United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange
- ------- Act of 1934
For the quarterly period ended March 31, 2001
Transition report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 For the transition period from ______________ to
______________
Commission File Number: 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 May 10, 2001, 47,742,608 shares of Class A Common Stock, par value
$0.01 per share, and 86,624,693 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, 2000
and March 31, 2001...............................................4
Condensed Consolidated Statements of Operations - Three
Months Ended March 31, 2000 and 2001.............................5
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 2001.............................6
Notes to Condensed Consolidated Financial Statements..............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................24
Item 2. Changes in Securities...........................................24
Item 3. Defaults Upon Senior Securities.................................24
Item 4. Submission of Matters to a Vote of Security Holders.............24
Item 5. Other Information...............................................24
Item 6. Exhibits and Reports on Form 8-K................................24
SIGNATURES...............................................................25
INDEX TO EXHIBITS........................................................26
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Statements included in this Form 10-Q,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are not historical facts are 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
and business conditions, the availability and cost of capital, acquisitions and
divestitures, government and regulatory policies and developments, the pricing
and availability of equipment, materials and inventories, risks associated with
reliance on the performance and financial condition of vendors and customers,
dependence on customers and their spending patterns, technological developments,
the ability of the Company to execute on its business plan, 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 months ended March 31, 2000 and 2001. 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.
Item 1. Financial Statements
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share and per share amounts)
December 31, March 31,
2000 2001
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents ..................... $ 3,543 $ 17,048
Accounts receivable - net ..................... 79,650 89,323
Other current assets .......................... 14,936 22,960
----------- -----------
Total current assets ..................... 98,129 129,331
Restricted cash .................................... 54,178 37,462
Investments ........................................ 48,409 48,303
Property, plant and equipment - net ................ 1,534,612 1,640,528
Other assets - net ................................. 154,138 150,636
----------- -----------
Total .................................... $ 1,889,466 $ 2,006,260
=========== ===========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
OTHER STOCKHOLDERS' (DEFICIENCY) EQUITY:
Current liabilities:
Accounts payable ............................. $ 158,249 $ 82,840
Due to parent - net .......................... 1,544 7,262
Due to affiliates - net ...................... 8,067 2,161
Accrued interest ............................. 31,011 42,711
Accrued interest - parent .................... 7,003 13,775
Other current liabilities .................... 13,339 23,002
----------- -----------
Total current liabilities ................ 219,213 171,751
13% Senior discount notes due 2003 ................. 291,891 302,133
12 1/4% Senior secured notes due 2004 .............. 250,000 250,000
12% Senior subordinated notes due 2007 ............. 300,000 300,000
Note payable ....................................... 500,000 286,808
Other debt ......................................... 48,565 47,992
----------- -----------
Total liabilities ........................ 1,609,669 1,358,684
----------- -----------
12 7/8% Senior exchangeable redeemable
preferred stock ................................... 297,067 306,851
----------- -----------
Commitments and contingencies (Note 3)
Common stock and other stockholders' (deficiency) equity:
Class A common stock, $0.01 par value, 800,000,000
shares authorized, 35,848,366 and 47,742,608
shares outstanding, respectively .............. 358 477
Class B common stock, $0.01 par value, 400,000,000
shares authorized, 35,143,859 and 86,624,693
shares outstanding, respectively .............. 351 866
Additional paid in capital ....................... 678,140 1,128,587
Class B common stock warrants .................... 1,022 904
Unearned stock compensation ...................... (4,070) (3,658)
Accumulated deficit .............................. (693,071) (786,451)
----------- -----------
Total common stock and other stockholders'
(deficiency) equity ..................... (17,270) 340,725
----------- -----------
Total .................................... $ 1,889,466 $ 2,006,260
=========== ===========
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
March 31,
----------------------
2000 2001
--------- ---------
Revenues .................................... $ 69,301 $ 110,343
--------- ---------
Operating expenses:
Network operations ........................ 33,732 60,764
Selling, general and administrative ....... 58,846 65,492
Restructuring charges ..................... -- 4,979
Depreciation and amortization ............. 19,438 36,550
--------- ---------
Total ............................. 112,016 167,785
--------- ---------
Operating loss .............................. (42,715) (57,442)
Other income (expense):
Interest income ........................... 404 761
Interest income-affiliate ................. 5,023 --
Interest expense-affiliate ................ -- (6,772)
Interest expense .......................... (12,930) (29,822)
--------- ---------
Loss before income taxes and equity in net
loss of joint ventures .................... (50,218) (93,275)
Income tax expense .......................... -- --
--------- ---------
Loss before equity in net loss of joint
ventures ................................... (50,218) (93,275)
Equity in net loss of joint ventures ........ (105) (106)
--------- ---------
Net loss .................................... (50,323) (93,381)
Dividend requirements applicable to preferred
stock ...................................... (8,497) (9,645)
--------- ---------
Net loss applicable to common stockholders .. $ (58,820) $(103,026)
========= =========
Basic and diluted net loss per weighted
average share of common stock ............... $ (0.85) $ (1.33)
========= =========
Weighted average shares of common
stock outstanding .......................... 69,431 77,523
========= =========
See notes to condensed consolidated financial statements.
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months
Ended March 31,
----------------------
2000 2001
--------- ---------
Cash flows from operating activities:
Net loss ........................................ $ (50,323) $ (93,381)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation .............................. 18,248 30,821
Amortization .............................. 1,190 5,729
Noncash interest expense .................. 8,907 10,242
Equity in net loss of joint ventures ...... 105 106
Non-cash stock compensation ............... 799 662
Restructuring charges ..................... -- 4,979
Change in operating assets and liabilities net
of effects of acquisitions:
Other assets - net ........................ (39,014) (19,954)
Accounts payable .......................... (12,057) (80,389)
Accrued interest and other liabilities .... 2,891 28,135
--------- ---------
Net cash used in operating activities ............. (69,254) (113,050)
--------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment .. (167,709) (136,292)
Investments ..................................... (1,375) --
Change in restricted cash ....................... 15,312 16,716
--------- ---------
Net cash used in investing activities ............. (153,772) (119,576)
--------- ---------
Cash flows from financing activities:
Repayments of debt .............................. (1,622) (214,177)
Repayments and advances from related parties, net 226,798 (188)
Proceeds from rights offering, net .............. -- 460,496
--------- ---------
Net cash provided by financing activities ......... 225,176 246,131
--------- ---------
Increase in cash and cash equivalents ............. 2,150 13,505
Cash and cash equivalents, beginning of period .... 2,133 3,543
--------- ---------
Cash and cash equivalents, end of period .......... $ 4,283 $ 17,048
========= =========
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, 2000.
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 March 31, 2001 and the unaudited
results of operations for the three months ended March 31, 2000 and 2001 have
been included. The results of operations for the three months ended March 31,
2001 are not necessarily indicative of the results to be expected for the year
ending December 31, 2001.
1. Significant Events Subsequent to December 31, 2000:
During December 2000, the Company revised its network expansion plan. The
Company reduced the number of markets it intended to be operating in by the end
of 2001 from a range of 175 to 200 to approximately 80. During January 2001, the
Company reduced its national staff by approximately 8% as a result of the
Company's revised network expansion plan. Most affected employees were located
in markets in which the Company has stopped expansion.
During March 2001, the Company issued and sold 25,322 shares of Class A
common stock, to the public in a rights offering at a price of $7.28 per share.
Simultaneously, the Company issued and sold 11,820,070 and 51,459,624 shares of
Class A and Class B common stock, respectively in the rights offering to
Adelphia at a price of $7.28 per share. Total proceeds to the Company were
approximately $460,861.
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:
Current
Ownership December 31, March 31,
Percentage 2000 2001
---------- ------------ ----------
Investments accounted for using the equity method:
PECO-Hyperion (Philadelphia) 50.0% $ 46,725 $ 46,725
PECO-Hyperion (Allentown, Bethlehem,
Easton, Reading) 50.0 11,050 11,050
Hyperion of York 50.0 6,525 6,525
------------ ----------
64,300 64,300
Cumulative equity in net loss (18,391) (18,497)
------------ ----------
Subtotal 45,909 46,803
Investments accounted for using the cost method 2,500 2,500
------------ ----------
Total $ 48,409 $ 48,303
============ ==========
Summarized combined unaudited financial information for the Company's
investments, which as of March 31, 2001 were being accounted for using the
equity method of accounting follows:
December 31, March 31,
2000 2001
----------- ----------
Current assets $ 26,942 $ 21,794
Property, plant and
equipment - net 105,420 115,307
Current liabilities 10,221 10,366
Non current liabilities 31,010 37,211
Three Months Ended March 31,
2000 2001
--------- ---------
Revenues $ 11,864 $ 19,982
Net loss (560) (212)
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 three months ended March 31, 2000 and 2001, the Company paid
interest of $15,312 and $15,312 respectively.
Accumulated depreciation of property, plant and equipment amounted to
$193,214 and $224,035 as of December 31, 2000 and March 31, 2001, respectively.
For the three months ended March 31, 2000 and 2001, the Company recorded
non-cash preferred stock dividends of $8,497 and $9,645, respectively.
6. Restructuring Charges:
During December 2000, the Company initiated a plan to reduce its network
expansion plan from its former target of 175 to 200 markets nationwide by the
end of 2001 to a new target of approximately 80 markets, thereby canceling plans
to enter or continue operations in approximately 120 markets. In January 2001,
the Company reduced its national staff by approximately 8% as a result of the
Company's revised business plan. Most of the affected employees were located in
markets in which the Company has stopped expansion. For the year ended December
31, 2000, the Company recorded a charge of approximately $5,420 to cover a
portion of the costs associated with this revised business plan. During the
quarter ended March 31, 2001, the Company recorded a charge of approximately
$4,979 to cover additional costs associated with this revised business plan and
paid $3,522 associated with this charge and the previously recorded charges,
resulting in a remaining liability of $6,877 at March 31, 2001.
7. Recent Accounting Pronouncements
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138. "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFAS No. 133, as amended,
establishes accounting and reporting standards requiring that every derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value with changes in fair value reflected in the statement
of operations or other comprehensive income. As of December 31, 2000 and March
31, 2001, the Company did not hold any derivative instruments. Accordingly, the
adoption of this statement did not have an effect on the Company's consolidated
results of operations or financial position.
-------------------------------------------------
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
(i) 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, 2000 and (ii) the section entitled "Forward
Looking Statements" following the index to this Form 10-Q, which section is
incorporated by reference herein.
Overview
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 21 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 two 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 are broken into two
subcategories, the 13 markets which began operations in 1996 or previously (the
"Class of 1996") and the eight markets which began operations in 1997 and 1998
(the "Class of 1997/98"), and (ii) the additional networks operational or under
development subsequent to May 8, 1998 (the "Expansion Markets") which are also
broken into two subcategories, those which began operations in 1999 (the "Class
of 1999") and those which began operations in 2000 (the "Class of 2000"). During
December 2000, the Company sold to a subsidiary of Adelphia certain network and
telecommunications assets. The assets sold related to six markets in Virginia,
Colorado, California and Ohio which the Company has decided not to pursue as
part of the revised business plan. Network or market information presented in
this Form 10-Q for the current quarter excludes these six markets.
Adelphia Business Solutions is a leading 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 75 markets. To serve the Company's
customers' broad and expanding communications needs, the Company has assembled a
diverse collection of high-bandwidth, local and long-haul 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 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 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. The Company's Original Markets are principally located in the
eastern half of the United States. Due to the Company's success in operating and
expanding the Original Markets, the Company intends to serve approximately 80
total markets 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 footprint will position it to address approximately
53% of the 60 million business access lines nationwide, which currently
represent approximately $70 billion in annual revenues. This network system
expansion includes the purchase, lease or construction of local fiber optic
network facilities and the interconnection of substantially all of the Company's
existing and new markets with Company owned or leased 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 long-haul fiber optic
backbone in the eastern half of the United States, combined with the Company's
local fiber will support the Company's full line of communication service
offerings.
A summary of the Company s non-financial statistical information as of
March 31, 2001 follows:
Active
-----------
Local Route Miles 9,095
Fiber Strand Miles 500,389
Long-Haul Route Miles 7,879
Buildings Connected
on-network with owned facilities 3,294
Central Offices Connected
on-network 309
Lucent 5ESS Voice Switches 30
Data Switches 26
Sales Employees 573
Total Employees 2,387
Customers, including joint ventures 41,883
Average monthly revenue per customer $1,018
Recent Developments
During December 2000, the Company revised its network expansion plan. The
Company reduced the number of markets it intended to be operating in by the end
of 2001 from a range of 175 to 200 to approximately 80. During January 2001, the
Company reduced its national staff by approximately 8% as a result of the
Company's revised network expansion plan. Most affected employees were located
in markets in which the Company has stopped expansion.
During March 2001, the Company issued and sold 25,322 shares of Class A
common stock, to the public in a rights offering at a price of $7.28 per share.
Simultaneously, the Company issued and sold 11,820,070 and 51,459,624 shares of
Class A and Class B common stock, respectively in the rights offering to
Adelphia at a price of $7.28 per share. Total proceeds to the Company were
approximately $460,861.
Results of Operations
Three Months Ended March 31, 2001 in Comparison with Three Months
Ended March 31, 2000
Revenues increased 59% to $110,343 for the three months ended March 31,
2001, from $69,301 for the same quarter in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Class of 1996 Markets $ 20,502
Growth in Class of 1997/98 Markets 3,266
Growth in Class of 1999 Markets 11,931
Growth in Class of 2000 Markets 2,386
Acquisition of local partner interests 1,612
Management fees 1,345
The primary sources of revenues, reflected as a percentage of total
revenue were as follows:
Three Months
Ended
March 31,
2000 2001
-------------
Voice services 75.4% 68.5%
Data and dedicated access services 17.8% 20.8%
Management fees 1.6% 2.2%
Other 5.2% 8.5%
Network operations expense increased 80% to $60,764 for the three months
ended March 31, 2001 from $33,732 for the same quarter in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 8,253
Acquisition of local partner interests 341
Expansion Markets 17,824
Network Operations Control Center ("NOCC") 614
The increase in network operations expense was due to start up costs in
the Company's Expansion 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 11% to $65,492 for
the three months ended March 31, 2001 from $58,846 for the same quarter in the
prior year, primarily reflecting the growth in the Expansion Markets.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 195
Acquisition of local partner interests 466
Expansion Markets 6,649
Sales and marketing activities (2,762)
Corporate overhead charges 2,234
Non-cash stock compensation (136)
Restructuring charges for the three months ended March 31, 2001, were
$4,979 as compared to zero for the same quarter in the prior year primarily as a
result of the Company's revised network expansion plan.
Depreciation and amortization expense increased 88% to $36,550 during the
three months ended March 31, 2001 from $19,438 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 March 31, 2001 increased 88% to
$761 from $404 for the same quarter in the prior year as a result of increases
in interest income from higher amounts of cash and cash equivalents throughout
the quarter.
Interest income-affiliate for the three months ended March 31, 2001 was
zero as compared to $5,023 for the same quarter in the prior year as a result of
no demand advances outstanding to Adelphia during the period.
Interest expense increased 131% to $29,822 during the three months ended
March 31, 2001 from $12,930 for the same period in the prior year. The increase
was primarily attributable to an increase in the amount of interest expense
incurred as a result of outstanding borrowings on the Company's joint credit
facility with other subsidiaries of Adelphia.
Interest expense-affiliate was $6,772 for the three months ended March 31,
2001 as a result of outstanding borrowings on the Company's joint credit
facility with other subsidiaries of Adelphia.
Equity in net loss of joint ventures for the three months ended March 31,
2001 was $106 as compared to $105 for the same quarter in the prior year.
The number of joint ventures paying management fees to the Company
decreased from four at March 31, 2000 to three at March 31, 2001 due to the
Company's increased ownership in the State College network. In addition, the
properties sold to Adelphia during December 2000 are paying management fees to
the Company. These non-consolidated joint ventures and Adelphia networks paid
management and monitoring fees to the Company, which are included in revenues,
aggregating approximately $2,444 for the three months ended March 31, 2001, as
compared with $1,099 for the same quarter in the prior fiscal year. The
nonconsolidated joint ventures, for the three months ended March 31, 2000 and
2001, had a net loss of approximately $560 and $212, respectively.
Preferred stock dividends increased by 14% to $9,645 for the three months
ended March 31, 2001 from $8,497 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 March 31, 2001, 54 of the 75 operational markets had been in operation
for two years or less, while the remaining 21 markets have been in operation for
more than two years. In order to provide an additional measure of the financial
position, growth and performance of the Company and its networks, management
analyzes and aggregates operational markets based on the year or years in which
the markets became operational. The Original Markets, including nonconsolidated
joint ventures, are broken down into two categories, those which began
operations in 1996 or before and those which began operations in 1997 or 1998.
The Expansion Markets are also broken down into two categories, those markets
which began operations in 1999 and those markets which began operations in 2000.
The following table provides information relating to the aggregation of those
markets. This financial information, however, is not indicative of the Company's
overall historical financial position or results of operations.
Quarter Ended March 31, 2001 Quarter Ended December 31, 2000
---------------------------------------------------- ---------------------------------------------------
Original Expansion Original Expansion
Markets Markets Markets Markets
------------------ ----------------- ------------------ -----------------
(dollars in Class Class Class Class Total Class Class Class Class Total
thousands) of of of of Operating of of of of Operating
1996 1997/98 1999 2000 Results(a) 1996 1997/98 1999 2000 Results(a)
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
Revenue ........... $ 86,654 $ 16,322 $ 22,518 $ 2,386 $ 127,880 $ 81,936 $ 14,825 $ 22,275 $ 2,005 $ 121,041
Direct Operating
Expenses ......... 25,247 5,827 28,280 2,326 61,680 22,440 6,365 26,060 2,370 57,235
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
Gross Margin ...... 61,407 10,495 (5,762) 60 66,200 59,496 8,460 (3,785) (365) 63,806
Gross Margin
Percentage ....... 70.9% 64.3% (25.6%) 2.5% 51.8% 72.6% 57.1% (17.0%) (18.2%) 52.7%
Sales, General
and Administrative
Expenses ......... 28,766 5,614 18,082 4,330 56,792 27,970 5,644 22,781 6,031 62,426
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA before
allocation of
Corporate
Overhead (b) ..... $ 32,641 $ 4,881 $(23,844) $ (4,270) $9,408 $ 31,526 $ 2,816 $(26,566) $ (6,396) $ 1,380
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA as a
Percentage
of Revenues ...... 37.7% 29.9% (105.9%) (179.0%) 7.4% 38.5% 19.0% (119.3%) NM(c) 1.1%
March 2001 Quarter vs. December 2000 Quarter
Percentage Change Comparison
---------------------------------------------------
Original Expansion
Markets Markets
------------------ -----------------
Percent Change Class Class Class Class Total
Comparison of of of of Operating
1996 1997/98 1999 2000 Results(a)
-------- -------- -------- -------- ----------
Revenues .......... 5.8% 10.1% 1.1% 19.0% 5.7%
Direct Operating
Expenses ......... 12.5% (8.5%) 8.5% (1.9%) 7.8%
-------- -------- -------- -------- ----------
Gross Margin ...... 3.2% 24.1% (52.2%) NM(c) 3.8%
Sales, General
and Administrative
Expenses ......... 2.8% (0.5%) (20.6%) (28.2%) (9.0%)
-------- -------- -------- -------- ----------
EBITDA before
allocation of
Corporate
Overhead (b) ..... 3.5% 73.3% 10.2% 33.2% 581.7%
-------- -------- -------- -------- ----------
<FN>
(a) Table 2 summarizes operating results before the allocation of corporate
overhead for Adelphia Business Solutions' Original and Expansion Markets,
grouped by the year or years in which operations commenced. Operating
Results are presented before an allocation of Corporate Overhead for network
operating control center, engineering and other administrative support
functions totaling $22.2 million in the March 2001 quarter and $23.7 million
in the December 2000 quarter and before a bad debt provision for previously
recorded revenues of $15 million in the December 2000 quarter.
(b) Earnings before interest, income taxes, depreciation and amortization,
restructuring charges, other income/expense and noncash stock compensation
("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 indicator of operating performance or an
alternative to cash flows from operating activities as a measure of
liquidity as defined by GAAP, and while EBITDA may not be comparable to
other similarly titled measure of other companies, management of Adelphia
Business Solutions believes that EBITDA is a meaningful measure of
performance.
(c) Not meaningful
</FN>
Quarter Ended March 31, 2001 Quarter Ended March, 2000
---------------------------------------------------- ---------------------------------------------------
Original Expansion Original Expansion
Markets Markets Markets Markets
------------------ ----------------- ------------------ -----------------
(dollars in Class Class Class Class Total Class Class Class Class Total
thousands) of of of of Operating of of of of Operating
1996 1997/98 1999 2000 Results(a) 1996 1997/98 1999 2000 Results(a)
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
Revenue ........... $ 86,654 $ 16,322 $ 22,518 $ 2,386 $ 127,880 $ 62,086 $ 9,403 $ 10,587 $ --- $ 82,076
Direct Operating
Expenses ......... 25,247 5,827 28,280 2,326 61,680 15,641 5,121 13,873 24 34,659
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
Gross Margin ...... 61,407 10,495 (5,762) 60 66,200 46,445 4,282 (3,286) (24) 47,417
Gross Margin
Percentage ....... 70.9% 64.3% (25.6%) 2.5% 51.8% 74.8% 45.5% (31.0%) --- 57.8%
Sales, General
and Administrative
Expenses ......... 28,766 5,614 18,082 4,330 56,792 26,607 4,379 16,672 735 48,393
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA before
allocation
of Corporate
Overhead (b) ..... $ 32,641 $ 4,881 $(23,844) $ (4,270) $ 9,408 $ 19,838 $ (97) $(19,958) $ (759) $ (976)
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA as a
Percentage
of Revenues ...... 37.7% 29.9% (105.9%) (179.0%) 7.4% 32.0% (1.0%) (188.5%) NM(c) (1.2%)
March 2001 Quarter vs. March 2000 Quarter
Percentage Change Comparison
---------------------------------------------------
Original Expansion
Markets Markets
------------------ -----------------
Percent Change Class Class Class Class Total
Comparison of of of of Operating
1996 1997/98 1999 2000 Results(a)
-------- -------- -------- -------- ----------
Revenues .......... 39.6% 73.6% 112.7% NM(c) 55.8%
Direct Operating
Expenses ......... 61.4% 13.8% 103.8% NM(c) 78.0%
-------- -------- -------- -------- ----------
Gross Margin ...... 32.2% 145.1% 75.3% NM(c) 39.6%
Sales, General
and Administrative
Expenses ......... 8.1% 28.2% 8.5% NM(c) 17.4%
-------- -------- -------- -------- ----------
EBITDA before
allocation of
Corporate
Overhead (b) ..... 64.5% NM(c) (19.5%) NM(c) NM(c)
-------- -------- -------- -------- ----------
<FN>
(a) Table 2 summarizes operating results before the allocation of corporate
overhead for Adelphia Business Solutions' Original and Expansion Markets,
grouped by the year or years in which operations commenced. Operating Results
are presented before an allocation of Corporate Overhead for network
operating control center, engineering and other administrative support
functions totaling $22.2 million in the March 2001 quarter and $17.0 million
in the March 2000 quarter.
(b) Earnings before interest, income taxes, depreciation and amortization
restructuring charges, other income/expense and noncash stock compensation
("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 indicator of operating performance or an
alternative to cash flows from operating activities as a measure of liquidity
as defined by GAAP, and while EBITDA may not be comparable to other similarly
titled measure 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 network operations control
center ("NOCC"), have resulted in substantial capital expenditures and
investments during the past several years. Capital expenditures by the Company
were $167,709 and $136,292 for the three months ended March 31, 2000 and 2001,
respectively. Further, investments made by the Company in nonconsolidated joint
ventures were $1,375 and zero for the three months ended March 31, 2000 and
2001, respectively. The decrease in capital expenditures for the three months
ended March 31, 2001 as compared with the same period in the prior fiscal year
is largely attributable to the revised business plan announced during December
2000. The Company expects that it will continue to incur capital expenditures in
the build-out of the Class of 1999 and 2000 markets, as well as success based
capital spending in all markets. 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.
The Company expects calendar 2001 revenues to be approximately $485,000 to
$500,000, with second quarter 2001 revenues slightly higher than the March 2001
quarter. As a result of continued revenue growth combined with cost reduction
efforts associated with the revised business plan, the Company expects EBITDA
losses to decrease to approximately $10,000 for the second quarter of calendar
2001 and to approximately $20,000 for the full year of calendar 2001. These
expectations include the Company's estimate of the effect of the revised
business plan and the general economic downturn affecting the United States
economy and its effect on the Company's customers and vendors.
Expansion of the Company's Original Markets, the development of Expansion
Markets and additional investment in new products 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 and (iii)
the design, construction and development of the Expansion Markets. The Company
has made substantial capital investments and investments in joint ventures in
connection with the installation of 5ESS switches in all of its Original Markets
and certain key Expansion Markets when such Expansion 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 Expansion Markets on a standard
switching platform based on Lucent 5 switch technology. The Company estimates
that, in addition to the cash and cash equivalents on hand and remaining
availability under the $500 million bank credit facility as of March 31, 2001, a
total of an additional approximately $360,000 will be required to fund the
Company's capital expenditures, working capital requirements, operating losses
and pro rata investments in the joint ventures from April, 2001 through the
quarter ending March 31, 2002.
During the March 2001 quarter, the Company funded its free cash flow
deficit with the proceeds from the common stock rights offering. Proceeds from
the rights offering not needed to fund the quarter's free cash flow deficit were
used to pay down the Company's bank credit facility. As of March 31, 2001,
approximately $213,192 was available on the bank credit facility. The Company's
ability to fund its operations, capital expenditures and debt service will
depend upon its future financial and operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, some of which are beyond the Company's control. The Company expects to
fund its projected future deficits through mid-2002 through a combination of
additional draws under the credit facility and additional bank or institutional
indebtedness or other sources. The Company expects to implement these financing
plans in the second half of 2001. The Company believes that the additional bank
or institutional indebtedness and cash generated from operations will be
sufficient to fund the Company's operations and capital expenditures. There can
be no assurances 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. However, if the additional financing does not
become available, the Company could take additional strategic measures to fund
the Company's operations and capital expenditures.
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 the Original Markets and the Expansion Markets and
development of the LMDS or the 39 Ghz spectrum or (ii) that anticipated
financings and other sources of capital will become available to the Company on
a basis consistent with the current business plan or on an 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
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting For Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138. "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFAS No. 133, as amended,
establishes accounting and reporting standards requiring that every derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at its fair value with changes in fair value reflected in the statement
of operations or other comprehensive income. As of December 31, 2000 and March
31, 2001, the Company did not hold any derivative instruments. Accordingly, the
adoption of this statement did not have an effect on the Company's consolidated
results of operations or financial position.
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. The Telecommunications Act of 1996 (the
"Telecommunications Act") and associated federal and state regulatory
initiatives are intended to provide increased business opportunities to
competitive local exchange carriers ("CLECs") such as the Company. However,
regulators may provide ILECs with increased pricing flexibility for their
services or other significant regulatory relief, as competition increases or for
other reasons. 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 FCC has approved applications for such
authority for Verizon (formerly Bell Atlantic) in New York and Massachusetts and
for SBC in Texas, Oklahoma and Kansas. These approvals may well result in
decreased market share for the major inter-exchange carriers ("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 merger of
Ameritech and SBC, whose combined territory covers a substantial portion of the
Company's markets. Other combinations have occurred in the industry, which may
have an effect on the Company, such as the combination of AT&T Corp. with
MediaOne Group, Bell Atlantic with GTE, which became Verizon Communications,
Qwest with US West, and AOL with Time Warner. 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, ILECs which are not subject to RBOC restrictions on long
distance, AT&T, WorldCom, 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 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 is intended to remove state
regulatory barriers to competition. To do so, it imposes numerous requirements
to facilitate the provision of local telecommunications services by multiple
providers. For instance carriers interconnect their networks, transfer their
customers' telephone numbers to each other when customers change carriers, and
compensate each other for local traffic they exchange. ILECs have additional
duties, such as providing competitors with network interconnection at any
technically feasible point, with access to unbundled network elements, and with
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. On the other hand, states may 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, and localities may manage public rights-of-way. There have been
numerous disputes over what conditions a local government may impose on CLECs as
part of a "franchise" to occupy the public rights-of-way. The result of these
cases have been mixed, in some cases sustaining, and in others rejecting,
burdensome financial and/or operational requirements. Depending on the result,
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. The FCC's rules have been
and likely will continue to be subject to litigation, but in most significant
respects they have ultimately been upheld by the courts. The FCC's rules for
setting the prices that ILECs may charge CLECs for use of their networks remains
in litigation. These rules are generally viewed as favorable to CLECs. There can
be no assurance that these rules will be sustained by the courts.
Many CLECs have experienced difficulties with the ILECs' fulfillment of
their duties with respect to provisioning, interconnection, rights-of-way,
collocation and implementing the systems used by CLECs 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, but ILECs may not view that incentive as sufficient to justify
willing compliance with their obligations under the Telecommunications Act.
Moreover, the Company cannot be assured that RBOCs will be accommodating to the
Company's networks once they are permitted to offer long distance service as
they have thus far in New York, Massachusetts, Texas, Oklahoma and Kansas. If
the Company's networks cannot obtain the cooperation of an RBOC for any reason,
the Company's networks' ability to offer local services in such region on a
timely and cost effective basis would be adversely affected.
The FCC has adopted rules designed to make it easier and less expensive
for CLECs to obtain collocation at ILEC central offices by, among other things,
restricting the ILECs ability to prevent certain types of equipment from being
collocated, requiring ILECs to offer alternative collocation arrangements to
CLECs, and establishing nationwide guidelines for how long it should take to
establish a collocation arrangement. The FCC has also required ILECs to allow
CLECs to use the high-frequency portion of the spectrum on a customer line to
offer data services even if the CLEC does not provide the customer with voice
service. While the intent of these rules is to facilitate competition by CLECs
such as the Company's networks, ILECs continue to resist the rules and it
remains uncertain that they will prove significant in practical terms.
ILECs generally contest the claim that the obligation to pay reciprocal
compensation to CLECs applies 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. The FCC accepted this logic, but ruled that this
general conclusion did not supercede any state ruling that compensation is
required under a particular contract or prevent a state from imposing
compensation on a prospective basis. On March 24, 2000, a federal court of
appeals vacated the ruling and remanded the issue to the FCC for further
consideration. On April 27, 2001, the FCC released an order in which it held
that ISP-bound calls should not be subject to inter-carrier compensation; the
FCC also held that, because of existing compensation arrangements, the
transition to a compensation-free regime will be phased in over three years,
during which time compensation rates for ISP-bound calls will be capped at
gradually decreasing rates. Significantly, for an ILEC to receive the benefit of
the capped rates during the three-year transition period, it must agree to
exchange all traffic at these rates. If an ILEC refuses to accept the lower
rates for all calls (including calls that a CLEC sends to the ILEC), then
ISP-bound calls are to be compensated for like any other traffic. In addition,
the FCC capped the number of minutes for which a CLEC may receive compensation
in a given state, at the number of minutes received in the first quarter of 2001
(annualized), plus a 10% growth factor. It appears to be likely that the FCC's
ruling will be appealed. In the meantime, the FCC's order and/or subsequent
court and/or state rulings, could affect the costs incurred by ISPs and CLECs
and the demand for their offerings. An unfavorable outcome could affect the
Company's potential future revenues.
Several ILECs have initiated legislative efforts to remove certain
obligations imposed 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 first opening their markets to compensation in accordance with the
Telecommunications Act. The FCC reaffirmed in late 1999 that such services are
subject to the resale and unbundling obligations of the Telecommunications Act.
This decision is under review by the courts. 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.
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.
When the Company's networks provide interexchange telecommunications
service to customers who receive local service from another carrier, the Company
will generally be required to pay the other carrier access charges. Similarly,
when another carrier provider interexchange service to a customer who receives
local service from the Company, the other carrier owes the Company access
charges. ILEC interstate access charges are subject to extensive regulation by
the FCC; CLEC access charges are subject to less regulation but still must be
just reasonable, and not unreasonably discriminatory. Some of the interexchange
providers to whom the Company's networks provide access services, including AT&T
and Sprint, have refused to pay access charges that exceed the access charges of
the ILEC in any given geographic area, leading to litigation. While the
Company's networks have not experienced any such challenges to their right to
collect access charges, they could experience them in the future. On April 27,
2001, the FCC released an order detariffing CLEC interstate access rates above
established maximum levels over a three-year period. This means that CLECs will
no longer be able to rely on the legally binding force of filed tariffs to seek
to collect access charges above the newly established levels. At the same time,
however, the FCC gave CLECs greater power to collect access charges at or below
the new maximums. Specifically, the FCC established that CLEC access rates set
at or within its benchmarks are conclusively presumed to be reasonable. Notably,
the new rules do not forbid above-cap CLEC access rates; however, they do remove
CLECs' ability to simply tariff such access rates, which now must be negotiated.
The manner in which the FCC has lowered access charge levels could have material
effect on the ability of the Company's networks to compete in providing
interstate access services and terminating and originating long distance
traffic.
On April 27, 2001, the FCC also released a Notice of Proposed Rulemaking
seeking comment on, among other things, the benefits and legal sustainability of
moving to a regime under which there would be no intercarrier compensation for
local calls, ISP-bound calls, wireless calls and, indirectly, toll calls. The
manner in which the FCC resolves these issues could have a materials effect on
both the Company's expenses and revenues.
The FCC has ruled that non-dominant IXCs, such as the Company, will no
longer be able to file tariffs with the FCC concerning their interexchange long
distance services. This ruling deprives 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 also presides over ongoing proceedings addressing a variety of
other matters, including number portability, Internet-Protocol, telephony,
slamming, rights of way, building access, numbering resources, pole attachments,
customer privacy, wire tapping, 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, 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 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 have been
certificated. 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 revenues or some other
measure such as quantity of facilities installed. In addition, in areas where
the Company does not use its own facilities or those 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. Such legal challenges by other CLECs
have produced mixed results, with some municipal requirements that the Company
believes are discriminatory or otherwise illegal being judicially upheld.
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, redeemable preferred stock and variable
rate debt 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 no 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 March 31, 2001.
Expected Maturity
- -------------------------------------------------------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
- ----------------------------------------------------------------------------------------------------------
Fixed Rate Public Debt
and Redeemable
Preferred Stock: $ --- $303,840 $250,000 $ --- $ --- $ 606,851 $1,160,691 $ 712,627
Average Interest Rate 12.54% 12.44% 12.40% 12.44% 12.44% 12.74% --- ---
Fixed Rate Non
Public Debt $ --- $ 1,169 $ 1,559 $ 13,249 $ 33,357 $ 237,474 $ 286,808 $ 286,808
Average Interest Rate 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% --- ---
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 March 31, 2001, 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 March 31, 2001, 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 months ended March 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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 May 14, 2001
(b) Reports on Form 8-K:
During the three months ended March 31, 2001, the Company filed reports
on Form 8-K on January 10, 2001 and February 22, 2001, which reported
information under Items 5, 7 and 9; no financial statements were filed.
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: May 15, 2001 By: /s/ Timothy J. Rigas
--------------------
Timothy J. Rigas
Vice Chairman, Chief Financial Officer
(authorized officer), Chief Accounting
Officer and Treasurer
Index to Exhibits
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 May 14, 2001
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: 3/31/01
***
Unaudited Other
North East Mid-Atlantic Mid-South Markets Total
FINANCIAL DATA (dollars in thousands):
Total Revenue $ 23,609.2 $ 50,746.6 $ 25,860.8 $ 27,695.2 $ 127,911.8
Total Capital Expenditures $ 13,019.8 $ 96,348.0 $ 27,081.2 $ 16,415.6 $ 152,864.6
Total EBITDA $ 5,580.0 $ (219.3) $ 903.9 $ 4,720.8 $ 10,985.4
Gross PP&E $ 186,172.6 $ 919,897.1 $ 314,310.1 $ 645,066.4 $2,065,446.2
Proportional Revenue* $ 23,609.2 $ 40,755.8 $ 25,860.8 $ 27,695.2 $ 117,921.0
Proportional Capital Expenditures* $ 13,019.8 $ 89,158.1 $ 27,081.2 $ 16,415.6 $ 145,674.7
Proportional EBITDA* $ 5,580.0 $ (3,349.2) $ 903.9 $ 4,720.8 $ 7,855.5
Proportional Gross PP&E* $ 186,172.6 $ 839,913.2 $ 314,310.1 $ 645,066.4 $1,985,462.3
STATISTICAL DATA Increase for March 31, 2001:
Markets in Operation --- --- --- --- ---
Route Miles --- 107 --- 12 119
Fiber Miles --- 17,250 --- 3,916 21,166
Buildings connected 20 76 9 16 121
LEC-Cos collocated** 10 --- --- --- 10
Voice Grade Equivalent Circuits 86,688 382,368 111,552 272,160 852,768
As of December 31, 2000:
Markets in Operation*** 15 30 15 15 75
Route Miles 3,598 5,501 4,280 4,623 18,002
Fiber Miles 111,277 203,893 121,242 146,281 582,693
Buildings connected 827 1,024 772 550 3,173
LEC-Cos collocated** 22 122 76 79 299
Voice Grade Equivalent Circuits 407,232 1,620,192 808,416 544,992 3,380,832
As of March 31, 2001:
Markets in Operation 15 30 15 15 75
Route Miles 3,598 5,608 4,280 4,635 18,121
Fiber Miles 111,277 221,143 121,242 150,197 603,859
Buildings connected 847 1,100 781 566 3,294
LEC-Cos collocated** 32 122 76 79 309
Voice Grade Equivalent Circuits 493,920 2,002,560 919,968 817,152 4,233,600
<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: 3/31/01
Unaudited
Total
FINANCIAL DATA (dollars in thousands)(a):
Total Revenue $ 40,130.3
Total Capital Expenditures $ 17,646.6
Total EBITDA $ 13,573.5
Gross Property, Plant & Equipment $ 379,442.5
STATISTICAL DATA(b):
As of March 31, 2001:
Markets in Operation 7
Route Miles 3,741
Fiber Miles 171,131
Buildings connected 1,696
LEC-COs collocated 63
Voice Grade Equivalent Circuits 1,289,568
(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.