John J. Rigas........... 0 0 0/100,000 0/3,200,000
James P. 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
Daniel R. Milliard...... 0 0 81,250/0 2,914,844/0
- --------
(a) All options granted were with respect to the Class A common stock of the
Company, 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.
7
Employment Contracts
Mr. Milliard served as President and Vice Chairman of the Company. Mr.
Milliard's employment agreement with the Company 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 President and
Secretary of the Company and as senior vice president and secretary of Adelphia
effective as of September 20, 1999, although he continued to serve as a
director of both companies until the 1999 annual 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 for the period covering
January 1, 2000 through March 31, 2001, and is entitled to receive an
additional option to purchase 81,250 shares of the Company's Class A common
stock at fair market value. Certain other matters under Mr. Milliard's
employment agreement remain under discussion and negotiation by Mr. Milliard
and the Company.
Compensation Committee Interlocks and Insider Participation
James Gray and Pete Metros serve as members of the Compensation Committee of
the Board of Directors. Neither Mr. Gray nor Mr. Metros is or has been an
officer or employee of the Company.
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 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 Board committees.
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.
8
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Executive compensation decisions during the year period ended December 31,
1999 were addressed by the Compensation Committee of the Board of Directors
(see "Election of Directors--Audit and Compensation Committees and Meetings of
the Board of Directors"), composed of two independent, non-employee directors,
Pete J. Metros and James L. Gray.
Effective January 1, 1999, James P. Rigas, the Chief Executive Officer, was
employed by the Company directly, but continued to receive his salary for his
work with the Company pursuant to the terms of a previously existing employment
agreement with Adelphia Communications. For the year ended December 31, 1999,
the Committee made no decisions with respect to the salary or bonus
compensation of Mr. Rigas.
Neither John J. Rigas, Michael J. Rigas nor Timothy J. Rigas were given
salaries or bonuses directly by the Company during the twelve-month period
ended December 31, 1999. Their services, as well as the services of certain
other employees of Adelphia Communications, were paid for directly by Adelphia
Communications. Adelphia Communications has historically charged the Company
for the provision of shared corporate overhead services, but has not charged
the Company for the actual cost of compensating these named executive officers
of the Company who are employees of Adelphia Communications.
To further directly align the interests of the Company's executives with
those of stockholders, the Company granted definitive stock options and
restricted stock awards to James P. Rigas, John J. Rigas, Michael J. Rigas and
Timothy J. Rigas for the first time in 1999. The Committee believes that such
awards, along with the personal commitment of each of the executives to lead
the Company in pursuit of its growth strategies, provide the executive officers
with significant incentives to achieve a high level of Company performance, and
that such awards are comparable in value to stock compensation awards granted
to peer group executives. The Committee may consider, from time to time,
providing additional equity incentive compensation to its named executive
officers.
David R. Milliard was compensated pursuant to a previously existing
employment agreement with the Company. Mr. Milliard resigned from the Company
and Adelphia Communications on September 20, 1999.
COMPENSATION COMMITTEE
Pete J. Metros
James L. Gray
9
Compensation Committee Interlocks and Insider Participation
James Gray and Pete Metros serve as members of the Compensation Committee of
the Board of Directors. Neither Mr. Gray nor Mr. Metros is or has been an
officer or employee of the Company.
Stock Performance Graph
The following graph compares the percentage change in the cumulative total
shareholder return on the weighted average of the Company's Class A Common
Stock ("Adelphia Business Solutions Class A Common Stock" after October 25,
1999 prior to such date "Hyperion Class A Common Stock") during the period from
May 5, 1998 through December 31, 1999 with the cumulative total return on the
Standard & Poor's 500 Stock Index and with a selected peer group of five
companies engaged in the competitive access/telephony industry: Allegiance
Telecom Inc. (Class A); GST Telecommunications Inc. (Class A); ICG
Communications Inc. (Class A); RCN Corp. (Class A) and US Lec Corp. (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 May 5, 1998 in the Company's Class A
Common Stock and in each of the foregoing indices, and also assumes
reinvestment of dividends.
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG ADELPHIA BUSINESS SOLUTIONS, S&P 500 INDEX AND PEER GROUP INDEX
Measurement period S&P 500 Peer Group
(Fiscal year Covered) Adelphia Business Index Index
Measurement PT_
05/05/98 $100.00 $100.00 $100.00
FYE 06/98 $ 98.05 $101.76 $ 97.39
FYE 09/98 $ 36.72 $ 91.64 $ 53.10
FYE 12/98 $ 94.53 $111.15 $ 69.41
FYE 03/99 $ 75.78 $116.69 $109.07
FYE 06/99 $117.58 $121.97 $160.23
FYE 09/99 $155.08 $117.12 $147.31
FYE 12/99 $300.00 $134.54 $213.78
* $100 invested on 5/5/98 in Stock or Index--including Reinvestment of
Dividends.
10
Certain Transactions
During the year ended December 31, 1999, the Company made demand advances to
Adelphia periodically, for which the Company earned interest at 5.15%, totaling
approximately $8.5 million. During the period January 1, 1999 to December 31,
1999, the largest amount due from Adelphia Communications at the end of any
quarter was approximately $392.6 million at December 31, 1999.
The Company and Adelphia Communications have entered into a registration
rights agreement, as amended, whereby the Company has agreed to provide to
Adelphia Communications and certain permitted transferees, with respect to
common stock owned by them, two demand registration rights per year under
certain conditions, including that any such demand be with respect to shares
with a minimum of $10 million in market value, and with certain piggyback
registration rights in future public offerings of the common stock. Adelphia
Communications' demand registration rights terminate at such time as Adelphia
Communications ceases to hold at least $10 million in market value of common
stock.
During the year ended December 31, 1999, the Company incurred charges from
Adelphia Communications of approximately $8.6 million for the provision to the
Company of shared corporate overhead services in areas such as personnel,
payroll, management information services, computer services, shared use of
office, aircraft and network facilities and support equipment. The Company
expects that charges for the provision of similar services by Adelphia
Communications to the Company, or by the Company to Adelphia Communications,
will continue to be incurred or charged by the Company in the future. The
transactions related to the provision of these services have been based on
allocation of Adelphia Communications' incremental costs incurred for these
services, and do not necessarily represent the actual costs that would be
incurred if the Company was to secure such services on its own or the costs
which would be charged on a pro-rata allocation of such costs under the
Management Services Agreement between the Company and Adelphia Communications
dated April 10, 1998, with respect to shared corporate overhead service. During
the year ended December 31, 1999, the Company (i) paid Adelphia Communications
or certain of Adelphia Communications' affiliates, fiber lease payments of
approximately $0.2 million, (ii) received from Adelphia Communications $1.8
million in revenue for providing switched services, and (iii) paid to entities
owned by members of the Rigas family who are executive officers of the Company
approximately $7.6 million for property, plant and equipment and services.
On March 2, 1999, Highland Holdings, a partnership owned by the Rigas
family, purchased directly from the Company $100 million aggregate principal
amount of the Company's 12% Senior Subordinated Notes due 2007 at a purchase
price equal to the principal amount less the discount to the initial purchasers
of the other $200 million of such notes sold on that date.
On November 30, 1999, the Company 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, the Company issued and sold 5,181,350
shares of Class B common stock to Adelphia Communications at a purchase price
of $28.95 per share, which was equal to the offering price less the
underwriting discount for the Class A common stock sold to the public.
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, officers and more than
ten percent stockholders filed on a timely basis all reports due under Section
16(a) for the period from January 1, 1999 through December 31, 1999, except
that an initial report of ownership was filed late by Mr. Mancini and Mr.
Venetis.
11
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Class A common stock and Class B common stock as of June 20, 2000 by (i) each
person known by the Company to be a beneficial owner of more than 5% of either
the Class A common stock or Class B common stock, (ii) the directors and
executive officers and (iii) all directors and executive officers as a group.
As of June 20, 2000, there were 35,319,670 shares of Class A common stock
outstanding and 35,172,364 shares of Class B common stock outstanding. Unless
otherwise indicated, each of the shareholders in the table has sole voting and
investment power with respect to the shares beneficially owned.
Total
Class A Class B Common Stock
Common Stock Common Stock (%)
------------ ------------ ------------
Adelphia Communications
Corporation (a)................ 7,880,047(b)(c) 34,306,356(b) 59.8%
John J. Rigas (a)............... 617,500 -- 0.9%
James P. Rigas (a).............. 642,500 -- 0.9%
Michael J. Rigas (a)............ 602,500 -- 0.9%
Timothy J. Rigas (a)............ 592,500 -- 0.8%
Peter L. Venetis (d)............ 517,500 -- 0.7%
Pete J. Metros.................. 3,300 -- --
James L. Gray................... 6,000 -- --
All executive officers and
directors as a group (eight
persons) (a)................... 8,891,847(e) 34,306,356(e) 61.3%
The Mutuelles AXA group......... 3,150,950(f) -- 4.5%
c/o AXA Assurances I.A.R.D.
Mutuelle
21, rue de Chateaudun
75009 Paris, France
MFS Investment Management....... 1,787,820(g) -- 2.6%
500 Boylston Street, 15th floor
Boston, MA 02116
Morgan Stanley Dean Witter & 2,078,677(h) -- 2.9%
Co.............................
1585 Broadway
New York, NY 10036
- --------
(a) The business address of Adelphia Communications Corporation is One North
Main Street, Coudersport, PA 16915. In their capacity as executive
officers of Adelphia Communications, the following persons share or may be
deemed to share voting and investment power over the shares of common
stock owned by Adelphia Communications, subject to the discretion of the
Board of Directors of Adelphia: John J. Rigas, James P. Rigas, Michael J.
Rigas and Timothy J. Rigas. Share amounts shown for John J. Rigas, James
P. Rigas, Michael J. Rigas and Timothy J. Rigas each include 492,500 of
the same Class A common stock shares held by a Rigas family partnership in
which each of them is a general partner. Edward S. Mancini, a director of
the Company owns no shares of the Company's Common Stock.
(b) Each share of Class B common stock is convertible at any time at the
option of the holder into an equal number of shares of Class A common
stock. Holders of Class A common stock are entitled to one vote per share
and holders of Class B common stock are entitled to 10 votes per share on
all matters submitted to a vote of stockholders.
12
(c) The information presented reflects only shares of Class A common stock
held directly by Adelphia and does not include (i) shares of Class A
common stock into which Class B common stock may be converted or (ii)
708,121 shares of Class A common stock issuable under warrants held by
Adelphia. Assuming the conversion of all Class B common stock held by
Adelphia into Class A common stock and the exercise of all such warrants,
Adelphia would beneficially own 60.2% of the Class A common stock as of
such date.
(d) The information presented includes 25,000 shares owned directly by Mr.
Venetis and 492,356 shares deemed to be beneficially owned through a Rigas
family partnership by Ellen K. Rigas, the wife of Mr. Venetis and the
daughter of John J. Rigas.
(e) The information presented includes 7,880,047 shares of Class A common
stock and 34,306,356 shares of Class B common stock held by Adelphia, for
which the following executive officers and directors of the Company share
or may be deemed to share voting and investment power over the shares,
subject to the discretion of the Board of Directors of Adelphia: John J.
Rigas, James P. Rigas, Michael J. Rigas and Timothy J. Rigas. The
information presented excludes 708,121 shares of Class A common stock
issuable under warrants held by Adelphia.
(f) According to a Schedule 13G, the named entity is a group consisting of AXA
Conseil Vie Assurance Mutuelle, AXA Assurances I.A.R.D. Mutuelle, AXA
Assurances Vie Mutuelle and AXA Courtage Assurances Mutuelle. In addition
AXA Financial, Inc. (formerly known as The Equitable Companies
Incorporated) and AXA also report the same beneficial ownership over these
shares. All these reporting entities report sole voting power over
1,075,700 of such shares, shared voting power over 2,060,300 of such
shares, sole investment power over 3,146,850 of such shares, and shared
investment power over 4,100 of such shares. The shares shown represent
8.9% of the outstanding Class A common stock. Alliance Capital Management
L.P., a subsidiary of AXA Financial, Inc., has sole voting power over
918,900 of such shares, shared voting power over 2,060,300 of such shares
and sole dispositive power over 2,979,200 of such shares.
(g) According to a Schedule 13G, the named entity has sole voting power over
1,636,120 of such shares and sole investment power over all such shares,
which represent 5.1% of the outstanding Class A common stock.
(h) According to a Schedule 13G, the named entity shares voting power over
1,963,177 of these shares and shares investment power over all of them.
The shares shown represent 5.9% of the outstanding Class A common stock.
13
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 YEAR ENDED 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 BUSINESS
SOLUTIONS, INC., 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 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.
Stockholders who wish to make a proposal at the 2001 Annual Meeting other than
by inclusion in the Company's proxy materials must notify the Company of the
matter no later than May 23, 2001. Notwithstanding the fact that the Company
may at its discretion exclude any untimely proposal, if a stockholder presents
a proposal after May 23, 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.
14
APPENDIX A
TABLE OF CONTENTS
Selected Financial Data.................................................. A-2
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... A-4
Quantitative and Qualitative Disclosure About Market Risk................ A-12
Financial Statements and Supplementary Data.............................. A-12
Independent Auditors' Report............................................. A-13
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated Balance
Sheets.................................................................. A-14
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated
Statements of Operations................................................ A-15
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated
Statements of Common Stock and Other Stockholders' Equity (Deficiency).. A-16
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated
Statements of Cash Flows................................................ A-17
Adelphia Business Solutions, Inc. Notes to Consolidated Financial
Statements.............................................................. A-18
Market For the Company's Common Equity and Related Stockholder Matters... A-38
A-1
SELECTED FINANCIAL DATA
The following 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 the Company and the related notes
thereto. These data should be read in conjunction with the consolidated
financial statements and related notes thereto for the year ended March 31,
1998, the nine months ended December 31, 1998, the year ended December 31, 1999
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. The balance sheet data as of
March 31, 1996, 1997 and 1998 and the statement of operations data and the
other Company data with respect to the years ended March 31, 1996 and 1997 have
been derived from audited consolidated financial statements of the Company not
included herein.
Nine Months
Year Ended March 31, Ended Year Ended
----------------------------- December 31, December 31,
1996 1997 1998 1998 1999
-------- -------- --------- ------------ ------------
(Dollars in thousands, except per share amounts)
Statement of Operations Data (a):
Revenues......................... $ 3,322 $ 5,088 $ 13,510 $ 34,776 $ 154,575
Operating expenses:
Network operations.............. 2,690 3,432 7,804 18,709 58,525
Selling, general and
administrative................. 3,084 6,780 14,314 35,341 142,615
Depreciation and amortization... 1,184 3,945 11,477 26,671 65,244
-------- -------- --------- --------- ---------
Operating loss.................. (3,636) (9,069) (20,085) (45,945) (111,809)
Gain on sale of investment...... -- 8,405 -- -- --
Interest income................. 199 5,976 13,304 10,233 19,933
Interest income--affiliate...... -- -- -- 8,395 8,483
Interest expense and fees....... (6,088) (28,377) (49,334) (38,638) (74,314)
Other income.................... -- -- -- 1,113 --
Equity in net loss of joint
ventures....................... (4,292) (7,223) (12,967) (9,580) (7,758)
Net loss........................ (13,620) (30,547) (69,082) (74,185) (165,466)
Dividend requirements applicable
to preferred stock............. -- -- (12,409) (21,117) (31,618)
Net loss applicable to common
stockholders................... (13,620) (30,547) (81,491) (95,302) (197,084)
Basic and diluted net loss per
weighted average share of
common stock................... $ (0.42) $ (0.89) $ (2.33) $ (1.80) $ (3.47)
Common stock dividends.......... -- -- -- -- --
Other Company Data (a):
EBITDA (b)...................... $ (2,452) $ (5,124) $ (8,608) $ (19,274) $ (46,565)
Capital expenditures and company
investments (c)................ 18,899 79,396 132,889 215,770 477,755
Cash (used in) provided by
operating activities........... (833) (4,823) (6,333) (8,810) 17,485
Cash used in investing
activities..................... (18,899) (72,818) (266,604) (200,458) (556,247)
Cash provided by financing
activities..................... 19,732 137,455 443,873 221,088 298,325
A-2
As of March 31, As of December 31,
----------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- --------- --------- ----------
(Dollars in thousands)
Balance Sheet Data (a):
Cash and cash
equivalents............. $ -- $ 59,814 $ 230,750 $ 242,570 $ 2,133
Total assets............. 35,269 174,601 639,992 836,342 1,563,703
Long term debt and
exchangeable redeemable
Preferred stock......... 50,855 215,675 735,980 722,783 1,103,507
Common stock and other
stockholders' equity
(deficiency)............ (27,323) (50,254) (118,991) 74,031 279,931
- --------
(a) The data presented represents financial information for the Company and
its consolidated subsidiaries. As of December 31, 1999, four of the
Company's networks were owned by joint ventures in which it owned an
interest of 50%, and for which the Company reports its interest pursuant
to the equity method of accounting consistent with generally accepted
accounting principles.
(b) Earnings before interest expense, income taxes, depreciation and
amortization, other non-cash charges, gain on sale of investment, interest
income and equity in net loss of joint ventures ("EBITDA") and similar
measurements of cash flow are commonly used in the telecommunications
industry to analyze and compare telecommunications companies on the basis
of operating performance, leverage, and liquidity. While EBITDA is not an
alternative to operating income as an indicator of operating performance
or an alternative to cash flows from operating activities as a measure of
liquidity, all as defined by generally accepted accounting principles, and
while EBITDA may not be comparable to other similarly titled measures of
other companies, the Company's management believes EBITDA is a meaningful
measure of performance.
(c) For the fiscal years ended March 31, 1996, 1997 and 1998, the nine months
ended December 31, 1998, and the year ended December 31, 1999, the
Company's capital expenditures (including capital expenditures relating to
its wholly owned operating companies) were $6.1, $24.6, $68.6, $146.8 and
$453.2 million, respectively, and the Company's investments in its less
than wholly owned operating companies were $12.8, $34.8, $64.3, $69.0 and
$24.5 million, respectively, for the same periods.
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information or statements
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 future growth, expansion of operations or the
effect of future regulation or competition. These "forward-looking statements"
include statements regarding the intent, belief and current expectations of
Adelphia Business Solutions and its directors and officers, and 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. Any such forward-looking
information involves important risks and uncertainties that could significantly
affect expected results in the future from those expressed in any forward-
looking statements made by, or on behalf of, the Company.
These risks and uncertainties include, but are not limited to, uncertainties
relating to our ability to successfully market our services to current and new
customers, access markets on a nondiscriminatory basis, identify, design and
construct fiber optic networks, install cable and facilities (including
switching electronics) and obtain rights of way, access rights to buildings and
any required governmental authorizations, franchises and permits, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions, as
well as risks and uncertainties relating to general economic conditions, the
availability and cost of capital, acquisitions and divestitures, government and
regulatory policies, the pricing and availability of equipment, materials,
inventories and programming, technological developments, the costs and other
effects of rapid growth and changes in the competitive environment in which the
Company operates. Readers of this proxy statement are cautioned that such
statements are only predictions, that no assurance can be given that any
particular future results will be achieved, and that actual events or results
may differ materially. In evaluating such statements, readers should
specifically consider the various factors which could cause actual events or
results to differ materially from those indicated by such forward looking
statements. Unless otherwise stated, the information contained in this proxy
statement is as of and for the twelve months ended December 31, 1999.
Additional information regarding factors that may affect the business and
financial results of Adelphia Business Solutions can be found in the Company's
filings with the Securities and Exchange Commission, including the prospectus
and most recent prospectus supplement under Registration Statement No. 333-
11142 (formerly No. 333-88927), under the caption "Risk Factors."
The "Company" or "Adelphia Business Solutions" means Adelphia Business
Solutions, Inc. together with its majority-owned subsidiaries, except where the
context otherwise requires. Unless the context otherwise requires, references
herein to the networks mean (i) the 22 telecommunications networks in operation
or under construction as of May 8, 1998, the date of the Company's initial
public offering (the "Original Markets"), which are owned by wholly and
majority owned subsidiaries or by three joint venture partnerships or limited
liability companies managed by the Company and in which the Company holds a 50%
equity interest with one or more other partners, and (ii) the additional
networks operational or under development subsequent to May 8, 1998 (the "New
Markets").
Adelphia Business Solutions is a leading national provider of facilities-
based integrated communications services to customers that include businesses,
governmental and educational end users and other communications services
providers throughout the United States. The Company currently offers a full
range of communications services in 53 markets and expects by the end of the
year 2000 to be offering services in approximately 115 markets nationwide,
including substantially all of the top 40 metropolitan statistical areas in the
United States. To serve the Company's customers' broad and expanding
communications needs, the Company has assembled a diverse collection of high-
bandwidth, local and national network assets. The Company intends to integrate
these assets with advanced communications technologies and services in order to
A-4
provide comprehensive end-to-end communications services over its national
network. The Company provides customers with communications services such as
local switch dial tone (also known as local phone service), long distance
service, high-speed data transmission and Internet connectivity. The Company's
customers have a choice of receiving these services separately or as bundled
packages which are typically priced at a discount when compared to the price of
the separate services.
In order to take advantage of the improved economic returns and better
customer service from providing services "on-net," or over the Company's own
network, the Company is in the process of further expanding the reach of its
network system nationwide. The Company's Original Markets are principally
located in the eastern half of the United States; however, due to the Company's
success in operating and expanding these markets the Company is pursuing an
aggressive nationwide growth plan. The Company intends to serve 200 total
markets nationwide by the end of the year 2001, leveraging the Company's
existing and planned switching platforms and inter-city fiber networks. The
Company believes that this nationwide footprint will position it to address
approximately 65% of the 60 million business access lines nationwide, which
currently represent approximately $75 billion in annual revenues. This network
system expansion includes the purchase, lease or construction of local fiber
optic network facilities and the interconnection of all of the Company's
existing and new markets with its own fiber optic facilities. The Company will
also implement various technologies including dense wave division multiplexing,
or DWDM, to provide greater bandwidth capacity on its local and long-haul
network system. Once fully installed, the 33,000 route mile fiber optic
backbone will connect each of the Company's local markets. This fully redundant
network system will support the Company's full line of communication service
offerings.
The Company has experienced success in the sale of business access lines
with approximately 360,205 access lines sold as of December 31, 1999, of which
approximately 331,007 lines were installed at such date. This represents an
addition of 87,570 access lines sold and 80,202 access lines installed during
the quarter ended December 31, 1999 and an addition of 229,856 access lines
sold and 224,339 access lines installed during the year ended December 31,
1999. As of December 31, 1999, approximately 55% of these access lines are
provisioned on Company owned switches.
Financing Transactions
On March 2, 1999 Adelphia Business Solutions issued $300 million of 12%
Senior Subordinated Notes due 2007 (the "Subordinated Notes"). An entity
controlled by members of the Rigas family, controlling stockholders of
Adelphia, purchased $100 million 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 million 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.
On October 13, 1999, the Company filed a shelf registration statement with
the Securities and Exchange Commission to sell up to $1.5 billion in debt
securities, preferred and common stock, depository shares, and other equity
securities. This registration statement became effective on October 22, 1999.
Proceeds of any sales under this registration statement are expected to be used
for general corporate purposes, including capital spending, acquisitions, debt
repayment, investments and other purposes, and to facilitate the national
expansion.
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,
prior to the exercise of any underwriters' over-allotment option.
Simultaneously, Adelphia purchased 5,181,350 shares of Class B Common Stock at
a price equal to the public offering price less the underwriting discount for
the Class A Common Stock. The net proceeds of approximately $403 million will
be used to fund 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.
A-5
Acquisitions of Partner Interests
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 our jointly owned networks located in
the Wichita, KS, Jacksonville, FL and Richmond, VA markets for an aggregate of
approximately $89.8 million. The agreements increased the Company's ownership
interest in each of these networks to 100%. The acquisitions were accounted for
under the purchase method of accounting. 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, the Company 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 $36.5 million for its ownership interests in these markets. The
agreements increased the Company's ownership interest in each of these networks
to 100%. The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired networks are
included in the consolidated results of Adelphia Business Solutions effective
from the date acquired.
On March 21, 2000, the Company entered into a purchase agreement with
Allegheny Communications Connect, Inc. ("Allegheny") to acquire Allegheny's 50%
interest in the jointly owned network in State College, Pennsylvania, and to
make certain changes to the fiber lease agreement with Allegheny for this
network. The consideration to be paid to Allegheny under the purchase agreement
is 330,000 shares of the Company's Class A common stock. The consummation of
this transaction is subject to certain regulatory approvals and customary
closing conditions.
Results of Operations
Change of Year End. On March 30, 1999, the Board of Directors of Adelphia
Business Solutions approved a change in the Company'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.
Twelve months ended December 31, 1999 in comparison with twelve months ended
December 31, 1998
Revenues increased 290% to $154.6 million for the twelve months ended
December 31, 1999, from $39.6 million in the prior twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following:
Growth in Original Markets................................. $75,978
Acquisition of local partner interests..................... 27,955
New Markets................................................ 9,798
Management fees............................................ 1,247
A-6
The primary sources of revenues, reflected as a percentage of total revenue
were as follows:
Twelve Months
Ended
December 31,
--------------
1998 1999
------ ------
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%
Network operations expense increased 175% to $58.5 million for the twelve
months ended December 31, 1999, from $21.3 million in the prior twelve-month
period.
Amounts
(in thousands)
--------------
The increase is attributable to the following:
Growth in Original Markets................................. $17,270
Acquisition of local partner interests..................... 8,381
New Markets................................................ 10,888
Network Control Center..................................... 701
The increased number and size of the operations of the networks resulted in
increased employee related costs, equipment maintenance costs and expansion
costs.
Selling, general and administrative expense increased 251% to $142.6 million
for the twelve months ended December 31, 1999, from $40.6 million in the prior
twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following:
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
Depreciation and amortization expense increased 110% to $65.2 million during
the twelve months ended December 31, 1999, from $31.1 million in the prior
twelve-month period 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 income increased to $19.9 million from $15.6 million in the prior
twelve-month period as a result of the payment of interest due to the Company
from Telergy as discussed previously, offset by decreases in interest income
resulting from lower amounts of cash and cash equivalents and U.S. Government
securities.
Interest income--affiliate remained relatively unchanged at $8.5 million
compared to $8.4 million in the prior twelve-month period.
Interest expense increased 43% to $74.3 million for the twelve months ended
December 31, 1999, from $52.0 million in the prior twelve-month period as a
result of the issuance of the 12% Senior Subordinated Notes due 2007 discussed
previously, partially offset by an increase in the amount of interest
capitalized on projects under construction in 1999.
A-7
Equity in net loss of joint ventures decreased by 41% to $7.8 million for
the twelve months ended December 31, 1999, from $13.3 million in the prior
twelve-month period as a result of the consolidation of several joint ventures
resulting from the purchase of the local partners' interests, and the maturing
of the remaining joint venture networks. The 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 the Company decreased from eight at December 31, 1998 to four at December
31, 1999. These networks paid management and monitoring fees to the Company,
which are included in revenues, aggregating approximately $4.9 million for the
twelve months ended December 31, 1999, an increase of approximately $1.2
million 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 $28.4 million and $15.2
million respectively.
Preferred stock dividends increased 14% to $31.6 million during the twelve
months ended December 31, 1999 from $27.7 million during the prior twelve-month
period. The increase was due to a higher outstanding preferred stock base
resulting from the payment of dividends in additional shares of preferred
stock.
Nine Months Ended December 31, 1998 in Comparison with Nine months Ended
December 31, 1997
Revenues increased 300% to $34.8 million for the nine months ended December
31, 1998, from $8.7 million for the same period in the prior fiscal year.
Growth in revenues of $26.1 million resulted from an increase in revenues from
majority and wholly-owned networks of approximately $27.2 million as compared
to the same period in the prior fiscal year due to the continued expansion of
the Company's 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 $1.1 million as compared to the same period in the prior
fiscal year primarily due to the consolidation of the above mentioned networks.
Network operations expense increased 255% to $18.7 million for the nine
months ended December 31, 1998 from $5.3 million for the same period in the
prior fiscal 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.
Selling, general and administrative expense increased 288% to $35.3 million
for the nine months ended December 31, 1998 from $9.1 million for the same
period in the prior fiscal 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 the networks
managed and monitored by the Company, as well as the consolidation of the
Buffalo, Syracuse, New Jersey, Louisville, Lexington and Harrisburg networks.
Depreciation and amortization expense increased 280% to $26.7 million during
the nine months ended December 31, 1998 from $7.1 million for the same period
in the prior fiscal 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 income for the nine months ended December 31, 1998 increased 33% to
$10.2 million from $7.7 million for the same period in the prior fiscal year as
a result of increased cash and cash equivalents and U.S. Government securities
due to the investment of the proceeds of the 12 1/4% Senior Secured Notes, the
12 7/8% Senior Exchangeable Redeemable Preferred Stock and the Company's
initial public offering of Class A common stock, partially offset by demand
advances made to Adelphia.
A-8
Interest income--affiliate for the nine months ended December 31, 1998
increased to $8.4 million from $0.3 million as a result of demand advances made
to Adelphia during the current period.
Interest expense increased 8% to $38.6 million during the nine months ended
December 31, 1998 from $35.9 million for the same period in the prior fiscal
year. The increase was attributable to the interest on the 12 1/4% Senior
Secured Notes partially offset by the reduction of interest expense associated
with the reduced amounts payable to Adelphia and higher interest capitalized on
networks under construction.
Equity in net loss of joint ventures increased to $9.6 million during the
nine months ended December 31, 1998 from $9.3 million 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 the
Company was eight at December 31, 1998. These networks and networks under
construction paid management and monitoring fees to the Company, which are
included in revenues, aggregating approximately $2.7 million for the nine
months ended December 31, 1998, as compared with $3.8 million 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 $13.7 million and $22.3 million
respectively.
Preferred stock dividends increased by 264% to $21.1 million for the nine
months ended December 31, 1998 from $5.8 million for the same period in the
prior fiscal year. The increase is due to the preferred stock which was issued
in October 1997.
Supplementary Network Financial Analysis
The Company believes that historically, working with Local Partners to
develop markets has enabled the Company to build larger networks in a rapid and
more cost effective manner than it could have on its own. The Company currently
has joint ventures covering four networks with Local Partners where the Company
owns 50% of each joint venture. As a result of the Company's historic ownership
position in these and other joint ventures, a substantial portion of the
networks' historic results have been reported by the Company on the equity
method of accounting for investments which only reflects the Company's pro rata
share of net income or loss of the networks. Because of the recently completed
partner roll-ups, management of the Company believes this historical
presentation of the assets, liabilities and results of operations of the
Company does not represent a complete measure of the financial position, growth
or operations of the Company.
In order to provide an additional measure of the financial position, growth
and performance of the Company and its networks, management of the Company
analyzes financial information of the consolidated networks and the non-
consolidated joint venture networks on a combined basis. This combined
financial presentation in the table below reflects Adelphia Business Solutions'
consolidated financial position and results of operations adjusted for the
inclusion of certain networks (Richmond, Jacksonville and Wichita) which were
purchased in March 1999 (the "Adjusted Operating Results") combined with the
non-consolidated joint ventures' results of operations. All combined results of
operations in the table below are presented as if Adelphia Business Solutions
consolidated all networks which were involved in the partnership roll-ups
during the entire period presented. This financial information, however, is not
indicative of the Company's overall historical financial position or results of
operations.
A-9
Year ended December 31, 1999 Year ended December 31, 1998
-------------------------------- ---------------------------------
(dollars in thousands) (dollars in thousands)
Adjusted Adjusted
Adjusted Joint Adjusted Joint
Consolidated Venture Combined Consolidated Venture Combined
Operating Operating Operating Operating Operating Operating
Results Results Results Results Results Results
------------ --------- --------- ------------ --------- ---------
Revenues................ $159,803 $38,524 $198,327 $ 55,925 $11,231 $ 67,156
Direct Operating
Expenses............... 60,346 11,764 72,110 26,664 6,634 33,298
-------- ------- -------- -------- ------- --------
Gross Margin............ 99,457 26,760 126,217 29,261 4,597 33,858
Gross Margin
Percentage............. 62.2% 69.5% 63.6% 52.3% 40.9% 50.4%
Selling, General and
Administrative
Expenses............... 144,531 20,086 164,617 45,800 12,471 58,271
-------- ------- -------- -------- ------- --------
EBITDA (a).............. (45,074) 6,674 (38,400) (16,539) (7,874) (24,413)
-------- ------- -------- -------- ------- --------
EBITDA Percentage of
Revenues............... (28.2%) 17.3% (19.4%) (29.6%) (70.1%) (36.4%)
December 1999 Year vs.
December 1998 Year
--------------------------------
Joint
Consolidated Venture Combined
Operating Operating Operating
Results Results Results
------------ --------- ---------
% Change Comparison
Revenues................ 185.7% 243.0% 195.3%
Direct Operating
Expenses............... 126.3% 77.3% 116.6%
----- ----- -----
Gross Margin............ 239.9% 482.1% 272.8%
Selling, General and
Administrative
Expenses............... 215.6% 61.1% 182.5%
----- ----- -----
EBITDA (a).............. NM(b) NM(b) (57.3%)
- --------
(a) EBITDA and similar measurements of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity.
While EBITDA is not an alternative to operating income as an indicator of
operating performance or an alternative to cash flows from operating
activities as a measure of liquidity, all as defined by generally accepted
accounting principles, and while EBITDA may not be comparable to other
similarly titled measures of other companies, the Company's management
believes EBITDA is a meaningful measure of performance.
(b) Not meaningful
Liquidity and Capital Resources
The development of the Company's business and the installation and expansion
of the networks, as well as the development of the markets, combined with the
construction and expansion of the Company's NOCC, have resulted in substantial
capital expenditures and investments during the past several years. Capital
expenditures by the Company were $146.8 million and $453.2 million for the nine
months ended December 31, 1998 and the twelve months ended December 31, 1999,
respectively. Further, investments made by the Company in nonconsolidated
networks and in LMDS licenses were $69.0 million and $24.5 million for the nine
months ended December 31, 1998 and the year ended December 31, 1999,
respectively. The significant increase in capital expenditures for the year
ended December 31, 1999 is largely attributable to capital expenditures
necessary to develop the Original Markets and the New Markets, as well as the
fiber purchases to interconnect the networks. The Company expects that it will
continue to incur substantial capital expenditures in this development effort.
The Company also expects to continue to fund operating losses as the Company
develops and grows its business. For information regarding recent transactions
affecting the Company's liquidity and capital resources, see "Financing
Transactions" and "Acquisitions of Partners Interests" above.
A-10
The Company has experienced negative operating and investing cash flow since
its inception. A combination of operating losses, substantial capital
investments required to build the Company's networks and its state-of-the-art
NOCC, and incremental investments in the joint ventures has resulted in
substantial negative cash flow.
Expansion of the Company's Original Markets and services and the development
of New Markets and additional networks and services requires significant
capital expenditures. The Company's operations have required and will continue
to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's networks, (ii) the expansion
and improvement of the Company's NOCC and Original Markets, (iii) the design,
construction and development of New Markets and (iv) the acquisition of
additional ownership interests in the Original Markets. The Company has made
substantial capital investments and investments in joint ventures in connection
with the installation of 5ESS switches or remote switching modules in all of
its Original Markets and plans to install regional super switches in certain
key New Markets when such New Markets are operational. To date, the Company has
installed switches in all of its Original Markets and plans to provide such
services in all of its New Markets on a standard switching platform based on
Lucent 5 switch technology. In addition, the Company intends to increase
spending on marketing and sales significantly in the foreseeable future in
connection with the expansion of its sales force and marketing efforts
generally. The Company also plans to purchase its partners' interest in the
joint ventures when it can do so at attractive economic terms. The Company
estimates that, in addition to the cash and cash equivalents on hand, demand
loans to Adelphia and the U.S. government securities pledged as of December 31,
1999, a total of approximately $500 million will be required to fund the
Company's capital expenditures, working capital requirements, operating losses
and pro rata investments in the joint ventures from January 1, 2000 through the
quarter ending December 31, 2000.
In addition, there can be no assurance (i) that the Company's future cash
requirements will not vary significantly from those presently planned due to a
variety of factors including acquisition of additional networks, continued
acquisition of increased ownership in its networks, material variances from
expected capital expenditure requirements for Original Markets and New Markets
and development of the LMDS spectrum, or (ii) that anticipated financings,
Local Partner investments and other sources of capital will become available to
the Company on economically attractive terms or at all. In addition, it is
possible that expansion of the Company's networks may include the geographic
expansion of the Company's existing clusters and the development or acquisition
of other new markets not currently planned.
The Company will need substantial additional funds to fully fund its
business plan. The Company expects to fund its capital requirements through
existing resources, credit facilities and vendor financings at the Company and
joint venture levels, internally generated funds, equity invested by Local
Partners in joint ventures and additional debt or equity financings, as
appropriate, and expects to fund any potential additional purchase of
partnership interests of Local Partners through existing resources, internally
generated funds and additional debt or equity financings, as appropriate. There
can be no assurances, however, that the Company will be successful in
generating sufficient cash flow or in raising sufficient debt or equity capital
on terms that it will consider acceptable, or at all.
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 the impact of SFAS No. 133 on the Company's
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.
A-11
Impact of Inflation
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations or on the operations of the joint
ventures in the year ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(Dollars in thousands)
The Company uses fixed 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 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.
Expected Maturity
--------------------------------------- Fair
2000 2001 2002 2003 2004 Thereafter Total Value
----- ----- ----- -------- -------- ---------- ---------- ----------
Debt.................... $ -- $ -- $ -- $303,840 $250,000 $560,848 $1,114,688 $1,120,837
Fixed Rate
Average Interest Rate.. 12.53% 12.53% 12.53% 12.42% 12.61% 12.61%
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto and
independent auditors' report follow.
A-12
INDEPENDENT AUDITORS' REPORT
Adelphia Business Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Adelphia
Business Solutions, Inc. and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, of 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 Business Solutions,
Inc. 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 1, 2000
A-13
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
December 31,
---------------------
1998 1999
--------- ----------
ASSETS:
Current assets:
Cash and cash equivalents............................. $ 242,570 $ 2,133
Due from parent--net.................................. 4,950 392,629
Due from affiliates--net.............................. 1,078 6,230
Accounts receivable--net.............................. 14,221 68,075
Other current assets.................................. 1,362 9,852
--------- ----------
Total current assets................................ 264,181 478,919
U.S. government securities--pledged..................... 58,054 29,899
Investments............................................. 112,328 44,066
Property, plant and equipment--net...................... 374,702 943,756
Other assets--net....................................... 27,077 67,063
--------- ----------
Total............................................... $ 836,342 $1,563,703
========= ==========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER
STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable...................................... $ 20,386 $ 150,151
Accrued interest and other liabilities................ 19,142 27,595
--------- ----------
Total current liabilities........................... 39,528 177,746
13% Senior Discount Notes due 2003...................... 220,784 253,860
12 1/4% Senior Secured Notes due 2004................... 250,000 250,000
12% Senior Subordinated Notes due 2007.................. -- 300,000
Other debt.............................................. 23,325 41,318
--------- ----------
Total liabilities................................... 533,637 1,022,924
--------- ----------
12 7/8% Senior Exchangeable Redeemable Preferred Stock.. 228,674 260,848
--------- ----------
Commitments and contingencies (Note 7)
Common stock and other stockholders' equity
(deficiency):
Class A common stock, $0.01 par value, 800,000,000
shares authorized, 22,376,071 and 34,066,587 shares
outstanding, respectively............................ 224 341
Class B common stock, $0.01 par value, 400,000,000
shares authorized, 32,314,761 and 35,371,458 shares
outstanding, respectively............................ 323 354
Additional paid in capital............................ 286,782 666,021
Class B common stock warrants......................... 4,483 2,177
Unearned stock compensation........................... -- (5,715)
Accumulated deficit................................... (217,781) (383,247)
--------- ----------
Total common stock and other stockholders' equity
(deficiency)....................................... 74,031 279,931
--------- ----------
Total............................................... $ 836,342 $1,563,703
========= ==========
See notes to consolidated financial statements.
A-14
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ------------ ------------
Revenues................................. $ 13,510 $ 34,776 $ 154,575
-------- -------- ---------
Operating expenses:
Network operations..................... 7,804 18,709 58,525
Selling, general and administrative.... 14,314 35,341 142,615
Depreciation and amortization.......... 11,477 26,671 65,244
-------- -------- ---------
Total................................ 33,595 80,721 266,384
-------- -------- ---------
Operating loss........................... (20,085) (45,945) (111,809)
Other income (expense):
Interest income........................ 13,304 10,233 19,933
Interest income--affiliate............. -- 8,395 8,483
Interest expense....................... (49,334) (38,638) (74,314)
Other income........................... -- 1,113 --
-------- -------- ---------
Loss before income taxes, equity in net
loss of joint ventures and extraordinary
gain.................................... (56,115) (64,842) (157,707)
Income tax expense....................... -- -- (1)
-------- -------- ---------
Loss before equity in net loss of joint
ventures and extraordinary gain......... (56,115) (64,842) (157,708)
Equity in net loss of joint ventures..... (12,967) (9,580) (7,758)
-------- -------- ---------
Loss before extraordinary gain........... (69,082) (74,422) (165,466)
Extraordinary gain on repurchase of
debt.................................... -- 237 --
-------- -------- ---------
Net loss................................. (69,082) (74,185) (165,466)
Dividend requirements applicable to
preferred stock......................... (12,409) (21,117) (31,618)
-------- -------- ---------
Net loss applicable to common
stockholders............................ $(81,491) $(95,302) $(197,084)
======== ======== =========
Basic and diluted net loss per weighted
average share of common stock before
extraordinary gain...................... $ (2.33) $ (1.81) $ (3.47)
Basic and diluted extraordinary gain on
repurchase of debt per weighted average
share of common stock................... -- 0.01 --
-------- -------- ---------
Basic and diluted net loss per weighted
average share of common stock........... $ (2.33) $ (1.80) $ (3.47)
======== ======== =========
Weighted average shares of common stock
outstanding............................. 34,986 53,035 56,739
======== ======== =========
See notes to consolidated financial statements.
A-15
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK
AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands except per share amounts)
Class Class Class A Class B Unearned
A B Additional Common Common Loans to Stock Accum-
Common Common Paid-in Stock Stock Stock- Compen- ulated
Stock Stock Capital Warrant Warrants holders sation Deficit Total
------ ------ ---------- -------- -------- -------- -------- --------- ---------
Balance, March 31,
1997................... $ 3 $325 $ 153 $ -- $11,087 $(3,000) $ -- $ (58,822) $ (50,254)
Issuance of Class A
common stock warrant.. -- -- -- 13,000 -- -- -- -- 13,000
Dividend requirements
applicable to
preferred stock....... -- -- -- -- -- -- -- (12,409) (12,409)
Other.................. -- -- -- -- -- -- -- (273) (273)
Issuance of Class A
common stock bonus.... 1 -- 26 -- -- -- -- -- 27
Net loss............... -- -- -- -- -- -- -- (69,082) (69,082)
---- ---- -------- -------- ------- ------- ------- --------- ---------
Balance, March 31,
1998................... 4 325 179 13,000 11,087 (3,000) -- (140,586) (118,991)
Proceeds from issuance
of Class A common
stock................. 129 -- 190,731 -- -- -- -- -- 190,860
Proceeds from issuance
of Class A common
stock to Adelphia..... 33 -- 49,827 -- -- -- -- -- 49,860
Exercise of Class A
common stock warrant.. 7 -- 12,993 (13,000) -- -- -- -- --
Conversion of note and
payables to Adelphia
to Class A common
stock................. 36 -- 44,222 -- -- -- -- -- 44,258
Exercise of Class B
common stock
warrants.............. -- 8 6,596 -- (6,604) -- -- -- --
Conversion of Class B
common stock to Class
A common stock........ 10 (10) -- -- -- -- -- -- --
Repayment of loan to
stockholders.......... -- -- -- -- -- 3,000 -- -- 3,000
Dividend requirements
applicable to
preferred stock....... -- -- (18,168) -- -- -- -- (2,949) (21,117)
Other.................. -- -- (353) -- -- -- -- (61) (414)
Issuance of Class A
common stock bonus.... 5 -- 755 -- -- -- -- -- 760
Net loss............... -- -- -- -- -- -- -- (74,185) (74,185)
---- ---- -------- -------- ------- ------- ------- --------- ---------
Balance December 31,
1998................... 224 323 286,782 -- 4,483 -- -- (217,781) 74,031
Proceeds from issuance
of Class A common
stock................. 88 -- 252,766 -- -- -- -- -- 252,854
Proceeds from issuance
of Class B common
stock................. -- 52 149,948 -- -- -- -- -- 150,000
Exercise of Class B
common stock
warrants.............. -- 3 2,303 -- (2,306) -- -- -- --
Conversion of Class B
common stock to Class
A common stock........ 24 (24) -- -- -- -- -- -- --
Unearned stock
compensation.......... 4 -- 6,396 -- -- -- (5,715) -- 685
Dividend requirements
applicable to
preferred stock....... -- -- (31,618) -- -- -- -- -- (31,618)
Other.................. 1 -- (556) -- -- -- -- -- (555)
Net loss............... -- -- -- -- -- -- -- (165,466) (165,466)
---- ---- -------- -------- ------- ------- ------- --------- ---------
Balance December 31,
1999................... $341 $354 $666,021 $ -- $ 2,177 $ -- $(5,715) $(383,247) $ 279,931
==== ==== ======== ======== ======= ======= ======= ========= =========
See notes to consolidated financial statements.
A-16
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Nine Months
Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
--------- ------------ ------------
Cash flows from operating activities:
Net loss................................ $ (69,082) $ (74,185) $(165,466)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation.......................... 9,038 23,838 59,430
Amortization.......................... 2,439 2,833 5,814
Equity in net loss of joint ventures.. 12,967 9,580 7,758
Non-cash interest expense............. 34,038 23,857 33,076
Noncash stock compensation............ 27 761 685
Extraordinary gain on repurchase of
debt................................. -- (237) --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Other assets--net................... (5,302) (15,533) (62,580)
Accounts payable.................... 6,023 9,862 127,697
Accrued interest and other
liabilities........................ 3,519 10,414 11,071
--------- --------- ---------
Net cash (used in) provided by operating
activities............................... (6,333) (8,810) 17,485
--------- --------- ---------
Cash flows from investing activities:
Net cash used for acquisitions.......... (65,968) -- (129,118)
Expenditures for property, plant and
equipment.............................. (68,629) (146,752) (453,206)
Repayment of senior secured note........ -- -- 20,000
Investments in joint ventures........... (64,260) (69,018) (24,496)
Investments in U.S. government
securities--pledged.................... (83,400) -- --
Sale of U.S. government securities--
pledged................................ 15,653 15,312 30,626
--------- --------- ---------
Net cash used in investing activities..... (266,604) (200,458) (556,194)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred
stock.................................. 194,522 -- --
Proceeds from issuance of Class A common
stock.................................. -- 255,462 262,500
Proceeds from issuance of Class B common
stock.................................. -- -- 150,000
Proceeds from sale and leaseback of
equipment.............................. 14,876 -- --
Proceeds from debt...................... 250,000 -- 300,000
Repayments of debt...................... (2,326) (19,868) (5,668)
Costs associated with debt financing.... (12,664) -- (6,180)
Costs associated with issuance of common
stock.................................. -- (14,742) (9,646)
Repayment of loans from stockholders.... -- 3,000 --
Advances to affiliates.................. (535) (2,764) (392,734)
--------- --------- ---------
Net cash provided by financing
activities............................... 443,873 221,088 298,272
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents.............................. 170,936 11,820 (240,437)
Cash and cash equivalents, beginning of
period................................... 59,814 230,750 242,570
--------- --------- ---------
Cash and cash equivalents, end of period.. $ 230,750 $ 242,570 $ 2,133
========= ========= =========
See notes to consolidated financial statements.
A-17
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
(1) The Company and Summary of Significant Accounting Policies
Organization and Business
The consolidated financial statements include the accounts of Adelphia
Business Solutions, Inc. and its more than 50% owned subsidiaries ("Adelphia
Business Solutions" or the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation. The Company was formed
in 1991 and is a majority owned subsidiary of Adelphia Communications
Corporation ("Adelphia"). On October 25, 1999, the stockholders of the Company
elected to change the name of the Company from Hyperion Telecommunications,
Inc. to Adelphia Business Solutions, Inc. With this decision, management
believes the strengths of Adelphia and the Company are further aligned to
develop a single brand in the communications marketplace.
On March 30, 1999, Adelphia Business Solutions elected to change 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.
On May 8, 1998, the Company issued and sold 12,500,000 shares of Class A
common stock at a price to the public of $16.00 per share (the "IPO").
Simultaneously with the closing of the IPO, the Company issued and sold an
additional 3,324,001 shares of Class A common stock to Adelphia at a purchase
price of $15.00 per share (or an aggregate of approximately $49,900). In
addition, at such closing, the Company issued 3,642,666 shares of Class A
common stock to Adelphia in exchange for certain of the Company's indebtedness
and payables with a carrying value of $44,258 owed to Adelphia at a purchase
price of $15.00 per share (or an aggregate of $54,600). In a related
transaction, on June 5, 1998, the Company issued and sold 350,000 shares of
Class A common stock at the $16.00 IPO price pursuant to the underwriters'
over-allotment option in the IPO.
On November 30, 1999, the Company 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, the Company issued and sold 5,181,350
shares of Class B common stock to Adelphia at a purchase price of $28.95 per
share.
At December 31, 1999, Adelphia owned approximately 60% of Adelphia Business
Solutions' outstanding common stock and held approximately 90% of the total
voting rights.
The Company is a leading national provider of facilities-based integrated
communications services to customers that include businesses, governmental and
educational end users and other communications services providers throughout
the United States. The Company currently offers a full range of communications
services in 53 markets and expects by the end of the year 2000 to be offering
services in approximately 115 markets nationwide, including substantially all
of the top 40 metropolitan statistical areas in the United States. To serve its
customers' broad and expanding communications needs, the Company has assembled
a diverse collection of high-bandwidth, local and national network assets. The
Company intends to integrate these assets with advanced communications
technologies and services in order to provide comprehensive end-to-end
communications services over our own national network. The Company provides
customers with communications services such as local switch dial tone (also
known as local phone service), long distance service, high-speed data
transmission and Internet connectivity. The Company offers its customers a
choice of receiving these services separately or as a bundled packages which
are typically priced at a discount when compared to the price of the separate
services.
A-18
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
To develop the original markets and the new markets, as well as the fiber
purchases to interconnect the networks, the Company expects that it will
continue to incur substantial capital expenditures. A total of approximately
$500,000 will be required fund the Company's capital expenditures, working
capital requirements, operating losses and pro rata investments in the joint
ventures from January 1, 2000 through December 31, 2000. The Company will need
substantial additional funds to fully fund its business plan. The Company
expects to fund its capital requirements through existing resources, credit
facilities and vendor financings at the Company and joint venture levels,
internally generated funds, equity invested by local partners in joint ventures
and additional debt or equity financings, as appropriate, and expects to fund
any potential additional purchase of partnership interest of local partners
through existing resources, internally generated funds and additional debt or
equity financings, as appropriate. There can be no assurances, however, that
the Company will be successful in generating sufficient cash flow or in raising
sufficient debt or equity capital on terms that it will consider acceptable, or
at all.
Joint ventures in which the Company does not have a majority interest are
accounted for under the equity method of accounting.
Acquisitions of Partner Interests
On September 12, 1997, the Company 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, the Company 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 February 12, 1998, the Company purchased additional partnership interests
in Louisville Lightwave (Louisville and Lexington), NHT Partnership (Buffalo),
New Jersey Fiber Technologies and Hyperion of Harrisburg. As a result, the
Company's ownership in these networks increased to 100%. The aggregate purchase
price was comprised of approximately $45,000 in cash and a warrant for 731,624
shares of the Company's Class A common stock. (See Note 6.) In addition,
Hyperion paid certain amounts related to fiber lease financings upon
consummation of the purchase of the additional partnership interests.
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 $89,750. The agreements increased the Company's ownership
interest in each of these networks to 100%.
During June 1999, the Company 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 $36,518 for its ownership interests in these markets. The
agreements increased the Company's ownership interest in each of these networks
to 100%.
All of the acquisitions described above were accounted for using the
purchase method. Accordingly, the financial results of each acquisition have
been included in the Company's consolidated financial statements from the date
acquired.
The following unaudited financial information of the Company assumes that
each of the transactions described above had occurred on April 1, 1997.
A-19
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Year Ended Nine Months Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ----------------- ------------
Revenues............................ $ 28,061 $ 49,156 $ 162,138
Net loss............................ (80,293) (79,745) (169,282)
Net loss applicable to common
stockholders....................... (92,179) (98,572) (198,924)
Basic and diluted net loss per
weighted average
share of common stock.............. $ (2.63) $ (1.86) $ (3.51)
Cash and cash equivalents
Cash and cash equivalents consist of highly liquid instruments with an
initial maturity date of three months or less.
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 12
1/4% Senior Secured Notes. Such investments are classified as held-to-maturity
and the carrying value approximates market value.
Accounts Receivable
An allowance for doubtful accounts of $1,128 and $9,640 is recorded as a
reduction of accounts receivable at December 31, 1998 and 1999, respectively.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with
network engineering, design and construction.
Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.
The estimated useful lives of the Company's principal classes of property,
plant and equipment are as follows:
Telecommunications networks......................................... 10-20 years
Network monitoring and switching equipment.......................... 5-10 years
Fiber optic use rights.............................................. 15 years
Other............................................................... 3-10 years
Revenue Recognition
The Company recognizes revenue from communications services in the month the
related service is provided. Revenues on billings to customers for services in
advance of providing such services are deferred and recognized when earned. The
Company recognizes revenues related to management and network monitoring of the
joint ventures in the month that the related services are provided. Reciprocal
compensation revenue is an element of switched service revenue, which
represents compensation from Local Exchange Carriers ("LECs") for local
exchange traffic originated by other LECs terminated on the Company's
facilities. Adelphia Business
A-20
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Solutions recognizes revenue based upon established contracts with the LECs and
has established a reserve for a portion of those revenues that are under
dispute.
Significant Customers
During the year ended March 31, 1998, Adelphia Business Solutions' sales to
AT&T and MCI WorldCom represented 18.3% and 14.5% of total revenues,
respectively. During the nine months ended December 31, 1998, Adelphia Business
Solutions' sales to AT&T and Bell Atlantic represented 11.4% and 10.1% of total
revenues, respectively. During the year ended December 31, 1999, Adelphia
Business Solutions' sales to AT&T and Bell Atlantic represented 8.8% and 14.7%
of total revenues, respectively.
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
upon the weighted average number of common shares and warrants outstanding
during the period. Diluted net loss per common share is equal to basic net loss
per common share because the Adelphia Warrant discussed in Note 6 had an
antidilutive effect for the periods presented; however, the Adelphia Warrant
could have a dilutive effect on earnings per share in future periods. A warrant
to purchase 731,624 shares of Class A common stock and Class B common stock
warrants to purchase shares of Class B common stock have been included as
shares outstanding for purposes of the calculation of both basic and diluted
net loss per share for, the year ended March 31, 1998, the nine months ended
December 31, 1998 and the year ended December 31, 1999.
Other Assets--net
Deferred debt financing costs, included in other assets, are amortized over
the term of the related debt. The unamortized amounts of deferred debt
financing costs at December 31, 1998 and 1999 were $14,606 and $17,434,
respectively. Included in other assets at December 31, 1998 is a Senior Secured
Note (See Note 3). Included in other assets at December 31, 1999 is $44,605
relating to 195 31-Ghz licenses, which cover approximately 30% of the nation's
population. These licenses are a spectrum for a fixed wireless technology known
as local multipoint distribution service ("LMDS").
Asset Impairments
Adelphia Business Solutions periodically reviews the carrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of these 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.
Financial Instruments
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentration of
credit risk with respect to accounts receivable is limited due to the
dispersion of the Company's customer base among different customers and
geographic areas.
The Company's financial instruments include cash and cash equivalents, notes
payable and redeemable preferred stock. The fair value of the notes payable
exceeded carrying value by approximately $12,016 and
A-21
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
$52,058 at December 31, 1998 and 1999, respectively. The carrying value of the
redeemable preferred stock exceeded the fair value by approximately $23,938 at
December 31, 1998 and was equal to the fair value at December 31, 1999. The
fair values of the financial instruments were based upon quoted market prices.
Non-cash 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
$24,500, $1,155 and $5,772, respectively (See Note 5). Dividend requirements
applicable to preferred stock were satisfied by the issuance of an additional
6,860, 20,624 and 30,733 shares of such preferred stock during the year ended
March 31, 1998, the nine months ended December 31, 1998 and the year ended
December 31, 1999, respectively (See Note 5). During the nine months ended
December 31, 1998, Adelphia Business Solutions converted the Note Payable--
Adelphia and certain accounts payable into Class A common stock (See Note 1).
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.
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 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.
Reclassifications
Certain March 31, 1998 and December 31, 1998 amounts have been reclassified
to conform with the presentation for the year ended December 31, 1999.
A-22
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
(2) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
--------------------
1998 1999
-------- ----------
Telecommunications networks............................... $ 59,764 $ 139,248
Network monitoring and switching equipment................ 165,697 431,078
Fiber asset under construction (Note 3)................... 11,500 --
Fiber optic use rights.................................... 44,109 108,239
Construction in process................................... 123,439 344,439
Other..................................................... 8,282 18,270
-------- ----------
412,791 1,041,274
Less accumulated depreciation............................. (38,089) (97,518)
-------- ----------
Total..................................................... $374,702 $ 943,756
======== ==========
Additions to property, plant and equipment are recorded at cost which
includes amounts for material, applicable labor and overhead and interest.
Capitalized interest amounted to $4,271, $9,986 and $23,282 for the year ended
March 31, 1998, the nine months ended December 31, 1998 and the year ended
December 31, 1999, respectively.
(3) Investment in Fiber Asset and Senior Secured Note
On February 20, 1997, the Company entered into several agreements regarding
the leasing of dark fiber in New York state in furtherance of its strategy to
interconnect its networks in the northeastern United States. Pursuant to these
agreements and in consideration of a payment of $20,000, the Company received a
$20,000 Senior Secured Note bearing interest at 22 1/2% (subject to reduction
upon early repayment of principal) due February 2002 (subject to early
redemption options), from Telergy, Inc. ("Telergy"), a right to receive 58,752
shares of Telergy Class A common stock ("Telergy Stock"), and a fully prepaid
lease from a Telergy affiliate for an initial lease term of 25 years (with two
additional ten-year extensions) for 24 strands of dark fiber installed or to be
installed in a New York fiber optic telecommunications backbone network. As of
December 31, 1998, the Company included $11,500 and $8,500 in Property, Plant
and Equipment and Other Assets, respectively, as the allocation of the $20,000
payment between the fiber asset and the Senior Secured Note. No amounts were
allocated to the Telergy Stock. The allocation reflected the Company's estimate
of the relative fair values of the assets acquired.
On May 15, 1998, Telergy paid the Company $1,000 in exchange for the Telergy
Stock and a gain of $1,000 was recorded by the Company, which is included in
"other income" in the consolidated statement of operations. On November 10,
1998, the Senior Secured Note was amended to mature on January 20, 2000 in
exchange for an indefeasible right to use ("IRU") or long term lease of certain
fiber segments in New York City and along Telergy's long haul fiber segments in
the northeastern United States and Southeastern Canada.
During May, 1999, the Company received $32,329 from Telergy for the
repayment of the Senior Secured Note. The payment represented $20,000 in
principal and $12,329 of interest, which is included in "Interest income" in
the consolidated statement of operations.
A-23
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
(4) Investments
The equity method of accounting is used to account for investments in joint
ventures in which the Company owns less than a majority interest. Under this
method, the Company's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or loss of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
The Company's nonconsolidated investments are as follows:
Ownership
Percentage December 31,
---------- ------------------
1998 1999
-------- --------
MediaOne Fiber Technologies (Jacksonville)... 100.0%(1) $ 8,150 $ --
Multimedia Hyperion Telecommunications
(Wichita)................................... 100.0%(1) 5,863 --
MediaOne of Virginia (Richmond).............. 100.0%(1) 7,284 --
Entergy Hyperion Telecommunications of
Louisiana................................... 100.0%(2) 6,714 --
Entergy Hyperion Telecommunications of
Mississippi................................. 100.0%(2) 7,130 --
Entergy Hyperion Telecommunications of
Arkansas.................................... 100.0%(2) 7,586 --
PECO-Hyperion (Philadelphia)................. 50.0% 33,936 42,475
PECO-Hyperion (Allentown, Bethlehem, Easton,
Reading).................................... 50.0% 7,227 7,425
Hyperion of York............................. 50.0% 5,721 6,525
Allegheny Hyperion Telecommunications........ 50.0% 3,043 4,975
Baker Creek Communications................... 49.9%(3) 44,637 --
Other........................................ Various 1,323 --
-------- --------
138,614 61,400
Cumulative equity in net losses.............. (26,286) (17,334)
-------- --------
Total Investments............................ $112,328 $ 44,066
======== ========
- --------
(1) As discussed in Note 1, the Company has consummated agreements which
increased its ownership to 100% in these networks during March 1999.
(2) As discussed in Note 1, the Company has consummated an agreement which
increased its ownership to 100% in these networks during June 1999.
(3) On March 24, 1998, the Federal Communications Commission ("FCC") completed
the auction of licenses for LMDS. The Company, through Baker Creek
Communications, was the successful bidder for 195 31-Ghz licenses, which
cover approximately 30% of the nation's population--in excess of 83
million people in the eastern half of the United States. In connection
with the FCC's full review of all bids and the granting of final licenses
it was concluded that the Company, through Baker Creek Communications,
would acquire the entire interest in the 195 licenses for a total cost of
approximately $44,605, all of which was paid as of October 26, 1998. On
September 30, 1999, the FCC granted the Company's request to transfer, and
the Company transferred the licenses from Baker Creek Communications to a
wholly owned subsidiary of the Company. The licenses are included in Other
assets--net on the consolidated balance sheet at December 31, 1999 (See
Note 1).
A-24
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Summarized unaudited combined financial information for the Company's
nonconsolidated investments listed above being accounted for using the equity
method of accounting as of the dates and for the periods ended, is as follows:
December 31,
-----------------
1998 1999
-------- --------
Current assets............................................... $ 11,315 $ 21,645
PP&E-net..................................................... 190,552 112,210
Non-current assets........................................... 47,522 55
Current liabilities.......................................... 18,599 10,175
Non-current liabilities...................................... 48,635 45,278
Year Ended Nine Months Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ----------------- ------------
Revenues.............................. $ 11,999 $ 24,986 $ 43,753
Net loss.............................. (19,923) (22,325) (15,154)
(5) Financing Arrangements
Note payable--Adelphia
The Company had an unsecured credit arrangement with Adelphia which had no
repayment terms prior to April 15, 1996. On April 15, 1996, $25,000 of the
proceeds from the sale of the 13% Senior Discount Notes (the "Senior Discount
Notes") and Class B common stock warrants were used to repay a portion of this
obligation. Interest expense and fees on this credit arrangement were based
upon the weighted average cost of unsecured borrowings of Adelphia during the
corresponding periods. Effective April 15, 1996, the remaining balance due on
the Note payable-Adelphia was evidenced by an unsecured subordinated note due
April 16, 2003. This obligation had an interest rate of 16.5% per annum.
Interest accrued through May 8, 1998 on the amount outstanding to Adelphia
totaled $10,645. On May 8, 1998, the Note payable--Adelphia and all accrued
interest was converted into shares of Class A common stock simultaneously with
the closing of the IPO (See Note 1).
13% Senior Discount Notes and Class B Common Stock Warrants
On April 15, 1996, the Company issued $329,000 of 13% Senior Discount Notes
due April 15, 2003 and 329,000 warrants to purchase an aggregate of 1,993,638
shares of its Class B common stock. Prior to April 15, 2001, interest on the
Senior Discount Notes is not payable in cash, but is added to principal.
Thereafter, interest is payable semi-annually commencing October 15, 2001. The
Senior Discount Notes are unsecured and are senior to all future subordinated
indebtedness. On or after April 15, 2001, the Company may redeem, at its
option, all or a portion of the Senior Discount Notes at 106.5%, which declines
to par in 2002, plus accrued interest.
The holders of the Senior Discount Notes may put the Senior Discount Notes
to the Company at any time at a price of 101% of accreted principal upon the
occurrence of a Change of Control (as defined in the Indenture). In addition,
the Company will be required to offer to purchase Senior Discount Notes at a
price of 100% with the proceeds of certain asset sales (as defined in the
Indenture). The Indenture stipulates, among other things, limitations on
additional borrowings, issuance of equity instruments, payment of dividends and
A-25
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
other distributions, repurchase of equity interests or subordinated debt,
sale--leaseback transactions, liens, transactions with affiliates, sales of
Company assets, mergers and consolidations.
The Class B common stock warrants are exercisable at $0.00308 per share,
upon the earlier of May 1, 1997 or a Change of Control. Unless exercised, the
Class B common stock warrants expire on April 1, 2001. The number of shares and
the exercise price for which a warrant is exercisable are subject to adjustment
under certain circumstances. Through December 31, 1999, 264,405 warrants were
exercised and converted into 1,602,294 shares of Class B common stock. Of the
1,602,294 shares issued, 1,189,965 shares had been converted into Class A
common stock as of December 31, 1999. The Company received $5 in consideration
for the exercise of the warrants.
During the nine months ended December 31, 1998, the Company paid $17,313 to
repurchase a portion of the Senior Discount Notes which had a face value of
$25,160 and a carrying value of $17,750. The notes were retired upon repurchase
which resulted in a $237 gain.
12 1/4% Senior Secured Notes
On August 27, 1997, the Company issued $250,000 aggregate principal amount
of 12 1/4% Senior Secured Notes due September 1, 2004 (the "Senior Secured
Notes"). The Senior Secured Notes are collateralized through the pledge of the
common stock of certain of the Company's wholly owned subsidiaries. A portion
of the proceeds was invested in U.S. government securities and placed in an
escrow account for payment in full when due of the first six scheduled semi-
annual interest payments on the Senior Secured Notes as required by the
Indenture.
Interest is payable semi-annually commencing March 1, 1998. The Senior
Secured notes rank pari passu in right of payment with all existing and future
senior Indebtedness (as defined in the Indenture) of the Company and will rank
senior in right of payment to future subordinated Indebtedness of the Company.
On or before September 1, 2000 and subject to certain restrictions, the Company
may redeem, at its option, up to 25% of the aggregate principal amount of the
Senior Secured Notes at a price of 112.25% of principal with the net proceeds
of one or more Qualified Equity Offerings (as defined in the Indenture). On or
after September 1, 2001, the Company may redeem, at its option, all or a
portion of the Senior Secured Notes at 106.125% of principal which declines to
par in 2003, plus accrued interest. The holders of the Senior Secured Notes may
put them to the Company at a price of 101% of principal upon the occurrence of
a Change of Control (as defined in the Indenture). The Indenture stipulates,
among other things, limitations on additional borrowing, payment of dividends
and other distributions, repurchase of equity interests, transactions with
affiliates and the sale of assets.
12 7/8% Senior Exchangeable Redeemable Preferred Stock
On October 9, 1997, the Company issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due
October 15, 2007 (the "Preferred Stock"). Proceeds to the Company, net of
commissions and other transaction costs, were approximately $194,500.
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
the Company's option. Subsequent to October 15, 2002, dividends are payable in
cash. The Preferred Stock ranks junior in right of payment to all indebtedness
and other obligations of the Company, its subsidiaries and joint ventures. On
or before October 15, 2000, and subject to certain restrictions, the Company
may redeem, at its option, up to 35% of the initial aggregate liquidation
preference of the Preferred Stock
A-26
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
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, the
Company may redeem, at its option, all or a portion of the Preferred Stock at
106.438% of the liquidation preference thereof declining to 100% of the
liquidation preference in 2005, plus accrued interest. The Company 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.
The holders of the Preferred Stock may put the Preferred Stock to the
Company at any time at a price of 101% of the liquidation preference thereof
upon the occurrence of a Change of Control (as defined in the Certification of
Designation). The Certificate of Designation stipulates, among other things,
limitations on additional borrowings, payment of dividends and other
distributions, transactions with affiliates and the sale of assets. The Company
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 (the "Exchange Debentures").
Interest, redemption and registration rights provisions of the Exchange
Debentures are consistent with the provisions of the Preferred Stock.
12% Senior Subordinated Notes due 2007
On March 2, 1999, Adelphia Business Solutions issued $300,000 aggregate
principal amount of 12% Senior Subordinated Notes due 2007 ("Subordinated
Notes"). An entity controlled by members of the Rigas Family, controlling
stockholders of Adelphia, purchased $100,000 aggregate principal amount of the
Subordinated Notes directly from the Company. Proceeds to the Company, net of
discounts, commissions and other transaction costs were approximately $295,000.
Interest is payable semi-annually commencing May 1, 1999. The Subordinated
Notes rank behind all current and future indebtedness (other than trade
payables), except indebtedness that expressly provides that it is not senior to
the notes. On or before November 1, 2003 and subject to certain restrictions,
the Company may redeem at its option, up to 25% of the aggregate principal
amount of the Subordinated Notes at a price of 112.00% of principal with the
net proceeds of one or more Qualified Equity Offerings (as defined in the
Indenture). On or after November 1, 2003, the Company may redeem, at its
option, all or a portion of the Subordinated Notes at 106.00% of principal
which declines to par in 2005, plus accrued interest. The holders of the
Subordinated Notes may put them to the Company at a price of 101.00% of
principal upon the occurrence of a Change in Control (as defined in the
Indenture). The Indenture stipulates, among other things, limitations on
additional borrowing, payment of dividends, and other distributions, repurchase
of equity, interests, transactions with affiliates and the sale of assets.
Long Term Lease Facility
On December 31, 1997, the Company consummated an agreement for a $24,500
long-term lease facility with AT&T Capital Corporation. The lease facility
provides financing for certain of the switching equipment. Included in the
lease facility is the sale and leaseback of certain switch equipment for which
the Company received $14,876.
A-27
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Vendor Financing
The Company has arrangements with several equipment providers which provide
the Company with payment terms which range from 6 to 12 months with 0%
interest. The Company has purchased equipment from these vendors and the
amounts due are included in accounts payable on the consolidated balance sheet.
Other Debt
Other debt consists primarily of capital leases entered into in connection
with the acquisition of fiber leases for use in the telecommunications networks
and the long-term lease facility described above. The interest rate on such
debt ranges from 7.5% to 15.0%.
Maturities of other debt for the five years after December 31, 1999 are as
follows:
2000................................................................ $5,500
2001................................................................ 5,013
2002................................................................ 5,597
2003................................................................ 5,821
2004................................................................ 6,340
(6) Common Stock and Other Stockholders' Equity (Deficiency)
Adelphia Business Solutions' authorized capital stock consists of
800,000,000 shares of Class A common stock, par value $0.01 per share,
400,000,000 shares of Class B common stock, par value $0.01 per share, and
50,000,000 shares of preferred stock, par value $0.01 per share.
Common Stock
Shares of Class A common stock and Class B common stock are substantially
identical, except that holders of Class A common stock are entitled to one vote
per share and holders of Class B common stock are entitled to 10 votes per
share on all matters submitted to a vote of stockholders. Each share of Class B
common stock is convertible into one share of Class A common stock. In the
event a cash dividend is paid, the holders of the Class A and the Class B
common stock will be paid an equal amount.
Prior to the IPO in May 1998, certain former company officers (the
"Officers") were parties to a stockholder agreement, as amended (the
"Stockholder Agreement") with Adelphia. The Stockholder Agreement provided,
among other things, (i) that upon the earlier of (a) the termination of
employment of any of the officers or (b) after October 7, 1998, such officers
may put their shares to Adelphia for fair market value, unless such put rights
are terminated as a result of the registration of the Company's common stock
under the Securities Act of 1933 (the "Securities Act") and (ii) for certain
buy/sell and termination rights and duties among Adelphia and the Officers. The
Stockholder Agreement terminated automatically upon the date of the IPO.
The Company also entered into Term Loan and Stock Pledge Agreements ("Loan
Agreements") with each of the Officers. Pursuant to the Loan Agreements, each
Officer borrowed $1,000 from the Company. Each of these loans accrued interest
at the average rate at which the Company could invest cash on a short-term
basis, was secured by a pledge of the borrower's common stock in the Company,
and would mature upon the earlier of (i) October 8, 1998 or (ii) the date of
the IPO and the Officers have the right to sell at least $1,000 worth of their
shares. Each Loan Agreement also provided that any interest accruing on a loan
from the date six months
A-28
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
after the date of such loan would be offset by a bonus payment when principal
and interest thereon are due and which would include additional amounts to pay
income taxes applicable to such bonus payment.
Pursuant to agreements among the Company, Adelphia and the Officers,
simultaneous with the consummation of the IPO, (i) the Stockholder Agreement
and Loan Agreements terminated, (ii) the Officers each repaid the $1,000
borrowed from the Company pursuant to the Loan Agreements plus accrued interest
thereon by each selling 66,667 shares of Class B common stock to Adelphia and
using the proceeds therefrom to repay such loans and (iii) the Company paid to
the management stockholders bonus payments in the amount of interest accruing
on the Loans from the date six months after the date of the Loan Agreements and
any additional amounts necessary to pay income taxes applicable to such bonus
payments.
On April 8, 1998, the Board of Directors of the Company approved a 3.25-for-
one stock split of its Class A and Class B common stock payable to stockholders
of record on April 28, 1998. The stock split was effected in the form of a
dividend of 2.25 shares for every outstanding share of common stock. All
references in the accompanying consolidated financial statements to the number
of shares of common stock and the par value have been retroactively restated to
reflect the stock split on April 28, 1998.
On October 25, 1999, the shareholders of the Company approved an amendment
to Article IV of the Amended and Restated Certificate of Incorporation
increasing the number of authorized shares of capital stock from 455,000,000 to
1,250,000,000, the authorized number of Class A common stock from 300,000,000
to 800,000,000, the authorized number of shares of Class B common stock from
150,000,000 to 400,000,000, and the authorized number of shares of Preferred
Stock from 5,000,000 to 50,000,000.
Warrants
Class A Common Stock Warrant
On February 12, 1998, the Company consummated an agreement with Lenfest
Telephony, Inc. ("Lenfest") whereby Lenfest received a warrant to obtain
731,624 shares of Class A common stock of the Company (the "Lenfest Warrant")
in exchange for its partnership interest in the Harrisburg, Pennsylvania
network. The Lenfest Warrant was exercised during May 1998 for no additional
consideration.
Class B Common Stock Warrants
The Class B common stock warrants were issued on April 15, 1996 in
connection with the issuance of the Senior Discount Notes (See Note 5).
Adelphia Warrant
On June 13, 1997, the Company entered into agreements with MCI. Pursuant to
these agreements the Company is designated MCI's preferred provider for new end
user dedicated access circuits and of conversions of end user dedicated access
circuits as a result of conversions from the incumbent LEC in the Company's
markets. Adelphia Business Solutions also has certain rights of first refusal
to provide MCI with certain communications services. Under this arrangement,
the Company issued a warrant to purchase 913,380 shares of Class A common stock
for $6.15 per share to MCI (the "MCI Warrant") representing 2 1/2% of the
common stock of the Company on a fully diluted basis. MCI could receive
additional warrants to purchase up to an additional 6% of the shares of the
Company's Class A common stock, on a fully diluted basis, at fair value, if MCI
met certain purchase volume thresholds over the term of the agreement.
A-29
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
In connection with the IPO and the related over-allotment option, the
Company and MCI entered into an agreement that provides as follows with respect
to the MCI Warrant and MCI's right to receive additional MCI warrants as a
result of the IPO (the "Additional MCI Warrants"): (i) the Additional MCI
Warrants issued with respect to the shares sold to the public in the IPO, the
over-allotment option and with respect to the Adelphia shares purchased will
have an exercise price equal to the lower of $6.15 per share or the price per
share to the public in the IPO (the "IPO Price"), and (ii) Adelphia purchased
from MCI the MCI Warrant and the Additional MCI Warrants for a purchase price
equal to the number of Class A common stock shares issuable under the warrants
being purchased times the IPO Price minus the underwriting discount, less the
aggregate exercise price of such warrants. Furthermore, in consideration of the
obligations undertaken by Adelphia to facilitate the agreements between MCI and
Adelphia Business Solutions, the Company paid to Adelphia a fee of $500 and
issued a warrant to Adelphia, which expires three years after its issuance, to
purchase 200,000 shares of Class A common stock at an exercise price equal to
the IPO Price.
Long-Term Incentive Compensation Plan
On October 3, 1996, the Board of Directors and stockholders of the Company
approved the Company's 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 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 the
Company's 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, the Company 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 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 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 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 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 all plans:
Number of Weighted average
shares subject exercise price
to options per share
-------------- ----------------
Outstanding, December 31, 1998............... -- --
Granted...................................... 600,417 $15.13
------- ------
Outstanding, December 31, 1999............... 600,417 $15.13
======= ======
A-30
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
Options outstanding Options exercisable
----------------------------------------- ---------------------------------------
Weighted average Weighted Weighted average Weighted
Exercise remaining average Number remaining average
price per Number contractual life exercise price of contractual life exercise price
share of shares (years) per share shares (years) per share
- --------- --------- ---------------- -------------- ------- ---------------- --------------
$12.13-$16.00 600,417 5.2 $15.13 200,417 6.3 $13.38
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 the Company 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 the Company's employees.
SFAS 123 pro forma numbers are as follows:
Year ended
December 31,
1999
------------
Net loss--as reported......................................... $(165,466)
Net loss--Pro forma applying SFAS 123......................... (167,800)
Basic and diluted net loss per common share--as reported under
ABP 25....................................................... (3.47)
Basic and diluted net loss per common share--pro forma under
SFAS 123..................................................... (3.51)
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:
Employee
Stock Options
Year ended
December 31, 1999
-----------------
Expected dividend yield.................................... 0%
Risk-free interest rate.................................... 6.93%
Expected volatility........................................ 50%
Expected life (in years)................................... 5.2
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 the Company's 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 the Company's options.
In addition to the stock options and Rigas Grants, the Company issued 58,500
shares of 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.
A-31
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
(7)Commitments and Contingencies
The Company rents office space, node space and fiber 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 $1,236, $1,893 and $10,166 for the year ended March 31, 1998, the
nine months ended December 31, 1998 and the year ended December 31, 1999,
respectively.
The minimum future lease obligations under the noncancelable operating
leases as of December 31, 1999 are approximately:
Period ending December 31,
--------------------------
2000................................................................ $12,617
2001................................................................ 12,309
2002................................................................ 12,063
2003................................................................ 12,278
2004................................................................ 10,467
Thereafter.......................................................... 48,761
During July 1999, the Company 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 the Company to pay $2,000
per year.
The communications industry and Adelphia Business Solutions are subject to
extensive regulation at the federal, state and local levels. On February 8,
1996, President Clinton signed the Telecommunications Act of 1996
("Telecommunications Act"), the most comprehensive reform of the nation's
telecommunications laws since the the Commununications Act of 1934. Management
of the Company is unable to predict the effect that the Telecommunications Act,
related rulemaking proceedings or other future rulemaking proceedings will have
on its business and results of operations in future periods.
Adelphia Business Solutions has entered into a series of agreements with
several local and long-haul fiber optic network providers that will allow the
Company to accelerate its national expansion. These agreements, totaling
approximately $288,867, provide the Company with ownership or an IRU to over
25,000 route miles of local and long-haul fiber optic cable. Through December
31, 1999, the Company has paid $108,903 of the total due under the agreements,
which was included in property, plant and equipment. The Company 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:
Period ending December 31,
--------------------------
2000............................................................... $149,911
2001............................................................... 16,039
2002............................................................... 453
2003............................................................... 453
2004............................................................... 453
Thereafter......................................................... 12,655
A-32
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
In addition to the amounts due under the agreements for the fiber optic
cable, the Company is also required to pay certain fiber optic network
providers for pro-rated maintenance and rights of ways fees on a yearly basis.
(8)Related Party Transactions
The following table summarizes the Company's transactions with related
parties:
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
1998 1998 1999
---------- ------------ ------------
Revenues:
Management fees.......................... $3,809 $2,135 $4,948
Telecommunications service revenue....... 173 363 1,840
Network monitoring fees.................. 977 589 --
Special access fees...................... 500 -- --
------ ------ ------
Total.................................. $5,459 $3,087 $6,788
====== ====== ======
Interest Income............................ $ 617 $8,395 $8,483
====== ====== ======
Expenses:
Interest expense......................... $5,997 $ 737 $ --
Allocated corporate costs................ 1,656 2,981 8,587
Fiber leases............................. 47 139 236
------ ------ ------
Total.................................. $7,700 $3,857 $8,823
====== ====== ======
Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial, legal,
regulatory, network design, construction and other administrative services.
Telecommunications services revenue from related parties represent fees
received by the Company from Adelphia for providing switched services to
various Adelphia offices, including Coudersport, Pennsylvania.
Network monitoring fees represent fees received by the Company for technical
support for the monitoring of each individual joint venture's
telecommunications system.
Special access fees represent amounts charged to joint ventures for use of
the network of a wholly owned subsidiary of the Company.
Interest income represents interest charged on certain affiliate receivable
balances with joint ventures and with Adelphia.
Interest expense relate to the Note payable--Adelphia (See Note 5).
Allocated corporate costs represent costs incurred by Adelphia on behalf of
the Company for the administration and operation of the Company. These costs
include charges for office space, corporate aircraft and shared services such
as finance activities, information systems, computer services, human resources,
and taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs that would be incurred if the Company was to secure
such services on its own.
A-33
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Fiber lease expense represents amounts paid to various subsidiaries of
Adelphia for the utilization of existing cable television plant for development
and operation of the consolidated operating networks.
During the year ended March 31, 1998, the nine months ended December 31,
1998 and the year ended December 31, 1999, the Company paid $299, $1,044 and
$7,577, respectively, to entities owned by certain shareholders of Adelphia
primarily for property, plant and equipment and services at market rates.
During the nine months ended December 31, 1998 and the year ended December
31, 1999, the Company made demand advances to Adelphia. At December 31, 1998
and 1999, $4,950 and $392,629 respectively were outstanding under this
agreement. The Company received interest on such advances at a rate of 5.15%,
which is included in interest income--affiliate in the consolidated statement
of operations. Demand advances represent cash held by Adelphia's centralized
cash management system immediately available to the Company for any corporate
purpose on demand.
(9)Employee Benefits Plan
The Company participates in the Adelphia 401(k) and stock value plan which
provides that eligible full-time employees may contribute from 2% to 16% of
their pre-tax compensation subject to certain limitations. The Company matches
contributions up to 1.5% of each participant's pre-tax compensation. During the
year ended March 31, 1998, the nine months ended December 31, 1998 and the year
ended December 31, 1999, no significant matching contributions were made by the
Company. The 401(k) and stock value plan also provides for certain stock
incentive awards on an annual basis.
In addition to the 401(k) and stock value plan, the Company participates in
an Adelphia stock incentive plan which provides certain management level
employees with compensation bonuses based on a weighted average of Adelphia
Class A common stock and Adelphia Business Solutions Class A common stock
performance. Costs associated with this plan to the Company was approximately
$1,746 for the year ended December 31, 1999.
(10)Income Taxes
Adelphia and its corporate subsidiaries (including the Company) filed
consolidated federal income tax returns for the year ended March 31, 1998. For
the nine months ended December 31, 1998 and the year ended December 31, 1999,
Adelphia Business Solutions will not be included within Adelphia's consolidated
federal income tax return. For financial reporting purposes, current and
deferred income tax assets and liabilities are computed on a separate company
basis. At December 31, 1998 and 1999, the Company had net operating loss
carryforwards for federal income tax purposes of $178,503 and $351,539,
respectively, expiring through 2019.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carryforwards.
A-34
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The Company's net deferred tax asset included in other assets--net is
comprised of the following:
December 31,
-------------------
1998 1999
-------- ---------
Deferred tax assets:
Differences between book and tax basis of intangible
assets................................................. $ 138 $ 1,562
Net operating loss carryforwards........................ 71,391 142,993
Allowance for doubtful accounts and other............... 77 4,384
-------- ---------
Total................................................. 71,606 148,939
Valuation allowance..................................... (48,746) (114,043)
-------- ---------
Total................................................. 22,860 34,896
-------- ---------
Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment.................................... 19,015 34,626
Investment in partnerships.............................. 3,808 233
-------- ---------
Total................................................. 22,823 34,859
-------- ---------
Net deferred tax asset.................................. $ 37 $ 37
======== =========
The net change in the valuation allowance for the nine months ended December
31, 1998 and the year ended December 31, 1999 was an increase of $31,367 and
$65,297, respectively.
Income tax expense for the years ended March 31, 1998, the nine months ended
December 31, 1998 and the year ended December 31, 1999:
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
---------- ------------ ------------
1998 1998 1999
---------- ------------ ------------
Current.................................... $-- $-- $ 1
Deferred................................... -- -- --
--- --- ---
Total.................................... $-- $-- $ 1
=== === ===
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
---------- ------------ ------------
1998 1998 1999
---------- ------------ ------------
Statutory federal income tax rate........ 35.0% 35.0% 35.0%
Change in valuation allowance............ (35.0) (35.0) (35.0)
State taxes, net of federal benefit and
other................................... -- -- --
----- ----- -----
Income tax expense....................... --% --% --%
===== ===== =====
A-35
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
(11)Quarterly Financial Data (unaudited)
The following tables summarize the financial results of the Company for each
of the quarters in the nine months ended December 31, 1998 and the year ended
December 31, 1999:
Three Months Ended
------------------------------------
June 30, September 30, December 31,
1998 1998 1998
-------- ------------- ------------
Revenues........................................... $ 7,635 $ 12,098 $ 15,043
-------- -------- --------
Operating expenses:
Network operations............................... 4,989 7,056 6,664
Selling, general and administrative.............. 8,432 10,391 16,518
Depreciation and amortization.................... 6,120 9,843 10,708
-------- -------- --------
Total.......................................... 19,541 27,290 33,890
-------- -------- --------
Operating loss..................................... (11,906) (15,192) (18,847)
Other income (expense):
Interest income.................................. 4,235 4,169 1,829
Interest income--affiliate....................... 1,824 2,995 3,576
Interest expense................................. (13,704) (12,535) (12,399)
Other income..................................... 1,000 113 --
-------- -------- --------
Loss before income taxes, equity in net loss of
joint ventures and extraordinary gain............. (18,551) (20,450) (25,841)
Income tax expense................................. -- -- --
-------- -------- --------
Loss before equity in net loss of joint ventures
andextraordinary gain............................. (18,551) (20,450) (25,841)
Equity in net loss of joint ventures............... (3,190) (2,614) (3,776)
-------- -------- --------
Loss before extraordinary gain..................... (21,741) (23,064) (29,617)
Extraordinary gain on repurchase of debt........... -- 237 --
-------- -------- --------
Net loss........................................... (21,741) (22,827) (29,617)
Dividend requirements applicable to preferred
stock............................................. (6,807) (7,026) (7,284)
-------- -------- --------
Net loss applicable to common stockholders......... $(28,548) $(29,853) $(36,901)
======== ======== ========
Basic and diluted net loss per
weighted average share of
common stock...................................... $(0.59) $(0.54) $(0.66)
-------- -------- --------
Weighted average shares of common stock outstanding
(in thousands).................................... 48,110 55,497 55,497
======== ======== ========
A-36
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Three Months Ended
----------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Revenues...................... $ 21,438 $ 34,215 $ 43,347 $ 55,575
-------- -------- -------- --------
Operating expenses:
Network operations.......... 8,504 11,671 15,862 22,488
Selling, general and
administrative............. 21,009 32,637 39,972 48,997
Depreciation and
amortization............... 13,535 13,586 18,168 19,955
-------- -------- -------- --------
Total..................... 43,048 57,894 74,002 91,440
-------- -------- -------- --------
Operating loss................ (21,610) (23,679) (30,655) (35,865)
Other income (expense):
Interest income............. 1,998 14,780 2,867 288
Interest income--affiliate.. 2,828 2,779 1,336 1,540
Interest expense............ (15,533) (21,805) (19,045) (17,931)
-------- -------- -------- --------
Loss before income taxes and
equity in net loss of joint
ventures..................... (32,317) (27,925) (45,497) (51,968)
Income tax expense............ -- (4) -- 3
-------- -------- -------- --------
Loss before equity in net loss
of joint ventures............ (32,317) (27,929) (45,497) (51,965)
Equity in net loss of joint
ventures..................... (3,803) (3,291) (246) (418)
-------- -------- -------- --------
Net loss...................... (36,120) (31,220) (45,743) (52,383)
Dividend requirements
applicable to preferred
stock........................ (7,479) (7,720) (7,979) (8,450)
-------- -------- -------- --------
Net loss applicable to common
stockholders................. $(43,599) $(38,940) $(53,712) $(60,833)
======== ======== ======== ========
Basic and diluted net loss per
weighted average share of
common stock................. $ (0.79) $ (0.70) $ (0.97) $ (1.01)
======== ======== ======== ========
Weighted average shares of
common stock outstanding
(in thousands)............... 55,497 55,497 55,497 60,453
======== ======== ======== ========
A-37
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Class A common stock is quoted on the National Association of
Securities Dealers Automated Quotations System National Market System (NASDAQ-
NMS). Adelphia Business Solutions' NASDAQ-NMS symbol is "ABIZ". Prior to
October 25, 1999, the Company's NASDAQ-NMS symbol was "HYPT".
The following table sets forth the range of high and low closing bid prices
of the Class A common stock on NASDAQ/NMS. Such bid prices represent inter-
dealer quotations, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
CLASS A COMMON STOCK
HIGH LOW
---- ----
QUARTER ENDED:
June 30, 1998 $18 1/6 $14 1/4
September 30, 1998 $16 5/8 $ 5 7/8
December 31, 1998 $15 1/8 $ 4 1/2
March 31, 1999 $16 3/8 $ 8 5/8
June 30, 1999 $18 7/8 $11
September 30, 1999 $25 $15 1/2
December 31, 1999 $51 1/4 $24 11/16
As of March 24, 2000 there were 210 holders of record of the Company's Class
A common stock, par value $0.01 per share and 22 holders of record of the
Company's Class B common stock, par value $0.01 per share.
Dividends
The Company has never declared any cash dividends on any of its respective
equity securities. Covenants in the indenture pursuant to which the Company's
Senior Discount Notes, Senior Secured Notes and Senior Subordinated Notes were
issued restrict the ability of the Company to pay cash dividends on its capital
stock.
A-38
PROXY
ADELPHIA BUSINESS SOLUTIONS, INC.
This Proxy is Solicited On Behalf Of The Board Of Directors Of The Company
The undersigned hereby appoints John J. Rigas, James P. Rigas, Timothy J. Rigas
and Michael J. 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, Class B Common Stock and Preferred 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 Business Solutions, Inc. to be
held at the Coudersport Theater, Main Street, Coudersport, Pennsylvania on
July 31, 2000 at 11:30 a.m. and at any adjournment thereof.
(Please sign on reverse side and return promptly)
Please Detach and Mail in the Envelope Provided
[X] Please mark your votes
as in this example
WITHHOLD The Board of Directors
FOR AUTHORITY recommends a vote "FOR"
all nominees to vote for all proposals numbered 1 and 2.
listed at right nominees listed
at right
[ ] [ ]
1. Election of Directors Nominees:
(Instructions: To withhold authority to John J. Rigas, James P. Rigas,
vote for any individual nominee, strike Michael J. Rigas, Timothy J. Rigas,
a line through that nominee's name.) Pete J. Metros, James L. Gray,
Peter Venetis and Edward S. Mancini
2. 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 exercise all powers
hereunder.
PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE-PAID
RETURN ENVELOPE.
Signature ______________________ Signature __________________ Dated:______, 2000
IF HELD JOINTLY
NOTE: Stockholder sign here exactly as name appears hereon.