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 June 30, 2001
Transition report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 For the transition period
from ______________ to _____________
Commission File Number: 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 10, 2001, 47,766,846 shares of Class A Common Stock, par value
$0.01 per share, and 86,750,438 shares of Class B Common Stock, par
value $0.01 per share, of the registrant were outstanding.
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2000
and June 30, 2001....................................................4
Condensed Consolidated Statements of Operations - Three
and Six Months Ended June 30, 2000 and 2001..........................5
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 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........26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................27
Item 2. Changes in Securities.............................................27
Item 3. Defaults Upon Senior Securities...................................27
Item 4. Submission of Matters to a Vote of Security Holders...............27
Item 5. Other Information.................................................27
Item 6. Exhibits and Reports on Form 8-K..................................27
SIGNATURES.................................................................28
INDEX TO EXHIBITS..........................................................29
SAFE HARBOR STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, is forward-looking, such as information
relating to future growth, expansion of operations or the effects of future
regulation or competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect expected
results in the future from those expressed in any forward-looking statements
made by, or on behalf of, Adelphia Business Solutions, Inc. and subsidiaries
("the Company"). 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. 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. Persons reading this Form 10-Q are cautioned that
forward-looking statements herein are only predictions, that no assurance can
be given that the future results will be achieved, and that actual events or
results may differ materially as a result of risks and uncertainties facing
the Company. 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, 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, June 30,
2000 2001
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents .......................... $ 3,543 $ 2,153
Accounts receivable - net .......................... 79,650 97,554
Other current assets ............................... 26,114 27,893
----------- -----------
Total current assets .......................... 109,307 127,600
Restricted cash ......................................... 54,178 28,443
Investments ............................................. 48,409 51,544
Property, plant and equipment - net ..................... 1,523,434 1,721,196
Other assets - net ...................................... 154,138 148,838
----------- -----------
Total ......................................... $ 1,889,466 $ 2,077,621
=========== ===========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND
OTHER STOCKHOLDERS' (DEFICIENCY) EQUITY:
Current liabilities:
Accounts payable .................................. $ 158,249 $ 70,551
Due to parent - net ............................... 1,544 --
Due to affiliates - net ........................... 8,067 11,894
Accrued interest .................................. 31,011 31,173
Accrued interest - parent ......................... 7,003 6,036
Other current liabilities ......................... 13,339 35,556
----------- -----------
Total current liabilities ..................... 219,213 155,210
13% Senior discount notes due 2003 ...................... 291,891 303,840
12 1/4% Senior secured notes due 2004 ................... 250,000 250,000
12% Senior subordinated notes due 2007 .................. 300,000 300,000
Note payable ............................................ 500,000 445,739
Other debt .............................................. 48,565 47,172
----------- -----------
Total liabilities ............................. 1,609,669 1,501,961
----------- -----------
12 7/8% Senior exchangeable redeemable preferred stock .. 297,067 316,945
----------- -----------
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 86,774,676 shares
outstanding, respectively ............................ 351 868
Additional paid in capital ............................ 678,140 1,119,218
Class B common stock warrants ......................... 1,022 70
Unearned stock compensation ........................... (4,070) (3,247)
Accumulated deficit ................................... (693,071) (858,671)
----------- -----------
Total common stock and other stockholders'
(deficiency) equity ........................... (17,270) 258,715
----------- -----------
Total ......................................... $ 1,889,466 $ 2,077,621
=========== ===========
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,
---------------------- ----------------------
2000 2001 2000 2001
--------- --------- --------- ---------
Revenues .............................. $ 80,214 $ 116,941 $ 149,515 $ 227,284
--------- --------- --------- ---------
Operating expenses:
Network operations .................. 41,661 61,861 75,393 122,625
Selling, general and administrative . 63,348 64,306 122,194 129,798
Restructuring charges ............... -- -- -- 4,979
Depreciation and amortization ....... 26,689 35,144 46,127 71,694
--------- --------- --------- ---------
Total ....................... 131,698 161,311 243,714 329,096
--------- --------- --------- ---------
Operating loss ........................ (51,484) (44,370) (94,199) (101,812)
Other income (expense):
Interest income ..................... 1,020 382 1,424 1,143
Interest income-affiliate ........... 1,259 -- 6,282 --
Interest expense .................... (15,264) (25,437) (28,194) (55,258)
Interest expense-affiliate .......... -- (6,036) -- (12,808)
--------- --------- --------- ---------
Loss before equity in net (loss)
income of joint ventures ............. (64,469) (75,461) (114,687) (168,735)
Equity in net (loss) income of
joint ventures ....................... (346) 3,242 (451) 3,135
--------- --------- --------- ---------
Net loss .............................. (64,815) (72,219) (115,138) (165,600)
Dividend requirements applicable
to preferred stock ................... (8,771) (9,956) (17,268) (19,601)
--------- --------- --------- ---------
Net loss applicable to common
stockholders ......................... $ (73,586) $ (82,175) $(132,406) $(185,201)
========= ========= ========= =========
Basic and diluted net loss per
weighted average share of common stock $ (1.06) $ (0.61) $ (1.91) $ (1.75)
========= ========= ========= =========
Weighted average shares of
common stock outstanding ............. 69,503 134,530 69,417 106,026
========= ========= ========= =========
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,
----------------------
2000 2001
--------- ---------
Cash flows from operating activities:
Net loss .......................................... $(115,138) $(165,600)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation ................................ 43,587 60,193
Amortization ................................ 2,540 11,501
Non-cash interest expense ................... 18,352 11,949
Equity in net loss (income) of joint ventures 451 (3,135)
Non-cash stock compensation ................. 1,225 1,074
Restructuring charges ....................... -- 4,979
Change in operating assets and liabilities
net of effects of acquisitions:
Other assets - net .......................... (50,856) (25,883)
Accounts payable ............................ (50,133) (92,679)
Accrued interest and other liabilities ...... 6,379 21,412
--------- ---------
Net cash used in operating activities ............... (143,593) (176,189)
--------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment .... (288,838) (256,793)
Investments ....................................... (7,125) --
Sale of U.S. government securities-pledged ........ 15,312 --
Change in restricted cash ......................... (75,785) 25,735
--------- ---------
Net cash used in investing activities ............... (356,436) (231,058)
--------- ---------
Cash flows from financing activities:
Repayments of debt ................................ (2,246) (215,747)
Repayments and advances from related parties, net . 414,178 2,283
Proceeds from rights offering ..................... -- 460,835
Proceeds from exercise of warrant ................. 5,611 --
Proceeds from debt ................................ 96,082 158,931
Costs associated with financing ................... (15,009) (445)
--------- ---------
Net cash provided by financing activities ........... 498,616 405,857
--------- ---------
Increase in cash and cash equivalents ............... (1,413) (1,390)
Cash and cash equivalents, beginning of period ...... 2,133 3,543
--------- ---------
Cash and cash equivalents, end of period ............ $ 720 $ 2,153
========= =========
See notes to condensed consolidated financial statements.
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except share and per share amounts)
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 June 30, 2001 and the unaudited
results of operations for the three and six months ended June 30, 2000 and
2001 have been included. The results of operations for the three and six
months ended June 30, 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 11,820,070 and 51,459,624
shares of Class A and Class B common stock, respectively in a rights offering
to Adelphia at a price of $7.28 per share. Simultaneously, the Company issued
and sold 25,322 shares of Class A common stock, to the public in the rights
offering at a price of $7.28 per share. Total proceeds to the Company were
approximately $460,835.
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 and
cannot exercise control. 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, June 30,
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) (15,256)
------------ ------------
Subtotal 45,909 49,044
Investments accounted for using the
cost method 2,500 2,500
------------ ------------
Total $ 48,409 $ 51,544
============ ============
Summarized combined unaudited financial information for the Company's
investments, which as of June 30, 2001 were being accounted for using the
equity method of accounting follows:
December 31, June 30,
2000 2001
---------- ----------
Current assets $ 26,942 $ 26,973
Property, plant and equipment - net 105,420 115,964
Current liabilities 10,221 5,322
Non current liabilities 31,010 39,525
Six Months Ended June 30,
2000 2001
---------- ----------
Revenues $ 27,372 $ 41,910
Net (loss) income (239) 6,271
3. Commitments and Contingencies:
Reference is made to the Liquidity and Capital Resources and Regulation
sections of 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, 2000 and 2001, the Company paid
interest of $33,312 and $70,541 respectively.
Accumulated depreciation of property, plant and equipment amounted to
$193,214 and $253,407 as of December 31, 2000 and June 30, 2001, respectively.
For the six months ended June 30, 2000 and 2001, the Company recorded
non-cash preferred stock dividends of $17,268 and $19,601, 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. During the quarter ended
June 30, 2001, the Company paid an additional $2,823 associated with the
restructuring charge resulting in a liability of $4,054 at June 30, 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 instrument 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 June 30, 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.
The Financial Accounting Standards Board has issued SFAS No. 141,
"Business Combinations" and No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and the use of the
pooling-of-interests method is no longer allowed. SFAS No. 142 requires that
upon adoption, amortization of goodwill will cease and instead, the carrying
value of goodwill will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". SFAS No. 142 is effective for the Company's fiscal year
beginning January 1, 2002. The Company is evaluating the impact of the
adoption of these standards and has not yet determined the effect of adoption
on its financial position and results of operations.
_________________________________________________
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
June 30, 2001 follows:
Active
---------
Local Route Miles 10,142
Fiber Strand Miles 586,183
Long-Haul Route Miles 8,214
Buildings Connected on-network
with owned facilities 3,369
Central Offices Connected on-network 321
Lucent 5ESS Voice Switches 30
Data Switches 26
Sales Employees 518
Total Employees 2,533
Customers, including joint ventures 42,370
Average monthly revenue per customer $ 988
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 11,820,070 and 51,459,624
shares of Class A and Class B common stock, respectively in a rights offering
to Adelphia at a price of $7.28 per share. Simultaneously, the Company issued
and sold 25,322 shares of Class A common stock, to the public in the rights
offering at a price of $7.28 per share. Total proceeds to the Company were
approximately $460,835.
Reclassification
Certain December 31, 2000 amounts have been reclassified to conform with
the presentation for the six months ended June 30, 2001.
Results of Operations
Three Months Ended June 30, 2001 in Comparison with Three Months Ended June
30, 2000
Revenues increased 46% to $116,941 for the three months ended June 30,
2001, from $80,214 for the same quarter in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Class of 1996 Markets $ 17,932
Growth in Class of 1997/98 Markets 4,018
Growth in Class of 1999 Markets 9,134
Growth in Class of 2000 Markets 3,762
Acquisition of local partner interests 1,501
Management fees 380
The primary sources of revenues, reflected as a percentage of total
revenue were as follows:
Three Months
Ended
June 30,
2000 2001
-------------
Voice services 73.7% 68.3%
Data and dedicated access services 19.6% 22.5%
Management fees 1.4% 1.3%
Other 5.3% 7.9%
Network operations expense increased 48% to $61,861 for the three months
ended June 30, 2001 from $41,661 for the same quarter in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 4,596
Acquisition of local partner interests 337
Expansion Markets 15,405
Network Operations Control Center ("NOCC") (138)
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 2% to $64,306 for
the three months ended June 30, 2001 from $63,348 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 Markets $ 924
Acquisition of local partner interests 820
Sales and marketing activities (645)
Corporate overhead charges (199)
Non-cash stock compensation 58
Depreciation and amortization expense increased 32% to $35,144 during
the three months ended June 30, 2001 from $26,689 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, 2001 decreased to
$382 from $1,020 for the same quarter in the prior year as a result of
decreases in interest income from lower amounts of cash and cash equivalents
throughout the quarter.
Interest income-affiliate for the three months ended June 30, 2001 was
zero as compared to $1,259 for the same quarter in the prior year as a result
of no demand advances outstanding to Adelphia during the period.
Interest expense increased 67% to $25,437 during the three months ended
June 30, 2001 from $15,264 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 $6,036 for the three months ended June
30, 2001 as a result of outstanding borrowings on the Company's joint credit
facility with other subsidiaries of Adelphia.
Equity in net (loss) income of joint ventures for the three months ended
June 30, 2001 was $3,242 as compared to ($346) for the same quarter in the
prior year.
The number of joint ventures paying management fees to the Company
decreased from four at June 30, 2000 to three at June 30, 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 $1,516 for the three months ended June
30, 2001, as compared with $1,136 for the same quarter in the prior fiscal
year. The nonconsolidated joint ventures, for the three months ended June 30,
2000 and 2001, had a net (loss) income of approximately ($553) and $6,483,
respectively.
Preferred stock dividends increased by 14% to $9,956 for the three
months ended June 30, 2001 from $8,771 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, 2001 in Comparison with Six Months Ended June 30,
2000
Revenues increased 52% to $227,284 for the six months ended June 30,
2001, from $149,515 for the same period in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Class of 1996 Markets $ 38,434
Growth in Class of 1997/98 Markets 7,284
Growth in Class of 1999 Markets 21,065
Growth in Class of 2000 Markets 6,148
Acquisition of local partner interests 3,113
Management fees 1,725
The primary sources of revenues, reflected as a percentage of total
revenue were as follows:
Six Months
Ended
June 30,
2000 2001
-------------
Voice services 74.5% 68.4%
Data and dedicated access services 18.8% 21.7%
Management fees 1.5% 1.7%
Other 5.2% 8.2%
Network operations expense increased 63% to $122,625 for the six months
ended June 30, 2001 from $75,393 for the same period in the prior year.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Original Markets $ 12,849
Acquisition of local partner interests 679
Expansion Markets 33,229
Network Operations Control Center ("NOCC") 475
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 6% to $129,798 for
the six months ended June 30, 2001 from $122,194 for the same period in the
prior year, primarily reflecting the growth in the Expansion Markets.
Amounts
The change is attributable to the following: (in thousands)
--------------
Growth in Markets $ 7,446
Acquisition of local partner interests 1,287
Sales and marketing activities (3,360)
Corporate overhead charges 2,310
Non-cash stock compensation (79)
Restructuring charges for the six months ended June 30, 2001, were
$4,979 as compared to zero for the same period in the prior year primarily as
a result of the Company's revised network expansion plan.
Depreciation and amortization expense increased 55% to $71,694 during
the six months ended June 30, 2001 from $46,127 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, 2001 decreased 20% to
$1,143 from $1,424 for the same period in the prior year as a result of
decreases in interest income from lower amounts of cash and cash equivalents
throughout the period.
Interest income-affiliate for the six months ended June 30, 2001 was
zero as compared to $6,282 for the same period in the prior year as a result
of no demand advances outstanding to Adelphia during the period.
Interest expense increased 96% to $55,258 during the six months ended
June 30, 2001 from $28,194 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 $12,808 for the six months ended June 30,
2001 as a result of outstanding borrowings on the Company's joint credit
facility with other subsidiaries of Adelphia.
Equity in net (loss) income of joint ventures for the six months ended
June 30, 2001 was $3,135 as compared to ($451) for the same period in the
prior year.
The number of joint ventures paying management fees to the Company
decreased from four at June 30, 2000 to three at June 30, 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 $3,961 for the six months ended June 30,
2001, as compared with $2,236 for the same period in the prior fiscal year.
The nonconsolidated joint ventures, for the six months ended June 30, 2000
and 2001, had a net (loss) income of approximately ($1,193) and $6,271,
respectively.
Preferred stock dividends increased by 14% to $19,601 for the six months
ended June 30, 2001 from $17,268 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.
Forward Looking Guidance
The Company expects calendar 2001 revenues to be approximately $475,000
and expects EBITDA losses to decrease to approximately $2,000 to $5,000 for
the third quarter of calendar 2001 and to a total of 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.
Supplementary Network Financial Analysis
At June 30, 2001, 54 of the 75 operational markets had been in operation
for thirty months or less, while the remaining 21 markets have been in
operation for more than thirty months. 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 June 30, 2001 Quarter Ended March 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 ........... $ 90,775 $ 18,101 $ 24,710 $ 3,768 $ 137,354 $ 86,654 $ 16,322 $ 22,518 $ 2,386 $ 127,880
Direct Operating
Expenses ......... 27,127 6,405 27,319 3,336 64,187 25,247 5,827 28,280 2,326 61,680
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
Gross Margin ...... 63,648 11,696 (2,609) 432 73,167 61,407 10,495 (5,762) 60 66,200
Gross Margin
Percentage ....... 70.1% 64.6% (10.6%) 11.5% 53.3% 70.9% 64.3% (25.6%) 2.5% 51.8%
Sales, General
and Administrative
Expenses ......... 26,076 5,054 19,217 4,590 54,937 28,766 5,614 18,082 4,330 56,792
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA before
allocation of
Corporate
Overhead (b) ..... $ 37,572 $ 6,642 $(21,826) $ (4,158) $ 18,230 $ 32,641 $ 4,881 $(23,844) $ (4,270) $ 9,408
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA as a
Percentage
of Revenues ...... 41.4% 36.7% (88.3%) (110.4%) 13.3% 37.7% 29.9% (105.9%) (179.0%) 7.4%
June 2001 Quarter vs. March 2001 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 .......... 4.8% 10.9% 9.7% 57.9% 7.4%
Direct Operating
Expenses ......... 7.4% 9.9% (3.4%) 43.4% 4.1%
-------- -------- -------- -------- ----------
Gross Margin ...... 3.6% 11.4% 54.7% NM(c) 10.5%
Sales, General
and Administrative
Expenses ......... (9.4%) (10.0%) 6.3% 6.0% (3.3%)
-------- -------- -------- -------- ----------
EDITDA before
allocation of
Corporate
Overhead (b) ..... 15.1% 36.1% 8.5% 2.6% 93.8%
-------- -------- -------- -------- ----------
<FN>
(a) Table 2 summarizes operating results before the allocation of corporate
overhead for Adelphia Business Solutions' Original and Expansion Markets,
which includes non-consolidated joint ventures, 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 $14.4 million
in the June 2001 quarter and $17.2 million in the March 2001 quarter and
before a restructuring charge of $5 million in the March 2001 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 June 30, 2001 Quarter Ended June 30, 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 ........... $ 90,775 $ 18,101 $ 24,710 $ 3,768 $ 137,354 $ 67,338 $ 11,931 $ 15,576 $ 6 $ 94,851
Direct Operating
Expenses ......... 27,127 6,405 27,319 3,336 64,187 17,998 5,971 18,997 155 43,121
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
Gross Margin ...... 63,648 11,696 (2,609) 432 73,167 49,340 5,960 (3,421) (149) 51,730
Gross Margin
Percentage ....... 70.1% 64.6% (10.6%) 11.5% 53.3% 73.3% 50.0% (22.0%) NM(c) 54.5%
Sales, General
and Administrative
Expenses ......... 26,076 5,054 19,217 4,590 54,937 31,315 4,354 18,545 1,910 56,124
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA before
allocation of
Corporate
Overhead (b) ..... $ 37,572 $ 6,642 $(21,826) $ (4,158) $ 18,230 $ 18,025 $ 1,606 $(21,966) $ (2,059) $ (4,394)
-------- -------- -------- -------- ---------- --------- -------- -------- -------- ----------
EBITDA as a
Percentage
of Revenues ...... 41.4% 36.7% (88.3%) (110.4%) 13.3% 26.8% 13.5% (141.0%) NM(c) (4.6%)
June 2001 Quarter vs. June 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 .......... 34.8% 51.7% 58.6% NM(c) 44.8%
Direct Operating
Expenses ......... 50.7% 7.3% 43.8% NM(c) 48.9%
-------- -------- -------- -------- ----------
Gross Margin ...... 29.0% 96.2% 23.7% NM(c) 41.4%
Sales, General
and Administrative
Expenses ......... (16.7%) 16.1% 3.6% NM(c) (2.1%)
-------- -------- -------- -------- ----------
EDITDA before
allocation of
Corporate
Overhead (b) ..... 108.4% NM(c) (0.6%) 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,
which includes non-consolidated joint ventures, 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 $14.4 million
in the June 2001 quarter and $14.8 million in the June 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 $288,838 and $256,793 for the six months
ended June 30, 2000 and 2001, respectively. Further, investments made by the
Company in nonconsolidated joint ventures were $4,625 and zero for the six
months ended June 30, 2000 and 2001, respectively. The decrease in capital
expenditures for the six months ended June 30, 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 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, 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, (iii) the design, construction and
development of the Expansion Markets and (iv) strategic further investments
in the operation and development of the Original 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 has historically funded the substantial deficit between cash
generated from operations and its cash needs through a combination of
issuances of debt securities, issuances of common stock, short term advances
and borrowings from Adelphia and to a limited extent asset sales to Adelphia,
and borrowings under the $500,000 bank credit facility. During the June 2001
quarter, the Company funded its free cash flow deficit with draws from the
$500,000 bank credit facility. Under its current business plan, the Company
estimates that, in addition to the cash and cash equivalents on hand and
remaining availability under the $500,000 bank credit facility as of June 30,
2001, a total of an additional approximately $500,000 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,
2001 through June 30, 2002, of which approximately $260,000 will be required
through December 31, 2001. For information regarding recent transactions
affecting the Company's liquidity and capital resources, see "Recent
Developments." Even if the Company made further cutbacks in its current
business plan to develop its markets, the Company would still incur
substantial cash deficits that would require additional funding during these
periods.
As of June 30, 2001, approximately $54,261 was available under the bank
credit facility. To fund its projected short term cash needs as well as
future deficits through mid-2002, the Company is exploring additional sources
of liquidity including additional bank or institutional credit facilities and
other alternatives including possible asset sales. The Company believes that
these sources of liquidity and cash generated from operations will be sufficient
to fund the Company's operations and capital expenditures. The Company's ability
to fund its operations, capital expenditures and debt service will depend upon
its ability to access the capital markets, and its future financial and
operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, many of which are
beyond the Company's control.
The Company does not have any commitments for additional long term or
short term funding. There can be no assurance (i) that additional funding
will become available to the Company on either a short term or long term
basis, (ii) that the terms of any additional funding would not be materially
adverse to the Company including substantial interest rates, the imposition
of restrictive covenants, the pledging of assets, the sale of assets, the
dilution of existing stockholders interest or otherwise, (iii) that the
Company will not be required to consider further revisions to its business
plan and reductions in capital and other expenditures, the sale of assets or
other alternatives, or (iv) that the Company's future cash requirements will
not vary significantly from those presently planned due to a variety of
factors including failure to generate anticipated revenues, 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.
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 instrument 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 June 30, 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.
The Financial Accounting Standards Board has issued SFAS No. 141,
"Business Combinations" and No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 and the use of the
pooling-of-interests method is no longer allowed. SFAS No. 142 requires that
upon adoption, amortization of goodwill will cease and instead, the carrying
value of goodwill will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". SFAS No. 142 is effective for the Company's fiscal year
beginning January 1, 2002. The Company is evaluating the impact of the
adoption of these standards and has not yet determined the effect of adoption
on its financial position and results of operations.
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 material
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 June 30, 2001.
Expected Maturity
--------------------------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
-----------------------------------------------------------------------------
Fixed Rate Public Debt and
Redeemable Preferred Stock: $ --- $303,840 $250,000 $ --- $ --- $616,945 $1,170,785 $684,888
Average Interest Rate 12.54% 12.44% 12.40% 12.44% 12.44% 12.74% --- ---
Fixed Rate Non Public Debt $ --- $ 1,988 $ 2,650 $ 2,650 $44,792 $393,659 $ 445,739 $445,739
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 June 30, 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 June 30, 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 June 30, 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 August 10, 2001
(b) Reports on Form 8-K:
During the three months ended June 30, 2001, the Company filed no
reports on Form 8-K.
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, 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 August 10, 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: 6/30/01
***
Unaudited Other
North East Mid-Atlantic Mid-South Markets Total
FINANCIAL DATA (dollars in thousands):
Total Revenue $ 22,781.2 $ 60,827.0 $ 24,655.5 $ 28,934.9 $ 137,198.6
Total Capital Expenditures $ 11,305.3 $ 21,302.9 $ 20,548.0 $ 62,016.1 $ 115,172.3
Total EBITDA $ 4,661.1 $ 11,918.6 $ (1,898.6) $ 4,746.4 $ 19,427.5
Gross PP&E $ 197,477.9 $ 941,200.0 $ 334,858.1 $ 666,167.0 $2,139,703.0
Proportional Revenue* $ 22,781.2 $ 49,862.6 $ 24,655.5 $ 28,934.9 $ 126,234.2
Proportional Capital Expenditures* $ 11,305.3 $ 18,736.8 $ 20,548.0 $ 62,016.1 $ 112,606.2
Proportional EBITDA* $ 4,661.1 $ 5,829.8 $ (1,898.6) $ 4,746.4 $ 13,338.7
Proportional Gross PP&E* $ 197,477.9 $ 858,650.1 $ 334,858.1 $ 666,167.0 $2,057,153.1
STATISTICAL DATA
Increase for June 30, 2001:
Markets in Operation --- --- --- --- ---
Route Miles 180 609 204 54 1,047
Fiber Miles 2,598 58,905 3,603 20,688 85,794
Buildings connected 41 16 (11) 29 75
LEC-Cos collocated** --- 2 10 --- 12
Voice Grade Equivalent Circuits 104,832 10,752 116,928 18,816 251,328
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
As of June 30, 2001:
Markets in Operation 15 30 15 15 75
Route Miles 3,778 6,217 4,484 4,689 19,168
Fiber Miles 113,875 280,048 124,845 170,885 689,653
Buildings connected 888 1,116 770 595 3,369
LEC-Cos collocated** 32 124 86 79 321
Voice Grade Equivalent Circuits 598,752 2,013,312 1,036,896 835,968 4,484,928
<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: 6/30/01
Unaudited
Total
FINANCIAL DATA (dollars in thousands)(a):
Total Revenue $ 37,285.5
Total Capital Expenditures $ 10,677.4
Total EBITDA $ 10,244.1
Gross Property, Plant & Equipment $ 390,119.9
STATISTICAL DATA(b):
As of June 30, 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.