SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities
- -------
Exchange Act of 1934
For the quarterly period ended September 30, 1999
____ 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)
Hyperion Telecommunications, Inc.
(Former name, if changed since last report)
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 November 9, 1999, 23,965,385 shares of Class A Common Stock, par
value $0.01 per share, and 31,538,977 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, 1998 and September 30, 1999.................3
Condensed Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 1998 and 1999....................................................................4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1999....................................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................26
Item 2. Changes in Securities and Use of Proceeds......................................................26
Item 3. Defaults Upon Senior Securities...............................................................26
Item 4. Submission of Matters to a Vote of Security Holders...........................................26
Item 5. Other Information.............................................................................26
Item 6. Exhibits and Reports on Form 8-K...............................................................27
SIGNATURES..............................................................................................28
INDEX TO EXHIBITS.......................................................................................29
Item 1. Financial Statements
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
December 31, September 30,
1998 1999
---------------- -----------------
ASSETS:
Current assets:
Cash and cash equivalents $ 242,570 $ 125,988
Accounts receivable and other current assets 15,583 63,695
Due from parent - net 4,950 ---
Due from affiliates - net 1,078 4,905
---------------- -----------------
Total current assets 264,181 194,588
U.S. government securities - pledged 58,054 29,451
Investments 112,328 47,409
Property, plant and equipment - net 374,702 740,870
Other assets - net 27,077 66,567
---------------- -----------------
Total $ 836,342 $ 1,078,885
================ =================
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND (DEFICIENCY):
OTHER STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable $ 20,386 $ 17,009
Due to parent - net --- 8,388
Accrued interest and other current liabilities 19,142 24,483
--------------- ----------------
Total current liabilities 39,528 49,880
13% Senior Discount Notes due 2003 220,784 245,052
12 1/4% Senior Secured Notes due 2004 250,000 250,000
12% Senior Subordinated Notes due 2007 --- 300,000
Other debt 23,325 44,056
--------------- ----------------
Total liabilities 533,637 888,988
--------------- ----------------
12 7/8% Senior exchangeable redeemable preferred stock 228,674 252,261
--------------- ----------------
Commitments and contingencies (Note 3)
Common stock and other stockholders' equity (deficiency):
Class A common stock, $0.01 par value, 300,000,000
shares authorized, 22,376,071 and 23,912,785 shares
outstanding, respectively 224 239
Class B common stock, $0.01 par value, 150,000,000
shares authorized, 32,314,761 and 31,181,077 shares
outstanding, respectively 323 312
Additional paid in capital 286,782 269,608
Class B common stock warrants 4,483 4,467
Unearned stock compensation --- (6,126)
Accumulated deficit (217,781) (330,864)
--------------- ----------------
Total common stock and other stockholders' equity (deficiency) 74,031 (62,364)
--------------- ----------------
Total $ 836,342 $ 1,078,885
=============== ================
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 Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------
1998 1999 1998 1999
---------------- -------------- ------------- -------------
Revenues $ 12,098 $ 43,347 $ 24,553 $ 99,000
---------------- -------------- ------------- ---------------
Operating expenses:
Network operations 7,056 15,862 14,586 36,037
Selling, general and administrative 10,391 39,972 24,038 93,618
Depreciation and amortization 9,843 18,168 20,413 45,289
---------------- -------------- ------------- ---------------
Total 27,290 74,002 59,037 174,944
---------------- -------------- ------------- ---------------
Operating loss (15,192) (30,655) (34,484) (75,944)
Other income (expense):
Interest income 4,169 2,867 13,506 19,645
Interest income-affiliate 2,995 1,336 5,070 6,943
Interest expense (12,535) (19,045) (39,639) (56,383)
Other income 113 --- 1,113 ---
---------------- -------------- ------------- ---------------
Loss before income taxes and
equity in net loss of joint ventures (20,450) (45,497) (54,434) (105,739)
Income tax expense --- --- --- (4)
---------------- -------------- ------------- ---------------
Loss before equity in net loss
of joint ventures (20,450) (45,497) (54,434) (105,743)
Equity in net loss of joint ventures (2,614) (246) (9,487) (7,340)
---------------- -------------- ------------- ---------------
Loss before extraordinary gain (23,064) (45,743) (63,921) (113,083)
Extraordinary gain on repurchase of debt 237 --- 237 ---
---------------- -------------- ------------- ---------------
Net loss (22,827) (45,743) (63,684) (113,083)
Dividend requirements applicable to preferred stock (7,026) (7,969) (20,448) (23,168)
---------------- -------------- ------------- ---------------
Net loss applicable to common stockholders $ (29,853) $ (53,712) $ (84,132) $ (136,251)
================ ============== ============= ===============
Basic and diluted net loss per weighted average
share of common stock $ (0.54) $ (0.97) $ (1.82) $ (2.46)
================ ============== ============= ===============
Weighted average shares of
common stock outstanding 55,497 55,497 46,293 55,497
================ ============== ============= ===============
See notes to condensed consolidated financial statements.
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months
Ended September 30,
--------------------------------
1998 1999
-------------- ---------------
Cash flows from operating activities:
Net loss $ (63,684) $ (113,083)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 17,872 41,063
Amortization 2,541 4,226
Noncash interest expense 25,555 24,268
Equity in net loss of joint ventures 9,487 7,340
Non-cash stock compensation 761 274
Extraordinary gain on repurchase of debt (237) ---
Change in operating assets and liabilities net of effects of acquisitions:
Other assets - net (10,943) (46,244)
Accounts payable 13,005 (5,445)
Accrued interest and other liabilities (5,937) 7,959
-------------- ----------------
Net cash used in operating activities (11,580) (79,642)
-------------- ----------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (145,490) (232,418)
Investments in joint ventures (32,150) (27,421)
Net cash used for acquisitions (58,330) (129,118)
Sale of U.S. government securities - pledged 30,965 30,626
Repayment of senior secured note --- 20,000
-------------- ----------------
Net cash used in investing activities (205,005) (338,331)
-------------- ----------------
Cash flows from financing activities:
Repayments of debt (21,389) (2,465)
Advances (to) from related parties (211,697) 9,607
Proceeds from debt --- 300,000
Costs associated with financing (379) (5,751)
Proceeds from issuance of Class A Common Stock 255,462 ---
Costs associated with issuance of Class A Common Stock (14,688) ---
Repayment of loans to stockholders 3,000 ---
-------------- ---------------
Net cash provided by financing activities 10,309 301,391
-------------- ---------------
Decrease in cash and cash equivalents (206,276) (116,582)
Cash and cash equivalents, beginning of period 332,863 242,570
-------------- ----------------
Cash and cash equivalents, end of period $ 126,587 $ 125,988
============== ===============
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. On
October 25, 1999, the shareholders of the Company elected to change the
name of the Company from Hyperion Telecommunications, Inc. to Adelphia
Business Solutions, Inc.
On March 30, 1999, Adelphia Business Solutions elected to change its
fiscal year from March 31 to December 31. The decision was made to conform to
general industry practice and for administrative purposes. The change became
effective for the nine months ended December 31, 1998. 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 March 31, 1998 and its Transition Report on Form
10-K for the nine months ended December 31, 1998.
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 September 30, 1999, and the unaudited
results of operations for the three and nine months ended September 30, 1998 and
1999, have been included. The results of operations for the three and nine
months ended September 30, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999.
1. Significant Events Subsequent to December 31, 1998:
On March 2, 1999, Adelphia Business Solutions issued $300,000 of 12%
Senior Subordinated Notes due 2007 ("Subordinated Notes"). An entity controlled
by members of the Rigas family, controlling stockholders of Adelphia, purchased
$100,000 of the Subordinated Notes directly from Adelphia Business Solutions at
a price equal to the aggregate principal amount less the discount to the initial
purchasers. The net proceeds of approximately $295,000 were or will be used to
fund Adelphia Business Solutions' acquisition of interests held by local
partners in certain of its markets and will be used to fund capital expenditures
and investments in its networks and for general corporate and working capital
purposes.
During March 1999, Adelphia Business Solutions consummated purchase
agreements with subsidiaries of Multimedia Inc. and MediaOne of Colorado Inc. to
acquire their respective interests in jointly owned networks located in the
Wichita, KS, Jacksonville, FL and Richmond, VA markets for an aggregate of
$89,750. The agreements increased the Company's ownership interest in each of
these networks to 100%. The acquisitions were accounted for under the purchase
method of accounting. Accordingly, the financial results of the acquired
networks are included in the consolidated results of Adelphia Business Solutions
effective from the date acquired.
On April 15, 1999, the Company acquired an indefeasible right of use
("IRU") from e.spire Communications, Inc. ("e.spire") for approximately 576
miles of network fiber and construction services which allows the Company access
to 14 new markets. In exchange, the Company granted e.spire an IRU to a
432-strand fiber optic cable in South Florida that is currently under
construction.
On May 25, 1999, the Company entered into an IRU agreement with CapRock
Communications Corp. for approximately $16,260 which grants the Company a
long-term license to approximately 1,650 route miles of long haul fiber. The IRU
gives the Company a presence in the southwestern United States.
During May 1999, the Company received $32,329 from Telergy, Inc.
("Telergy") for the repayment of a senior secured note held by the Company. The
payment represented $20,000 in principal and $12,329 of interest due to the
Company resulting from a February 1997 transaction in which the Company loaned
Telergy $20,000 in exchange for a $20,000 senior secured note and a fully
prepaid lease of dark fiber in New York state.
During June 1999, the Company consummated a purchase agreement with
Entergy Corporation ("Entergy"), the parent of its local partner in the Baton
Rouge, LA, Little Rock, AR, and Jackson, MS markets, whereby Entergy received
approximately $36,518 for its ownership interests in these markets. The
agreements increased the Company's ownership interest in each of these networks
to 100%. The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired networks are
included in the consolidated results of Adelphia Business Solutions effective
from the date acquired.
During August 1999, the Company granted under the 1996 Long-Term
Incentive Compensation Plan to each of John J. Rigas, Michael J. Rigas, Timothy
J. Rigas, and James P. Rigas (i) stock options covering 100,000 shares of Class
A common stock, which options will vest in equal one-third amounts on the third,
fourth and fifth year anniversaries of grant (vesting conditioned on continued
services as an employee or director) and which shall be exercisable at $16.00
per share and (ii) stock awards covering 100,000 shares of Class A common stock,
which stock awards will vest in equal one-third amounts on the third, fourth and
fifth year anniversaries of grant (vesting conditioned on continued services as
an employee or director).
On August 31, 1999, the Company entered into a binding agreement with
Digital Teleport, Inc. ("DTI") for the purchase of dark fiber IRUs covering over
4,000 route miles of long-haul and local fiber in the central portion of the
United States. Although no payments have been made as of September 30, 1999, the
cost of the IRUs is estimated to be between $27,000 and $42,000 depending upon
the exercise by the Company of a number of options for additional routes and/or
fiber strands.
On September 21, 1999, the Company announced its decision to extend its
fiber optic network into the western half of the United States. Management
believes this national expansion will enable the Company to offer its services
in approximately 200 markets throughout the country.
On October 13, 1999, the Company filed a shelf registration statement
with the Securities and Exchange Commission to sell up to $1,500,000 in debt
securities, preferred and common stock, depository shares, and other equity
securities. This registration became effective on October 22,1999. Proceeds of
any sales under this registration statement are expected to be used for general
corporate purposes, including capital spending, acquisitions, debt repayment,
investments and other purposes, and to facilitate the national expansion.
On October 25, 1999, shareholders of the Company elected to change the
legal name of the Company from Hyperion Telecommunications, Inc. to Adelphia
Business Solutions, Inc. With this decision, management believes the strengths
of Adelphia and the Company are further aligned to develop a single brand in the
communications marketplace.
During the nine months ended September 30, 1999, the Company made
demand advances to Adelphia which, as of September 30, 1999, had been repaid.
The Company received interest on the advances at a rate of 5.15%.
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures in which the Company holds less than a majority interest. Under
this method, the Company's initial investment is recorded at cost and
subsequently adjusted for the amount of its equity in the net income or losses
of its joint ventures. Dividends or other distributions are recorded as a
reduction of the Company's investment. Investments in joint ventures accounted
for using the equity method reflect the Company's equity in their underlying net
assets.
The Company's non-consolidated investments are as follows:
Ownership December 31, September 30,
Percentage 1998 1999
--------------- ---------------- ----------------
MediaOne Fiber Technologies (Jacksonville) 100.0% (1) $ 8,150 $ ---
Multimedia Hyperion Telecommunications (Wichita) 100.0 (1) 5,863 ---
MediaOne of Virginia (Richmond) 100.0 (1) 7,284 ---
Entergy Hyperion Telecommunications of Louisiana 100.0 (2) 6,714 ---
Entergy Hyperion Telecommunications of Mississippi 100.0 (2) 7,130 ---
Entergy Hyperion Telecommunications of Arkansas 100.0 (2) 7,586 ---
PECO-Hyperion (Philadelphia) 50.0 33,936 42,135
PECO-Hyperion (Allentown, Bethlehem, Easton, Reading) 50.0 7,227 10,351
Hyperion of York 50.0 5,721 7,121
Allegheny Hyperion Telecommunications 50.0 3,043 4,718
Baker Creek Communications 49.9 (3) 44,637 ---
Other Various 1,323 ---
---------------- ----------------
138,614 64,325
Cumulative equity in net losses (26,286) (16,916)
---------------- ----------------
Total $ 112,328 $ 47,409
================ ================
<FN>
(1) As discussed in Note 1, the Company has consummated agreements which
increased its ownership to 100% in these networks during March 1999.
(2) As discussed in Note 1, the Company has consummated an agreement which
increased its ownership to 100% in these networks during June 1999.
(3) On March 24, 1998, the Federal Communications Commission ("FCC") completed
the auction of licenses for Local Multipoint Distribution Service. The
Company, through Baker Creek Communications, was the successful bidder for
195 31-Ghz licenses, which cover approximately 30% of the nation's
population - in excess of 83 million people in the eastern half of the
United States. In connection with the FCC's full review of all bids and the
granting of final licenses it was concluded that the Company, through Baker
Creek Communications, would acquire the entire interest in the 195 licenses
for a total cost of approximately $44,605, all of which was paid as of
October 26, 1998. On September 30, 1999, the FCC granted the Company's
request to transfer, and the Company transferred the licenses from Baker
Creek Communications to a wholly owned subsidiary of the Company. The
licenses are included in Other assets - net on the condensed consolidated
balance sheet at September 30, 1999.
</FN>
Summarized combined unaudited financial information for
the Company's investments being accounted for using the equity method of
accounting, excluding Jacksonville, Richmond, Wichita, the Entergy partnerships
and Baker Creek Communications, follows:
December 31, September 30,
1998 1999
--------------- ----------------
Current assets $ 4,656 $ 17,800
Property, plant and equipment - net 93,929 111,829
Other non-current assets 650 53
Current liabilities 5,258 5,182
Non current liabilities 32,127 34,833
Nine Months Ended September 30,
1998 1999
--------------- ----------------
Revenues $ 4,405 $ 23,852
Net loss (10,732) (6,472)
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 nine months ended September 30, 1998 and 1999, the Company
paid interest of $30,965 and $36,525, respectively.
Accumulated depreciation of property, plant and equipment amounted to
$38,089 and $79,151 at December 31, 1998 and September 30, 1999, respectively.
-------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Company's unaudited Condensed Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Form 10-Q and the Company's audited
Consolidated Financial Statements and Notes thereto included in its Transition
Report on Form 10-K for the nine months ended December 31, 1998.
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information or statements
included in this Form 10-Q, including Management's Discussion and Analysis of
Financial Condition and Results of Operations is forward-looking, such as
information relating to future growth, expansion of operations or the effect of
future regulation or competition. These "forward-looking statements" include
statements regarding the intent, belief and current expectations of Adelphia
Business Solutions and its directors and officers, and can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "intends" or anticipates" or the negative thereof or other variations
thereon or comparable terminology or by discussions of strategy that involve
risks and uncertainties. Any such forward-looking information involves important
risks and uncertainties that could significantly affect expected results in the
future from those expressed in any forward-looking statements made by, or on
behalf of, the Company.
These risks and uncertainties include, but are not limited to,
uncertainties relating to our ability to successfully market our services to
current and new customers, access markets on a nondiscriminatory basis,
identify, design and construct fiber optic networks, install cable and
facilities (including switching electronics) and obtain rights of way, access
rights to buildings and any required governmental authorizations, franchises and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions, as well as risks and uncertainties relating to general economic
conditions, the availability and cost of capital, acquisitions and divestitures,
government and regulatory policies, the pricing and availability of equipment,
materials, inventories and programming technological developments, the costs and
other effects of rapid growth, year 2000 issues 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 my differ materially. In evaluating such statements, readers
should specifically consider the various factors which could cause actual events
or results to differ materially from those indicated by such forward looking
statements. Unless otherwise stated, the information contained in this Form 10-Q
is as of and for the three and nine months ended September 30, 1998 and 1999.
Additional information of 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 under
Registration Statement 333-88927, under the caption "Risk Factors."
The "Company" or "Adelphia Business Solutions" means Adelphia Business
Solutions, Inc. together with its majority-owned subsidiaries, except where the
context otherwise requires. Unless the context otherwise requires, references
herein to the networks mean (i) the 22 telecommunications networks in operation
or under construction (the "Original Markets") in operation or under
construction as of May 8, 1998, the date of the Company's initial public
offering, which are wholly and majority owned subsidiaries or are joint venture
partnerships and corporations managed by the Company and in which the Company
holds less than a majority equity interest with one or more other partners, and
(ii) the additional networks operational or under development subsequent to May
8, 1998 (the "New Markets").
Adelphia Business Solutions is a leading national provider of
facilities-based integrated communications services to customers that include
businesses, governmental and educational end users and other communications
services providers throughout the United States. The Company currently offers a
full range of communications services in 50 markets and expects by the end of
the year 2000 to be offering services in approximately 115 markets nationwide,
including substantially all of the top 40 metropolitan statistical areas in the
United States. To serve the Company's customers' broad and expanding
communications needs, the Company has assembled a diverse collection of
high-bandwidth, local and national network assets. The Company intends to
integrate these assets with advanced communications technologies and services in
order to provide comprehesive end-to-end communications services over its
national network. The Company provides customers with communications services
such as local switch dial tone (also known as local phone service), long
distance service, high-speed data transmission, and Internet connectivity. The
customers have a choice of receiving these services separately or as bundled
packages which are typically priced at discount when compared to the price of
the separate services.
In order to take advantage of the improved economic returns and better
customer service from providing services "on-net," or over the Company's own
network, the Company is in the process of further expanding the reach of its
network system nationwide. The Company's Original Markets are principally
located in the eastern half of the United States; however, due to the Company's
success in operating and expanding these markets the Company is pursuing an
aggressive nationwide growth plan. The Company intends to serve 200 total
markets nationwide by the end of the year 2001, leveraging the Company's
existing and planned switching platforms and inter-city fiber networks. The
Company believes that this nationwide footprint will position it to address
approximately 65% of the 60 million business access lines nationwide, which
currently represent approximately $75 billion in annual revenues. This network
system expansion includes the purchase, lease or construction of local fiber
optic network facilities and the interconnection of all of the Company's
existing and new markets with its own fiber optic facilities. The Company will
also implement various technologies including Dense Wave Division Multiplexing
to provide greater bandwidth capacity on its local and long-haul network system.
Once fully installed, the 30,000 route mile fiber optic backbone will connect
each of the Company's local markets. This fully redundant network system will
support the Company's full line of communication service offerings.
The Company has experienced success in the sale of business access
lines with approximately 272,635 access lines sold as of September 30, 1999, of
which approximately 250,805 lines were installed at such date. This represents
an addition of 60,444 access lines sold and 59,520 access lines installed during
the quarter ended September 30, 1999. As of September 30, 1999, approximately
57% of these access lines are provisioned on Company owned switches.
Recent Developments
On March 2, 1999, Adelphia Business Solutions issued $300,000 of 12%
Senior Subordinated Notes due 2007 ("Subordinated Notes"). An entity controlled
by members of the Rigas family, controlling stockholders of Adelphia, purchased
$100,000 of the Subordinated Notes directly from Adelphia Business Solutions at
a price equal to the aggregate principal amount less the discount to the initial
purchasers. The net proceeds of approximately $295,000 were or will be used to
fund Adelphia Business Solutions' acquisition of interests held by local
partners in certain of its markets and will be used to fund capital expenditures
and investments in its networks and for general corporate and working capital
purposes.
During March 1999, Adelphia Business Solutions consummated purchase
agreements with subsidiaries of Multimedia Inc. and MediaOne of Colorado Inc. to
acquire their respective interests in jointly owned networks located in the
Wichita, KS, Jacksonville, FL and Richmond, VA markets for an aggregate of
$89,750. The agreements increased the Company's ownership interest in each of
these networks to 100%. The acquisitions were accounted for under the purchase
method of accounting. Accordingly, the financial results of the acquired
networks are included in the consolidated results of Adelphia Business Solutions
effective from the date acquired.
On April 15, 1999, the Company acquired an indefeasible right of use
("IRU") from e.spire Communications, Inc. ("e.spire") for approximately 576
miles of network fiber and construction services which allows the Company access
to 14 new markets. In exchange, the Company granted e.spire an IRU to a
432-strand fiber optic cable in South Florida that is currently under
construction.
On May 25, 1999, the Company entered into an IRU agreement with CapRock
Communications Corp. for approximately $16,260 which grants the Company a
long-term license to approximately 1,650 route miles of long haul fiber. The IRU
gives the Company a presence in the southwestern United States.
During May 1999, the Company received $32,329 from Telergy, Inc.
("Telergy") for the repayment of a senior secured note held by the Company. The
payment represented $20,000 in principal and $12,329 of interest due to the
Company resulting from a February 1997 transaction in which the Company loaned
Telergy $20,000 in exchange for a $20,000 senior secured note and a fully
prepaid lease of dark fiber in New York state.
During June 1999, the Company consummated a purchase agreement with
Entergy Corporation ("Entergy"), the parent of its local partner in the Baton
Rouge, LA, Little Rock, AR, and Jackson, MS markets, whereby Entergy received
approximately $36,518 for its ownership interests in these markets. The
agreements increased the Company's ownership interest in each of these networks
to 100%. The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired networks are
included in the consolidated results of Adelphia Business Solutions effective
from the date acquired.
During August 1999, the Company granted under the 1996 Long-Term
Incentive Compensation Plan to each of John J. Rigas, Michael J. Rigas, Timothy
J. Rigas, and James P. Rigas (i) stock options covering 100,000 shares of Class
A common stock, which options will vest in equal one-third amounts on the third,
fourth and fifth year anniversaries of grant (vesting conditioned on continued
services as an employee or director) and which shall be exercisable at $16.00
per share and (ii) stock awards covering 100,000 shares of Class A common stock,
which stock awards will vest in equal one-third amounts on the third, fourth and
fifth year anniversaries of grant (vesting conditioned on continued services as
an employee or director).
On August 31, 1999, the Company entered into a binding agreement with
Digital Teleport, Inc. ("DTI") for the purchase of dark fiber IRUs covering over
4,000 route miles of long-haul and local fiber in the central portion of the
United States. Although no payments have been made as of September 30, 1999, the
cost of the IRUs is estimated to be between $27,000 and $42,000 depending upon
the exercise by the Company of a number of options for additional routes and/or
fiber strands.
On September 21, 1999, the Company announced its decision to extend its
fiber optic network into the western half of the United States. Management
believes this expansion will enable the Company to offer its services in
approximately 200 markets throughout the country, which represents approximately
65% of the addressable business telecommunications market in the United States.
On October 13, 1999, the Company filed a shelf registration statement
with the Securities and Exchange Commission to sell up to $1,500,000 in debt
securities, preferred and common stock, depository shares, and other equity
securities. This registration statement became effective on October 22,1999.
Proceeds of any sales under this registration statement are expected to be used
for general corporate purposes, including capital spending, acquisitions, debt
repayment, investments and other purposes, and to facilitate the national
expansion.
On October 25, 1999, shareholders of the Company elected to change the
legal name of the Company from Hyperion Telecommunications, Inc. to Adelphia
Business Solutions, Inc. With this decision, management believes the strengths
of Adelphia and the Company are further aligned to develop a single brand in the
communications marketplace.
During the nine months ended September 30, 1999, the Company made
demand advances to Adelphia which, as of September 30, 1999, had been repaid.
The Company received interest on the advances at a rate of 5.15%.
Results of Operations
Three Months Ended September 30, 1999 in Comparison with Three Months Ended
September 30, 1998
Revenues increased 258% to $43,347 for the three months ended September
30, 1999, from $12,098 for the same quarter in the prior year. Growth in
revenues of $31,249 resulted from an increase in revenues from majority and
wholly-owned networks of approximately $30,951 as compared to the same period in
the prior year due to the continued expansion of the Company's customer base,
success in the roll out of switched services, and the consolidation of the
Jacksonville, Richmond, Wichita, Baton Rouge, Jackson and Little Rock markets.
The increase was also partially due to increased management fees from the
non-consolidated subsidiaries of $298 from the same period in the prior year.
Network operations expense increased 125% to $15,862 for the three
months ended September 30, 1999 from $7,056 for the same quarter in the prior
year. The increase was attributable to higher costs associated with an increase
in off-net resale costs, the expansion of operations at the Network Operating
Control Center ("NOCC"), the increased number and size of the operations of the
networks which resulted in increased employee related costs, equipment
maintenance costs, costs related to planned expansion into new markets, and the
consolidation of the Jacksonville, Richmond, Wichita, Baton Rouge, Jackson and
Little Rock markets.
Selling, general and administrative expense increased 285% to $39,972
for the three months ended September 30, 1999 from $10,391 for the same quarter
in the prior year. The increase was due primarily to increased expenses
associated with the network expansion plan, an increase in the network sales
force, an increase in corporate overhead costs to accommodate the growth in the
number, size and operations of the networks as a result of the expansion, and
the consolidation of the Jacksonville, Richmond, Wichita, Baton Rouge, Jackson
and Little Rock markets.
Depreciation and amortization expense increased 85% to $18,168 during
the three months ended September 30, 1999 from $9,843 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 consolidation of the Jacksonville, Richmond,
Wichita, Baton Rouge, Jackson and Little Rock markets.
Interest income for the three months ended September 30, 1999 decreased
31% to $2,867 from $4,169 for the same quarter in the prior year as a result of
decreases in interest income from lower amounts of cash and cash equivalents and
U.S. Government securities.
Interest income-affiliate for the three months ended September 30, 1999
decreased to $1,336 from $2,995 as a result of a decrease in the amount of
demand advances made to Adelphia during the period.
Interest expense increased 52% to $19,045 during the three months ended
September 30, 1999 from $12,535 for the same period in the prior year. The
increase was primarily attributable to higher interest expense associated with
interest on the 12% senior subordinated notes.
Equity in net loss of joint ventures decreased by 91% to $246 during
the three months ended September 30, 1999 from $2,614 for the same quarter in
the prior year. The net losses of the joint ventures for the three months ended
September 30, 1998 and 1999 were primarily the result of increased revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks of the joint
ventures. The decrease was due to the consolidation of several joint ventures
resulting from the purchase of the partners' interests, and to the maturing of
the remaining joint venture networks.
The number of joint ventures paying management fees to the Company
decreased from eight at September 30, 1998 to four at September 30, 1999 due to
the Company's increased ownership in several joint ventures as a result of the
previously mentioned acquisitions. These non-consolidated joint ventures and
networks under construction paid management and monitoring fees to the Company,
which are included in revenues, aggregating approximately $1,215 for the three
months ended September 30, 1999, as compared with $3,701 for the same quarter in
the prior fiscal year. The nonconsolidated joint ventures' net losses, including
networks under construction, for the three months ended September 30, 1998 and
1999, aggregated approximately $3,315 and $1,720, respectively.
Preferred stock dividends increased by 13% to $7,969 for the three
months ended September 30, 1999 from $7,026 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.
Nine Months Ended September 30, 1999 in Comparison with Nine Months Ended
September 30, 1998
Revenues increased 303% to $99,000 for the nine months ended September
30, 1999, from $24,553 for the same period in the prior year. Growth in revenues
of $74,447 resulted from an increase in revenues from majority and wholly-owned
networks of approximately $73,258 as compared to the same period in the prior
year due to the continued expansion of the Company's customer base, success in
the roll out of switched services and the consolidation of the Jacksonville,
Richmond, Wichita, Baton Rouge, Jackson and Little Rock markets. The increase
was also partially due to increased management fees from the non-consolidated
subsidiaries of $1,189 from the same period in the prior year.
Network operations expense increased 147% to $36,037 for the nine
months ended September 30, 1999 from $14,586 for the same period in the prior
year. The increase was attributable to the expansion of operations at the NOCC,
the increased number and size of the operations of the networks which resulted
in increased employee related costs, equipment maintenance costs and costs
related to planned expansion into new markets, and the consolidation of the
Jacksonville, Richmond, Wichita, Baton Rouge, Jackson and Little Rock markets.
Selling, general and administrative expense increased 290% to $93,618
for the nine months ended September 30, 1999 from $24,038 for the same period in
the prior year. The increase was due primarily to higher costs associated with
an increase in off-net resale costs, increased expenses associated with the
network expansion plan, an increase in the network sales force, an increase in
corporate overhead costs to accommodate the growth in the number, size and
operations of the networks managed and monitored by the Company, and the
consolidation of the Jacksonville, Richmond, Wichita, Baton Rouge, Jackson and
Little Rock markets.
Depreciation and amortization expense increased 122% to $45,289 during
the nine months ended September 30, 1999 from $20,413 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 majority and wholly owned
networks, amortization of deferred financing costs and the consolidation of the
Jacksonville, Richmond and Wichita, Baton Rouge, Jackson and Little Rock
markets.
Interest income for the nine months ended September 30, 1999 increased
46% to $19,645 from $13,506 for the same period in the prior year as a result of
the payment of interest due to the Company from Telergy as discussed previously,
offset by decreases in interest income resulting from lower amounts of cash and
cash equivalents and U.S.
Government securities.
Interest income-affiliate for the nine months ended September 30,
1999 increased to $6,943 from $5,070 as a result of demand advances made to
Adelphia during the period.
Interest expense increased 42% to $56,383 during the nine months ended
September 30, 1999 from $39,639 for the same period in the prior year. The
increase was primarily attributable to higher interest expense associated with
the 12% senior subordinated notes.
Equity in net loss of joint ventures decreased by 23% to $7,340 during
the nine months ended September 30, 1999 from $9,487 for the same period in the
prior year. The net losses of the joint ventures for the nine months ended
September 30, 1999 and 1998 were primarily the result of increased revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and management of the networks. The decrease was
due to the consolidation of several joint ventures resulting from the purchase
of the partners' interests, and to the maturing of the remaining joint venture
networks.
The number of nonconsolidated joint ventures paying management fees to
the Company decreased from eight at September 30, 1998 to four at September 30,
1999 due to the Company's increased ownership in several joint ventures as a
result of the previously mentioned acquisitions. These non-consolidated joint
ventures and networks under construction paid management and monitoring fees to
the Company, which are included in revenues, aggregating approximately $3,824
for the nine months ended September 30, 1999, as compared with $2,636 for the
same period in the prior fiscal year. The nonconsolidated joint ventures' net
losses, including networks under construction, for the nine months ended
September 30, 1998 and 1999, aggregated approximately $10,732 and $6,472,
respectively.
Preferred stock dividends increased by 13% to $23,168 for the nine
months ended September 30, 1999 from $20,448 for the same period in the prior
year. The increase was due to a higher outstanding preferred stock base
resulting from the payment of dividends in additional shares of preferred stock.
Supplementary Network Financial Analysis
The Company believes that historically, working with Local Partners to
develop markets has enabled the Company to build larger networks in a rapid and
more cost effective manner than it could have on its own. The Company currently
has joint ventures covering four networks with Local Partners where the Company
owns 50% of each joint venture. As a result of the Company's historic ownership
position in these and other joint ventures, a substantial portion of the
networks' historic results have been reported by the Company on the equity
method of accounting for investments which only reflects the Company's pro rata
share of net income or loss of the networks. Because of the recently completed
partner roll-ups, management of the Company believes this historical
presentation of the assets, liabilities and results of operations of the Company
does not represent a complete measure of the financial position, growth or
operations of the Company.
In order to provide an additional measure of the financial position,
growth and performance of the Company and its networks, management of the
Company analyzes financial information of the consolidated networks and the
nonconsolidated joint venture networks on a combined basis. This combined
financial presentation in the table below reflects Adelphia Business Solutions'
consolidated financial position and results of operations adjusted for the
inclusion of certain networks (Richmond, Jacksonville and Wichita) which were
purchased in March 1999 (the "Adjusted Operating Results") combined with the
non-consolidated joint ventures' results of operations. All combined results of
operations in the table below are presented as if Adelphia Business Solutions
consolidated all networks which were involved in the partnership roll-ups during
the entire period presented. This financial information, however, is not
indicative of the Company's overall historical financial position or results of
operations.
Quarter ended September 30, 1999 Quarter ended September 30, 1998
--------------------------------------- ---------------------------------------
(dollars in thousands) (dollars in thousands)
Adjusted
Consolidated Joint Combined Adjusted Joint
Consolidated Venture Combined Consolidated Venture Combined
Operating Operating Operating Operating Operating Operating
Results Results Results Results Results Results
--------------------------------------- ---------------------------------------
Revenues $ 43,347 $ 9,501 $ 52,848 $ 16,672 $ 3,211 $ 19,883
Direct Operating Expenses 15,862 2,526 18,388 8,410 1,902 10,312
--------------------------------------- ---------------------------------------
Gross Margin 27,485 6,975 34,460 8,262 1,309 9,571
Gross Margin Percentage 63.4% 73.4% 65.2% 49.6% 40.8% 48.1%
Selling, General and Administrative 39,972 4,194 44,166 11,813 3,046 14,859
Expenses
--------------------------------------- ---------------------------------------
EBITDA (a) (12,487) 2,781 (9,706) (3,551) (1,737) (5,288)
--------------------------------------- ---------------------------------------
EBITDA Percentage of Revenues (28.8%) 29.3% (18.4%) (21.3%) (54.1%) (26.6%)
September 1999 Quarter vs.
September 1998 Quarter
---------------------------------------------------
% Change Comparison Consolidated Joint Venture Combined
Operating Operating Operating
Results Results Results
---------------------------------------------------
Revenues 160.0% 195.9% 165.8%
Direct Operating Expenses 88.6% 32.8% 78.3%
---------------------------------------------------
Gross Margin 232.7% 432.8% 260.0%
Selling, General and Administrative 238.4% 37.7% 197.2%
Expenses
---------------------------------------------------
EBITDA (a) NM(b) NM(b) 83.5%
---------------------------------------------------
<FN>
(a) Earnings before interest, income taxes, depreciation and amortization and
other income/expense ("EBITDA") and similar measures of cash flow are
commonly used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance,
leverage, and liquidity. While EBITDA is not an alternative indicator of
operating performance or an alternative to cash flows from operating
activities as a measure of liquidity as defined by generally accepted
accounting principles, and while EBITDA may not be comparable to other
similarly titled measures of other companies, management of Adelphia
Business Solutions believes that EBITDA is a meaningful measure of
performance.
(b) Not meaningful
</FN>
Liquidity and Capital Resources
The development of the Company's business and the installation and
expansion of the networks, as well as the development of new markets, combined
with the construction and expansion of the Company's NOCC, have resulted in
substantial capital expenditures and investments during the past several years.
Capital expenditures by the Company were $145,490 and $232,418 for the nine
months ended September 30, 1998 and 1999, respectively. Further, investments
made by the Company in nonconsolidated joint ventures were $32,150 and $27,421
for the nine months ended September 30, 1998 and 1999, respectively. The
increase in capital expenditures for the nine months ended September 30, 1999 as
compared with the same period in the prior fiscal year is largely attributable
to the capital expenditures necessary to develop the original markets and the
new markets as well as the fiber purchases to interconnect the networks. The
Company expects that it will continue to incur substantial capital expenditures
in the development effort. The Company also expects to continue to fund
operating losses as the Company develops and grows its business. For information
regarding recent transactions affecting the Company's liquidity and capital
resources, see "Recent Developments."
The Company has experienced negative operating cash flow since its
inception. A combination of operating losses, substantial capital investments
required to build the Company's networks and its state-of-the-art NOCC, and
incremental investments in the joint ventures has resulted in substantial
negative cash flow.
Expansion of the Company's Original Markets and services and the
development of New Markets and 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 switched services in the Company's networks, (ii) the expansion and
improvement of the Company's NOCC and Original Markets, (iii) the design,
construction and development of the New Markets and (iv) the acquisition of
additional ownership interests in the Original Markets. The Company has made
substantial capital investments and investments in joint ventures in connection
with the installation of switches or remote switching modules in all of its
Original Markets and plans to install regional super switches in certain New
Markets when such New Markets are operational. To date, the Company has
installed switches in all of its Original Markets and plans to provide such
services in all of its new markets on a standard switching platform based on
Lucent 5 switch technology. In addition, the Company intends to continue to
increase spending on marketing and sales significantly in connection with the
expansion of its sales force and marketing efforts generally. The Company also
plans to continue to purchase its partners' interests in the joint ventures when
it can do so on attractive economic terms. The Company estimates that, in
addition to the cash and cash equivalents on hand and the U.S. government
securities pledged as of September 30, 1999, a total of approximately $550,000
will be required to fund the Company's capital expenditures, working capital
requirements, operating losses and pro rata investments in the joint ventures
from October 1, 1999 through the quarter ending December 31, 2000.
There can be no assurance (i) that the Company's future cash
requirements will not vary significantly from those presently planned due to a
variety of factors including acquisition of additional networks, continued
acquisition of increased ownership in its networks, material variance from
expected capital expenditure requirements for the Original Markets and the New
Markets and development of the LMDS spectrum or (ii) that anticipated
financings, Local Partner investments and other sources of capital will become
available to the Company on economically attractive terms or at all. In
addition, it is possible that expansion of the Company's networks may include
the geographic expansion of the Company's existing clusters and the development
or acquisition of other new networks not currently planned.
The Company will need substantial additional funds to fully fund its
business plan. The Company expects to fund its capital requirements through
existing resources, credit facilities and vendor financings at the Company and
joint ventures levels, internally generated funds, equity invested by Local
Partners in the joint ventures and additional debt or equity financings, as
appropriate, and expects to fund any potential additional purchase of
partnership interests of Local Partners through existing resources, internally
generated funds and additional debt or equity financings, as appropriate. There
can be no assurances, however, that the Company will be successful in generating
sufficient cash flow or in raising sufficient debt or equity capital on terms
that it will consider acceptable, or at all.
The Company currently expects that its existing cash balance,
internally generated funds and future financing sources will be sufficient to
fund the Company's capital expenditures, acquisitions, operating losses and pro
rata investments in the joint ventures through December 2001. There can be no
assurance, however, as to the availability of funds from internal cash flow,
Local Partner investments or from the private or public equity or debt markets.
Also, the indentures relating to the 13% Senior Discount Notes, the 12 1/4%
Senior Secured Notes and the 12% Subordinated Notes and the Certificate of
Designation for the 12 7/8% Senior Exchangeable Redeemable Preferred Stock
provide certain restrictions upon the Company's ability to incur additional
indebtedness. The Company's inability to fund its capital expenditures,
acquisitions, operating losses or pro rata investment in the joint ventures
could have a material effect upon the Company and/or the joint ventures.
Year 2000 Issue
The year 2000 issue refers to the inability of computerized systems and
technologies to recognize and process dates beyond December 31, 1999. The
Company has evaluated the impact of the year 2000 issue on its business
applications and its products and services. This could present risks to the
operation of the Company's business in several ways. The evaluation included a
review of the Company's information technology systems, telephony equipment and
other embedded technologies. A significant portion of the Company's computerized
systems and technologies have been developed, installed or upgraded in recent
years and are generally more likely to be year 2000 ready. The Company's
evaluation also included evaluating the potential impact as a result of its
reliance on third-party systems that may have the year 2000 issue.
Computerized business applications that could be adversely affected by
the year 2000 issue include:
information processing and financial reporting systems;
customer billing systems;
customer service systems;
telecommunication transmission and reception systems; and
facility systems.
System failure or miscalculation could result in an inability to
process transactions, send invoices, accept customer orders or provide customers
with products and services. Customers could also experience a temporary
inability to receive or use the Company's products and services.
The Company has developed a program to assess and address the year
2000 issue. This program consists of the following phases:
inventorying and assessing the impact on affected technology and systems,
developing solutions for affected technology and systems;
modifying or replacing affected technology and systems;
testing and verifying solutions;
implementing solutions; and
developing contingency plans.
The Company has substantially completed its inventory and assessment of
affected computerized systems and technologies. The Company is in the final
stages of its year 2000 compliance program with respect to the remediation of
the affected systems and technologies.
The Company has engaged a consulting firm familiar with its financial
reporting systems. This firm has developed and tested year 2000 solutions that
the Company has implemented. The Company has certified all eight of its
financial systems as year 2000 compliant.
A third-party billing vendor currently facilitates customer billing.
This third-party vendor certified that it implemented and successfully tested
its own year 2000 solution in April 1999.
Telecommunication plant rebuilds and upgrades in recent years have
minimized the potential impact of the year 2000 issue on the Company's
facilities, customer service, telecommunication transmission and reception
systems. The Company has substantially completed a comprehensive internal
inventory and assessment of all hardware components and component controlling
software throughout its telecommunication networks and has implemented
substantially all modifications, upgrades or replacements resulting from this
internal review.
Costs incurred to date directly related to addressing the year 2000
issue have been approximately $750. The Company has also redeployed internal
resources to meet the goals of its year 2000 program. The Company currently
estimates the total cost of its year 2000 remediation program to be
approximately $1,000. Although the Company will continue to incur substantial
capital expenditures in the ordinary course of meeting its telecommunications
system upgrade goals through the year 2000, it will not specifically accelerate
its expenditures to facilitate year 2000 readiness, and accordingly such
expenditures are not included in the above estimate.
The Company is continuing to communicate with others with whom it does
significant business to determine their year 2000 readiness and to determine the
extent to which the Company is vulnerable to the year 2000 issue related to
those third parties. The Company purchases much of its technology from third
parties. There can be no assurance that the systems of other companies on which
the Company's systems rely will be year 2000 ready or timely converted into
systems compatible with the Company's systems. The Company's failure or a
third-party's failure to become year 2000 ready or the Company's inability to
become compatible with third parties with which the Company has a material
relationship, including companies that the Company acquires, may have a material
adverse effect on the Company, including significant service interruption or
outages; however, the Company cannot currently estimate the extent of any such
adverse effects.
The Company is in the process of identifying secondary sources to
supply its systems or services in the event it becomes probable that any of its
systems will not be year 2000 ready prior to the end of 1999. The Company is
also in the process of identifying secondary vendors and service providers to
replace those vendors and service providers whose failure to be year 2000 ready
could lead to a significant delay in the Company's ability to provide its
service to its customers.
Competition
The Company faces competition from many competitors with significantly
greater financial resources, well-established brand names and large, existing
installed customer bases. Moreover, we expect the level of competition to
intensify in the future.
In each of the markets served by the Company's networks, the services
offered by the Company compete principally with the services offered by the
Incumbent Local Exchange Carrier ("ILEC") serving that area. ILECs have
long-standing relationships with their customers, have the potential to
subsidize competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act of 1996 (the "Telecommunications Act"), federal and state
regulatory initiatives provide increased business opportunities to competitive
local exchange carriers ("CLECs") such as the Company, but regulators are likely
to provide ILECs with increased pricing flexibility for their services as
competition increases. Further, if a Regional Bell Operating Company ("RBOC") is
authorized to provide long distance service originating in region 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, each request for such authority has been
denied by the FCC, although the FCC is currently considering Bell Atlantic's
petition for the State of New York. An approval could result in decreased market
share for the major IXCs, which are among the Operating Companies' significant
customers. Any of these results could have an adverse effect on the Company.
There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market, including the completed
merger of Bell Atlantic and NYNEX, 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. and MediaOne and the proposed mergers between SBC and Ameritech, Bell
Atlantic and GTE, Qwest and US West, and MCIWorldCom and Sprint. 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, ILECs which
are not subject to RBOC restrictions on long distance, AT&T, MCI 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 the other
existing IXCs, there are no assurances that any of these IXCs will not build
their own facilities, purchase other carriers or their facilities, or resell the
services of other carriers rather than use the Company's services when entering
the market for local exchange services.
Regulation
Government Overview
A significant portion of the services provided by the Company and its
networks is subject to regulation by federal, state and local government
agencies. Future federal or state regulations and legislation may be less
favorable to us than current regulation and legislation and therefore may have a
material and adverse impact on our business and financial prospects. In
addition, we may expend 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 on February 21, 1996 establishes
local exchange competition as a national policy. This act removes state
regulatory barriers to competition, and imposes numerous requirements to
facilitate the provision of local telecommunications services by multiple
providers. For instance, carriers must provide to each other services for
resale, number portability, dialing parity, access to rights of way, and
compensation for traffic they exchange. ILECs must also provide competitors with
network interconnection, access to unbundled network elements, and collocation
at ILEC premises, among other things. Finally, the FCC is responsible for
implementing and presiding over rules relating to these requirements as well as
universal service subsidies, charges for access to long distance carriers,
access to buildings, customer privacy, and services for the disabled.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any entity from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers. The Company
has successfully challenged states' attempts to limit competition in certain
rural areas. One state has requested a stay of the favorable FCC order.
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. It has done so by
promulgating rules which encourage increased local competition. In 1997, a
federal appeals court for the Eighth Circuit vacated some of these rules. In
January 1999, the United States Supreme Court reversed the majority of the
Eighth Circuit's ruling, finding that the FCC has broad authority to interpret
the Telecommunications Act and issue rules for its implementation. Specifically,
the Court stated that the FCC has authority to set pricing guidelines for
unbundled network elements, to prevent ILECs from dismantling existing
combinations of network elements, and to establish rules allowing competitors to
"pick and choose" among provisions of existing interconnection agreements.
However, the Court vacated the FCC's rules that identified the unbundled network
elements that ILECs must provide to CLECs. The FCC will soon issue an order
explaining which unbundled network elements ILECs must provide. In addition,
because the Eighth Circuit had only ruled on the FCC's jurisdiction to set a
pricing methodology, the ILECs have renewed their opposition to the actual
methodology.
Many new carriers have experienced difficulties in working with the
ILECs, with respect to provisioning, interconnection, rights-of-way, collocation
and implementing the systems used by these new carriers to order and receive
unbundled network elements and wholesale service from the ILECs. Coordination
with ILECs is necessary for new carriers such as the Company to provide local
service to customers on a timely and competitive basis. The Telecommunications
Act created incentives for RBOCs to cooperate with new carriers, allowing the
RBOCs to offer long distance services originating in their region, if the RBOC
satisfies statutory conditions designed to open their local markets to
competition. The RBOCs in the Company's proposed markets are not yet permitted
by the FCC to offer long distance services, although the FCC may soon grant Bell
Atlantic's bid in New York. The Company cannot be assured that RBOCs will be
accommodating to the Company's networks once they are permitted to offer long
distance service. If the Company's networks are unable to obtain the cooperation
of an RBOC in a region, whether or not such RBOC has been authorized to offer
long distance service, the Company's networks' ability to offer local services
in such region on a timely and cost effective basis would be adversely affected.
The FCC recently adopted new 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 and requiring ILECs to offer alternative
collocation arrangements to CLECs. The FCC also initiated a new proceeding to
address line sharing which, if implemented, would allow CLECs to offer data
services over the same line that a consumer uses for voice services without the
CLEC having to provide the voice service. While the Company expects that the
FCC's new collocation rules will be beneficial to the Company's networks, ILECs
continue to resist the rules and it remains uncertain that these new rules will
be implemented in a favorable manner.
A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to Internet service providers ("ISPs"). The ILECs
claim that this traffic is interstate in nature and therefore should be exempt
from compensation arrangements applicable to local, intrastate calls. Most
states have required ILECs to pay ISPs reciprocal compensation. However, on
February 25, 1999, the FCC adopted an order in which it determined that calls to
ISPs are interstate in nature and proposed rules to govern compensation to
carriers for transmitting these calls. It stated, however, that its action was
not intended to dislodge previous state decisions interpreting interconnection
agreements between ILECs and CLECs to require reciprocal compensation between
two local carriers jointly delivering dial-up traffic to ISPs. Although the FCC
does not intend to require ISPs to pay access charges or contribute to universal
service funds, the FCC's order and subsequent state rulings could affect the
costs incurred by ISPs and the demand for their offerings. An unfavorable
outcome could materially affect the Company's potential future revenues.
Several ILECs have filed petitions at the FCC and have initiated
legislative efforts to effect a waiver of certain obligations imposed on ILECs
in the Telecommunications Act with respect to RBOC-provisioned high-speed data
services, including, among other things, the obligation to unbundle and offer
for resale such services. In addition, the ILECs are seeking to provide
high-speed data services on an interLATA basis without complying with the market
opening provisions of the competitive checklist set forth in the
Telecommunications Act, which would be otherwise required of them. The FCC has
subsequently approved that such services are subject to interstate jurisdiction
and to the resale and unbundling obligation of the Telecommunications Act.
However, the FCC has initiated a proceeding to determine whether ILECs can
create separate affiliates for their high-speed data services that would be free
from these obligations. In addition, there are numerous bills being considered
by Congress which would deregulate advanced services. These outcomes could have
a material adverse effect on the Company.
Any of the regulatory changes discussed above could require
renegotiation of relevant portions of existing interconnection agreements, or
subject them to additional court and regulatory proceedings. It remains to be
seen whether the networks can continue to obtain and maintain interconnection
agreements on terms acceptable to them in every state, though most states have
already adopted pricing rules, if not interim prices, which are for the most
part consistent with the FCC's related pricing provisions.
The FCC also manages universal service subsidies for rural, high-cost,
and low-income markets and currently assesses the Company's networks for such
payments on the basis of certain revenue for the previous year. Within the past
year, the FCC established new subsidies for telecommunications and information
services provided to qualifying schools and libraries and for services provided
to rural health care providers. The FCC also expanded the federal subsidies for
local exchange telephone service provided to low-income consumers. Various
states also implement their own universal service programs to which the Company
is subject.
To the extent that the Company's networks provide interexchange
telecommunications service, access charges are required to be paid to ILECs when
the facilities of those companies are used to originate or terminate
interexchange calls. Also, as CLECs, the Company's networks provide access
service to other interexchange service providers. The interstate access charges
of ILECs are subject to extensive regulation by the FCC, while those of CLECs
are subject to a lesser degree of FCC regulation but remain subject to the
requirement that all charges be just, reasonable, and not unreasonably
discriminatory. Some of the interexchange providers to whom the Company's
networks provide access services, including AT&T and Sprint, have announced
plans to resist paying access charges that exceed the access charges of the ILEC
in any given geographic area. While the Company's networks have not experienced
any such challenges to their rights to collect access charges, they could
experience them in the future. The FCC has initiated a proceeding to investigate
whether CLEC access charges should be subjected to more stringent regulation.
The manner in which the FCC regulates or lowers access charge levels could have
a material effect on the ability of the Company's networks to compete in
providing interstate access services and terminating and originating long
distance traffic.
In an exercise of its "forbearance authority," the FCC has ruled that
following a transition period non-dominant IXCs will no longer be able to file
tariffs with the FCC concerning their interexchange long distance services (the
"IXC Detariffing Order"). Tariffs set forth the terms and conditions under which
the operating companies provide services. This would deprive the Company of the
advantages of being able to rely on terms and conditions contained in a filed
tariff, requiring instead reliance on individual contracts. The IXC Detariffing
Order has been stayed pending review in the U.S. Court of Appeals for the
District of Columbia.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any entity from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers. The Company
has successfully challenged states' attempts to limit competition in certain
rural areas. However, inability to implement the related FCC order could
adversely effect the Company's expansion plans.
The FCC also presides over ongoing proceedings addressing a variety of
other matters, including number portability, Internet, telephony, slamming,
rights of way, building access, pole attachments, customer privacy, and services
to the disabled. The outcome of any such proceedings may adversely affect the
Company and its ability to offer service in competition with LECs.
State Regulation
Most State Public Utility Commissions ("PUCs") require companies that
wish to provide intrastate common carrier services to be certified to provide
such services. These certifications generally require a showing that the carrier
has adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. In addition, Company
networks have been certificated or are otherwise authorized to provide
telecommunications services in Alabama, Arkansas, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana,
Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Tennessee, Texas, Vermont, Virginia and West Virginia. The certificates or other
authorizations permit the Company's networks to provide a full range of local
telecommunications services, including basic local exchange service. In certain
states, each of the Company, its subsidiaries and the Company's networks may be
subject to additional state regulatory requirements, including tariff filing
requirements, to begin offering the telecommunications services for which such
entities have been certificated. In some states, the Company network tariff
lists a rate range or sets prices on an individual case basis. Many states also
may have additional regulatory requirements such as reporting and customer
service and quality requirements, Y2K compliance, unbundling and universal
service contributions all of which are subject to change and may adversely
affect the Company. In addition, in virtually every state, the Company's
certificate or other authorization is subject to the outcome of proceedings by
the state commission that address regulation of LECs and CLECs, competition,
geographic build-out, mandatory detariffing, service requirements, and universal
service issues.
In addition to obtaining certification, a Company network must
negotiate terms of interconnection with the ILEC before it can begin providing
switched services. To date, the Company's networks have negotiated
interconnection agreements with one or more of the ILECs, in each state in which
they 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 a percent of fiber
lease payment revenues. In addition, in areas where the Company does not use
facilities constructed by a Local Partner, the Company's networks may be
required to pay such fees. There are no assurances that certain municipalities
that do not currently impose fees will not seek to impose fees in the future,
nor is there any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In addition, some
municipalities may seek to impose requirements or fees on users of transmission
facilities, even though they do not own such facilities.
In many markets, other companies providing local telecommunications
services, particularly the ILECs, currently are excused from paying license or
franchise fees or pay fees that are materially lower than those required to be
paid by the Company network or Local Partner. The Telecommunications Act
requires municipalities to charge nondiscriminatory fees to all
telecommunications providers, but it is uncertain how quickly this requirement
will be implemented by particular municipalities in which the Company operates
or plans to operate or whether it will be implemented without a legal challenge
initiated by the Company or another CLEC.
If any of the existing local partner agreements or fiber lease
agreements held by a Local Partner or a Company network for a particular market
were terminated prior to its expiration date, such termination could have a
material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company uses fixed rate debt and redeemable preferred stock to fund
its working capital requirements, capital expenditures and acquisitions. These
financing arrangements expose the Company to market risk related to changes in
interest rates. The table below summarizes the fair values and contract terms of
the Company's financial instruments subject to interest rate risk as of
September 30, 1999.
Expected Maturity
----------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
--------- --------- ---------- ---------- ---------- ----------- ------------ ------------
Fixed Rate Debt and
Redeemable Preferred Stock: --- --- --- --- $303,840 $802,261 $1,106,101 $1,036,761
Average Interest Rate 12.53% 12.53% 12.53% 12.53% 12.41% 12.35% --- ---
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 24, 1999, the Company was served with a summons and
complaint filed in the United States District Court for the Northern District of
New York, Case Number 99-CV-268, by Hyperion Solutions Corporation
("Solutions"), which is described in the complaint as a company in the business
of developing, marketing and supporting comprehensive computer software tools,
executive information systems and applications that companies use to improve
their business performance. The complaint alleges, among other matters, that the
Company's use of the name "Hyperion" in its business infringes upon various
trademarks and service marks of Solutions in violation of federal trademark laws
and violates various New York business practices, advertising and business
reputation laws. The complaint seeks, among other matters, to enjoin the Company
from using the name or mark "Hyperion" in the Company's business as well as to
recover unspecified damages, treble damages and attorneys' fees. Management of
the Company believes that the Company has meritorious defenses to the complaint
and intends to vigorously defend this lawsuit. Although management believes that
this lawsuit will not in any event have a material adverse effect upon the
Company, no assurance can be given regarding the effect upon the Company if
Solutions were to prevail in this lawsuit.
Item 2. Changes in Securities and Use of Proceeds
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 September 30, 1999,
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 September 30, 1999,
pursuant to Section 4.03(a)(iii) of the Indenture dated August 27, 1997 with
respect to the 12 1/4% Senior Secured Notes.
The attached Exhibit 99.03 provides certain financial and business
information of the Company for the three and nine months ended September 30,
1999.
The attached Exhibit 99.04 provides certain information with respect to a
current proposed financing of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3.01 Amended and Restated Certificate of Incorporation, as amended as
of October 25, 1999
Exhibit 27.01 Financial Data Schedule (supplied for the information of
the Commission).
Exhibit 99.01 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint
Ventures Presented by Cluster".
Exhibit 99.02 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the
Joint Ventures".
Exhibit 99.03 Press Release dated November 10, 1999
Exhibit 99.04 Press Release dated November 10, 1999
(b) Reports on Form 8-K:
Form 8-Ks were filed on September 27, 1999, October 26, 1999 and October 27,
1999 which reported information under Item 5 and/or Item 7 thereof. 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: November 10, 1999 By: /s/ Timothy J. Rigas
----------------------
Timothy J. Rigas
Vice Chairman, Chief Financial Officer
(authorized officer), Chief Accounting
Officer and Treasurer
Exhibit Index
Exhibit 3.01 Amended and Restated Certificate of Incorporation, as
amended as of October 25, 1999.
Exhibit 27.01 Financial Data Schedule (supplied for the information of
the Commission).
Exhibit 99.01 "Schedule E - Form of Financial Information and
Operating Data of the Subsidiaries and the Joint Ventures
Presented by Cluster".
Exhibit 99.02 "Schedule F - Form of Financial Information and
Operating Data of the Pledged Subsidiaries and the Joint
Ventures".
Exhibit 99.03 Press Release dated November 10, 1999
Exhibit 99.04 Press Release dated November 10, 1999
Exhibit 99.01
SCHEDULE E
Adelphia Business Solutions Telecommunications, Inc.
Form of Financial Information and Operating Data
Of the Subsidiaries and the Joint Ventures Presented by Cluster
Data presented for the quarter ended: 9/30/99
Unaudited ***
North East Mid-Atlantic Mid-South Other Markets Total
FINANCIAL DATA (dollars in thousands):
Total Revenue $ 12,738.4 $ 20,521.6 $ 10,623.0 $ 6,337.6 $ 50,220.6
Total Capital Expenditures $ 9,343.6 $ 53,483.4 $ 16,135.3 $ 31,350.1 $ 110,312.4
Total EBITDA $ 4,465.8 $ (269.2) $ (4,115.6) $ (1,774.8) $ (1,693.8)
Gross PP&E $ 117,726.0 $ 444,624.4 $ 180,016.5 $ 209,271.2 $ 951,638.1
Proportional Revenue * $ 12,738.4 $ 15,820.7 $ 10,623.0 $ 6,337.6 $ 45,519.7
Proportional Capital Expenditures* $ 9,343.6 $ 50,361.4 $ 16,135.3 $ 31,350.1 $ 107,190.4
Proportional EBITDA * $ 4,465.8 $ (1,606.9)$ (4,115.6)$ (1,774.8) $ (3,031.5)
Proportional Gross PP&E * $ 117,726.0 $ 378,806.2 $ 180,016.5 $ 209,271.2 $ 885,819.9
STATISTICAL DATA
Increase for September 30, 1999:
quarter:
Markets in Operation 1 4 2 1 8
Route Miles 111 58 189 --- 358
Fiber Miles 5,324 2,803 4,704 --- 12,831
Buildings connected 46 66 64 5 181
Building with customers 316 2,311 941 1,002 4,570
LEC-COs collocated ** --- 1 --- 1 2
Voice Grade Equivalent Circuits 42,336 129,696 87,360 22,848 282,240
As of June 30, 1999:
Markets in Operation 4 21 9 6 40
Route Miles 3,220 4,350 3,618 4,102 15,290
Fiber Miles 94,374 155,174 69,184 59,368 378,100
Buildings connected 353 763 377 444 1,937
Buildings with customers 2,401 3,879 4,128 1,463 11,871
LEC-COs collocated ** 16 82 32 18 148
Voice Grade Equivalent Circuits 285,600 823,872 401,184 303,744 1,814,400
As of September 30, 1999:
Markets in Operation 5 25 11 7 48
Route Miles 3,331 4,408 3,807 4,102 15,648
Fiber Miles 99,698 157,977 73,888 59,368 390,931
Buildings connected 399 829 441 449 2,118
Buildings with customers 2,717 6,190 5,069 2,465 16,441
LEC-COs collocated ** 16 83 32 19 150
Voice Grade Equivalent Circuits 327,936 953,568 488,544 326,592 2,096,640
Access Lines Sold 40,500 137,517 63,371 31,247 272,635
Access Lines Installed 35,666 124,968 60,104 30,067 250,805
* Represents portion attributable to the Company.
** Local Exchange Carrier's central office
*** Other Market amounts includes Network Control Centers and Corporate Capital
Expenditures and Gross Property, Plant and Equipment
Exhibit 99.02
SCHEDULE F
Adelphia Business Solutions Telecommunications, Inc.
Form of Financial Information and Operating Data
of the Pledged Subsidiaries and the Joint Ventures
Data presented for the quarter ended: 9/30/99
Unaudited
Total
FINANCIAL DATA (dollars in thousands)(a):
Total Revenue $ 20,610.1
Total Capital Expenditures $ 18,181.8
Total EBITDA $ 5,702.7
Gross Property, Plant & Equipment $ 226,230.1
STATISTICAL DATA(b):
As of September 30, 1999:
Markets in Operation 7
Route Miles 3,466
Fiber Miles 158,626
Buildings connected 981
LEC-COs collocated 61
Voice Grade Equivalent Circuits 958,944
Access Lines Sold 85,471
Access Lines Installed 78,746
(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.
Exhibit 99.03
PRESS RELEASE
Contact Information
Ed Babcock
Adelphia Business Solutions
814-274-9830
FOR IMMEDIATE RELEASE:
ADELPHIA BUSINESS SOLUTIONS, INC ANNOUNCES THIRD QUARTER RESULTS
OF OPERATIONS
Coudersport, PA - November 10, 1999
John J. Rigas, Chairman of Adelphia Communications Corporation
("Adelphia") (NASDAQ NNM: ADLAC) and Adelphia Business Solutions, Inc. (formerly
Hyperion Telecommunications, Inc. ) ("the Company") (NASDAQ NNM: ABIZ) reported
results of operations for the Company and its Operating Companies (defined in
footnote) for the third quarter which ended on September 30, 1999. Third quarter
results saw record levels of consolidated operating revenues of $43.3 million,
and record access line installations of 59,520. Furthermore, the Company's
Original Markets (defined in Table 2) achieved positive EBITDA of $9.9 million
while overall Company and Operating Company EBITDA losses in the September 1999
quarter remained constant with the June 1999 quarter at negative $9.7 million.
Net loss applicable to common shareholders for the third quarter totaled $53.7
million, or $0.97 per share, compared with $29.9 million, or $0.54 per share,
for the same period in the prior year. The Company now offers communications
services in 48 markets in the eastern half of the United States with plans to
expand to a total of 200 markets throughout the United States by the end of
2001. Summarized financial results are included in Tables 1, 2 and 3 below.
As represented in Table 1, on a sequential quarterly basis, pro-forma
consolidated revenues increased 26.7% to $43.3 million in the September 1999
quarter, from $34.2 million in the June 1999 quarter. Gross margin as a percent
of sales was 63.4% in the September 1999 quarter as compared with 65.9% of sales
in the June 1999 quarter. EBITDA losses for the September 1999 quarter totaled
$12.5 million versus a $10.1 million EBITDA loss in the June 1999 quarter. The
lower gross margin percent and higher EBITDA losses were in line with the
Company's expectations and are a direct result of its expansion efforts.
Additionally, the Company's joint ventures, in the four markets in which the
Company is a 50% partner continued to demonstrate improved financial results
with EBITDA margins as a percent of sales of 29.3% versus 3.1% in the June 1999
quarter.
Table 2 presents the Company's financial results of operations for the
22 Original Markets and the Company's current expansion into its New Markets
(defined in Table 2). The Original Markets EBITDA increased by $2.2 million to
$9.9 million, or 20.0% of revenues in the September 1999 quarter. Furthermore,
gross margin as a percent of sales in the Original Markets maintained a strong
69.9% in the September 1999 quarter as the Company continued to provision most
of its lines completely on its own network in its Original Markets. New Markets
revenues increased to $3.3 million in the September quarter from $0.6 million in
the June 1999 quarter as this represented the first full quarter of operations.
New Market EBITDA losses increased to $19.6 million for the September 1999
quarter from a loss of $17.5 million in the June 1999 quarter as the markets
continue to develop. Overall, EBITDA losses were constant at $9.7 million from
the June 1999 quarter to September 1999 quarter.
Access lines installed increased by 59,520, resulting in an installed
access line base of 250,805 as of September 30, 1999, 57% of which are serviced
on the Company's switches. Access lines sold as of September 30, 1999 totaled
272,635, an increase of 60,444 in the quarter.
During the September 1999 quarter, the Company and its consolidated
subsidiaries invested $100.6 million in capital expenditures. As of September
30, 1999, total gross property, plant and equipment of the Company and its
consolidated subsidiaries was approximately $820.0 million.
As of September 30, 1999, the Operating Companies had approximately
6,675 local route miles and 301,000 local fiber miles. The Company had customers
located in approximately 16,441 buildings, of which 2,118 buildings were
connected with Company owned fiber and was collocated in 150 local exchange
carrier central offices. To date, 22 Lucent 5ESS switches or remote switching
modules have been installed to provide local telephone service with nine
additional regional switches planned for operation during 1999 and early 2000.
Adelphia Business Solutions is a majority owned subsidiary of Adelphia
Communications Corporation that provides integrated communications services to
business customers through its state-of-the-art fiber optic communications
network. As a result of its consolidation efforts, the Company now owns 100% of
the interests in 44 of 48 markets in which it currently offers communications
services, with the remaining 4 markets operating as 50% owned joint ventures
with a local partner. By the end of 2001, the Company expects to serve 200
markets throughout the United States including substantially all major Tier I
and Tier II cities, through the interconnection of these markets, creating a
single fiber optic backbone network. This fully redundant, 30,000-mile long-haul
fiber optic network will support the Company's full line of communication
service offerings, including local and long distance voice services, messaging,
high-speed data and internet services. For more information on Adelphia Business
Solutions, or to review an electronic version of this press release visit the
company's web site at http://www.adelphia-abs.net.
Footnote: The Company's Operating Companies represent partnerships or
limited liability companies with local partners, and wholly or majority owned
subsidiaries of the Company (collectively, the "Operating Companies").
Certain statements in this release are forward-looking statements that
are subject to material risks and uncertainties. Actual results could differ
materially from those stated or implied by such forward-looking statements due
to risks and uncertainties associated with the Company's business, which include
among others, competitive developments, risks associated with the Company's
growth, the development of the Company's markets, regulatory risks, dependence
on its customers and their spending patterns and other risks which are discussed
in the Company's filings with the Securities and Exchange Commission. Additional
information of 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 under Registration
Statement File No. 333-88927, under the caption "Risk Factors."
Adelphia Business Solutions, Inc.
Table 1 - Unaudited Proforma Consolidated and
Joint Venture Operating Results
Quarter ended September 30, 1999 Quarter ended June 30, 1999 Quarter ended September 30, 1998
---------------------------------------------------------------------------------------------------
Joint Joint Pro-forma Joint
Consolidated Venture Total Consolidated Venture Total Consolidated Venture Total
(dollars in thousands) Operating Operating Operating Operating Operating Operating Operating Operating Operating
Results Results Results Results Results Results Results Results Results
---------------------------------------------------------------------------------------------------
Revenues $43,347 $ 9,501 $52,848 $34,215 $9,742 $43,957 $16,672 $3,211 $19,883
Direct Operating Expenses 15,862 2,526 18,388 11,671 3,565 15,236 8,410 1,902 10,312
---------------------------------------------------------------------------------------------------
Gross Margin 27,485 6,975 34,460 22,544 6,177 28,721 8,262 1,309 9,571
Gross Margin Percentage 63.4% 73.4% 65.2% 65.9% 63.4% 65.3% 49.6% 40.8% 48.1%
Sales, General and Administrative 39,972 4,194 44,166 32,637 5,875 38,512 11,813 3,046 14,859
Expenses
--------------------------------------------------------------------------------------------------
EBITDA (a) (12,487) 2,781 (9,706) (10,093) 302 (9,791) (3,551) (1,737) (5,288)
--------------------------------------------------------------------------------------------------
EBITDA Percentage of Revenues -28.8% 29.3% -18.4% -29.5% 3.1% -22.3% -21.3% -54.1% -26.6%
September 1999 Quarter vs. September 1999 Quarter vs.
June 1999 Quarter September 1998 Quarter
------------------------------------------------------------------------
Joint Pro-forma Joint
Percent Change Comparison Consolidated Venture Total Consolidated Venture Total
Operating Operating Operating Operating Operating Operating
Results Results Results Results Results Results
------------------------------------------------------------------------
Revenues 26.7% -2.5% 20.2% 160.0% 195.9% 165.8%
Direct Operating Expenses 35.9% -29.1% 20.7% 88.6% 32.8% 78.3%
------------------------------------------------------------------------
Gross Margin 21.9% 12.9% 20.0% 232.7% 432.8% 260.0%
Sales, General and Administrative 22.5% -28.6% 14.7% 238.4% 37.7% 197.2%
------------------------------------------------------------------------
EBITDA (a) 23.7% NM -0.9% 251.6% NM 83.5%
------------------------------------------------------------------------
<FN>
Table 1 summarizes operating results for (i) Adelphia Business Solutions and its
consolidated subsidiaries and (ii) its non-consolidated joint ventures. All
prior period's operating results have been presented on a pro-forma basis,
adjusted for the consolidation of the Richmond, Jacksonville and Wichita markets
as if Adelphia Business Solutions' purchase of its partners' interests in these
markets had occurred at the beginning of each period presented.
(a) Earnings before interest, income taxes, depreciation and amortization and
other income/expense ("EBITDA") and similar measures of cash flow are commonly
used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance, leverage,
and liquidity. While EBITDA is not an alternative 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 measures of other companies, management of Adelphia
Business Solutions believes that EBITDA is a meaningful measure of performance.
</FN>
Adelphia Business Solutions, Inc.
Table 2 - Unaudited Original Markets
New Markets Operating Results
(dollars in thousands) Quarter ended September 30, 1999 Quarter Ended June 30, 1999(b) Quarter ended September 30, 1998
--------------------------------------------------------------------------------------------------
Original New Total Original New Total Original New Total
Markets Markets Operating Markets Markets Operating Markets Markets Operating
Results Results Results Results Results Results Results Results Results
--------------------------------------------------------------------------------------------------
Revenues $ 49,513 $ 3,335 $ 52,848 $ 43,317 $ 640 $ 43,957 $ 19,632 $ 251 $ 19,883
Direct Operating Expenses 14,924 3,464 18,388 13,205 2,031 15,236 10,053 259 10,312
--------------------------------------------------------------------------------------------------
Gross Margin 34,589 (129) 34,460 30,112 (1,391) 28,721 9,579 (8) 9,571
Gross Margin Percentage 69.9% -3.9% 65.2% 69.5% -217.3% 65.3% 48.8% -3.2% 48.1%
Sales, General and Administrative 18,289 13,305 31,594 17,002 11,223 28,225 10,457 202 10,659
Expenses
Allocated Corporate Overhead Expense 6,421 6,152 12,573 5,397 4,890 10,287 4,200 -- 4,200
--------------------------------------------------------------------------------------------------
EBITDA (a) 9,879 (19,586) (9,707) 7,713 (17,504) (9,791) (5,078) (210) (5,288)
--------------------------------------------------------------------------------------------------
EBITDA Percentage of Revenue 20.0% -587.3% -18.4% 17.8% -2735.0% -22.3% -25.9% -83.7% -26.6%
September 1999 Quarter vs. September 1999 Quarter vs.
June 1999 Quarter September 1998 Quarter
-----------------------------------------------------------------------
Original New Total Original New Total
Percent Change Comparison Markets Markets Operating Markets Markets Operating
Results Results Results Results Results Results
-----------------------------------------------------------------------
Revenues 14.3% 421.1% 20.2% 152.2% NM 165.8%
Direct Operating Expenses 13.0% 70.6% 20.7% 48.5% NM 78.3%
-----------------------------------------------------------------------
Gross Margin 14.9% -90.7% 20.0% 261.1% NM 260.0%
Sales, General and Administrative 7.6% 18.6% 11.9% 74.9% NM 196.4%
Expenses
Allocated Corporate Overhead 19.0% 25.8% 22.2% 52.9% NM 199.4%
-----------------------------------------------------------------------
EBITDA (a) 28.1% NM -0.9% NM NM 83.6%
-----------------------------------------------------------------------
<FN>
Table 2 summarizes operating results for (i) Adelphia Business Solutions' 22
Original Markets which were in operation or under construction when Adelphia
Business Solutions completed its initial public offering in May 1998 and (ii)
the additional markets which were operational or under development subsequent to
May 1998, as a result of Adelphia Business Solutions' geographic expansion in
the eastern half of the United States, (the "New Markets"). Corporate overhead
has been allocated on the basis of the number of markets in services or under
development for each period presented.
(a) Earnings before interest, income taxes, depreciation and amortization and
other income/expense ("EBITDA") and similar measures of cash flow are commonly
used in the telecommunications industry to analyze and compare
telecommunications companies on the basis of operating performance, leverage,
and liquidity. While EBITDA is not an alternative 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 measures of other companies, management of Adelphia
Business Solutions believes that EBITDA is a meaningful measure of performance.
(b) June 30, 1999 quarterly results include reclassification of Corporate
network and switch operating control center costs totaling $2,361 which had been
previously reported in allocated corporate overhead. The reclassification was
made to provide a more comprehensive understanding of the direct operating
expenses and the related gross margins of the operating centers.
</FN>
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
TABLE 3 - CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------
1998 1999 1998 1999
---------------- -------------- ------------- -------------
Revenues $ 12,098 $ 43,347 $ 24,553 $ 99,000
---------------- -------------- ------------- ---------------
Operating expenses:
Network operations 7,056 15,862 14,586 36,037
Selling, general and administrative 10,391 39,972 24,038 93,618
Depreciation and amortization 9,843 18,168 20,413 45,289
---------------- -------------- ------------- ---------------
Total 27,290 74,002 59,037 174,944
---------------- -------------- ------------- ---------------
Operating loss (15,192) (30,655) (34,484) (75,944)
Other income (expense):
Interest income 4,169 2,867 13,506 19,645
Interest income-affiliate 2,995 1,336 5,070 6,943
Interest expense (12,535) (19,045) (39,639) (56,383)
Other income 113 --- 1,113 ---
---------------- -------------- ------------- ---------------
Loss before income taxes and
equity in net loss of joint ventures (20,450) (45,497) (54,434) (105,739)
Income tax expense --- --- --- (4)
---------------- -------------- ------------- ---------------
Loss before equity in net loss
of joint ventures (20,450) (45,497) (54,434) (105,743)
Equity in net loss of joint ventures (2,614) (246) (9,487) (7,340)
---------------- -------------- ------------- ---------------
Loss before extraordinary gain (23,064) (45,743) (63,921) (113,083)
Extraordinary gain on repurchase of debt 237 --- 237 ---
---------------- -------------- ------------- ---------------
Net loss (22,827) (45,743) (63,684) (113,083)
Dividend requirements applicable to preferred stock (7,026) (7,969) (20,448) (23,168)
---------------- -------------- ------------- ---------------
Net loss applicable to common stockholders $ (29,853) $ (53,712) $ (84,132) $ (136,251)
================ ============== ============= ===============
Basic and diluted net loss per weighted average
share of common stock $ (0.54) $ (0.97) $ (1.82) $ (2.46)
================ ============== ============= ===============
Weighted average shares of
common stock outstanding 55,497 55,497 46,293 55,497
================ ============== ============= ===============
Exhibit 99.04
PRESS RELEASE
Contact Information
Timothy J. Rigas
Adelphia Business Solutions
814-274-9830
FOR IMMEDIATE RELEASE:
ADELPHIA BUSINESS SOLUTIONS (ABIZ) ANNOUNCES PUBLIC STOCK OFFERING
Coudersport, PA, November 10, 1999 -- Adelphia Business Solutions, Inc.
(NASDAQ-NNM: ABIZ) announced today that it is filing a supplement to its shelf
registration statement with the Securities and Exchange Commission for a public
offering of Class A Common Stock. The preliminary prospectus supplement
contained in the filing provides for a public offering of approximately
$300,000,000 in shares of Adelphia Business Solution's Class A Common prior to
the exercise of any underwriters' over-allotment option. The offering will be
made only by prospectus. Adelphia Business Solutions, which is a majority owned
subsidiary of Adelphia Communications Corporation (NASDAQ-NNM:ADLAC), was
formerly known as Hyperion Telecommunications, Inc.
In addition to the $300,000,000 in shares of Class A Common Stock to be sold by
Adelphia Business Solutions to the public, Adelphia Communications Corporation
is expected to enter into an agreement to purchase at the closing of the public
offering approximately $150,000,000 in shares of Class B Common Stock of
Adelphia Business Solutions at a price per share equal to the public offering
price for the Class A Common Stock less the underwriting discount.
Adelphia Business Solutions intends to use the proceeds from these offerings for
the funding of its national expansion, working capital requirements, operating
losses and investments in its networks, and for other general corporate
purposes. Adelphia Business Solutions provides integrated communication services
to business customers over its state-of-the-art fiber optic network.
This press release shall not constitute an offer to sell or the solicitation of
an offer to buy nor shall there be any sale of the Class A Common Stock or Class
B Common Stock in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.