SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly Report under Section 13 or 15(d) of the Securities Exchange - ------- Act of 1934 For the quarterly period ended June 30, 2000 Transition report pursuant to Section 13 or 15(d) of the Securities - ------- Exchange Act of 1934 For the transition period from _____________ to _____________ Commission File Number: 000-21605 ADELPHIA BUSINESS SOLUTIONS, INC. (Exact name of registrant as specified in its charter) Delaware 25-1669404 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One North Main Street Coudersport, PA 16915-1141 (Address of principal (Zip code) executive offices) 814-274-9830 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At August 8, 2000, 35,652,554 shares of Class A Common Stock, par value $0.01 per share, and 35,238,837 shares of Class B Common Stock, par value $0.01 per share, of the registrant were outstanding. ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES INDEX Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1999 and June 30, 2000......................3 Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 1999 and 2000.........................................................................4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 and 2000.........................................................................5 Notes to Condensed Consolidated Financial Statements.............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................25 PART II - OTHER INFORMATION Item 1. Legal Proceedings..............................................................................26 Item 2. Changes in Securities..........................................................................26 Item 3. Defaults Upon Senior Securities...............................................................26 Item 4. Submission of Matters to a Vote of Security Holders...........................................26 Item 5. Other Information.............................................................................26 Item 6. Exhibits and Reports on Form 8-K...............................................................27 SIGNATURES..............................................................................................28 INDEX TO EXHIBITS.......................................................................................29 Item 1. Financial Statements ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) December 31, June 30, 1999 2000 ---------------- ----------------- ASSETS: Current assets: Cash and cash equivalents $ 2,133 $ 720 Due from parent - net 392,629 --- Due from affiliates - net 6,230 --- Accounts receivable - net 68,075 99,358 Other current assets 9,852 9,955 ---------------- ----------------- Total current assets 478,919 110,033 U.S. government securities - pledged 29,899 15,167 Restricted cash --- 75,785 Investments 44,066 50,739 Property, plant and equipment - net 943,756 1,200,803 Other assets - net 67,063 96,361 ---------------- ----------------- Total $ 1,563,703 $ 1,548,888 ================ ================= LIABILITIES, PREFERRED STOCK, COMMON STOCK AND (DEFICIENCY): OTHER STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $ 150,151 $ 100,018 Due to affiliates-net --- 15,320 Accrued interest and other current liabilities 27,595 34,376 --------------- ----------------- Total current liabilities 177,746 149,714 13% Senior discount notes due 2003 253,860 272,212 12 1/4% Senior secured notes due 2004 250,000 250,000 12% Senior subordinated notes due 2007 300,000 300,000 Note payable --- 96,082 Other debt 41,318 48,806 --------------- ----------------- Total liabilities 1,022,924 1,116,814 --------------- ----------------- 12 7/8% Senior exchangeable redeemable preferred stock 260,848 278,393 --------------- ----------------- Commitments and contingencies (Note 3) Common stock and other stockholders' equity: Class A common stock, $0.01 par value, 800,000,000 shares authorized, 34,066,587 and 35,322,554 shares outstanding, respectively 341 353 Class B common stock, $0.01 par value, 400,000,000 shares authorized, 35,371,458 and 35,238,837 shares outstanding, respectively 354 352 Additional paid in capital 666,021 654,883 Class B common stock warrants 2,177 1,370 Unearned stock compensation (5,715) (4,892) Accumulated deficit (383,247) (498,385) --------------- ----------------- Total common stock and other stockholders' equity 279,931 153,681 --------------- ----------------- Total $ 1,563,703 $ 1,548,888 =============== ================= See notes to condensed consolidated financial statements. ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ---------------------------- 1999 2000 1999 2000 ------------------------------- ---------------------------- Revenues $ 34,215 $ 80,214 $ 55,653 $ 149,515 --------------- -------------- ------------- ------------- Operating expenses: Network operations 11,671 41,661 20,175 75,393 Selling, general and administrative 32,637 63,348 53,646 122,194 Depreciation and amortization 13,586 26,689 27,121 46,127 --------------- -------------- ------------- ------------- Total 57,894 131,698 100,942 243,714 --------------- -------------- ------------- ------------- Operating loss (23,679) (51,484) (45,289) (94,199) Other income (expense): Interest income 14,780 1,020 16,778 1,424 Interest income-affiliate 2,779 1,259 5,607 6,282 Interest expense (21,805) (15,264) (37,338) (28,194) --------------- -------------- ------------- ------------- Loss before income taxes and equity in net loss of joint ventures (27,925) (64,469) (60,242) (114,687) Income tax expense (4) --- (4) --- ---------------- ------------- ------------ -------------- Loss before equity in net loss of joint ventures (27,929) (64,469) (60,246) (114,687) Equity in net loss of joint ventures (3,291) (346) (7,094) (451) ---------------- ------------- ------------ -------------- Net loss (31,220) (64,815) (67,340) (115,138) Dividend requirements applicable to preferred stock (7,720) (8,771) (15,199) (17,268) ---------------- ------------- ------------ -------------- Net loss applicable to common stockholders $ (38,940) $ (73,586) $ (82,539) $ (132,406) ================ ============= ============ ============== Basic and diluted net loss per weighted average share of common stock $ (0.70) $ (1.06) $ (1.49) $ (1.91) =============== ============== ============ ============== Weighted average shares of common stock outstanding 55,497 69,503 55,497 69,417 =============== ============== ============ ============== See notes to condensed consolidated financial statements. ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended June 30, -------------------------------- 1999 2000 --------------- --------------- Cash flows from operating activities: Net loss $ (67,340) $ (115,138) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 23,846 43,587 Amortization 3,275 2,540 Noncash interest expense 15,961 18,352 Equity in net loss of joint ventures 7,094 451 Non-cash stock compensation --- 1,225 Change in operating assets and liabilities net of effects of acquisitions: Other assets - net (20,463) (48,794) Accounts payable (477) (50,133) Accrued interest and other liabilities 7,023 6,379 --------------- --------------- Net cash used in operating activities (31,081) (141,531) --------------- --------------- Cash flows from investing activities: Expenditures for property, plant and equipment (131,831) (290,900) Investments (24,672) (7,125) Net cash used for acquisitions (126,268) --- Investment in restricted cash --- (75,785) Sale of U.S. government securities - pledged 15,322 15,312 Repayment of senior secured note 20,000 --- --------------- --------------- Net cash used in investing activities (247,449) (358,498) --------------- --------------- Cash flows from financing activities: Repayments of debt (1,246) (2,246) Repayments from related parties 4,066 414,178 Proceeds from exercise of warrant --- 5,611 Proceeds from debt 300,000 96,082 Costs associated with financing (5,400) (15,009) --------------- --------------- Net cash provided by financing activities 297,420 498,616 --------------- --------------- Increase (decrease) in cash and cash equivalents 18,890 (1,413) Cash and cash equivalents, beginning of period 242,570 2,133 --------------- --------------- Cash and cash equivalents, end of period $ 261,460 $ 720 =============== =============== See notes to condensed consolidated financial statements. ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands) Adelphia Business Solutions, Inc. is a majority owned subsidiary of Adelphia Communications Corporation ("Adelphia"). The accompanying unaudited condensed consolidated financial statements of Adelphia Business Solutions, Inc. and its majority owned subsidiaries ("Adelphia Business Solutions" or the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, all adjustments, consisting of only normal recurring adjustments necessary for a fair presentation of the financial position of Adelphia Business Solutions at June 30, 2000, and the unaudited results of operations for the three and six months ended June 30, 1999 and 2000, have been included. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. 1. Significant Events Subsequent to December 31, 1999: On January 7, 2000, the Company entered into an agreement with Allegheny Communications Connect, Inc. ("Allegheny") to purchase an indefeasible right of use ("IRU") for a total of approximately 600 long-haul and metro route miles from western Pennsylvania through West Virginia, and in Maryland and Virginia. On January 10, 2000, the Company entered into an agreement with Williams Communications, Inc. ("Williams") to purchase an IRU for a total of 4,543 route miles of fiber in the western United States at a cost of approximately $23 million. During January 2000, the Company entered into an IRU agreement with Level 3 Communications ("Level 3") for approximately 3,100 long-haul route miles throughout much of the western United States. In addition, the Company entered into an agreement with Level 3 to acquire access to approximately 750 miles of metro duct in the following central business districts: Chicago, Cincinnati, Dallas, Denver, Detroit, Los Angeles, Orlando, Phoenix, San Diego, San Francisco, San Jose and Seattle. The total cost of the agreement is approximately $54.6 million. During January 2000, the Company entered into an agreement with Metromedia Fiber Network ("Metromedia") which allows the Company to acquire access to fiber strand miles across any of Metromedia's North American markets. During April 2000, the Company was the successful bidder, in the Federal Communications Commission ("FCC") auction, for 177 licenses covering the 39 Ghz spectrum for approximately 164 million POPS. The Company has deposited $15,000 of the total $77,605 purchase price with the remaining balance due at the time the licenses are granted. On July 31, 2000, a petition to deny was filed against the Company. This petition does not seek to deny the grant of the licenses to the Company but, instead, seeks only to make such grant subject to petitioners' previously dismissed applications seeking the spectrum covered by the Company's licenses. The Company believes the petition is without merit and intends to vigorously oppose it and the Company currently believes its licenses will be granted during the third or fourth quarter of 2000. During April 2000, the Company and Bell Atlantic (now known as Verizon Communications) reached a settlement for outstanding amounts due to the Company from Bell Atlantic. As a result of the settlement, the Company wrote off $6,981 of accounts receivable during the quarter ended March 31, 2000. On May 3, 2000, the Company entered into a contract to build an advanced information technology infrastructure and to provide communication services to the Commonwealth of Pennsylvania state government. As part of the contract, the Company was required to place $75,785 into a restricted account to be used for the completion of the technology infrastructure. The Company and certain of Adelphia's subsidiaries and affiliates are parties to a joint bank credit facility. As part of this facility, the Company and its subsidiaries have the ability to borrow up to an aggregate of $500,000, which would be guaranteed by other members of the borrowing group, subject to compliance by the entire borrowing group with certain covenants and financial tests. As of June 30, 2000, a subsidiary of the Company had borrowed $96,082 under this new credit facility. In addition, the Company has agreed to pay a subsidiary of Adelphia approximately $15,000 as a fee for placing the credit facility. On July 13, 2000, Adelphia exercised a warrant to purchase 913,380 shares of Class A common stock of the Company at a price of $6.15 per share. Adelphia purchased the warrant in May 1998 from MCI Worldcom in connection with the Company's IPO. Total proceeds to the Company were $5,611. During July 2000, the Company consummated a purchase agreement with Allegheny to acquire interests in a jointly owned network located in State College, Pennsylvania. Consideration paid to Allegheny was 330,000 shares of the Company's Class A common stock. This purchase increased the Company's ownership in this network to 100%. The acquisition will be accounted for under the purchase method of accounting. Accordingly, the financial results of the acquired network will be included in the consolidated results of Adelphia Business Solutions effective from the date acquired. During the six months ended June 30, 2000, the Company made demand advances to Adelphia which, as of June 30, 2000, had been repaid. The Company received interest on the advances at a rate of 6.33%. 2. Investments: The equity method of accounting is used to account for investments in joint ventures in which the Company holds 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 losses 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 non-consolidated investments are as follows: Ownership December 31, June 30, Percentage 1999 2000 -------------- ------------------ ------------------ Investments accounted for using the equity method: PECO-Hyperion (Philadelphia) 50.0% $ 42,475 $ 44,975 PECO-Hyperion (Allentown, Bethlehem, Easton, Reading) 50.0 7,425 9,550 Hyperion of York 50.0 6,525 6,525 Allegheny Hyperion Telecommunications (1) 50.0 4,975 4,975 ------------------ ------------------ 61,400 66,025 Cumulative equity in net loss (17,334) (17,786) ------------------ ------------------ Subtotal 44,066 48,239 Investments accounted for using the cost method --- 2,500 ------------------ ------------------ Total $ 44,066 $ 50,739 ================== ================== (1) As discussed in Note 1, during July 2000, the Company consummated an agreement to increase its ownership to 100% in this market. Summarized combined unaudited financial information for the Company's investments being accounted for using the equity method of accounting follows: December 31, June 30, 1999 2000 -------------- -------------- Current assets $ 21,645 $ 24,050 Property, plant and equipment - net 112,210 115,050 Other non-current assets 55 49 Current liabilities 10,175 8,172 Non current liabilities 35,104 34,294 Six Months Ended June 30, 1999 2000 -------------- -------------- Revenues $ 14,349 $ 28,552 Net loss (4,712) (1,200) 3. Commitments and Contingencies: Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of material commitments and contingencies. 4. Net Loss Per Weighted Average Share of Common Stock: Net loss per weighted average share of common stock is computed based on the weighted average number of common shares outstanding after giving effect to dividend requirements on the Company's preferred stock. Diluted net loss per common share is equal to basic net loss per common share because additional warrants outstanding had an anti-dilutive effect for the periods presented; however, these warrants could have a dilutive effect on earnings per share in the future. 5. Supplemental Financial Information: For the six months ended June 30, 1999 and 2000, the Company paid interest of $21,222 and $33,312, respectively. Accumulated depreciation of property, plant and equipment amounted to $97,518 and $141,105 December 31, 1999 and June 30, 2000, respectively. ------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Company's unaudited Condensed Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Form 10-Q and the Company's audited Consolidated Financial Statements and Notes thereto included in its Form 10-K for the year ended December 31, 1999. Overview The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information or statements included in this Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations is forward-looking, such as information relating to 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 and inventories, reliance on vendors, dependence on customers and their spending patterns, technological developments, the costs and other effects of rapid growth and changes in the competitive environment in which the Company operates. Readers of this Form 10-Q 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 Form 10-Q is as of and for the three and six months ended June 30, 1999 and 2000. 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 333-11142 (formerly No. 333-88927), under the caption "Risk Factors." The Company does not undertake to update any forward looking statements in this report or with respect to matters described herein. 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 wholly and majority owned subsidiaries or are joint venture partnerships, limited liability companies or corporations 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 62 markets and expects by the end of the year 2000 to be offering services in approximately 80 to 100 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 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 customers have a choice of receiving these services separately or as bundled packages which are typically priced at 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 150 to 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 the full buildout of 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 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 sold approximately 509,405 business access lines as of June 30, 2000, of which approximately 493,632 lines were installed at such date. This represents an addition of 76,628 access lines sold and 81,460 access lines installed during the quarter ended June 30, 2000. As of June 30, 2000, approximately 51% of these access lines are provisioned on Company owned switches. Recent Developments On January 7, 2000, the Company entered into an agreement with Allegheny Communications Connect, Inc. ("Allegheny") to purchase an indefeasible right of use ("IRU") for a total of approximately 600 long-haul and metro route miles from western Pennsylvania through West Virginia, and in Maryland and Virginia. On January 10, 2000, the Company entered into an agreement with Williams Communications, Inc. ("Williams") to purchase an IRU for a total of 4,543 route miles of fiber in the western United States at a cost of approximately $23 million. During January 2000, the Company entered into an IRU agreement with Level 3 Communications ("Level 3") for approximately 3,100 long-haul route miles throughout much of the western United States. In addition, the Company entered into an agreement with Level 3 to acquire access to approximately 750 miles of metro duct in the following central business districts: Chicago, Cincinnati, Dallas, Denver, Detroit, Los Angeles, Orlando, Phoenix, San Diego, San Francisco, San Jose and Seattle. The total cost of the agreement is approximately $54.6 million. During January 2000, the Company entered into an agreement with Metromedia Fiber Network ("Metromedia") which allows the Company to acquire access to fiber strand miles across any of Metromedia's North American markets. During April, 2000, the Company was the successful bidder, in the Federal Communications Commission ("FCC") auction, for 177 licenses covering the 39 Ghz spectrum for approximately 164 million POPS. The Company has deposited $15,000 of the total $77,605 purchase price with the remaining balance due at the time the licenses are granted. On July 31, 2000 a petition to deny was filed against the Company. This petition does not seek to deny the grant of the licenses to the Company but, instead, seeks only to make such grant subject to petitioners' previously dismissed applications seeking the spectrum covered by the Company's licenses. The Company believes the petition is without merit and intends to vigorously oppose it and the Company currently believes its licenses will be granted be during the third or fourth quarter of 2000. During April 2000, the Company and Bell Atlantic reached a settlement for outstanding amounts due to the Company from Bell Atlantic. As a result of the settlement, the Company wrote off $6,981 of accounts receivable during the quarter ended March 31, 2000. On May 3, 2000, the Company entered into a contract to build an advanced information technology infrastructure and to provide communication services to the Commonwealth of Pennsylvania state government. As part of the contract, the Company was required to place $75,785 into a restricted account to be used for the completion of the technology infrastructure. The Company and certain of Adelphia's subsidiaries and affiliates are parties to a joint bank credit facility. As part of this facility, the Company and its subsidiaries have the ability to borrow up to an aggregate of $500,000, which would be guaranteed by other members of the borrowing group, subject to compliance by the entire borrowing group with certain covenants and financial tests. As of June 30, 2000, a subsidiary of the Company had borrowed $96,082 under this new credit facility. In addition, the Company has agreed to pay a subsidiary of Adelphia approximately $15,000 as a fee for placing the credit facility. On July 13, 2000, Adelphia exercised a warrant to purchase 913,380 shares of Class A common stock of the Company at a price of $6.15 per share. Adelphia purchased the warrant in May 1998 from MCI Worldcom in connection with the Company's IPO. Total proceeds to the Company were $5,611. During July 2000, the Company consummated a purchase agreement with Allegheny to acquire interests in a jointly owned network located in State College, Pennsylvania. Consideration paid to Allegheny was 330,000 shares of the Company's Class A common stock. The agreement increased the Company's ownership in this network to 100%. The acquisition will be accounted for under the purchase method of accounting. Accordingly, the financial results of the acquired network will be included in the consolidated results of Adelphia Business Solutions effective from the date acquired. During the six months ended June 30, 2000, the Company made demand advances to Adelphia which, as of June 30, 2000, had been repaid. The Company received interest on the advances at a rate of 6.33%. Results of Operations Three Months Ended June 30, 2000 in Comparison with Three Months Ended June 30, 1999 Revenues increased 134% to $80,214 for the three months ended June 30, 2000, from $34,215 for the same quarter in the prior year. Amounts The change is attributable to the following: (in thousands) -------------- Growth in Original Markets $ 27,198 Acquisition of local partner interests 4,225 New Markets 14,471 Management fees 105 The primary sources of revenues, reflected as a percentage of total revenue were as follows: Three Months Ended June 30, 1999 2000 ---------- ----------- Local service 68.0% 70.9% Dedicated access 27.7% 9.9% Management fees 3.0% 1.4% Enhanced services 1.0% 9.7% Long distance and other 0.3% 8.1% Network operations expense increased 257% to $41,661 for the three months ended June 30, 2000 from $11,671 for the same quarter in the prior year. Amounts The increase is attributable to the following: (in thousands) -------------- Growth in Original Markets $ 9,801 Acquisition of local partner interests 2,550 New Markets 17,548 Network Operations Control Center ("NOCC") 91 The increase in network operations expense was due to start up costs in the Company's New Markets as regional switches and network rings were activated, combined with start up costs in the Company's Original Markets associated with the Company data and internet access products. The increased number and size of the operations of the networks resulted in increased employee related costs, equipment maintenance costs and expansion costs. Selling, general and administrative expense increased 94% to $63,348 for the three months ended June 30, 2000 from $32,637 for the same quarter in the prior year, primarily reflecting the expansion of the Original and New Markets. Amounts The increase is attributable to the following: (in thousands) -------------- Growth in Original Markets $12,635 Acquisition of local partner interests 1,819 New Markets 9,570 Sales and marketing activities 460 Corporate overhead charges 5,801 Non-cash stock compensation 426 Depreciation and amortization expense increased 96% to $26,689 during the three months ended June 30, 2000 from $13,586 for the same quarter in the prior year primarily as a result of increased depreciation resulting from the higher depreciable asset base at the NOCC and the networks, amortization of deferred financing costs and the acquisition of local partner interests. Interest income for the three months ended June 30, 2000 decreased 93% to $1,020 from $14,780 for the same quarter in the prior year as a result of decreases in interest income from lower amounts of cash and cash equivalents and U.S. Government securities. Interest income-affiliate for the three months ended June 30, 2000 decreased to $1,259 from $2,779 for the same quarter in the prior year as a result of a decrease in the amount of demand advances outstanding to Adelphia during the period. Interest expense decreased 30% to $15,264 during the three months ended June 30, 2000 from $21,805 for the same period in the prior year. The decrease was primarily attributable to an increase in the amount of interest capitalized as a result of the Company's network expansion. Equity in net loss of joint ventures for the three months ended June 30, 2000 decreased 90% to $346 as compared to a net loss of $3,291 for the same quarter in the prior year as a result of the consolidation of several joint ventures resulting from the purchase of the local partners' interests, and the maturing of the remaining joint venture networks. The number of joint ventures paying management fees to the Company decreased from seven at June 30, 1999 to four at June 30, 2000 due to the Company's increased ownership in several joint ventures. These non-consolidated joint ventures and networks under construction paid management and monitoring fees to the Company, which are included in revenues, aggregating approximately $1,136 for the three months ended June 30, 2000, as compared with $1,032 for the same quarter in the prior fiscal year. The nonconsolidated joint ventures' net losses, including networks under construction, for the three months ended June 30, 1999 and 2000, aggregated approximately $2,491 and $564, respectively. Preferred stock dividends increased by 14% to $8,771 for the three months ended June 30, 2000 from $7,720 for the same period in the prior year. The increase was due to a higher outstanding preferred stock base resulting from the payments of dividends in additional shares of preferred stock. Six Months Ended June 30, 2000 in Comparison with Six Months Ended June 30, 1999 Revenues increased 169% to $149,515 for the six months ended June 30, 2000, from $55,653 for the same period in the prior year. Amounts The change is attributable to the following: (in thousands) -------------- Growth in Original Markets $ 52,366 Acquisition of local partner interests 17,280 New Markets 24,589 Management fees (373) The primary sources of revenues, reflected as a percentage of total revenue were as follows: Six Months Ended June 30, 1999 2000 ---------- ----------- Local service 66.5% 72.2% Dedicated access 26.0% 11.2% Management fees 4.7% 1.5% Enhanced services 0.6% 7.6% Long distance and other 2.2% 7.5% Network operations expense increased 274% to $75,393 for the six months ended June 30, 2000 from $20,175 for the same period in the prior year. Amounts The increase is attributable to the following: (in thousands) -------------- Growth in Original Markets $ 15,274 Acquisition of local partner interests 7,498 New Markets 30,741 Network Operations Control Center 1,705 The increase in network operations expense was due to start up costs in the Company's New Markets as regional switches and network rings were activated, combined with higher start up costs in the Company's Original Markets associated with the Company data and internet access products. The increased number and size of the operations of the networks resulted in increased employee related costs, equipment maintenance costs and expansion costs. Selling, general and administrative expense increased 128% to $122,194 for the six months ended June 30, 2000 from $53,646 for the same period in the prior year, primarily reflecting the expansion activity of the Original and New Markets and the acquisition of local partner interests. Amounts The increase is attributable to the following: (in thousands) -------------- Growth in Original Markets $ 16,308 Acquisition of local partner interests 7,891 New Markets 21,171 Sales and marketing activities 4,242 Corporate overhead charges 10,730 Bell Atlantic settlement charges 6,981 Non-cash stock compensation 1,225 Depreciation and amortization expense increased 70% to $46,127 during the six months ended June 30, 2000 from $27,121 for the same period in the prior year primarily as a result of increased depreciation resulting from the higher depreciable asset base at the NOCC and the networks, amortization of deferred financing costs and the acquisition of local partner interests. Interest income for the six months ended June 30, 2000 decreased 92% to $1,424 from $16,778 for the same period in the prior year as a result of decreases in interest income from lower amounts of cash and cash equivalents and U.S. Government securities. Interest income-affiliate for the six months ended June 30, 2000 increased to $6,282 from $5,607 for the same period in the prior year, as a result of an increase in the amount of demand advances outstanding to Adelphia during the period. Interest expense decreased 25% to $28,194 during the six months ended June 30, 2000 from $37,338 for the same period in the prior year. The decrease was primarily attributable to an increase in the amount of interest capitalized as a result of the Company's network expansion. Equity in net loss of joint ventures for the six months ended June 30, 2000 decreased 94% to $451 as compared to a loss of $7,094 for the same period in the prior year as a result of the consolidation of several joint ventures resulting from the purchase of the local partners' interests, and the maturing of the remaining joint venture networks. The number of joint ventures paying management fees to the Company decreased from seven at June 30, 1999 to four at June 30, 2000 due to the Company's increased ownership in several joint ventures. These non-consolidated joint ventures and networks under construction paid management and monitoring fees to the Company, which are included in revenues, aggregating approximately $2,236 for the six months ended June 30, 2000, as compared with $2,609 for the same period in the prior fiscal year. The nonconsolidated joint ventures' net losses, including networks under construction, for the six months ended June 30, 1999 and 2000, aggregated approximately $4,712 and $1,200, respectively. Preferred stock dividends increased by 14% to $17,268 for the six months ended June 30, 2000 from $15,199 for the same period in the prior year. The increase was due to a higher outstanding preferred stock base resulting from the payments of dividends in additional shares of preferred stock. Supplementary Network Financial Analysis At June 30, 2000, the Company had 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 has 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 nonconsolidated 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 Consolidated Operating Results") combined with these 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. Quarter ended June 30, 1999 Quarter ended June 30, 2000 --------------------------------------- --------------------------------------- (dollars in thousands) (dollars in thousands) Adjusted Adjusted Joint Consolidated Joint Venture Combined Consolidated Venture Combined Operating Operating Operating Operating Operating Operating Results Results Results Results Results Results --------------------------------------- --------------------------------------- Revenues $34,215 $9,742 $43,957 $80,214 $15,777 $95,991 Direct Operating Expenses 11,671 3,565 15,236 41,661 4,112 45,773 --------------------------------------- --------------------------------------- Gross Margin 22,544 6,177 28,721 38,553 11,665 50,218 Gross Margin Percentage 65.9% 63.4% 65.3% 48.1% 73.9% 52.3% Selling, General and Administrative Expenses 32,637 5,875 38,512 62,922 7,122 70,044 (a) --------------------------------------- --------------------------------------- EBITDA (b) (10,093) 302 (9,791) (24,369) 4,543 (19,826) --------------------------------------- --------------------------------------- EBITDA Percentage of Revenues (29.5%) 3.1% (22.3%) (30.4%) 28.8% (20.7%) June 2000 Quarter vs. June 1999 Quarter --------------------------------------------------- % Change Comparison Consolidated Joint Venture Combined Operating Operating Operating Results Results Results --------------------------------------------------- Revenues 134.4% 61.9% 118.4% Direct Operating Expenses 257.0% 15.3% 200.4% --------------------------------------------------- Gross Margin 71.0% 88.8% 74.8% Selling, General and Administrative Expenses (a) 92.8% 21.2% 81.9% --------------------------------------------------- EBITDA (b) (141.4%) NM(c) 102.5% --------------------------------------------------- <FN> (a) Excludes non-cash stock compensation (b) Earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation and other income/expense ("EBITDA") and similar measures 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 as defined by generally accepted accounting principles, and while EBITDA may not be comparable to other similarly titled measures of other companies, management of Adelphia Business Solutions believes that EBITDA is a meaningful measure of performance. (c) Not meaningful </FN> 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 new 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 $131,831 and $290,900 for the six months ended June 30, 1999 and 2000, respectively. Further, investments made by the Company in nonconsolidated joint ventures were $24,672 and $4,625 for the six months ended June 30, 1999 and 2000, respectively. The increase in capital expenditures for the six months ended June 30, 2000 as compared with the same period in the prior fiscal year is largely attributable to the capital expenditures necessary to develop the Original Markets and the New Markets as well as the fiber purchases and electronics 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 "Recent Developments." 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 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 will require significant capital expenditures. The Company's operations have required and will continue to require substantial capital investment for (i) the installation of electronics for voice and data 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 the 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 5ESS 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 continue 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 continue to purchase its partners' interests in the joint ventures when it can do so on attractive economic terms. The Company estimates that, in addition to the cash and cash equivalents on hand and the U.S. government securities pledged as of June 30, 2000, a total of approximately $800,000 will be required to fund the Company's capital expenditures, working capital requirements, operating losses and pro rata investments in the joint ventures from July 1, 2000 through the quarter ending June 30, 2001. This amount includes the $62,605 due on the 177 39 Ghz licenses which the Company believes will be paid during the third or fourth quarter of 2000. The Company will need substantial additional funds to fully fund its business plan. During the June 2000 quarter, the Company funded a portion of its free cash flow deficit with draws of approximately $96,082 under the previously mentioned $500,000 bank credit commitment. The Company expects to fund its projected future deficits through early 2002 through a combination of additional draws under the credit facility, additional bank or institutional indebtedness, capital contributions from minority partners (including potential Adelphia contributions of up to approximately $300,000) relating to the potential creation of new partnerships for the development of certain new markets, and the potential issuance of public equity or equity linked securities of approximately $300,000 of which Adelphia could potentially purchase approximately $150,000. There can be no assurances, however, that the Company will be successful in generating sufficient cash flow or in raising sufficient additional capital on terms that it will consider acceptable, or at all. 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 variance from expected capital expenditure requirements for the Original Markets and the New Markets and development of the LMDS or the 39 Ghz 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 networks not currently planned. 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. Competition The Company faces competition from many competitors with significantly greater financial resources, well-established brand names and large, existing installed customer bases. Moreover, we expect the level of competition to intensify in the future. In each of the markets served by the Company's networks, the services offered by the Company compete principally with the services offered by the incumbent local exchange carrier ("ILEC") serving that area. ILECs have long-standing relationships with their customers, have the potential to subsidize competitive services from monopoly service revenues, and benefit from favorable state and federal regulations. In light of the passage of the Telecommunications Act of 1996 (the "Telecommunications Act"), federal and state regulatory initiatives provide increased business opportunities to competitive local exchange carriers ("CLECs") such as the Company, but regulators may provide ILECs with increased pricing flexibility for their services as competition increases. Further, if a Regional Bell Operating Company ("RBOC") is authorized to provide long distance service originating in one or more states by fulfilling the market opening provisions of the Telecommunications Act, the RBOC may be able to offer "one stop shopping" that would be competitive with the Company's offerings. To date, the only RBOCs to gain such approval from the FCC are Bell Atlantic, for New York State, and Southwestern Bell, for Texas. Additional entry by the RBOCs into long distance markets could result in decreased market share for the major IXCs, which are among the operating companies' significant customers. Any of these results could have an adverse effect on the Company. There has been significant merger activity among the RBOCs in anticipation of entry into the long distance market, including the completed mergers of Ameritech and SBC, Bell Atlantic and GTE, and Qwest and U.S. West, whose combined territories cover a substantial portion of the Company's markets. Other combinations have occurred in the industry, which may have an effect on the Company. The effects of these combinations are unknown at this time. The Company believes that combinations of RBOCs and others will pose a greater competitive threat to the Company's strategy of originating and terminating a significant proportion of its customers' communications traffic over its own networks, rather than relying on the network of the ILEC. The Company also faces, and will continue to face, competition from other current and potential market entrants, including other CLECs and data-centric local providers, incumbent LECs which are not subject to RBOC restrictions on long distance, AT&T, MCIWorldCom, Sprint and other IXCs, cable television companies, electric utilities, microwave carriers, wireless telecommunications providers and private networks built by large end users. In addition, new carriers, such as Global Crossing, Williams, Qwest and Level 3 are building and managing nationwide networks which, in some cases, are designed to provide local services. Further, AT&T's acquisition of various cable companies will exploit ubiquitous local cable infrastructure for telecommunications and other services provided by the operating companies. Finally, although the Company has generally good relationships with the other existing IXCs, there are no assurances that any of these IXCs will not build their own facilities, purchase other carriers or their facilities, or resell the services of other carriers rather than use the Company's services when entering the market for local exchange services. Regulation Government Overview A significant portion of the services provided by the Company and its networks are subject to regulation by federal, state and local government agencies. Future federal or state regulations and legislation may be less favorable to the Company than current regulation and legislation and therefore may have a material and adverse impact on its business and financial prospects. In addition, the Company may expend significant financial and managerial resources to participate in proceedings setting rules at either the federal or state level, without achieving a favorable result. Federal Legislation and Regulation The Telecommunications Act enacted in 1996 establishes local exchange competition as a national policy. This act removes state regulatory barriers to competition, and imposes numerous requirements to facilitate the provision of local telecommunications services by multiple providers. For instance, carriers must provide to each other services for resale, number portability, dialing parity, access to rights of way, and compensation for traffic they exchange. ILECs must also provide competitors with network interconnection, access to unbundled network elements, and collocation at ILEC premises, among other things. Finally, the FCC is responsible for implementing and presiding over rules relating to these requirements as well as universal service subsidies, charges for access to long distance carriers, access to buildings, customer privacy, and services for the disabled. The Telecommunications Act prohibits state and local governments from enforcing any law, rule or legal requirement that prohibits or has the effect of prohibiting any entity from providing interstate or intrastate telecommunications services. States retain jurisdiction under the Telecommunications Act to adopt laws necessary to preserve universal service, protect public safety and welfare, ensure the continued quality of telecommunications services and safeguard the rights of consumers. The Company has successfully challenged states' attempts to limit competition in certain rural areas, and is continuing such challenges in other states. Some of these challenges are subject to further administrative and court appeals; if the states succeed in delaying competitive entry into rural areas, the Company's expansion plans may be adversely affected. The FCC is charged with the broad responsibility of implementing the local competition provisions of the Telecommunications Act. It has done so by promulgating rules which encourage increased local competition. In 1997, a federal appeals court for the Eighth Circuit vacated some of these rules. In January 1999, the United States Supreme Court reversed the majority of the Eighth Circuit's ruling, finding that the FCC has broad authority to interpret the Telecommunications Act and issue rules for its implementation. Specifically, the Court stated that the FCC has authority to set pricing guidelines for unbundled network elements, to prevent ILECs from dismantling existing combinations of network elements, and to establish rules allowing competitors to "pick and choose" among provisions of existing interconnection agreements. However, the Court vacated the FCC's rules that identified the unbundled network elements that ILECs must provide to CLECs, and the FCC issued an order explaining which unbundled network elements ILECs must provide. On July 18, 2000, the United States Court of Appeals for the Eighth Circuit issued a decision vacating certain rules of the FCC regarding the pricing of unbundled network elements provided by the ILECs to CLECs. Either the Court of Appeals or the Supreme Court may be asked to review this decision further. If the decision is not further reviewed, the FCC will be required to revise its pricing rules, which may result in changes in the prices paid by the Company to ILECs for use of their telephone lines and other facilities. Until the FCC actually issues new rules and they are implemented by the state regulatory commission, it is impossible to predict how this development may affect the Company's costs. Many new carriers have experienced difficulties in working with the ILECs, with respect to provisioning, interconnection, rights-of-way, collocation and implementing the systems used by these new carriers to order and receive unbundled network elements and wholesale service from the ILECs. Coordination with ILECs is necessary for new carriers such as the Company to provide local service to customers on a timely and competitive basis. The Telecommunications Act created incentives for RBOCs to cooperate with new carriers, allowing the RBOCs to offer long distance services originating in their region, if the RBOC satisfies statutory conditions designed to open their local markets to competition. The Company cannot be assured that RBOCs will be accommodating to the Company's networks once they are permitted to offer long distance service. If the Company's networks are unable to obtain the cooperation of an RBOC in a region, whether or not such RBOC has been authorized to offer long distance service, the Company's networks' ability to offer local services in such region on a timely and cost effective basis would be adversely affected. On December 9, 1999 the FCC released an order requiring the incumbent carriers to offer "line sharing" arrangements that will permit CLECs to offer DSL service and other advanced services over the same copper wires used by incumbent local exchange carriers to provide voice service. The specific prices and terms of these arrangements will be determined by future decisions of state utility commissions, and cannot be predicted at this time. The FCCs ruling may also be challenged in court. We expect that this order, if implemented, will allow CLECs to offer DSL services at a significantly lower cost than is now possible. On March 17, 2000, the U.S. Court of Appeals for the District of Columbia Circuit (the "DC Circuit Court") vacated certain FCC rules relating to collocation of competitors' equipment in ILEC central offices. This decision requires the FCC to limit collocation to equipment that is "necessary" for interconnection with the ILEC or access to the ILECs unbundled network elements. Any disputes over the "necessary" status of particular items of equipment may have to be resolved by the FCC or by state commissions, and such disputes could result in delays or changes to the Company's collocation plans. A number of ILECs around the country have been contesting whether the obligation to pay reciprocal compensation to CLECs should apply to local telephone calls terminating to Internet service providers ("ISPs"). The ILECs claim that this traffic is interstate in nature and therefore should be exempt from compensation arrangements applicable to local, intrastate calls. Most states have required ILECs to pay ISPs reciprocal compensation. In addition, on March 24, 2000, the DC Circuit Court vacated the FCC's ruling in which the FCC determined that calls to ISPs are interstate in nature. The FCC ruling, however, was not in any case intended to dislodge previous state decision interpreting interconnection agreements between ILECs and CLECs to require reciprocal compensation between local tow carriers jointly delivering dial-up traffic to ISPs. Although the FCC does not intend to require ISPs to pay access charges or contribute to universal service funds, the FCC's order and subsequent state rulings could affect the costs incurred by ISPs and the demand for their offerings. An unfavorable outcome could materially affect the Company's potential future revenues. Several ILECs have filed petitions at the FCC and have initiated legislative efforts to effect a waiver of certain obligations imposed on ILECs in the Telecommunications Act with respect to RBOC-provisioned high-speed data services, including, among other things, the obligation to unbundle and offer for resale such services. In addition, the ILECs are seeking to provide high-speed data services on an interLATA basis without complying with the market opening provisions of the competitive checklist set forth in the Telecommunications Act, which would be otherwise required of them. The FCC has determined that such services are subject to interstate jurisdiction and to the resale and unbundling obligation of the Telecommunications Act. In addition, there are numerous bills being considered by Congress which would deregulate advanced services. These outcomes could have a material adverse effect on the Company. Any of the regulatory changes discussed above could require renegotiation of relevant portions of existing interconnection agreements, or subject them to additional court and regulatory proceedings. It remains to be seen whether the networks can continue to obtain and maintain interconnection agreements on terms acceptable to them in every state, though most states have already adopted pricing rules, if not interim prices, which are for the most part consistent with the FCC's related pricing provisions. The FCC also manages universal service subsidies for rural, high-cost, and low-income markets, qualifying schools and libraries and services provided to rural health care providers. It currently assesses the Company's networks for such payments and other subsidies on the basis of certain revenue for the previous year. Various states also implement their own universal service programs to which the Company is subject. To the extent that the Company's networks provide interexchange telecommunications service, access charges are required to be paid to ILECs when the facilities of those companies are used to originate or terminate interexchange calls. Also, as CLECs, the Company's networks provide access service to other interexchange service providers. The interstate access charges of ILECs are subject to extensive regulation by the FCC, while those of CLECs are subject to a lesser degree of FCC regulation but remain subject to the requirement that all charges be just, reasonable, and not unreasonably discriminatory. In recent months, AT&T and Sprint have sent letters to virtually every nondominant provider asserting that the nondominant provider's terminating access rates are unreasonable, and demanding a reduction in rates to a "competitive" level. AT&T has also asserted that it has no obligation to purchase switched access services from nondominant providers if it is not satisfied with their rates, and has refused to pay some carriers' invoices for these services. The FCC is also considering whether it should take steps to limit the access charges of nondominant providers. Adverse decisions by the FCC or the courts could significantly reduce the Company's revenues from the access charges. On May 31, 2000, the FCC adopted an industry proposal for further reform of access charges. This has resulted in substantial reductions in the per-minute access charges of the major ILECs, which we expect will result in further downward competitive pressure on long-distance prices. This plan also resulted in some price increases for the ILEC's local services for business customers, which will make the Company's services more competitive in some markets. In an exercise of its "forbearance authority," the FCC has ruled that following a transition period non-dominant IXCs will no longer be able to file tariffs with the FCC concerning their interexchange long distance services (the "IXC Detariffing Order"). Tariffs set forth the terms and conditions under which the operating companies provide services. This would deprive the Company of the advantages of being able to rely on terms and conditions contained in a filed tariff, requiring instead reliance on individual contracts. The FCC's transition period will expire on January 31, 2001, by which date the Company will have to cancel its interexchange service tariffs. It is also likely that the FCC may impose a similar detariffing requirement on interstate access services, which could make it more difficult for the Company to obtain payment of its access charges from interexchange providers. The FCC also presides over ongoing proceedings addressing a variety of other matters, including number portability, Internet, telephony, slamming, rights of way, building access, pole attachments, customer privacy, and services to the disabled. The outcome of any such proceedings may adversely affect the Company and its ability to offer service in competition with LECs. State Regulation Most State Public Utility Commissions ("PUCs") require companies that wish to provide intrastate common carrier services to be certified to provide such services. These certifications generally require a showing that the carrier has adequate financial, managerial and technical resources to offer the proposed services in a manner consistent with the public interest. The certificates or other authorizations held by the Company permit it to provide a full range of local telecommunications services, including basic local exchange service. In certain states, each of the Company, its subsidiaries and the Company's networks may be subject to additional state regulatory requirements, including tariff filing requirements, to begin offering the telecommunications services for which such entities have been certificated. In some states, the Company network tariff lists a rate range or sets prices on an individual case basis. Many states also may have additional regulatory requirements such as reporting and customer service and quality requirements, Y2K compliance, unbundling and universal service contributions all of which are subject to change and may adversely affect the Company. In addition, in virtually every state, the Company's certificate or other authorization is subject to the outcome of proceedings by the state commission that address regulation of LECs and CLECs, competition, geographic build-out, mandatory detariffing, service requirements, and universal service issues. In addition to obtaining certification, a Company network must negotiate terms of interconnection with the ILEC before it can begin providing switched services. To date, the Company's networks have negotiated interconnection agreements with one or more of the ILECs, in each state in which they are currently operating. Agreements are subject to State PUC approval. The Company is subject to requirements in some states to obtain prior approval for, or notify the commission of any transfers of control, sales of assets, corporate reorganizations, issuance of stock or debt instruments, name changes and other transactions that may effect a change in the way that the Company does business. Although the Company believes such authorization could be obtained, there can be no assurance that the state commissions would grant the Company authority to complete any transactions. Local Government Authorizations A Company network may be required to obtain from municipal authorities street opening and construction permits, or operating franchises, to install and expand its fiber optic networks in certain cities. In some cities, the Local Partners or subcontractors may already possess the requisite authorizations to construct or expand the Company's networks. A Company network or its Local Partners also may be required to obtain a license to attach facilities to utility poles in order to build and expand facilities. Because utilities that are owned by a cooperative or municipality are not subject to federal pole attachment regulation, there are no assurances that a Company network or its Local Partners will be able to obtain pole attachments from these utilities at reasonable rates, terms and conditions. In some of the areas where the Company's networks provide service, their Local Partners pay license or franchise fees based on a percent of fiber lease payment revenues. In addition, in areas where the Company does not use facilities constructed by a Local Partner, the Company's networks may be required to pay such fees. There are no assurances that certain municipalities that do not currently impose fees will not seek to impose fees in the future, nor is there any assurance that, following the expiration of existing franchises, fees will remain at their current levels. In addition, some municipalities may seek to impose requirements or fees on users of transmission facilities, even though they do not own such facilities. In many markets, other companies providing local telecommunications services, particularly the ILECs, currently are excused from paying license or franchise fees or pay fees that are materially lower than those required to be paid by the Company network or Local Partner. The Telecommunications Act requires municipalities to charge nondiscriminatory fees to all telecommunications providers, but it is uncertain how quickly this requirement will be implemented by particular municipalities in which the Company operates or plans to operate or whether it will be implemented without a legal challenge initiated by the Company or another CLEC. If any of the existing local partner agreements or fiber lease agreements held by a Local Partner or a Company network for a particular market were terminated prior to its expiration date, such termination could have a material adverse effect on the Company. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company uses fixed rate debt and redeemable preferred stock to fund its working capital requirements, capital expenditures and acquisitions. These financing arrangements expose the Company to market risk related to changes in interest rates. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The table below summarizes the fair values and contract terms of the Company's financial instruments subject to interest rate risk as of June 30, 2000. Expected Maturity ---------------------------------------------------- Fair 2000 2001 2002 2003 2004 Thereafter Total Value --------- --------- ---------- ---------- ---------- ----------- ------------ ------------ Fixed Rate Debt and Redeemable Preferred Stock: --- --- --- $303,840 $250,000 $578,393 $1,132,233 $1,054,970 Average Interest Rate 12.53% 12.53% 12.53% 12.42% 12.61% 12.61% --- --- PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information The attached Exhibit 99.01 provides certain financial and business information of the Company for the three months ended June 30, 2000, pursuant to Section 4.03(a)(iii) of the Indenture dated April 15, 1996 with respect to the 13% Senior Discount Notes. The attached Exhibit 99.02 provides certain financial and business information of the Company for the three months ended June 30, 2000, pursuant to Section 4.03(a)(iii) of the Indenture dated August 27, 1997 with respect to the 12 1/4% Senior Secured Notes. The attached Exhibit 99.03 provides certain financial and business information of the Company for the three and six months ended June 30, 2000. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27.01 Financial Data Schedule (supplied for the information of the Commission). Exhibit 99.01 "Schedule E - Form of Financial Information and Operating Data of the Subsidiaries and the Joint Ventures Presented by Cluster". Exhibit 99.02 "Schedule F - Form of Financial Information and Operating Data of the Pledged Subsidiaries and the Joint Ventures". Exhibit 99.03 Press Release dated August 9, 2000 (b) Reports on Form 8-K: None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADELPHIA BUSINESS SOLUTIONS, INC. (Registrant) Date: August 14, 2000 By: /s/ Timothy J. Rigas ---------------------- Timothy J. Rigas Vice Chairman, Chief Financial Officer (authorized officer), Chief Accounting Officer and Treasurer Index of Exhibits Exhibit 27.01 Financial Data Schedule (supplied for the information of the Commission). Exhibit 99.01 "Schedule E - Form of Financial Information and Operating Data of the Subsidiaries and the Joint Ventures Presented by Cluster". Exhibit 99.02 "Schedule F - Form of Financial Information and Operating Data of the Pledged Subsidiaries and the Joint Ventures". Exhibit 99.03 Press Release dated August 9, 2000 Exhibit 99.01 SCHEDULE E Adelphia Business Solutions, Inc. Form of Financial Information and Operating Data Of the Subsidiaries and the Joint Ventures Presented by Cluster Data presented for the quarter ended: 6/30/00 *** Unaudited Other North East Mid-Atlantic Mid-South Markets Total FINANCIAL DATA (dollars in thousands): Total Revenue $ 18,835.2 $ 44,472.9 $ 18,440.3 $ 13,106.4 $ 94,854.8 Total Capital Expenditures $ 8,039.4 $ 50,361.9 $ 16,977.6 $ 62,323.1 $ 137,702.0 Total EBITDA $ (1,356.6) $ 3,756.5 $ (3,771.9) $ (3,586.1) $ (4,958.1) Gross PP&E $ 148,705.5 $ 669,886.0 $ 236,231.5 $ 434,413.0 $ 1,489,236.0 Proportional Revenue* $ 18,835.2 $ 36,584.4 $ 18,440.3 $ 13,106.4 $ 86,966.3 Proportional Capital Expenditures* $ 8,039.4 $ 47,902.3 $ 16,977.6 $ 62,323.1 $ 135,242.4 Proportional EBITDA* $ (1,356.6) $ 1,515.1 $ (3,758.0) $ (3,586.0) $ (7,185.5) Proportional Gross PP&E $ 148,705.5 $ 596,222.1 $ 236,231.5 $ 434,413.0 $ 1,415,572.1 STATISTICAL DATA Increase for June 30, 2000: Markets in Operation 2 1 1 --- 4 Route Miles 195 153 50 312 710 Fiber Miles 8,030 3,528 2,378 14,520 28,456 Buildings connected 298 35 36 22 391 Buildings with Customers 608 555 1,560 951 3,674 LEC-Cos collocated** 6 14 1 21 42 Voice Grade Equivalent Circuits 57,792 127,680 53,760 145,152 384,384 As of March 31, 2000: Markets in Operation*** 10 27 13 8 58 Route Miles 3,370 4,761 3,984 4,295 16,410 Fiber Miles 101,570 172,855 84,842 64,442 423,709 Buildings connected 502 908 762 494 2,666 Buildings with Customers 2,258 8,713 7,930 4,276 23,177 LEC-Cos collocated** 16 87 52 37 192 Voice Grade Equivalent Circuits 338,016 1,245,888 654,528 352,128 2,590,560 As of June 30, 2000: Markets in Operation 12 28 14 8 62 Route Miles 3,565 4,914 4,034 4,607 17,120 Fiber Miles 109,600 176,383 87,220 78,962 452,165 Buildings connected 800 943 798 516 3,057 Buildings with Customers 2,866 9,268 9,490 5,227 26,851 LEC-Cos collocated** 22 101 53 58 234 Voice Grade Equivalent Circuits 395,808 1,373,568 708,288 497,280 2,974,944 Access Lines Sold 69,032 250,146 110,837 79,390 509,405 Access Lines Installed 66,951 240,881 108,500 77,300 493,632 <FN> * Represents portion attributable to the Company. ** Local Exchange Carrier's central office *** Other Markets amounts include, among other things, Network Control Centers and Corporate Capital Expenditures and Gross Property, Plant and Equipment </FN> Exhibit 99.02 SCHEDULE F Adelphia Business Solutions, Inc. Form of Financial Information and Operating Data of the Pledged Subsidiaries and the Joint Ventures Data presented for the quarter ended: 6/30/00 Unaudited Total FINANCIAL DATA (dollars in thousands)(a): Total Revenue $ 30,034.2 Total Capital Expenditures $ 12,723.4 Total EBITDA $ 558.3 Gross Property, Plant & Equipment $ 332,607.4 STATISTICAL DATA(b): As of June 30, 2000: Markets in Operation 7 Route Miles 3,672 Fiber Miles 168,523 Buildings connected 1,654 LEC-COs collocated 63 Voice Grade Equivalent Circuits 1,120,224 Access Lines Sold 131,358 Access Lines Installed 127,860 (a) Financial Data represents 100% of the operations of all entities except Adelphia Business Solutions of Florida, which is reflected at its ownership in the Jacksonville network, which is 20%. (b) Statistical Data represents 100% of operating data for all entities.