SCHEDULE 14A INFORMATION
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ADELPHIA BUSINESS SOLUTIONS, INC.
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(Name of Registrant as Specified In Its Charter)
JOHN GLICKSMAN, ESQ.
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(Name of Person(s) Filing Proxy Statement)
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ADELPHIA BUSINESS SOLUTIONS, INC.
One North Main Street
Coudersport, Pennsylvania 16915
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Notice of Annual Meeting of Stockholders
to be held on August 7, 2001
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To the Stockholders of
Adelphia Business Solutions, Inc.:
The Annual Meeting of Stockholders of Adelphia Business Solutions, Inc. will
be held at the Coudersport Theater, Main Street, Coudersport, Pennsylvania, on
Tuesday, August 7, 2001, at 11:30 a.m., for the following purposes:
1. To elect eight (8) Directors by vote of the holders of Class A Common
Stock, Class B Common Stock and Preferred Stock, voting together.
2. To consider and act upon such other matters as may properly come before
the meeting.
The Board of Directors has fixed the close of business on June 25, 2001, as
the record date for determination of stockholders entitled to notice of and to
vote at the Annual Meeting.
IF YOU ARE UNABLE TO ATTEND THE MEETING AND YOU WISH TO VOTE YOUR STOCK, IT
IS REQUESTED THAT YOU COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
AS PROMPTLY AS POSSIBLE IN THE ENCLOSED ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS
John J. Rigas
Chairman of the Board
July 5, 2001
ADELPHIA BUSINESS SOLUTIONS, INC.
One North Main Street
Coudersport, Pennsylvania 16915
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PROXY STATEMENT FOR ANNUAL MEETING
OF STOCKHOLDERS
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This proxy statement is being furnished to the stockholders of Adelphia
Business Solutions, Inc., a Delaware corporation (the "Company"), in connection
with the solicitation by the Board of Directors of the Company of proxies to be
voted at the annual meeting of stockholders (the "Annual Meeting") scheduled to
be held on Tuesday, August 7, 2001, at the Coudersport Theater, Main Street,
Coudersport, Pennsylvania. The address of the principal executive offices of
the Company is One North Main Street, Coudersport, Pennsylvania 16915, and the
date this proxy statement was first mailed to stockholders was on or about July
5, 2001. A copy of the Annual Report to Stockholders for the year ended
December 31, 2000, is being furnished with this proxy statement.
Only stockholders of record as of the close of business on June 25, 2001,
are entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof. The outstanding capital stock of the Company on that date consisted of
47,742,608 shares of Class A Common Stock, $.01 par value (the "Class A Common
Stock"), 86,624,693 shares of Class B Common Stock, $.01 par value (the "Class
B Common Stock") and 312,275 shares of 12 7/8% Senior Exchangeable Redeemable
Preferred Stock due 2007 (the "Preferred Stock"). With respect to the matters
described in this proxy statement, the holders of Class A Common Stock, Class B
Common Stock and Preferred Stock vote together as a single class, and each
holder of Class A Common Stock is entitled to cast one (1) vote for each share
of Class A Common Stock standing in their name on the books of the Company,
each holder of Class B Common Stock is entitled to cast ten (10) votes for each
share of Class B Common Stock standing in their name on the books of the
Company, and each holder of Preferred Stock is entitled to cast one (1) vote
for each share of Preferred Stock standing in their name on the books of the
Company. The presence, in person or by proxy, of holders of a majority of the
votes of all outstanding shares of the Company's capital stock entitled to vote
is necessary to constitute a quorum at the Annual Meeting. The Directors shall
be elected by a plurality of the votes of the shares of capital stock present
in person or represented by proxy at the Annual Meeting and entitled to vote on
the election of directors.
All shares represented by valid proxies received by the Company prior to the
Annual Meeting will be voted at the Annual Meeting as specified in the proxy,
unless such proxies previously have been revoked. If no specification is made,
the shares will be voted FOR the election of each of the Board's nominees to
the Board of Directors. Unless otherwise indicated by the stockholder, the
proxy card also confers discretionary authority on the Board-appointed proxies
to vote the shares represented by the proxy on any matter that is properly
presented for action at the Annual Meeting. A stockholder giving a proxy has
the power to revoke it any time prior to its exercise by delivering to the
Secretary of the Company a written revocation or a duly executed proxy bearing
a later date, or by attendance at the meeting and voting his shares in person.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining whether a quorum is present. Abstentions will count as
shares entitled to vote and represented at the Annual Meeting and not voting in
favor of the proposals. Broker non-votes will not count as shares entitled to
vote and represented at the Annual Meeting and will not be included in
calculating the number of votes necessary for approval of the proposals
described below.
1
PROPOSAL 1
ELECTION OF DIRECTORS
Description of Board of Directors
The Bylaws of the Company provide for the Board of Directors to be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors by the
holders of Class A Common Stock, the holders of Class B Common Stock and the
holders of Preferred Stock, voting together as a single class, with each share
of Class A Common Stock entitled to one (1) vote, each share of Class B Common
Stock entitled to ten (10) votes and each share of Preferred Stock entitled to
one (1) vote. Stockholders of the Company are not entitled to cumulate their
votes in the election of directors.
The Bylaws of the Company provide that the Board of Directors shall
establish the number of directors which shall not be less than seven (7) nor
more than twenty-one (21). The Board currently consists of eight (8) directors,
all of whom are also nominees for director.
Each director is to hold office until the next annual meeting of
stockholders and until his successor is duly elected and qualified, subject to
the right of the stockholders to remove any director as provided in the Bylaws.
Any vacancy in the office of a director elected by the holders of Class A
Common Stock, the holders of Class B Common Stock and the holders of Preferred
Stock voting as a single class may be filled by such holders voting as a single
class. In the absence of a stockholder vote, a vacancy on the Board of
Directors may be filled by the remaining directors then in office, even if less
than a quorum, or by the sole remaining director. Any director elected by the
Board of Directors to fill a vacancy shall serve until the next annual meeting
of stockholders and until his successor has been duly elected and qualified. If
the Board of Directors increases the number of directors, any vacancy so
created may be filled by the Board of Directors.
The persons named as proxies in the enclosed form of proxy were selected by
the Board of Directors and have advised the Board of Directors that, unless
authority is withheld, they intend to vote the shares represented by them at
the Annual Meeting for the election of John J. Rigas, James P. Rigas, Michael
J. Rigas, Timothy J. Rigas, Pete J. Metros, James L. Gray, Peter L. Venetis and
Edward S. Mancini on behalf of all of the stockholders of the Company. All
nominees except Mr. Metros, Mr. Gray, Mr. Mancini and Mr. Venetis were first
elected or appointed as directors of the Company in 1991. Mr. Metros and Mr.
Gray were first elected as directors of the Company in 1997, and Mr. Mancini
and Mr. Venetis were first elected as directors of the Company in 1999.
The Board of Directors knows of no reason why any nominee for director would
be unable to serve as director. If at the time of the Annual Meeting any of the
named nominees are unable or unwilling to serve as directors of the Company,
the persons named in the proxy intend to vote for such substitutes as may be
nominated by the Board of Directors.
The following sets forth certain information concerning each nominee for
election as a director of the Company.
Nominees for Election of Directors
John J. Rigas
Age 76
John J. Rigas is the Chairman of the Board of the Company. He also is the
founder, Chairman, Chief Executive Officer and President of Adelphia
Communications Corporation ("Adelphia" or "Adelphia Communications"). Mr. Rigas
has owned and operated cable television systems since 1952. Among his business
and community service activities, Mr. Rigas is Chairman of the Board of
Directors of Citizens Bank
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Corp., Inc., Coudersport, Pennsylvania, and a member of the Board of Directors
of the Charles Cole Memorial Hospital. He is a director of the National Cable
Television Association and a member of its Pioneer Association and a past
President of the Pennsylvania Cable Television Association. He is also a member
of the Board of Directors of C-SPAN and the Cable Advertising Bureau, and is a
Trustee of St. Bonaventure University. He graduated from Rensselaer Polytechnic
Institute with a B.S. in Management Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company, and is the father-in-law of Peter L. Venetis who also serves as a
director of the Company.
James P. Rigas
Age 43
James P. Rigas is Vice Chairman, Chief Executive Officer, President and a
Director of the Company, Executive Vice President, Strategic Planning and a
Director of Adelphia Communications and a Vice President and Director of
Adelphia Communications' other subsidiaries. Mr. Rigas currently spends
substantially all of his time on concerns of the Company. He has been with
Adelphia Communications since 1986. Mr. Rigas graduated from Harvard University
(magna cum laude) in 1980 and received a Juris Doctor degree and an M.A. degree
in Economics from Stanford University in 1984. From June 1984 to February 1986,
he was a consultant with Bain & Co., a management consulting firm.
Michael J. Rigas
Age 47
Michael J. Rigas is Vice Chairman, Secretary and a Director of the Company,
Executive Vice President, Operations and a Director of Adelphia Communications
and a Vice President and Director of Adelphia Communications' other
subsidiaries. He has been with Adelphia Communications since 1981. From 1979 to
1981, he worked for Webster, Chamberlain & Bean, a Washington, D.C. law firm.
Mr. Rigas graduated from Harvard University (magna cum laude) in 1976 and
received his Juris Doctor degree from Harvard Law School in 1979.
Timothy J. Rigas
Age 44
Timothy J. Rigas is Vice Chairman, Chief Financial Officer, Treasurer and a
Director of the Company, Executive Vice President, Chief Accounting Officer,
Treasurer and a Director of Adelphia Communications, and a Vice President and
Director of Adelphia Communications' other subsidiaries. He has been with
Adelphia Communications since 1979. Mr. Rigas graduated from the University of
Pennsylvania, Wharton School, with a B.S. degree in Economics (cum laude) in
1978.
Pete J. Metros
Age 60
Pete J. Metros became a director of the Company on April 1, 1997. Mr. Metros
has been President and Managing Director, and a member of the Board of
Directors of Siemens Dematic AG, since December 1991. From August 1987 to
December 1991, he was President of Rapistan Corp., the predecessor of Rapistan
Demag Corporation, and of Truck Products Corp., both of which are major
subsidiaries of Lear Siegler Holdings Corp. From 1980 to August 1987, Mr.
Metros was President of the Steam Turbine, Motor & Generator Division of
Dresser-Rand Company. From 1964 to 1980, he held various positions at the
General Electric Company, the last of which was Manager of Manufacturing for
the Large Gas Turbine Division. Mr. Metros is also on the Board of Directors of
Borroughs Corporation of Kalamazoo, Michigan. Mr. Metros has served as a
director of Adelphia Communications Corporation since 1986 and received a B.S.
degree from the Georgia Institute of Technology in 1962.
3
James L. Gray
Age 66
James L. Gray became a director of the Company on April 1, 1997. Mr. Gray is
the retired chairman & CEO of PRIMESTAR Partners. Mr. Gray served as Chairman
and CEO of PRIMESTAR from 1995 to 1998. Mr. Gray has more than 20 years of
experience in the telecommunications, cable and satellite industries. He joined
Warner Cable in 1974, and advanced through several division operating posts
prior to being named president of Warner Cable in 1986. In 1992, after the
merger of Time Inc. and Warner Communications, Mr. Gray was appointed vice
chairman of Time Warner Cable where he served until his retirement in 1993. Mr.
Gray has served on the boards of several telecommunications companies and
associations, including the National Cable Television Association, where he
served as a director from 1986 to 1992, and Turner Broadcasting System, where
he served as a director from 1987 to 1991. He also served as chairman of the
executive committee and director of C-SPAN and as a director of E!
Entertainment Television, Cable in the Classroom and the Walter Kaitz
Foundation. Beginning in 1992, Mr. Gray began serving on PRIMESTAR's board of
directors. Since 1995, Mr. Gray has served as a director of Sea Pines
Associates, Inc. Mr. Gray received a bachelor's degree from Kent State
University in Kent, Ohio, and a master's degree in business administration
(M.B.A.) from the State University of New York at Buffalo.
Peter L. Venetis
Age 43
Peter L. Venetis became a director of the Company on October 25, 1999. Mr.
Venetis is Managing Partner of Praxis Capital Ventures, L.P., a private equity
investment firm providing growth capital to emerging companies in the
telecommunications, digital media and related industries. Praxis Capital
Ventures, L.P. is a subsidiary of Adelphia Communications. Mr. Venetis was
President and Chief Executive Officer of the Atlantic Bank of New York from
March 1992 to April 2000. Prior to this position, Mr. Venetis was a Director in
the Leveraged Finance Group at Salomon Brothers, Inc. where he was employed
from 1985 to 1992. Mr. Venetis is also a member of the Board of Directors of
Adelphia Communications Corporation and of the Atlantic Bank of New York, and
is a Trustee of the Churchill School and Center in Manhattan. Mr. Venetis
graduated from Columbia University (cum laude) in 1979 and received his M.B.A.
in Finance and International Business from the Columbia University Graduate
School of Business in 1981.
Edward S. Mancini
Age 41
Edward S. Mancini became a director of the Company on October 25, 1999. Mr.
Mancini is President/Owner of Artistic Stitches, Inc. From 1989 to 1993, Mr.
Mancini was Vice President--Media Lending at Canadian Imperial Bank of
Commerce. From 1986 to 1989, Mr. Mancini was in the corporate training program
at Chase Manhattan Bank. Mr. Mancini received has Masters of Science, Finance
and Accounting from Texas A&M University in 1986.
Audit and Compensation Committees and Meetings of the Board of Directors
The Board of Directors has a Compensation Committee, which as of December
31, 2000 consisted of James L. Gray, Pete J. Metros and Edward S. Mancini. The
Compensation Committee reviews and has authority to approve the compensation of
the key officers and employees of the Company. The Compensation Committee met
once during 2000. The Board of Directors also has an Audit Committee, which as
of March 31, 2001 was comprised of James L. Gray, Pete J. Metros and Timothy J.
Rigas. As of June 13, 2001, in compliance with NASD rules concerning the
composition of the Audit Committee, the Audit Committee consisted of James L.
Gray, Pete J. Metros and Edward S. Mancini. The Audit Committee is responsible
for monitoring the financial reporting of the Company on behalf of the Board of
Directors and the investing public, the approval of the selection of the
Company's independent auditors, the review of the scope and results of the
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annual audit and determining the objectivity and independence of the Company's
auditors. The Audit Committee met four times during the year ended December 31,
2000. The Board of Directors also has a Nominating Committee, comprised of John
J. Rigas, Michael J. Rigas, Timothy J. Rigas and James P. Rigas, which is
responsible for selecting the candidates to be nominated to the Board of
Directors of the Company. The Nominating Committee met once during the year
ended December 31, 2000. The Board of Directors met or acted by written consent
in lieu of meeting seven times during the year ended December 31, 2000. Each
director attended at least 75% of the meetings of the Board of Directors and
the respective committees of which each is a member.
Recommendation of the Board of Directors
The Board of Directors of the Company recommends a vote FOR each of the
nominees named above for election as directors.
5
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the twelve months ended
December 31, 1998, and the years ended December 31, 1999 and 2000, to the
Company's Chief Executive Officer and the three executive officers whose
compensation exceeded $100,000 in salary and bonus during the year ended
December 31, 2000:
Annual Long-Term
Compensation Compensation
--------------- ---------------------
Restricted Securities
Stock Underlying All Other
Name and Bonus Awards Options Compensation(c)(d)
Principal Position(a) Period(b) Salary($) ($) (f)($) (f)(#) ($)
- --------------------- --------------------- --------- ----- ---------- ---------- ------------------
John J. Rigas........... 12 months ended 12/00 1,407,763 -- -- -- $466,050
Chairman and Director 12 months ended 12/99 1,354,953 -- 1,575,000 100,000 461,940
12 months ended 12/98 1,367,399 -- -- -- 461,061
James P. Rigas(e)....... 12 months ended 12/00 236,883 -- -- -- 11,669
Vice Chairman, Chief 12 months ended 12/99 223,856 -- 1,575,000 100,000 11,669
Executive Officer,
President 12 months ended 12/98 229,385 -- -- -- 11,431
and Director
Michael J. Rigas........ 12 months ended 12/00 236,883 -- -- -- 20,996
Vice Chairman, Secretary 12 months ended 12/99 223,856 -- 1,575,000 100,000 10,950
and Director 12 months ended 12/98 229,866 -- -- -- 10,950
Timothy J. Rigas........ 12 months ended 12/00 236,883 -- -- -- 19,944
Vice Chairman, Chief 12 months ended 12/99 223,856 -- 1,575,000 100,000 10,950
Financial Officer,
Treasurer 12 months ended 12/98 229,866 -- -- -- 10,950
and Director
- --------
(a) John J. Rigas, Michael J. Rigas and Timothy J. Rigas are not employed by
the Company but are compensated by Adelphia Communications for services to
the Company pursuant to employment agreements with Adelphia. The Company
does not reimburse Adelphia directly for the services they provide to the
Company, although the Company does make payments for shared corporate
overhead services to Adelphia pursuant to a Management Services Agreement.
(b) The twelve months ended December 31, 1998, includes three months
compensation from the fiscal year ended March 31, 1998.
(c) The twelve months ended December 31, 1998, 1999 and 2000 amounts include:
(i) life insurance premiums paid during each respective period by Adelphia
Communications under employment agreements with John J. Rigas, James P.
Rigas, Michael J. Rigas, and Timothy J. Rigas in premium payment amounts of
$200,000, $10,919, $20,046 and $19,194, respectively, during the twelve
months ended December 31, 2000; $200,000, $10,919, $10,200, and $10,200,
respectively, during the twelve months ended December 31, 1999; and
$200,000, $10,681, $10,200, and $10,200, respectively, during the twelve
months ended December 31, 1998, on policies owned by the respective named
executive officers; (ii) $212,166, $216,270 and $227,805 for John J. Rigas
which represents the dollar value of the benefit of the whole-life portion
of the premiums paid by Adelphia during the twelve months ended December
31, 2000, 1999 and 1998, respectively, pursuant to a split-dollar life
insurance arrangement projected on an actuarial basis; (iii) $53,134,
$44,920 and $32,506 for John J. Rigas which represents payments by Adelphia
Communications during the twelve months ended December 31, 2000, 1999 and
1998, respectively, pursuant to a split-dollar life insurance arrangement
that is attributable to term life insurance coverage; and (iv) $750 in
Adelphia matching contributions for each executive officer under the
Company's 401(k) savings plan for the twelve months ended December 31,
2000, 1999 and 1998, respectively. The amounts shown above do not include
transactions between the Company and certain executive officers or certain
entities which are
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privately owned in whole or in part by the executive officers named in the
table. See "Certain Transactions."
In accordance with an agreement related to the split-dollar life insurance
arrangement referred to above, the Company will be reimbursed for all
premiums paid related to such arrangement upon the earlier of death of both
the insured and his spouse or termination of the insurance policies related
to such arrangement.
(d) Does not include the value of certain non-cash compensation to each
respective named individual which did not exceed the lesser of $50,000 or
10% of such individual's total salary shown in the table.
(e) For the twelve months ended December 31, 1998, James P. Rigas was not
employed by the Company, but was compensated by Adelphia Communications for
his services to the Company pursuant to an employment agreement with
Adelphia. During such periods, the Company did not directly reimburse
Adelphia for Mr. Rigas' base salary, insurance premium payments and other
benefits paid by Adelphia. Effective January 1, 1999, the Company employed
Mr. Rigas directly.
(f) The respective amounts set forth represent restrictive stock awards of the
Company's Class A Common Stock and stock options to purchase the Company's
Class A Common Stock, which were granted to the named executive officers by
the Company under its 1996 Long-Term Incentive Compensation Plan ("1996
Plan"). The amounts shown represent the aggregate restricted stock awards
held by the name executive officers at December 31, 2000. At that date, the
value of each such award, based on the closing price of the Class A Common
Stock, was $425,000.
Aggregate Option Exercises In Last Fiscal Year
And December 31, 2000 Option Values
Number of
Securities
Underlying
Unexercised Value of
Options at Unexercised In-The-
December 31, 2000 Money Options at
Shares (#)(a) December 31, 2000
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable($)(a)
- ---- ----------- ----------- ----------------- -------------------
John J. Rigas.... -- -- 0/100,000 0/0
James P. Rigas... -- -- 0/100,000 0/0
Michael J.
Rigas........... -- -- 0/100,000 0/0
Timothy J.
Rigas........... -- -- 0/100,000 0/0
- --------
(a) All options granted were with respect to the Class A Common Stock of the
Company, with an exercise price equal to the fair market value of such
stock on the date of grant. These options all vest in three equal, annual
amounts on the third, fourth and fifth anniversaries of the date of grant.
Compensation Committee Interlocks and Insider Participation
James L. Gray, Pete J. Metros and Edward S. Mancini serve as members of the
Compensation Committee of the Board of Directors. Neither Mr. Gray, Mr. Metros
nor Mr. Mancini is or has been an officer or employee of the Company or its
subsidiaries.
Board of Directors Compensation
Directors who are not also employees of the Company each currently receive
compensation from the Company for services as a director at a rate of $1,000
plus reimbursement of expenses for each Board and committee meeting attended.
Non-employee directors are eligible to receive grants under the Company's 1996
Long-Term Incentive Compensation Plan and Adelphia's 1998 Long-Term Incentive
Compensation Plan. Directors who are employees of the Company do not receive
any compensation for services as a director or as a member of Board committees.
Audit Committee Charter
On June 12, 2000, the Board of Directors of the Company adopted a written
charter for the Audit Committee of the Board, a copy of which is attached as
Appendix B.
7
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Executive compensation decisions during the year ended December 31, 2000,
were addressed by the Compensation Committee of the Board of Directors (see
"Election of Directors--Audit and Compensation Committees and Meetings of the
Board of Directors"), composed of three independent, non-employee directors,
Pete J. Metros, James L. Gray and Edward S. Mancini.
The annual base salary of James P. Rigas, the Chief Executive Officer, is
determined by the Compensation Committees of both the Company and Adelphia
Communications in accordance with Mr. Rigas's employment agreement with
Adelphia and after according significant weight to the input of John J. Rigas,
Chief Executive Officer of Adelphia. The Compensation Committee has recognized
Mr. Rigas's success in achieving the Company's strategic objectives and has
also recognized Mr. Rigas's leadership and vision in formulating strategies for
responding to the challenges of increased regulation and increasing
competition, and for positioning the Company for growth in a regulated
environment. Based on compensation data for other companies, the Compensation
Committee believes that Mr. Rigas's annual base salary and overall compensation
package is lower than the compensation packages (including salary, bonus,
options and deferred compensation) paid to chief executive officers of many
other publicly held telecommunications firms.
Neither John J. Rigas, Michael J. Rigas nor Timothy J. Rigas were given
salaries or bonuses directly by the Company during the year ended December 31,
2000. Their services, as well as the services of certain other employees of
Adelphia Communications, were paid for directly by Adelphia Communications.
Adelphia Communications has historically charged the Company for the provision
of shared corporate overhead services, but has not charged the Company for the
actual cost of compensating these named executive officers of the Company who
are employees of Adelphia Communications.
COMPENSATION COMMITTEE
Pete J. Metros
James L. Gray
Edward S. Mancini
8
Stock Performance Graph
The following graph compares the percentage change in the cumulative total
shareholder return on the weighted average of the Company's Class A Common
Stock ("Adelphia Business Solutions Class A Common Stock" after October 25,
1999, prior to such date "Hyperion Class A Common Stock") during the period
from May 5, 1998, through December 31, 2000, with the cumulative total return
on the Standard & Poor's 500 Stock Index, a selected peer group of five
companies engaged in the competitive access/telephony industry: Allegiance
Telecom Inc. (Class A); McLeodUSA, Inc. (Class A); RCN Corp. (Class A); US Lec
Corp. (Class A); and XO Communications, Inc. (Class A)(the " Peer Group").* The
returns of each component issuer in the foregoing peer group have been weighted
according to the respective issuer's market capitalization. The comparison
assumes $100 was invested on May 5, 1998, in the Company's Class A Common Stock
and in each of the foregoing indices, and also assumes reinvestment of
dividends.
[Stock Performance Graph]
Comparison of 32 Month Cumulative Total Return*
Among Adelphia Business Solutions, Inc.,
The S&P 500 Index, a New Peer Group** and an Old Peer Group
5/5/98 12/98 12/99 12/00
(In Dollars)
Adelphia Business Solutions, Inc. $100 $ 94.53 $300.00 $ 26.67
S&P 500 Index 100 111.15 134.54 122.29
New Peer Group 100 72.78 309.44 145.68
Old Peer Group 100 70.18 217.42 53.87
* $100 invested on 5/5/98 in Stock or Index--including Reinvestment of
Dividends.
** The peer group in the above stock performance graph differs from the peer
group in the Company's 2000 proxy statement as a result of the bankruptcy
filings of GST Telecommunications, Inc. and ICG Communications, Inc. Due
in large part to these bankruptcy filings, shares of these two members of
the Peer Group are no longer actively traded. Thus, the Company added
McLeodUSA, Inc. and XO Communications, Inc. to the peer group in this
proxy statement.
9
Certain Transactions
During the year ended December 31, 2000, the Company made demand advances to
Adelphia Communications periodically, for which the Company earned interest of
between 5.15% to 6.33% totaling approximately $6.3 million. During the period
January 1, 2000, to December 31, 2000, the largest amount due from Adelphia
Communications at the end of any quarter was approximately $163.2 million at
March 31, 2000.
The Company and Adelphia Communications have entered into a registration
rights agreement, as amended, whereby the Company has agreed to provide to
Adelphia Communications and certain permitted transferees, with respect to
common stock owned by them, two demand registration rights per year under
certain conditions, including that any such demand be with respect to shares
with a minimum of $10 million in market value, and with certain piggyback
registration rights in future public offerings of the common stock. Adelphia
Communications' demand registration rights terminate at such time as Adelphia
Communications ceases to hold at least $10 million in market value of common
stock.
During the year ended December 31, 2000, the Company incurred charges from
Adelphia Communications of approximately $18.5 million for the provision to the
Company of shared corporate overhead services in areas such as personnel,
payroll, management information services, computer services, shared use of
office, aircraft and network facilities and support equipment. The Company
expects that charges for the provision of similar services by Adelphia
Communications to the Company, or by the Company to Adelphia Communications,
will continue to be incurred or charged by the Company in the future. The
transactions related to the provision of these services have been based on
allocation of Adelphia Communications' incremental costs incurred for these
services, and do not necessarily represent the actual costs that would be
incurred if the Company was to secure such services on its own or the costs
which would be charged on a pro-rata allocation of such costs under the
Management Services Agreement between the Company and Adelphia Communications
dated April 10, 1998, with respect to shared corporate overhead service. During
the year ended December 31, 2000, the Company (i) paid Adelphia Communications
or certain of Adelphia Communications' affiliates, fiber lease payments of
approximately $0.3 million, (ii) received from Adelphia Communications $8.6
million in revenue for providing switched services, and (iii) paid to entities
owned by members of the Rigas family who are executive officers of the Company
approximately $11.4 million for property, plant and equipment and services.
During June 2000, Adelphia Communications exercised a warrant to purchase
913,380 shares of Class A common stock of the Company at a price of $6.15 per
share. Adelphia purchased the warrant in May 1998 from WorldCom in connection
with the Company's IPO. Total proceeds to the Company were approximately $5.6
million.
During December 2000, the Company sold to a subsidiary of Adelphia
Communications certain network and telecommunications assets. The assets sold
related to six markets in Virginia, Colorado, California and Ohio which the
Company has decided not to pursue as part of its revised business plan. The
aggregate purchase price for these transactions was approximately $87.5 million
plus the assumption of certain liabilities. The Company will manage these
networks for Adelphia on a going forward basis.
The Company and certain of Adelphia Communications' other subsidiaries and
affiliates are parties to a joint bank credit facility. As part of this
facility, the Company and its subsidiaries have the ability to borrow up to an
aggregate of $500.0 million which, if borrowed, would be guaranteed by other
members of the borrowing group. As of December 31, 2000, a subsidiary of the
Company had borrowed $500.0 million under this credit facility. In addition,
the Company has agreed to pay a subsidiary of Adelphia $15.0 million as a fee
for placing the credit facility. The interest rate at which the Company has
borrowed these funds is 12 1/2%, a portion of which is payable to a subsidiary
of Adelphia. For the year ended December 31, 2000, the Company recorded $21.9
million for interest expense relating to the credit facility, $7.0 million of
which was payable to a subsidiary of Adelphia.
10
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's
directors, executive officers and persons who beneficially own more than ten
percent of a class of the Company's registered equity securities to file with
the Securities and Exchange Commission and deliver to the Company initial
reports of ownership and reports of changes in ownership of such registered
equity securities.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company or written representations that no other
reports were required, the Company's directors, officers and more than ten
percent stockholders filed on a timely basis all reports due under Section
16(a) for the period from January 1, 2000 through December 31, 2000, except
that one report was filed late by Adelphia Communications and two reports were
filed late by Mr. Mancini.
11
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Class A Common Stock and Class B Common Stock as of April 1, 2001 by (i) each
person known by the Company to be a beneficial owner of more than 5% of either
the Class A Common Stock or Class B Common Stock, (ii) the directors and
executive officers and (iii) all directors and executive officers as a group.
As of such date, there were 47,742,758 shares of Class A common stock
outstanding and 86,603,483 shares of Class B common stock outstanding. Unless
otherwise indicated, each of the stockholders in the table has sole voting and
investment power with respect to the shares beneficially owned.
Class B Total
Class A Common Common Stock
Common Stock Stock (%)
------------ ---------- ------------
Adelphia Communications
Corporation (a)................. 19,700,117(b)(c) 85,766,040(b) 78.5%
John J. Rigas (a)................ 649,500 -- 0.5%
James P. Rigas (a)............... 642,500 -- 0.5%
Michael J. Rigas (a)............. 602,500 -- 0.4%
Timothy J. Rigas (a)............. 592,500 -- 0.4%
Peter L. Venetis (d)............. 517,500 -- 0.4%
Pete J. Metros................... 4,000 -- --
James L. Gray.................... 10,000 -- --
Edward Mancini................... 25,000 -- --
All executive officers and
directors as a group (eight
persons) (a).................... 20,773,617(e) 85,766,040(e) 79.3%
- --------
(a) The business address of Adelphia Communications Corporation is One North
Main Street, Coudersport, PA 16915. In their capacity as executive
officers of Adelphia, the following persons share or may be deemed to
share voting and dispositive power over the shares of common stock owned
by Adelphia, subject to the discretion of the Board of Directors of
Adelphia: John J. Rigas, James P. Rigas, Michael J. Rigas and Timothy J.
Rigas. Share amounts shown for John J. Rigas, James P. Rigas, Michael J.
Rigas and Timothy J. Rigas each include 492,500 of the same Class A
Common Stock shares held by Rigas family partnerships in which each of
them is a general partner, and 100,000 shares of Class A Common Stock
represented by a restricted stock award that begins to vest in 2002.
(b) Each share of Class B Common Stock is convertible at any time at the
option of the holder into an equal number of shares of Class A Common
Stock. Holders of Class A Common Stock are entitled to one vote per share
and holders of Class B Common Stock are entitled to 10 votes per share on
all matters submitted to a vote of stockholders.
(c) The information presented reflects only shares of Class A Common Stock
held directly by Adelphia Communications and does not include (i) shares
of Class A Common Stock into which Class B Common Stock may be converted
or (ii) 708,121 shares of Class A Common Stock issuable under warrants
held by Adelphia. Assuming the conversion of all Class B Common Stock
held by Adelphia into Class A Common Stock and the exercise of all such
warrants, Adelphia would beneficially own 79.1% of the Class A Common
Stock as of such date.
(d) The information presented includes 25,000 shares owned directly by Mr.
Venetis and 492,500 shares deemed to be beneficially owned through Rigas
family partnerships by Ellen Rigas Venetis, the wife of Mr. Venetis and
the daughter of John J. Rigas.
(e) The information presented includes 19,700,117 shares of Class A Common
Stock and 85,766,040 shares of Class B Common Stock held by Adelphia
Communications, for which the following executive officers and directors
of the Company share or may be deemed to share voting and dispositive
power over the shares, subject to the discretion of the Board of
Directors of Adelphia: John J. Rigas, James P. Rigas, Michael J. Rigas
and Timothy J. Rigas. The information presented excludes 708,121 shares
of Class A Common Stock issuable under warrants held by Adelphia.
12
ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND EXCHANGE COMMISSION
A COPY OF THE ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS) OF THE
COMPANY FOR THE YEAR ENDED DECEMBER 31, 2000, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, WILL BE FURNISHED FREE OF CHARGE, UPON WRITTEN REQUEST,
TO STOCKHOLDERS WHO HAVE NOT PREVIOUSLY RECEIVED A COPY FROM THE COMPANY.
WRITTEN REQUESTS MAY BE DIRECTED TO THE SECRETARY, ADELPHIA BUSINESS
SOLUTIONS, INC., ONE NORTH MAIN STREET, COUDERSPORT, PENNSYLVANIA 16915.
ANNUAL REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of Adelphia Business Solutions hereby reports as
follows with respect to the fiscal year ended December 31, 2000. Mr. Mancini
did not become a member of the Audit Committee until April 1, 2001, and did
not participate as a committee member with respect to the fiscal year ended
December 31, 2000:
1. The Audit Committee has reviewed and discussed the audited financial
statements with Adelphia Business Solutions management.
2. The Audit Committee has discussed with Deloitte & Touche LLP, the
Company's independent accountants, the matters required to be discussed
by SAS 61.
3. The Audit Committee has received the written disclosures and the letter
from Deloitte & Touche, required by Independence Standards Board
Standard No. 1, has discussed with Deloitte & Touche LLP their
independence, and considered whether the provision of non-audit services
is compatible with maintaining Deloitte & Touche LLP's independence.
4. Based on the review and discussion referred to in paragraphs (1) through
(3) above, the Audit Committee recommended to the Board of Directors of
Adelphia Business Solutions, and the Board has approved, that the
audited financial statements to be included in Adelphia Business
Solutions' Annual Report on Form 10-K for the fiscal year ended December
31, 2000, for filing with the Securities and Exchange Commission.
Members of the Audit Committee:
Timothy J. Rigas (committee member prior to June 13, 2001)
James L. Gray
Pete J. Metros
Edward S. Mancini (committee member as of April 1, 2001)
Notwithstanding anything to the contrary set forth in any of the Company's
previous or future filings under the Securities Act of 1933 or the Securities
Exchange Act of 1934 that might incorporate this proxy statement or future
filings with the Securities and Exchange Commission, in whole or in part, the
foregoing report shall not be deemed to be incorporated by reference into any
such filing.
Audit and Non-Audit Fees
Audit Fees. The aggregate fees billed by Deloitte & Touche LLP ("Deloitte")
for professional services rendered for the audit of the Company's annual
financial statements for the fiscal year ended December 31, 2000 and for the
review of the financial statements included in Quarterly Reports on Form 10-Q
for that fiscal year were $325,000.
Financial Information Systems Design and Implementation Fees. There were no
fees billed by Deloitte for professional services rendered for information
technology services relating to financial information systems design and
implementation for the fiscal year ended December 31, 2000.
13
All Other Fees. The aggregate fees billed by Deloitte for services rendered
to the Company, other than the services described above under "Audit Fees" and
"Financial Information Systems Design and Implementation Fees," for the fiscal
year ended December 31, 2000 were $89,000.
OTHER MATTERS
The Company knows of no other matters to be presented for action at the
Annual Meeting. If any other matters should properly come before the Annual
Meeting, however, it is intended that votes will be cast pursuant to the proxy
in respect thereto in accordance with the best judgment of the persons acting
as proxies.
The Company will pay the expense in connection with the printing, assembling
and mailing to the holders of capital stock of the Company the notice of
meeting, this proxy statement and the accompanying form of proxy. In addition
to the use of the mails, proxies may be solicited by directors, officers or
regular employees of the Company personally or by telephone or telegraph. The
Company may request the persons holding stock in their names, or in the names
of their nominees, to send proxy material to and obtain proxies from their
principals, and will reimburse such persons for their expense in so doing.
The Company's certified public accountants during the year ended December
31, 2000 were, and for fiscal 2001 will be, Deloitte & Touche LLP. Such
accountants are not expected to attend the Annual Meeting.
Stockholder Proposals
Proposals of stockholders submitted for consideration at the 2002 Annual
Meeting must be received by the Company no later than March 7, 2002, in order
to be considered for inclusion in the Company's proxy materials for that
meeting. Such proposals must also comply with the requirements set forth in the
rules and regulations of the Securities and Exchange Commission in order to be
eligible for inclusion in the 2002 Annual Meeting proxy materials. Stockholders
who wish to make a proposal at the 2002 Annual Meeting other than by inclusion
in the Company's proxy materials must notify the Company of the matter no later
than May 21, 2002. Notwithstanding the fact that the Company may at its
discretion exclude any untimely proposal, if a stockholder presents a proposal
after May 21, 2002, and that proposal is accepted by the Company, then the
proxies that management solicits for the meeting will have discretionary
authority to vote on the stockholder's proposal if the proposal is otherwise
properly brought before the meeting.
14
APPENDIX A
TABLE OF CONTENTS
Selected Financial Data.................................................. A-2
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... A-4
Quantitative and Qualitative Disclosure About Market Risk................ A-14
Financial Statements and Supplementary Data.............................. A-14
Independent Auditors' Report............................................. A-15
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated Balance
Sheets.................................................................. A-16
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated
Statements of Operations................................................ A-17
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated
Statements of Common Stock and Other Stockholders' Equity (Deficiency).. A-18
Adelphia Business Solutions, Inc. and Subsidiaries Consolidated
Statements of Cash Flows................................................ A-20
Adelphia Business Solutions, Inc. and Subsidiaries Notes to Consolidated
Financial Statements.................................................... A-21
Market for the Company's Common Equity and Related Stockholder Matters... A-43
A-1
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the nine
months ended December 31, 1998 and as of and for the years ended December 31,
1999 and 2000 have been derived from the audited consolidated financial
statements of the Company and the related notes thereto. This data should be
read in conjunction with the consolidated financial statements and related
notes thereto for the nine months ended December 31, 1998, the years ended
December 31, 1999 and 2000 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this proxy
statement. The balance sheet data as of March 31, 1997 and 1998 and December
31, 1998 and the statement of operations data and the other Company data with
respect to the years ended March 31, 1997 and 1998 have been derived from
audited consolidated financial statements of the Company not included herein.
Nine Months
Year Ended Ended Year Ended
March 31, December 31, December 31,
------------------- ------------ --------------------
1997 1998 1998 1999 2000
-------- --------- ------------ --------- ---------
(Dollars in thousands, except per share amounts)
Statement of Operations
Data (a):
Revenues............... $ 5,088 $ 13,510 $ 34,776 $ 154,575 $ 351,974
Operating expense:
Network operations.... 3,432 7,804 18,709 58,525 183,314
Selling, general and
administrative....... 6,780 14,314 35,341 142,615 277,198
Restructuring
charges.............. -- -- -- -- 5,420
Depreciation and
amortization......... 3,945 11,477 26,671 65,244 114,614
-------- --------- --------- --------- ---------
Operating loss........ (9,069) (20,085) (45,945) (111,809) (228,572)
Gain on sale of
investment........... 8,405 -- -- -- --
Interest income....... 5,976 13,304 10,233 19,933 3,900
Interest income--
affiliate............ -- -- 8,395 8,483 6,282
Interest expense...... (28,377) (49,334) (38,638) (74,314) (88,576)
Other income.......... -- -- 1,113 -- --
Equity in net loss of
joint ventures....... (7,223) (12,967) (9,580) (7,758) (2,858)
Extraordinary gain on
repurchase of debt... -- -- 237 -- --
-------- --------- --------- --------- ---------
Net loss.............. (30,547) (69,082) (74,185) (165,466) (309,824)
Dividend requirements
applicable to
preferred stock...... -- (12,409) (21,117) (31,618) (35,665)
-------- --------- --------- --------- ---------
Net loss applicable to
common stockholders.. $(30,547) $ (81,491) $ (95,302) $(197,084) $(345,489)
======== ========= ========= ========= =========
Basic and diluted net
loss per weighted
average share of
common stock......... $ (0.89) $ (2.33) $ (1.80) $ (3.47) $ (4.93)
Common stock
dividends............ -- -- -- -- --
Other Company Data (a):
EBITDA (b)............ $ (5,124) $ (8,608) $ (19,274) $ (46,565) $(108,538)
Capital expenditures
and company
investments (c)...... 79,396 132,889 215,770 477,702 723,185
Cash (used in)
provided by operating
activities........... (4,823) (6,333) 35,795 17,485 (144,330)
Cash used in investing
activities........... (72,818) (266,604) (245,063) (556,194) (736,917)
Cash provided by
financing
activities........... 137,455 443,873 221,088 298,272 882,657
A-2
As of March 31, As of December 31,
------------------- ------------------------------
1997 1998 1998 1999 2000
-------- --------- -------- ---------- ----------
Balance Sheet Data (a):
Cash and cash
equivalents............ $ 59,814 $ 230,750 $242,570 $ 2,133 $ 3,543
Total assets............ 174,601 639,992 836,342 1,563,703 1,889,466
Long term debt and
exchangeable redeemable
Preferred stock........ 215,675 735,980 722,783 1,106,026 1,687,523
Common stock and other
stockholders' equity
(deficiency)........... (50,254) (118,991) 74,031 279,931 (17,270)
- --------
(a) The data presented represents financial information for the Company and its
consolidated subsidiaries. As of December 31, 2000, three of the Company's
networks were owned by joint ventures in which it owned an interest of 50%,
and for which the Company reports its interest pursuant to the equity
method of accounting consistent with generally accepted accounting
principles. During December 2000, the Company sold six markets to Adelphia.
As a result, Statement of Operations and Other Company Data includes such
networks while Balance Sheet Data excludes such networks as of December 31,
2000.
(b) Earnings before interest expense, income taxes, depreciation and
amortization, restructuring charges, other non-cash charges, gain on sale
of investment, interest income and equity in net loss of joint ventures
("EBITDA") and similar measurements of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity.
While EBITDA is not an alternative to operating income as an indicator of
operating performance or an alternative to cash flows from operating
activities as a measure of liquidity, all as defined by generally accepted
accounting principles, and while EBITDA may not be comparable to other
similarly titled measures of other companies, the Company's management
believes EBITDA is a meaningful measure of performance.
(c) For the fiscal years ended March 31, 1997 and 1998, the nine months ended
December 31, 1998, and the years ended December 31, 1999 and 2000, the
Company's capital expenditures (including capital expenditures relating to
its wholly-owned operating companies) were $24.6, $68.6, $146.8, $453.2,
and $712.8 million, respectively, and the Company's investments in its less
than wholly-owned operating companies were $34.8, $64.3, $69.0, $24.5 and
$10.4 million, respectively, for the same periods. In addition, during the
fiscal year ended March 31, 1997, the Company invested $20.0 million in
fiber assets and a senior secured note.
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information, statements or
schedules included in this proxy statement, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, is forward-
looking, such as information relating to the effects of future regulation,
future capital commitments and the effects of competition. Such forward-looking
information involves important risks and uncertainties that could significantly
affect expected results in the future from those expressed in any forward-
looking statements made by, or on behalf of, the Company. These "forward-
looking statements" can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "intends" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and
uncertainties. These risks and uncertainties include, but are not limited to,
uncertainties relating to our ability to successfully market our services to
current and new customers, access markets on a nondiscriminatory basis,
identify, design and construct fiber optic networks, install cable and
facilities (including switching electronics) and obtain rights of way, access
rights to buildings and any required governmental authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, as well as uncertainties relating to general business and
economic conditions, acquisitions and divestitures, the cost of availability of
capital, government and regulatory policies, the pricing and availability of
equipment, materials, inventories and programming, product acceptance, risks
associated with reliance on the performance and financial condition of vendors
and customers, dependence on the Company's customers and their spending
patterns, the ability of the Company to execute on its business plan and to
design and construct fiber optic networks and related facilities, technological
developments and changes in the competitive environment in which the Company
operates. Persons reading this proxy statement are cautioned that forward-
looking statements herein are only predictions, that no assurance can be given
that the future results will be achieved, and that actual events or results may
differ materially as a result of the risks and uncertainties facing the
Company. Unless otherwise stated, the information contained in this proxy
statement is as of and for the twelve months ended December 31, 2000.
Additional information regarding factors that may affect the business and
financial results of Adelphia Business Solutions can be found in the Company's
filings with the Securities and Exchange Commission, including the prospectus
and most recent prospectus supplement under Registration Statement No. 333-
11142 (formerly No. 333-88927), under the caption "Risk Factors."
The "Company" or "Adelphia Business Solutions" means Adelphia Business
Solutions, Inc. together with its majority-owned subsidiaries, except where the
context otherwise requires. Unless the context otherwise requires, references
herein to the networks mean (i) the 22 telecommunications networks in operation
or under construction as of May 8, 1998, the date of the Company's initial
public offering (the "Original Markets"), which are owned by wholly-and
majority-owned subsidiaries or by two joint venture partnerships or limited
liability companies managed by the Company and in which the Company holds a 50%
equity interest with one or more other partners, and are broken into two
subcategories, the 14 markets which began operations in 1996 or previously (the
"Class of 1996") and the eight markets which began operations in 1997 or 1998
(the "Class of 1997/98") and (ii) the additional networks operational or under
development subsequent to May 8, 1998 (the "New Markets") which are broken into
two subcategories, those which began operations in 1999 (the "Class of 1999")
and those which began operations in 2000 (the "Class of 2000"). During December
2000, the Company sold to a subsidiary of Adelphia certain network and
telecommunications assets. The assets sold related to six markets in Virginia,
Colorado, California and Ohio which the Company has decided not to pursue as
part of the revised business plan. Network or market information presented in
this proxy statement includes these six markets.
Adelphia Business Solutions is a leading provider of facilities-based
integrated communications services to customers that include businesses,
governmental and educational end users and other communications services
providers primarily throughout the eastern United States. As of December 31,
2000, the Company offered a full
A-4
range of communications services in 75 markets and expects by the end of the
year 2001 to be offering services in approximately 80 markets, including
substantially all of the top 40 metropolitan statistical areas in the United
States. To serve the Company's customers' broad and expanding communications
needs, the Company has assembled a diverse collection of high-bandwidth, local
and national network assets. The Company intends to integrate these assets with
advanced communications technologies and services in order to provide
comprehensive end-to-end communications services over its networks. The Company
provides customers with communications services such as local switch dial tone
(also known as local phone service), long distance service, high-speed data
transmission and Internet connectivity. The Company's customers have a choice
of receiving these services separately or as bundled packages which are
typically priced at a discount when compared to the price of the separate
services.
In order to take advantage of the improved economic returns and better
customer service from providing services "on-net," or over the Company's own
network, the Company is in the process of further expanding the reach of its
network system. The Company's Original Markets are principally located in the
eastern half of the United States. Due to the Company's success in operating
and expanding the Original Markets, the Company intends to serve approximately
80 total markets by the end of the year 2001, leveraging the Company's existing
and planned switching platforms and inter-city fiber networks. The Company
believes that the full buildout of this footprint will position it to address
approximately 53% of the 60 million business access lines nationwide, which
currently represent approximately $70 billion in annual revenues. This network
system expansion includes the purchase, lease or construction of local fiber
optic network facilities and the interconnection of all of the Company's
existing and new markets with its own fiber optic facilities. The Company will
also implement various technologies including dense wave division multiplexing,
or DWDM, to provide greater bandwidth capacity on its local and long-haul
network system. Once fully installed, the long-haul fiber optic backbone in the
eastern half of the United States, combined with the Company's local fiber will
support the Company's full line of communication service offerings.
Financing Transactions. During June 2000, Adelphia exercised a warrant to
purchase 913,380 shares of Class A Common Stock of the Company at a price of
$6.15 per share. Adelphia purchased the warrant in May 1998 from WorldCom in
connection with the Company's IPO. The total proceeds to the Company were $5.6
million.
The Company and certain of Adelphia's other subsidiaries and affiliates are
party to a joint bank credit facility. As part of this facility, the Company
and its subsidiaries have the ability to borrow up to an aggregate of $500.0
million, which would be guaranteed by other members of the borrowing group,
subject to compliance by the entire borrowing group with certain covenants and
financial tests. As of December 31, 2000, a subsidiary of the Company had
borrowed $500.0 million under this new credit facility. In addition, the
Company has agreed to pay a subsidiary of Adelphia approximately $15.0 million
as a fee for placing the credit facility. The interest rate at which the
Company has borrowed these funds is 12 1/2%, a portion of which is payable to a
subsidiary of Adelphia. For the year ended December 31, 2000, the Company
recorded $7.0 million in interest expense relating to the portion of interest
due to the subsidiary of Adelphia.
During March 2001, the Company issued and sold 25,222 shares of Class A
common stock to the public in a rights offering at a price of $7.28 per share.
Simultaneously, the Company issued and sold 11,820,070 and 51,459,624 shares of
Class A and Class B common stock, respectively in the rights offering to
Adelphia at a price of $7.28 per share. Total proceeds to the Company were
$460.9 million.
Acquisition of Partner Interests. During July 2000, the Company consummated
a purchase agreement with Allegheny Communications Connect, Inc. ("Allegheny")
to acquire its interest in a jointly owned network located in State College,
PA. Consideration paid to Allegheny was 330,000 shares of the Company's Class A
common stock. This purchase increased the Company's ownership in this network
to 100%. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the financial results of the acquired network have
been included in the consolidated results of the Company effective from the
date acquired.
A-5
Sale of Operating Networks. During December 2000, the Company sold to a
subsidiary of Adelphia certain network and telecommunications assets. The
assets sold related to six markets in Virginia, Colorado, California and Ohio
which the Company has decided not to pursue as part of the revised business
plan. The aggregate purchase price for these transactions was approximately
$87.5 million plus the assumption of certain liabilities. The results of
operations discussed in Management's Discussion and Analysis of Financial
Conditions and Results of Operations include these six markets.
Results of Operations
Twelve months Ended December 31, 2000 in Comparison with twelve months Ended
December 31, 1999
Revenues. The primary sources of revenues, reflected as a percentage of
total revenue, were as follows:
Twelve Months
Ended
December 31,
--------------
1999 2000
------ ------
Local Services............................................... 69.2% 69.2%
Dedicated Access............................................. 21.1% 9.7%
Management Fees.............................................. 3.2% 2.2%
Enhanced Services............................................ 3.1% 8.9%
Long Distance................................................ 1.1% 2.4%
Other........................................................ 2.3% 7.6%
Revenues increased 128% to $352.0 million for the twelve months ended
December 31, 2000, from $154.6 million in the prior twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following
Growth in Class of 1996 Markets............................... $105,498
Growth in Class of 1997/98 Markets............................ 10,164
Acquisition of Local Partner Interests........................ 20,416
Growth in Class of 1999 Markets............................... 56,580
Class of 2000 Markets......................................... 2,093
Management fees............................................... 2,648
Network Operations. Network operations expense increased 213% to $183.3
million for the twelve months ended December 31, 2000, from $58.5 million in
the prior twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following
Growth in Original Markets.................................... $40,938
Acquisition of local partner interests........................ 8,299
Expansion Markets............................................. 72,343
Network Control Center........................................ 3,209
The increased number and size of the operations of the networks resulted in
increased employee related costs, equipment maintenance costs and expansion
costs.
A-6
Selling, general and administrative expense. Selling, general and
administrative expense increased 94% to $277.2 million for the twelve months
ended December 31, 2000, from $142.6 million in the prior twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following
Growth in Original Markets.................................... $35,303
Acquisition of local partner interests........................ 9,184
Expansion Markets............................................. 49,171
Sales and marketing activities................................ 2,616
Corporate overhead charges.................................... 38,309
Restructuring Charges. Restructuring charges were $5.4 million for the
twelve months ended December 31, 2000 primarily as a result of the Company's
revised network expansion plan.
Depreciation. Depreciation and amortization expense increased 76% to $114.6
million during the twelve months ended December 31, 2000, from $65.2 million in
the prior twelve-month period primarily as a result of increased depreciation
resulting from the higher depreciable asset base at the NOCC and the networks,
amortization of deferred financing costs and the acquisition of local partner
interests.
Interest Income. Interest income decreased to $3.9 million during the twelve
months ended December 31, 2000 from $19.9 million in the prior twelve-month
period as a result of the payment of interest due to the Company from Telergy
received in 1999 as well as decreases in interest income resulting from lower
amounts of cash and cash equivalents and U.S. Government securities.
Interest Income--Affiliate. Interest income--affiliate decreased 26% to $6.3
million during the twelve months ended December 31, 2000 from $8.5 million in
the prior twelve-month period as a result of lower demand advances made to
Adelphia.
Interest Expense. Interest expense increased 10% to $81.6 million for the
twelve months ended December 31, 2000, from $74.3 million in the prior twelve-
month period as a result of the draws on the credit facility.
Interest Expense--Affiliate. Interest expense--affiliate was $7.0 million as
a result of draws on the credit facility discussed previously and incremental
payments of interest to Adelphia in connection with these draws.
Equity in Net Loss of Joint Ventures. Equity in net loss of joint ventures
decreased by 63% to $2.9 million for the twelve months ended December 31, 2000,
from $7.8 million in the prior twelve-month period as a result of the
consolidation of several joint ventures resulting from the purchase of the
local partners' interests, and the maturing of the remaining joint venture
networks. The decreased net losses of the joint ventures were primarily the
result of increased revenues only partially being offset by startup and other
costs and expenses associated with design, construction, operation and
management of the networks.
The number of non-consolidated joint venture networks paying management fees
to the Company decreased from four at December 31, 1999 to three at December
31, 2000. These networks paid management and monitoring fees to the Company,
which are included in revenues, aggregating approximately $7.6 million for the
twelve months ended December 31, 2000, an increase of approximately $2.6
million over the prior twelve-month period. The non-consolidated networks' net
losses, including networks under construction, for the twelve months ended
December 31, 1999 and 2000, aggregated approximately $15.2 million and $6.2
million, respectively.
Preferred Stock Dividends. Preferred stock dividends increased 13% to $35.7
million during the twelve months ended December 31, 2000 from $31.6 million
during the prior twelve-month period. The increase was
A-7
due to a higher outstanding preferred stock base resulting from the payment of
dividends in additional shares of preferred stock.
Twelve months Ended December 31, 1999 in Comparison with twelve months Ended
December 31, 1998
Revenues. The primary sources of revenues, reflected as a percentage of
total revenue, were as follows.
Twelve Months
Ended
December 31,
--------------
1998 1999
------ ------
Local Services............................................... 53.0% 69.2%
Dedicated Access............................................. 37.5% 21.1%
Management Fees.............................................. 9.3% 3.2%
Enhanced Services............................................ -- 3.1%
Long Distance................................................ 0.1% 1.1%
Other........................................................ 0.1% 2.3%
Revenues increased 290% to $154.6 million for the twelve months ended
December 31, 1999, from $39.6 million in the prior twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following
Growth in Original Markets.................................... $75,978
Acquisition of local partner interests........................ 27,955
Expansion Markets............................................. 9,798
Management fees............................................... 1,247
Network Operations Expense. Network operations expense increased 175% to
$58.5 million for the twelve months ended December 31, 1999 from $21.3 million
in the prior twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following
Growth in Original Markets.................................... $17,270
Acquisition of local partner interests........................ 8,381
Expansion Markets............................................. 10,888
Network Control Center........................................ 701
The increased number and size of the operations of the networks resulted in
increased employee related costs, equipment maintenance costs and expansion
costs.
Selling, General and Administrative. Selling, general and administrative
expense increased 251% to $142.6 million for the twelve months ended December
31, 1999 from $40.6 million in the prior twelve-month period.
Amounts
(in thousands)
--------------
The increase is attributable to the following
Growth in Original Markets.................................... $28,406
Acquisition of local partner interests........................ 12,242
Expansion Markets............................................. 42,609
Sales and marketing activities................................ 6,865
Corporate overhead charges.................................... 11,830
A-8
Depreciation and Amortization. Depreciation and amortization expense
increased 110% to $65.2 million during the twelve months ended December 31,
1999 from $31.1 million in the prior twelve-month period primarily as a result
of increased depreciation resulting from the higher depreciable asset base at
the NOCC and the networks, amortization of deferred financing costs and the
acquisition of local partner interest.
Interest Income. Interest income for the twelve months ended December 31,
1999 increased 28% to $19.9 million from $15.6 million in the prior twelve-
month period as a result of the payment of interest due 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. Interest income--affiliate remained relatively
unchanged at $8.5 million for the twelve months ended December 31, 2000 as
compared to $8.4 million in the prior twelve-month period.
Interest Expense. Interest expense increased 43% to $74.3 million during the
twelve months ended December 31, 1999 from $52.0 million in the prior twelve-
month period as a result of the issuance of the 12% Senior Subordinated Notes
due 2007, partially offset by an increase in the amount of interest capitalized
on projects under construction in 1998.
Equity in Net Loss of Joint Venture. Equity in net loss of joint ventures
decreased by 41% to $7.8 million during the twelve months ended December 31,
1999 from $13.3 million in the prior twelve-month period as a result of the
consolidation of several joint ventures resulting from the purchase of the
local partners' interests, and the maturing of the remaining joint venture
networks. The decreased net losses of the joint ventures were primarily the
result of increased revenues only partially offsetting startup and other costs
and expenses associated with design, construction, operation and management of
the networks.
The number of non-consolidated networks paying management fees to the
Company decreased from eight at December 31, 1998 to four at December 31, 1999.
These networks paid management and monitoring fees to the Company, which are
included in revenues, aggregating approximately $4.9 million for the twelve
months ended December 31, 1999, an increase of approximately $1.2 million over
the prior twelve-month period. The non-consolidated networks' net losses,
including networks under construction, for the twelve months ended December 31,
1998 and 1999 aggregated approximately $28.4 million and $15.2 million,
respectively.
Preferred Stock Dividends. Preferred stock dividends increased by 14% to
$31.6 million during the twelve months ended December 31, 1999 from $27.7
million during the prior twelve-month period. The increase is due to a higher
outstanding preferred stock base resulting from the payment of dividends in
additional shares of preferred stock.
Supplementary Network Financial Analysis
At December 31, 2000, 54 of the 75 operational markets had been in operation
for two years or less, while the remaining 21 markets have been in operation
for more than two years. In order to provide an additional measure of the
financial position, growth and performance of the Company and its networks,
management analyzes the aggregates operational markets based on the year or
years in which the markets became operational. The Original Markets, including
nonconsolidated joint ventures, are broken down into two categories, those
which began operations in 1996 or before and those which began operations in
1997 or 1998. The Expansion Markets are also broken down into two categories,
those which began operations in 1999 and those which began operations in 2000.
The following table provides information relating to the aggregation of those
markets. This financial information, however, is not indicative of the
Company's overall historical financial position or results of operations.
A-9
Adelphia Business Solutions, Inc.
Unaudited Combined Results of Original and Expansion Markets
Before allocation of Corporate Overhead (a)
Quarter Ended December 31, 2000 Quarter Ended September 30, 2000
------------------------------------------------------- ----------------------------------------------------
Original Markets Expansion Markets Original Markets Expansion Markets
------------------- ------------------- Total ------------------ ------------------- Total
Class of Class of Class of Class of Operating Class of Class of Class of Class of Operating
1996 1997/98 1999 2000 Results (a) 1996 1997/98 1999 2000 Results (a)
-------- -------- -------- -------- ----------- -------- -------- -------- -------- -----------
(dollars in thousands)
Revenue............. $81,936 $14,825 $ 22,275 $ 2,005 $121,041 $78,168 $14,061 $ 18,829 $ 105 $111,163
Direct Operating
Expenses........... 22,440 6,365 26,060 2,370 57,235 20,933 6,575 23,986 879 52,373
------- ------- -------- ------- -------- ------- ------- -------- ------- --------
Gross Margin........ 59,496 8,460 (3,785) (365) 63,806 57,235 7,486 (5,157) (774) 58,790
Gross Margin
Percentage......... 72.6% 57.1% (17.0)% (18.2)% 52.7% 73.2% 53.2% (27.4)% NM 52.9%
Sales, General and
Administrative
Expenses........... 27,970 5,644 22,781 6,031 62,426 30,171 5,296 21,689 3,519 60,675
------- ------- -------- ------- -------- ------- ------- -------- ------- --------
EBITDA before
allocation of
Corporate Overhead
(b)................ $31,526 $ 2,816 $(26,566) $(6,396) $ 1,380 $27,064 $ 2,190 $(26,846) $(4,293) $( 1,885)
------- ------- -------- ------- -------- ------- ------- -------- ------- --------
EBITDA as a
Percentage of
Revenues........... 38.5% 19.0% (119.3)% NM 1.1% 34.6% 15.6% (142.6)% NM (1.7)%
December 2000 Quarter vs. September 2000
Quarter Percentage Change Comparison
-------------------------------------------------------
Original Markets Expansion Markets
------------------- ------------------- Total
Class of Class of Class of Class of Operating
1996 1997/98 1999 2000 Results (a)
-------- -------- -------- -------- -----------
Percent Change
Comparison
Revenues............ 4.8% 5.4% 18.3% NM 8.9%
Direct Operating
Expenses........... 7.2% (3.2)% 8.6% NM 9.3%
------- ------- -------- ------- --------
Gross Margin........ 4.0% 13.0% (26.6)% NM 8.5%
Sales, General and
Administrative
Expenses........... (7.5)% 6.6% 5.0% NM 2.9%
------- ------- -------- ------- --------
EDITDA before
allocation of
Corporate Overhead
(b)................ 16.5% 28.6% 1.0% NM NM
------- ------- -------- ------- --------
- -------
(a) The above table summarizes operating results before the allocation of
corporate overhead for Adelphia Business Solutions' Original and Expansion
Markets, grouped by the year or years in which operations commenced.
Operating Results are presented before an allocation of Corporate Overhead
for network operating control center, engineering and other administrative
support functions totaling $23.7 million in the December 2000 quarter and
$17.1 million in the September 2000 quarter and before a bad debt provision
for previously recorded revenues of $15.0 million in the December 2000
quarter. The Original Markets include fourteen markets in the Class of 1996
and eight markets in the Class of 1997/1998. The Expansion Markets include
thirty markets in the Class of 1999 and twenty-nine markets in the Class of
2000.
(b) Earnings before interest, income taxes, depreciation and amortization,
restructuring charges, other income/expense and non-cash stock compensation
("EBITDA") and similar measures of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity.
While EBITDA is not an alternative indicator of operating performance or an
alternative to cash flows from operating activities as a measure of
liquidity as defined by GAAP, and while EBITDA may not be comparable to
other similarly titled measure of other companies, management of Adelphia
Business Solutions believes that EBITDA is a meaningful measure of
performance.
A-10
Adelphia Business Solutions, Inc.
Unaudited Combined Results of Original and Expansion Markets--Continued
Before allocation of Corporate Overhead (a)
Quarter Ended December 31, 2000 Quarter Ended December 31, 1999
----------------------------------------------------- --------------------------------------------------
Original Markets Expansion Markets Original Markets Expansion Markets
------------------ ------------------- Total ------------------ ------------------- Total
Class of Class of Class of Class of Operating Class of Class of Class of Class of Operating
1996 1997/98 1999 2000 Results (a) 1996 1997/98 1999 2000 Results (a)
-------- -------- -------- -------- ----------- -------- -------- -------- -------- -----------
(dollars in thousands)
Revenue............. $81,936 $14,825 $ 22,275 $ 2,005 $121,041 $52,740 $8,121 $ 6,462 $ -- $67,053
Direct Operating
Expenses........... 22,440 6,365 26,060 2,370 57,235 11,221 4,009 7,743 -- 23,073
------- ------- -------- ------- -------- ------- ------ -------- ----- -------
Gross Margin........ 59,496 8,460 (3,785) (365) 63,806 41,249 4,112 (1,381) -- 43,980
Gross Margin
Percentage......... 72.6% 57.1% (17.0%) (18.2%) 52.7% 78.6% 50.6% (21.4%) -- 65.6%
Sales, General and
Administrative
Expenses........... 27,970 5,644 22,781 6,031 62,426 22,911 3,264 14,508 420 41,103
------- ------- -------- ------- -------- ------- ------ -------- ----- -------
EBITDA before
allocation of
Corporate Overhead
(b)................ $31,526 $ 2,816 $(26,566) $(6,396) $ 1,380 $18,338 $ 848 $(15,890) $(420) $ 2,877
------- ------- -------- ------- -------- ------- ------ -------- ----- -------
EBITDA Percentage of
Revenues........... 38.5% 19.0% (119.3%) NM 1.1% 34.9% 10.4% (245.9%) -- 4.3%
December 2000 Quarter vs. December 1999 Quarter
Percentage Change Comparison
-----------------------------------------------------
Original Markets Expansion Markets
------------------ ------------------- Total
Class of Class of Class of Class of Operating
1996 1997/98 1999 2000 Results (a)
-------- -------- -------- -------- -----------
Percent Change
Comparison
Revenues............ 56.2% 82.6% 244.7% NM 80.5%
Direct Operating
Expenses........... 100.0% 58.8% 232.2% NM 148.1%
------- ------- -------- ------- --------
Gross Margin........ 44.2% 105.7% NM NM 45.1%
Sales, General and
Administrative
Expenses........... 22.1% 72.9% 57.0% NM 51.9%
------- ------- -------- ------- --------
EDITDA before
allocation of
Corporate Overhead
(b)................ 71.9% 232.1% NM NM (52.0%)
------- ------- -------- ------- --------
- -------
(a) The table above summarizes operating results before the allocation of
corporate overhead for Adelphia Business Solutions' Original and Expansion
Markets, grouped by the year or years in which operations commenced.
Operating Results are presented before an allocation of Corporate Overhead
for network operating control center, engineering and other administrative
support functions totaling $23.7 million in the December 2000 quarter and
$14.4 million in the December 1999 quarter and before a bad debt provision
for previously recorded revenues of $15.0 million in the December 2000
quarter. The Original Markets include fourteen markets in the Class of 1996
and eight markets in the Class of 1997/98. The Expansion Markets include
thirty markets in the Class of 1999 and twenty-nine markets in the Class of
2000.
(b) Earnings before interest, income taxes, depreciation and amortization,
restructuring charges, other income/expense and non-cash stock compensation
("EBITDA") and similar measures of cash flow are commonly used in the
telecommunications industry to analyze and compare telecommunications
companies on the basis of operating performance, leverage, and liquidity.
While EBITDA is not an alternative indicator of operating performance or an
alternative to cash flows from operating activities as a measure of
liquidity as defined by GAAP, and while EBITDA may not be comparable to
other similarly titled measure of other companies, management of Adelphia
Business Solutions believes that EBITDA is a meaningful measure of
performance.
A-11
Liquidity and Capital Resources
The development of the Company's business and the installation and expansion
of the networks, as well as the development of the markets, combined with the
construction and expansion of the Company's NOCC, have resulted in substantial
capital expenditures and investments during the past several years. Capital
expenditures by the Company were $453.2 million and $712.8 million for the
years ended December 31, 1999 and 2000, respectively. Further, investments made
by the Company in nonconsolidated networks and in LMDS licenses were $24.5
million and $88.0 million for the years ended December 31, 1999 and 2000,
respectively. The significant increase in capital expenditures for the year
ended December 31, 2000 is largely attributable to capital expenditures
necessary to develop the Original Markets and the Expansion Markets, as well as
the fiber purchases to interconnect the networks. The Company expects that it
will continue to incur substantial capital expenditures in this development
effort. The Company also expects to continue to fund operating losses as the
Company develops and grows its business. For information regarding recent
transactions affecting the Company's liquidity and capital resources, see
"Financing Transactions" and "Acquisitions of Partners Interests" above.
The Company has experienced negative operating and investing cash flow since
its inception. A combination of operating losses, substantial capital
investments required to build the Company's networks and its state-of-the-art
NOCC, and incremental investments in the joint ventures has resulted in
substantial negative cash flow.
Expansion of the Company's Original Markets and services and the development
of Expansion Markets and additional networks and services requires significant
capital expenditures. The Company's operations have required and will continue
to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's networks, (ii) the expansion
and improvement of the Company's NOCC and Original Markets, (iii) the design,
construction and development of Expansion Markets and (iv) the acquisition of
additional ownership interests in the Original Markets. The Company has made
substantial capital investments and investments in joint ventures in connection
with the installation of 5ESS switches or remote switching modules in all of
its Original Markets and has installed regional super switches in certain key
Expansion Markets when such Expansion Markets were operational. To date, the
Company has installed switches in all of its Original Markets and plans to
provide such services in all of its Expansion Markets on a standard switching
platform based on Lucent 5 switch technology. The Company also plans to
purchase its partners' interest in the joint ventures when it can do so at
attractive economic terms. The Company estimates that, in addition to the cash
and cash equivalents on hand and the restricted cash as of December 31, 2000, a
total of approximately $500 million will be required to fund the Company's
capital expenditures, working capital requirements, operating losses and pro
rata investments in the joint ventures during calendar 2001. The Company
currently expects calendar 2001 revenues to be in the range of $500 million,
with first quarter 2001 revenue at approximately the same level as December
2000 quarterly revenue. These expectations include the Company's estimate of
the effect of the revised business plan, the sale of the six markets to
Adelphia and the general economic downturn affecting the United State economy
and its effect on the Company's customers and vendors.
In addition, there can be no assurance (i) that the Company's future cash
requirements will not vary significantly from those presently planned due to a
variety of factors including acquisition of additional networks, continued
acquisition of increased ownership in its networks, material variances from
expected capital expenditure requirements for Original Markets and Expansion
Markets and development of the LMDS spectrum, or (ii) that anticipated
financings, Local Partner investments and other sources of capital will become
available to the Company on economically attractive terms or at all. In
addition, it is possible that expansion of the Company's networks may include
the geographic expansion of the Company's existing clusters and the development
or acquisition of other new markets not currently planned.
The Company will need 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
A-12
venture levels, internally generated funds, equity invested by Local Partners
in joint ventures and additional debt or equity financings, as appropriate, and
expects to fund any potential additional purchase of partnership interests of
Local Partners through existing resources, internally generated funds and
additional debt or equity financings, as appropriate. The Company's ability to
generate cash to meet its future needs will depend generally on its results of
operations and the continued availability of external financing.
During March 2001, the Company issued and sold 25,322 shares of Class A
common stock, to the public in a rights offering at a price of $7.28 per share.
Simultaneously, the Company issued and sold 11,820,070 and 51,459,624 shares of
Class A and Class B common stock, respectively in the rights offering to
Adelphia at a price of $7.28 per share. Total proceeds to the Company were
$460.9 million.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," and by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" is effective for
the Company as of January 1, 2001. SFAS No. 133, as amended, establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value with changes in fair value reflected in the statement of
operations.
The Company has no freestanding derivative instruments. In conjunction with
preparing for the implementation of this standard, the Company reviewed
contracts from various functional areas of the Company to identify potential
derivatives embedded in the selected contracts. No embedded derivatives were
identified as a result of this review. The adoption of this statement or any
transition adjustment will not have a significant effect on the Company's
consolidated results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, which clarified the existing accounting
rules for revenue recognition. SAB No. 101 was adopted by the Company in the
fourth quarter of 2000. The Company's revenue recognition policy did not change
with the adoption of SAB No. 101.
Impact of Inflation
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations or on the operations of the joint
ventures in the nine months ended December 31, 1998 and the years ended
December 31, 1999 and 2000.
A-13
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses fixed rate debt to fund its working capital requirements,
capital expenditures and acquisitions. These debt arrangements expose the
Company to market risk related to changes in interest rates. The table below
summarizes the fair values and contract terms of the Company's financial
instruments subject to interest rate risk as of December 31, 2000.
Expected Maturity
------------------------------------------- Fair
2001 2002 2003 2004 2005 Thereafter Total Value
------ ------ -------- -------- ------- ---------- ---------- --------
Fixed Rate Debt and
Redeemable Preferred
Stock.................. $ -- $ -- $303,840 $250,000 $ -- $597,067 $1,150,907 $655,385
Average Interest Rate.. 12.54% 12.54% 12.44% 12.39% 12.44% 12.40% -- --
Fixed Rate Non Public
Debt................... $ -- $ -- $ 18,068 $ 38,409 $48,636 $394,887 $ 500,000 $500,000
Average Interest Rate.. 12.50% 12.50% 12.50% 12.50% 12.50% 12.50% -- --
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes thereto and
independent auditors' report follow.
A-14
INDEPENDENT AUDITORS' REPORT
Adelphia Business Solutions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Adelphia
Business Solutions, Inc. and Subsidiaries (the "Company") as of December 31,
1999 and 2000, and the related consolidated statements of operations, of common
stock and other stockholders' equity (deficiency) and of cash flows for the
nine months ended December 31, 1998 and the years ended December 31, 1999 and
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Adelphia Business Solutions,
Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of
their operations and their cash flows for the nine months ended December 31,
1998 and the years ended December 31, 1999 and 2000, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 22, 2001
A-15
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31,
----------------------
1999 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 2,133 $ 3,543
Due from parent--net................................. 392,629 --
Due from affiliate--net.............................. 6,230 --
Accounts receivable--net............................. 68,075 79,650
Other current assets................................. 9,852 14,936
---------- ----------
Total current assets............................... 478,919 98,129
U.S. government securities--pledged.................... 29,899 --
Restricted cash........................................ -- 54,178
Investments............................................ 44,066 48,409
Property, plant and equipment--net..................... 943,756 1,534,612
Other assets--net...................................... 67,063 154,138
---------- ----------
Total.............................................. $1,563,703 $1,889,466
========== ==========
LIABILITIES, PREFERRED STOCK, COMMON STOCK AND OTHER
STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable..................................... $ 150,151 $ 158,249
Due to parent--net................................... -- 1,544
Due to affiliates--net............................... -- 8,067
Accrued interest..................................... 16,566 31,011
Accrued interest--parent............................. -- 7,003
Other current liabilities............................ 11,029 13,339
---------- ----------
Total current liabilities.......................... 177,746 219,213
13% Senior Discount Notes due 2003..................... 253,860 291,891
12 1/4% Senior Secured Notes due 2004.................. 250,000 250,000
12% Senior Subordinated Notes due 2007................. 300,000 300,000
Note payable........................................... -- 500,000
Other debt............................................. 41,318 48,565
---------- ----------
Total liabilities.................................. 1,022,924 1,609,669
12 7/8% Senior Exchangeable Redeemable Preferred
Stock................................................. 260,848 297,067
Commitments and contingencies (Note 7)
Common stock and other stockholders' equity
(deficiency)
Class A common stock, $0.01 par value, 800,000,000
shares authorized, 34,066,587 and 35,848,366 shares
outstanding, respectively........................... 341 358
Class B common stock, $0.01 par value, 400,000,000
shares authorized, 35,371,459 and 35,143,859 shares
outstanding, respectively........................... 354 351
Additional paid in capital........................... 666,021 678,140
Class B common stock warrants........................ 2,177 1,022
Unearned stock compensation.......................... (5,715) (4,070)
Accumulated deficit.................................. (383,247) (693,071)
---------- ----------
Total common stock and other stockholders' equity
(deficiency)...................................... 279,931 (17,270)
---------- ----------
Total.............................................. $1,563,703 $1,889,466
========== ==========
See notes to consolidated financial statements
A-16
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Nine Months
Ended Year Ended
December 31, December 31,
------------ --------------------
1998 1999 2000
------------ --------- ---------
Revenues.................................... $ 34,776 $ 154,575 $ 351,974
Operating expenses:
Network operations........................ 18,709 58,525 183,314
Selling, general and administrative....... 35,341 142,615 277,198
Restructuring charges..................... -- -- 5,420
Depreciation and amortization............. 26,671 65,244 114,614
-------- --------- ---------
Total................................... 80,721 266,384 580,546
-------- --------- ---------
Operating loss.............................. (45,945) (111,809) (228,572)
Other income (expense):
Interest income........................... 10,233 19,933 3,900
Interest income--affiliate................ 8,395 8,483 6,282
Interest expense.......................... (38,638) (74,314) (81,573)
Interest expense--affiliate............... -- -- (7,003)
Other income.............................. 1,113 -- --
-------- --------- ---------
Loss before income taxes, equity in net loss
of joint ventures and extraordinary gain... (64,842) (157,707) (306,966)
Income tax expense.......................... -- (1) --
-------- --------- ---------
Loss before equity in net loss of joint
ventures and extraordinary gain............ (64,842) (157,708) (306,966)
Equity in net loss of joint ventures........ (9,580) (7,758) (2,858)
-------- --------- ---------
Loss before extraordinary gain.............. (74,422) (165,466) (309,824)
Extraordinary gain on repurchase of debt.... 237 -- --
-------- --------- ---------
Net loss.................................... (74,185) (165,466) (309,824)
Dividend requirements applicable to
preferred stock............................ (21,117) (31,618) (35,665)
-------- --------- ---------
Net loss applicable to common stockholders.. $(95,302) $(197,084) $(345,489)
======== ========= =========
Basic and diluted net loss per weighted
average share of common stock before
extraordinary gain......................... $ (1.81) $ (3.47) $ (4.93)
Basic and diluted extraordinary gain on
repurchase of debt per weighted average
share of common stock...................... 0.01 -- --
-------- --------- ---------
Basic and diluted net loss per weighted
average share of common stock.............. $ (1.80) $ (3.47) $ (4.93)
======== ========= =========
Weighted average shares of common stock
outstanding (in thousands)................. 53,035 56,739 70,088
======== ========= =========
See notes to consolidated financial statements
A-17
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK
AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands, except per share amounts)
Class Class Class A Class B
A B Additional Common Common Unearned
Common Common Paid-in Stock Stock Loans to Stock Accumulated
Stock Stock Capital Warrant Warrant Shareholders Compensation Deficit Total
------ ------ ---------- -------- ------- ------------ ------------ ----------- ---------
Balance, March 31,
1998................... $ 4 $325 $ 179 $ 13,000 $11,087 $(3,000) $ -- $(140,586) $(118,991)
Proceeds from issuance
of Class A common
stock................. 129 -- 190,731 -- -- -- -- -- 190,860
Proceeds from issuance
of Class A common
stock to Adelphia..... 33 -- 49,827 -- -- -- -- -- 49,860
Exercise of Class A
common stock warrant.. 7 -- 12,993 (13,000) -- -- -- -- --
Conversion of note and
payables to Adelphia
to Class A common
stock................. 36 -- 44,222 -- -- -- -- -- 44,258
Exercise of Class B
common stock
warrants.............. -- 8 6,596 -- (6,604) -- -- -- --
Conversion of Class B
common stock to Class
A common stock........ 10 (10) -- -- -- -- -- -- --
Repayment of loan to
shareholders.......... -- -- -- -- -- 3,000 -- -- 3,000
Dividend requirements
applicable to
preferred stock....... -- -- (18,168) -- -- -- -- (2,949) (21,117)
Other.................. -- -- (353) -- -- -- -- (61) (414)
Issuance of Class A
common stock bonus.... 5 -- 755 -- -- -- -- -- 760
Net loss............... -- -- -- -- -- -- -- (74,185) (74,185)
---- ---- -------- -------- ------- ------- ------- --------- ---------
Balance, December 31,
1998................... 224 323 286,782 -- 4,483 -- -- (217,781) 74,031
Proceeds from issuance
of Class A common
stock................. 88 -- 252,766 -- -- -- -- -- 252,854
Proceeds from issuance
of Class B common
stock................. -- 52 149,948 -- -- -- -- -- 150,000
Exercise of Class B
common stock
warrants.............. -- 3 2,303 -- (2,306) -- -- -- --
Conversion of Class B
common stock to Class
A common stock........ 24 (24) -- -- -- -- -- -- --
Unearned stock
compensation.......... 4 -- 6,396 -- -- -- (5,715) -- 685
Dividend requirements
applicable to
preferred stock....... -- -- (31,618) -- -- -- -- -- (31,618)
Other.................. 1 -- (556) -- -- -- -- -- (555)
Net loss............... -- -- -- -- -- -- -- (165,466) (165,466)
---- ---- -------- -------- ------- ------- ------- --------- ---------
Balance, December 31,
1999................... $341 $354 $666,021 $ -- $ 2,177 $ -- $(5,715) $(383,247) $ 279,931
==== ==== ======== ======== ======= ======= ======= ========= =========
See notes to consolidated financial statements.
A-18
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK
AND OTHER STOCKHOLDERS' EQUITY (DEFICIENCY) (continued)
(Dollars in thousands, except per share amounts)
Class Class Class A Class B
A B Additional Common Common Unearned
Common Common Paid-in Stock Stock Loans to Stock Accumulated
Stock Stock Capital Warrant Warrant Shareholders Compensation Deficit Total
------ ------ ---------- ------- ------- ------------ ------------ ----------- ---------
Balance, December 31,
1999................... $341 $354 $666,021 $-- $ 2,177 $-- $(5,715) $(383,247) $ 279,931
Exercise of Class A
common stock warrant.. 9 -- 5,612 -- -- -- -- -- 5,621
Exercise of Class B
common stock warrant.. -- 1 1,154 -- (1,155) -- -- -- --
Conversion of Class B
common stock to Class
A common stock........ 4 (4) -- -- -- -- -- -- --
Vesting of stock
compensation.......... -- -- -- -- -- -- 1,645 -- 1,645
Issuance of Class A
common stock bonus.... 1 -- 401 -- -- -- -- -- 402
Excess of sales price
over carrying value of
networks sold......... -- -- 34,255 -- -- -- -- -- 34,255
Issuance of Class A
common stock for
purchase of
telecommunications
network............... 3 -- 6,928 -- -- -- -- -- 6,931
Dividend requirements
applicable to
preferred stock....... -- -- (35,665) -- -- -- -- -- (35,665)
Other.................. -- -- (566) -- -- -- -- -- (566)
Net loss............... -- -- -- -- -- -- -- (309,824) (309,824)
---- ---- -------- --- ------- --- ------- --------- ---------
Balance, December 31,
2000................... $358 $351 $678,140 $-- $ 1,022 $-- $(4,070) $(693,071) $ (17,270)
==== ==== ======== === ======= === ======= ========= =========
See notes to consolidated financial statements.
A-19
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Year Ended
Ended December 31,
December 31, --------------------
1998 1999 2000
------------ --------- ---------
Cash flows from operating activities:
Net loss.................................. $ (74,185) $(165,466) $(309,824)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation............................ 23,838 59,430 102,126
Amortization............................ 2,833 5,814 12,488
Equity in net loss of joint ventures.... 9,580 7,758 2,858
Non-cash interest expense............... 23,857 33,076 38,031
Restructuring charges................... -- -- 5,420
Non-cash stock compensation............. 761 685 1,319
Extraordinary gain on repurchase of
debt................................... (237) -- --
Changes in operating assets and
liabilities, net of effects of
Acquisitions
Other assets--net..................... 29,072 (62,580) (27,835)
Accounts payable...................... 9,862 127,697 6,411
Accrued interest and other
liabilities.......................... 10,414 11,071 24,676
--------- --------- ---------
Net cash provided by (used in) operating
activities................................. 35,795 17,485 (144,330)
--------- --------- ---------
Cash flows from investing activities:
Net cash used for acquisitions............ -- (129,118) --
Expenditures for property, plant and
equipment................................ (146,752) (453,206) (712,807)
Repayment of senior secured note.......... -- 20,000 --
Investments in joint ventures............. (69,018) (24,496) (10,375)
Investments in fixed wireless licenses.... (44,605) -- (77,632)
Investments in restricted cash--net....... -- -- (54,178)
Sale of telecommunications networks....... -- -- 87,452
Sale of U.S. government securities--
pledged.................................. 15,312 30,626 30,626
--------- --------- ---------
Net cash used in investing activities....... (245,063) (556,194) (736,914)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of Class A common
stock.................................... 255,462 262,500 5,621
Proceeds from issuance of Class B common
stock.................................... -- 150,000 --
Proceeds from debt........................ -- 300,000 500,000
Repayment of debt......................... (19,868) (5,668) (10,288)
Costs associated with debt financing...... -- (6,180) (15,025)
Costs associated with issuance of common
stock.................................... (14,742) (9,646) --
Repayment of loans from stockholders...... 3,000 -- --
(Advances to) repayments from affiliates.. (2,764) (392,734) 402,346
--------- --------- ---------
Net cash provided by financing activities... 221,088 298,272 882,654
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents................................ 11,820 (240,437) 1,410
Cash and cash equivalents, beginning of
period..................................... 230,750 242,570 2,133
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 242,570 $ 2,133 $ 3,543
========= ========= =========
See notes to consolidated financial statements
A-20
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. The Company and Summary of Significant Accounting Policies
Organization and Business
The consolidated financial statements include the accounts of Adelphia
Business Solutions, Inc. and it's more than 50% owned subsidiaries ("Adelphia
Business Solutions" or the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation. The Company was formed
in 1991 and is a majority-owned subsidiary of Adelphia Communications
Corporation ("Adelphia"). On October 25, 1999, the stockholders of the Company
elected to change the name of the Company from Hyperion Telecommunications,
Inc. to Adelphia Business Solutions, Inc., which management believes will
further align the strengths of both companies to develop a single brand in the
communications marketplace.
Adelphia Business Solutions operates in one segment and is a nationwide
facilities based integrated communications provider, or ICP, that offers
broadband communications solutions, including local switch dial tone, long
distance service, high-speed data transmission and internet connectivity.
On March 30, 1999, Adelphia Business Solutions elected to change its fiscal
year from March 31 to December 31. The decision was made to conform to general
industry practice and for administrative purposes. The change became effective
for the nine months ended December 31, 1998.
On May 8, 1998, the Company issued and sold 12,500,000 shares of Class A
common stock at a price to the public of $16.00 per share (the "IPO").
Simultaneously with the closing of the IPO, the Company issued and sold an
additional 3,324,001 shares of Class A common stock to Adelphia at a purchase
price of $15.00 per share (or an aggregate of approximately $49,900). In
addition, at such closing, the Company issued 3,642,666 shares of Class A
common stock to Adelphia in exchange for certain of the Company's indebtedness
and payables with a carrying value of $44,258 owed to Adelphia at a purchase
price of $15.00 per share (or an aggregate of $54,600). In a related
transaction, on June 5, 1998, the Company issued and sold 350,000 shares of
Class A common stock at the $16.00 IPO price pursuant to the underwriters'
over-allotment option in the IPO.
On November 30, 1999, the Company issued and sold 8,750,000 shares of Class
A common stock at a price to the public of $30.00 per share. Simultaneously
with the closing of this transaction, the Company issued and sold 5,181,350
shares of Class B common stock to Adelphia at a purchase price of $28.95 per
share.
During March 2001, the Company issued and sold 25,322 shares of Class A
common stock, to the public in a rights offering at a price of $7.28 per share.
Simultaneously, the Company issued and sold 11,820,070 and 51,459,624 shares of
Class A and Class B common stock, respectively in the rights offering to
Adelphia at a price of $7.28 per share. Total proceeds to the Company were
$460,900.
At December 31, 2000, Adelphia owned approximately 60% of Adelphia Business
Solutions' outstanding common stock and held approximately 90% of the total
voting rights.
The Company is a leading provider of facilities-based integrated
communications services to customers that include businesses, governmental and
educational end users and other communications services providers primarily
throughout the eastern United States. The Company currently offers a full range
of communications services in 75 markets and expects by the end of the year
2001 to be offering services in approximately 80 markets, including
substantially all of the top 40 metropolitan statistical areas in the United
States. To serve its customers' broad and expanding communications needs, the
Company has assembled a diverse collection of high-bandwidth, local and
national network assets. The Company intends to integrate these assets with
A-21
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
advanced communications technologies and services in order to provide
comprehensive end-to-end communications services over our own networks. The
Company provides customers with communications services such as local switch
dial tone (also known as local phone service), long distance service, high-
speed data transmission and Internet connectivity. The Company offers its
customers a choice of receiving these services separately or as bundled
packages which are typically priced at a discount when compared to the price of
the separate services.
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 capital expenditures. In addition to cash and cash
equivalents on hand and the restricted cash as of December 31, 2000, a total of
approximately $500,000 will be required to fund the Company's capital
expenditures, working capital requirements, operating losses and pro rata
investments in the joint ventures during calendar 2001. The Company will need
additional funds to fully fund its business plan. The Company expects to fund
its capital requirements through existing resources, credit facilities and
vendor financings at the Company and joint venture levels, internally generated
funds, equity invested by local partners in joint ventures and additional debt
or equity financings, as appropriate, and expects to fund any potential
additional purchase of partnership interest of local partners through existing
resources, internally generated funds and additional debt or equity financings,
as appropriate. The Company's ability to generate cash to meet its future needs
will depend generally on its results of operations and the continued
availability of external financing.
Joint ventures, which the Company currently does not control, are accounted
for under the equity method of accounting.
Acquisitions of Partner Interests
On February 12, 1998, the Company purchased additional partnership interests
in Louisville Lightwave (Louisville and Lexington), NHT Partnership (Buffalo),
New Jersey Fiber Technologies and Hyperion of Harrisburg. As a result, the
Company's ownership in these networks increased to 100%. The aggregate purchase
price was comprised of approximately $45,000 in cash and a warrant, which was
not exercised until May 1998, for 731,624 shares of the Company's Class A
common stock (See Note 6). In addition, the Company paid certain amounts
related to fiber lease financings upon consummation of the purchase of the
additional partnership interests.
During March 1999, Adelphia Business Solutions consummated purchase
agreements with subsidiaries of Multimedia, Inc. and MediaOne of Colorado Inc.
to acquire their respective interests in jointly owned networks located in the
Wichita, Kansas, Jacksonville, Florida and Richmond, Virginia markets for an
aggregate of approximately $89,750. The agreements increased the Company's
ownership interest in each of these networks to 100%.
During June 1999, the Company consummated a purchase agreement with Entergy
Corporation ("Entergy"), the parent of its local partner in the Baton Rouge,
Louisianna, Little Rock, Arkansas, and Jackson, Mississippi 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%.
During July 2000, the Company consummated a purchase agreement with
Allegheny Communications Connect, Inc. ("Allegheny") to acquire interests in a
jointly owned network located in State College, Pennsylvania. Consideration
paid to Allegheny was 330,000 shares of the Company's Class A Common Stock.
This purchase increased the Company's ownership in this network to 100%.
A-22
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
All of the acquisitions described above were accounted for using the
purchase method. Accordingly, the financial results of each acquisition have
been included in the Company's consolidated financial statements from the date
acquired.
The following unaudited financial information of the Company assumes that
each of the transactions described above had occurred at the beginning of the
preceding period.
Nine Months Year Ended
Ended December 31,
December 31, --------------------
1998 1999 2000
------------ --------- ---------
Revenues................................... $ 49,156 $ 162,230 $ 352,689
Net loss................................... (79,789) (170,522) (310,303)
Net loss applicable to common
stockholders.............................. (100,907) (202,140) (345,969)
Basic and diluted net loss per weighted
average share of common stock............. $ (1.90) $ (3.56) $ (4.95)
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments with an
initial maturity date of three months or less.
Restricted Cash
Restricted cash consists of highly liquid investments with an initial
maturity date of three months or less reserved for the construction of the
advanced information technology infrastructure under the Company's contract
with the Commonwealth of Pennsylvania. The contract was entered into on May 3,
2000. As part of the contract, the Company was required to place $75.8 million
into a restricted account to be used for the completion on the technology
infrastructure. As of December 31, 2000, the Company had used $21.6 million
towards the completion of the infrastructure.
U.S. Government Securities--Pledged
U.S. Government Securities--Pledged consist of highly liquid investments
which will be used to pay the first six semi-annual interest payments on the 12
1/4% Senior Secured Notes. Such investments are classified as held-to-maturity
and the carrying value approximates market value.
Accounts Receivable
An allowance for doubtful accounts of $9,640 and $48,513 is recorded as a
reduction of accounts receivable at December 31, 1999 and 2000, respectively.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with
network engineering, design and construction.
Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.
A-23
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The estimated useful lives of the Company's principal classes of property,
plant and equipment are as follows:
Telecommunications networks......................................... 10-20 years
Network monitoring and switching equipment.......................... 5-10 years
Fiber optic use rights.............................................. 15 years
Other............................................................... 3-10 years
Revenue Recognition
The Company recognizes revenue from communications services in the month the
related service is provided. Revenues on billings to customers in advance of
providing services are deferred and recognized when earned. The Company
recognizes revenues related to management and network monitoring of the joint
ventures in the month that the related services are provided. Reciprocal
compensation revenue is an element of switched service revenue, which
represents compensation from Local Exchange Carriers ("LECs") for local
exchange traffic originated by other LECs terminated on the Company's
facilities. Adelphia Business Solutions recognizes revenue based upon
established contracts with the LECs and has established a reserve for a portion
of those revenues that are under dispute.
Significant Customers
During the nine months ended December 31, 1998, Adelphia Business Solutions'
sales to AT&T and Bell Atlantic represented 11.4% and 10.1% of total revenues,
respectively. During the year ended December 31, 1999, Adelphia Business
Solutions' sales to AT&T and Bell Atlantic represented 8.8% and 14.7% of total
revenues, respectively. During the year ended December 31, 2000, Adelphia
Business Solutions' sales to Verizon represented 15.7% of total revenues.
Basic and Diluted Net Loss per Weighted Average Share of Common Stock
Basic net loss per weighted average share of common stock is computed based
upon the weighted average number of common shares and warrants outstanding
during the period. Diluted net loss per common share is equal to basic net loss
per common share because the Adelphia Warrant discussed in Note 6 had an
antidilutive effect for the periods presented. Class B common stock warrants to
purchase shares of Class B common stock have been included as shares
outstanding for purposes of the calculation of both basic and diluted net loss
per share for the nine months ended December 31, 1998 and the years ended
December 31, 1999 and 2000.
Other Assets--net
Deferred debt financing costs, included in other assets, are amortized over
the term of the related debt. The unamortized amounts of deferred debt
financing costs at December 31, 1999 and 2000 were $17,434 and $27,034,
respectively. Included in other assets at December 31, 1999 and 2000 is $44,605
and $122,504, respectively, relating to licenses. These licenses which cover
approximately 60% of the nation's population are a spectrum for a fixed
wireless technology known as local multipoint distribution service ("LMDS") and
are being amortized on a straight line basis over the life of the licenses,
which is 10 years.
Asset Impairments
Adelphia Business Solutions periodically reviews the carrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be
A-24
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
recoverable. Measurement of any impairment would include a comparison of
estimated future operating cash flows anticipated to be generated during the
remaining life of the assets with their net carrying value. An impairment loss
would be recognized as the amount by which the carrying value of the assets
exceeds their fair value.
Financial Instruments
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentration of
credit risk with respect to accounts receivable is limited due to the
dispersion of the Company's customer base among different customers and
geographic areas.
The Company's financial instruments include cash and cash equivalents, notes
payable and redeemable preferred stock. The fair value of the notes payable
exceeded their carrying value by approximately $52,058 at December 31, 1999.
The carrying value of the notes payable exceeded their fair value by
approximately $275,626 at December 31, 2000. The carrying value of the
redeemable preferred stock was equal to its fair value at December 31, 1999.
The carrying value of the redeemable preferred stock exceeded its fair value by
approximately $207,947 at December 31, 2000. The fair values of the financial
instruments were based upon quoted market prices.
Non-cash Financing and Investing Activities
Capital leases entered into during the nine months ended December 31, 1998,
and the years ended December 31, 1999 and 2000 totaled $1,155, $5,772, and
$17,747 respectively (See Note 5). Dividend requirements applicable to
preferred stock were satisfied by the issuance of an additional 20,624, 30,733
and 34,885 shares of such preferred stock during the nine months ended December
31, 1998 and the years ended December 31, 1999 and 2000, respectively (See Note
5).
Comprehensive Income
Comprehensive income includes all changes to all changes in stockholder's
equity during a period except those resulting from investments by and
distributions to owners. For the nine months ended December 31, 1998 and the
years ended December 31, 1999 and 2000, the Company's only component of
comprehensive income is its net loss for those periods.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," and by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" is effective for
the Company as of January 1,
A-25
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
2001. SFAS No. 133, as amended, establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value with changes in fair
value reflected in the statement of operations.
The Company has no freestanding derivative instruments. In conjunction with
preparing for the implementation of this standard, the Company reviewed
contracts from various functional areas of the Company to identify potential
derivatives embedded in the selected contracts. No embedded derivatives were
identified as a result of this review. The adoption of this statement or any
transition adjustment will not have a significant effect on the Company's
consolidated results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, which clarified the existing accounting
rules for revenue recognition. SAB No. 101 was adopted by the Company in the
fourth quarter of 2000. The Company's revenue recognition policy did not change
with the adoption of SAB No. 101.
Reclassifications
Certain December 31, 1998 and 1999 amounts have been reclassified to conform
with the presentation for the year ended December 31, 2000.
2. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
---------------------
1999 2000
--------- ----------
Telecommunications networks.............................. $ 139,248 $ 214,856
Network monitoring and switching equipment............... 431,078 760,784
Fiber optic use rights................................... 108,239 156,858
Construction in process.................................. 344,439 539,977
Other.................................................... 18,270 55,351
--------- ----------
1,041,274 1,727,826
Less accumulated depreciation............................ (97,518) (193,214)
--------- ----------
Total.................................................... $ 943,756 $1,534,612
========= ==========
Additions to property, plant and equipment are recorded at cost which
includes amounts for material, applicable labor and overhead and interest.
Capitalized interest amounted to $9,986, $23,282 and $43,609 for the nine
months ended December 31, 1998 and the years ended December 31, 1999 and 2000,
respectively.
3. Investment in Fiber Asset and Senior Secured Note
On February 20, 1997, the Company entered into several agreements regarding
the leasing of dark fiber in New York state in furtherance of its strategy to
interconnect its networks in the northeastern United States. Pursuant to these
agreements and in consideration of a payment of $20,000, the Company received a
$20,000 Senior Secured Note bearing interest at 22 1/2% (subject to reduction
upon early repayment of principal) due February 2002 (subject to early
redemption options), from Telergy, Inc. ("Telergy"), a right to receive 58,752
shares of Telergy Class A common stock ("Telergy Stock"), and a fully prepaid
lease from a Telergy affiliate
A-26
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
for an initial lease term of 25 years (with two additional ten-year extensions)
for 24 strands of dark fiber installed or to be installed in a New York fiber
optic telecommunications backbone network. As of December 31, 1998, the Company
included $11,500 and $8,500 in Property, Plant and Equipment and Other Assets,
respectively, as the allocation of the $20,000 payment between the fiber asset
and the Senior Secured Note. No amounts were allocated to the Telergy Stock.
The allocation reflected the Company's estimate of the relative fair values of
the assets acquired.
On May 15, 1998, Telergy paid the Company $1,000 in exchange for the Telergy
Stock and a gain of $1,000 was recorded by the Company, which is included in
"other income" in the consolidated statement of operations. On November 10,
1998, the Senior Secured Note was amended to mature on January 20, 2000 in
exchange for an indefeasible right to use ("IRU") or long term lease of certain
fiber segments in New York City and along Telergy's long haul fiber segments in
the northeastern United States and Southeastern Canada.
During May 1999, the Company received $32,329 from Telergy for the repayment
of the Senior Secured Note. The payment represented $20,000 in principal and
$12,329 of interest, which is included in "Interest income" in the consolidated
statement of operations.
4. Investments
The equity method of accounting is used to account for investments in joint
ventures in which the Company owns less than a majority interest. Under this
method, the Company's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or loss of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
The Company's nonconsolidated investments are as follows:
December 31,
Ownership ------------------
Percentage 1999 2000
---------- -------- --------
PECO-Adelphia Business Solutions
(Philadelphia).............................. 50.0% $ 42,475 $ 46,725
PECO-Adelphia Business Solutions (Allentown,
Bethlehem, Easton, Reading)................. 50.0% 7,425 11,050
Adelphia Business Solutions of York.......... 50.0% 6,525 6,525
Allegheny Hyperion Telecommunications........ 100.0%(1) 4,975 --
-------- --------
61,400 64,300
Cumulative equity in net losses.............. (17,334) (18,391)
-------- --------
Subtotal..................................... $ 44,066 $ 45,909
Investments accounted for using the cost
method...................................... -- 2,500
-------- --------
Total........................................ $ 44,066 $ 48,409
======== ========
- --------
(1) As discussed in Note 1, the Company has consummated an agreement which
increased its ownership to 100% in this network during July 2000.
A-27
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Summarized unaudited combined financial information for the Company's
nonconsolidated investments listed above being accounted for using the equity
method of accounting as of the dates and for the periods ended, is as follows:
December 31,
---------------
1999 2000
------- -------
Current assets................................................. $21,645 $26,942
PP&E-net....................................................... 112,210 105,420
Non-current assets............................................. 55 ----
Current liabilities............................................ 10,175 10,221
Non-current liabilities........................................ 45,278 31,010
Nine Months Year Ended
Ended December 31,
December 31, ----------------
1998 1999 2000
------------ ------- -------
Revenues......................................... $24,986 $43,753 $62,766
Net loss......................................... (22,325) (15,154) (6,218)
5. Financing Arrangements
Note Payable--Adelphia
The Company had an unsecured credit arrangement with Adelphia which had no
repayment terms prior to April 15, 1996. On April 15, 1996, $25,000 of the
proceeds from the sale of the 13% Senior Discount Notes (the "Senior Discount
Notes") and Class B common stock warrants were used to repay a portion of this
obligation. Interest expense and fees on this credit arrangement were based
upon the weighted average cost of unsecured borrowings of Adelphia during the
corresponding periods. Effective April 15, 1996, the remaining balance due on
the Note payable-Adelphia was evidenced by an unsecured subordinated note due
April 16, 2003. This obligation had an interest rate of 16.5% per annum.
Interest accrued through May 8, 1998 on the amount outstanding to Adelphia
totaled $10,645. On May 8, 1998, the Note payable--Adelphia and all accrued
interest was converted into shares of Class A common stock simultaneously with
the closing of the IPO (See Note 1).
13% Senior Discount Notes and Class B Common Stock Warrants
On April 15, 1996, the Company issued $329,000 of 13% Senior Discount Notes
due April 15, 2003 and 329,000 warrants to purchase an aggregate of 1,993,638
shares of its Class B common stock. Prior to April 15, 2001, interest on the
Senior Discount Notes is not payable in cash, but is added to principal.
Thereafter, interest is payable semi-annually commencing October 15, 2001. The
Senior Discount Notes are unsecured and are senior to all future subordinated
indebtedness. On or after April 15, 2001, the Company may redeem, at its
option, all or a portion of the Senior Discount Notes at 106.5%, which declines
to par in 2002, plus accrued interest.
The holders of the Senior Discount Notes may put the Senior Discount Notes
to the Company at any time upon the occurrence of a Change of Control (as
defined in the Indenture) at a price of 101% of accreted principal. In
addition, the Company will be required to offer to purchase Senior Discount
Notes at a price of 100% with the proceeds of certain asset sales (as defined
in the Indenture). The Indenture stipulates, among other things, limitations on
additional borrowings, issuance of equity instruments, payment of dividends and
other distributions, repurchase of equity interests or subordinated debt, sale-
leaseback transactions, liens, transactions with affiliates, sales of Company
assets, mergers and consolidations.
A-28
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The Class B common stock warrants are exercisable at $0.00308 per share,
upon the earlier of May 1, 1997 or a Change of Control. Unless exercised, the
Class B common stock warrants will expire on June 30, 2001. The number of
shares and the exercise price for which a warrant is exercisable are subject to
adjustment under certain circumstances. Through December 31, 2000, 298,705
warrants were exercised and converted into 1,810,150 shares of Class B common
stock. The Company received $5 in consideration for the exercise of the
warrants.
During the nine months ended December 31, 1998, the Company paid $17,313 to
repurchase a portion of the Senior Discount Notes which had a face value of
$25,160 and a carrying value of $17,750. The notes were retired upon repurchase
which resulted in a $237 gain.
12 1/4% Senior Secured Notes
On August 27, 1997, the Company issued $250,000 aggregate principal amount
of 12 1/4% Senior Secured Notes due September 1, 2004 (the "Senior Secured
Notes"). The Senior Secured Notes are collateralized through the pledge of the
common stock of certain of the Company's wholly-owned subsidiaries. A portion
of the proceeds was invested in U.S. government securities and placed in an
escrow account for payment in full when due of the first six scheduled semi-
annual interest payments on the Senior Secured Notes as required by the
Indenture.
Interest is payable semi-annually commencing March 1, 1998. The Senior
Secured notes rank pari passu in right of payment with all existing and future
senior Indebtedness (as defined in the Indenture) of the Company and will rank
senior in right of payment to future subordinated Indebtedness of the Company.
On or before September 1, 2000 and subject to certain restrictions, the Company
could redeem, at its option, up to 25% of the aggregate principal amount of the
Senior Secured Notes at a price of 112.25% of principal with the net proceeds
of one or more Qualified Equity Offerings (as defined in the Indenture). As of
September 1, 2000, the Company had not exercised its option to redeem any
senior secured notes. On or after September 1, 2001, the Company may redeem, at
its option, all or a portion of the Senior Secured Notes at 106.125% of
principal which declines to par in 2003, plus accrued interest. The holders of
the Senior Secured Notes may put them to the Company at any time upon the
occurrence of a Change of Control (as defined in the Indenture) at a price of
101% of principal. The Indenture stipulates, among other things, limitations on
additional borrowing, payment of dividends and other distributions, repurchase
of equity interests, transactions with affiliates and the sale of assets.
12 7/8% Senior Exchangeable Redeemable Preferred Stock
On October 9, 1997, the Company issued $200,000 aggregate liquidation
preference of 12 7/8% Senior Exchangeable Redeemable Preferred Stock due
October 15, 2007 (the "Preferred Stock"). Proceeds to the Company, net of
commissions and other transaction costs, were approximately $194,500.
Dividends are payable quarterly commencing January 15, 1998 at 12 7/8% of
the liquidation preference of outstanding Preferred Stock. Through October 15,
2002, dividends are payable in cash or additional shares of Preferred Stock at
the Company's option. Subsequent to October 15, 2002, dividends are payable in
cash. The Preferred Stock ranks junior in right of payment to all indebtedness
and other obligations of the Company, its subsidiaries and joint ventures. On
or before October 15, 2000, and subject to certain restrictions, the Company
could redeem, at its option, up to 35% of the initial aggregate liquidation
preference of the Preferred Stock originally issued with the net cash proceeds
of one or more Qualified Equity Offerings (as defined in the Certificate of
Designation) at a redemption price equal to 112.875% of the liquidation
preference per share of
A-29
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
the Preferred Stock, plus, without duplication, accumulated and unpaid
dividends to the date of redemption; provided that, after any such redemption,
there are remaining outstanding shares of Preferred Stock having an aggregate
liquidation preference of at least 65% of the initial aggregate liquidation
preference of the Preferred Stock originally issued. As of October 15, 2000,
the Company had not exercised its option to redeem any Preferred Stock. On or
after October 15, 2002, the Company may redeem, at its option, all or a portion
of the Preferred Stock at 106.438% of the liquidation preference thereof
declining to 100% of the liquidation preference in 2005, plus accrued interest.
The Company is required to redeem all of the shares of Preferred Stock
outstanding on October 15, 2007 at a redemption price equal to 100% of the
liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends to the date of redemption.
The holders of the Preferred Stock may put the Preferred Stock to the
Company at any time upon the occurrence of a Change of Control (as defined in
the Certification of Designation) at a price of 101% of the liquidation
preference thereof. The Certificate of Designation stipulates, among other
things, limitations on additional borrowings, payment of dividends and other
distributions, transactions with affiliates and the sale of assets. The Company
may, at its option, on any dividend payment date, exchange in whole, but not in
part, the then outstanding shares of Preferred Stock for 12 7/8% Senior
Subordinated Debentures due October 15, 2007 (the "Exchange Debentures").
Interest, redemption and registration rights provisions of the Exchange
Debentures are consistent with the provisions of the Preferred Stock.
12% Senior Subordinated Notes due 2007
On March 2, 1999, Adelphia Business Solutions issued $300,000 aggregate
principal amount of 12% Senior Subordinated Notes due 2007 ("Subordinated
Notes"). An entity controlled by members of the Rigas Family, controlling
stockholders of Adelphia, purchased $100,000 aggregate principal amount of the
Subordinated Notes directly from the Company. Proceeds to the Company, net of
discounts, commissions and other transaction costs were approximately $295,000.
Interest is payable semi-annually commencing May 1, 1999. The Subordinated
Notes rank behind all current and future indebtedness (other than trade
payables), except indebtedness that expressly provides that it is not senior to
the notes. On or before November 1, 2003 and subject to certain restrictions,
the Company could redeem at its option, up to 25% of the aggregate principal
amount of the Subordinated Notes at a price of 112.00% of principal with the
net proceeds of one or more Qualified Equity Offerings (as defined in the
Indenture). On or after November 1, 2003, the Company could redeem, at its
option, all or a portion of the Subordinated Notes at 106.00% of principal
which declines to par in 2005, plus accrued interest. The holders of the
Subordinated Notes may put them to the Company at any time upon the occurrence
of a Change in Control (as defined in the Indenture) at a price of 101.00% of
principal. The Indenture stipulates, among other things, limitations on
additional borrowing, payment of dividends, and other distributions, repurchase
of equity, interests, transactions with affiliates and the sale of assets.
The expected maturities of the 13% Senior Discount Notes, the 12 1/4% Senior
Secured Notes, the 12 7/8% Senior Exchangeable Redeemable Preferred Stock and
the 12% Senior Subordinated Notes are as follows:
2001................................................................. $ --
2002................................................................. --
2003................................................................. 303,840
2004................................................................. 250,000
2005................................................................. --
Thereafter........................................................... 597,067
A-30
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Note Payable
The Company and certain of Adelphia's other subsidiaries and affiliates are
parties to a joint bank credit facility. As part of their facility, the Company
and its subsidiaries have the ability to borrow up to an aggregate of $500,000
which, if borrowed, would be guaranteed by other members of the borrowing
group. As of December 31, 2000, a subsidiary of the Company had borrowed
$500,000 under this credit facility. In addition, the Company has agreed to pay
a subsidiary of Adelphia $15,000 as a fee for placing the credit facility. The
interest rate at which the Company has borrowed these funds is 12 1/2%, a
portion of which is payable to a subsidiary of Adelphia. For the year ended
December 31, 2000, the Company recorded $21,874 for interest expense relating
to Note Payable, $7,003 of which was payable to a subsidiary of Adelphia.
Maturities of Note Payable are as follows:
2001................................................................ $ --
2002................................................................ --
2003................................................................ 18,068
2004................................................................ 38,409
2005................................................................ 48,636
Thereafter.......................................................... 394,887
Long Term Lease Facility
On December 31, 1997, the Company consummated an agreement for a $24,500
long-term lease facility with AT&T Capital Corporation. The lease facility
provides financing for certain of the switching equipment. Included in the
lease facility is the sale and leaseback of certain switch equipment for which
the Company received $14,876.
Other Debt
Other debt consists primarily of capital leases entered into in connection
with the acquisition of fiber leases for use in the telecommunications networks
and the long-term lease facility described above. The interest rate on such
debt ranges from 7.5% to 15.0%.
Maturities of other debt are as follows:
2001................................................................. $ 5,700
2002................................................................. 5,954
2003................................................................. 6,194
2004................................................................. 6,724
2005................................................................. 7,935
Thereafter........................................................... 16,058
A-31
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
6. Common Stock and Other Stockholders' Equity (Deficiency)
Adelphia Business Solutions' authorized capital stock consists of
800,000,000 shares of Class A common stock, par value $0.01 per share,
400,000,000 shares of Class B common stock, par value $0.01 per share, and
50,000,000 shares of preferred stock, par value $0.01 per share.
Common Stock
Shares of Class A common stock and Class B common stock are substantially
identical, except that holders of Class A common stock are entitled to one vote
per share and holders of Class B common stock are entitled to 10 votes per
share on all matters submitted to a vote of stockholders. Each share of Class B
common stock is convertible into one share of Class A common stock. In the
event a cash dividend is paid, the holders of the Class A and the Class B
common stock will be paid an equal amount.
Prior to the IPO in May 1998, certain former company officers (the
"Officers") were parties to a stockholder agreement, as amended (the
"Stockholder Agreement") with Adelphia. The Stockholder Agreement provided,
among other things, (i) that upon the earlier of (a) the termination of
employment of any of the officers or (b) after October 7, 1998, such officers
could put their shares to Adelphia for fair market value, unless such put
rights were terminated as a result of the registration of the Company's common
stock under the Securities Act of 1933 (the "Securities Act") and (ii) for
certain buy/sell and termination rights and duties among Adelphia and the
Officers. The Stockholder Agreement terminated automatically upon the date of
the IPO.
The Company also entered into Term Loan and Stock Pledge Agreements ("Loan
Agreements") with each of the Officers. Pursuant to the Loan Agreements, each
Officer borrowed $1,000 from the Company. Each of these loans accrued interest
at the average rate at which the Company could invest cash on a short-term
basis, was secured by a pledge of the borrower's common stock in the Company,
and would mature upon the earlier of (i) October 8, 1998 or (ii) the date of
the IPO and the Officers had the right to sell at least $1,000 worth of their
shares. Each Loan Agreement also provided that any interest accruing on a loan
from the date six months after the date of such loan would be offset by a bonus
payment when principal and interest thereon are due and which would include
additional amounts to pay income taxes applicable to such bonus payment.
Pursuant to agreements among the Company, Adelphia and the Officers,
simultaneous with the consummation of the IPO, (i) the Stockholder Agreement
and Loan Agreements terminated, (ii) the Officers each repaid the $1,000
borrowed from the Company pursuant to the Loan Agreements plus accrued interest
thereon by each selling 66,667 shares of Class B common stock to Adelphia and
using the proceeds therefrom to repay such loans and (iii) the Company paid to
the management stockholders bonus payments in the amount of interest accruing
on the Loans from the date six months after the date of the Loan Agreements and
any additional amounts necessary to pay income taxes applicable to such bonus
payments.
On April 8, 1998, the Board of Directors of the Company approved a 3.25-for-
one stock split of its Class A and Class B common stock payable to stockholders
of record on April 28, 1998. The stock split was effected in the form of a
dividend of 2.25 shares for every outstanding share of common stock. All
references in the accompanying consolidated financial statements to the number
of shares of common stock and the par value have been retroactively restated to
reflect the stock split on April 28, 1998.
On October 25, 1999, the shareholders of the Company approved an amendment
to Article IV of the Amended and Restated Certificate of Incorporation
increasing the number of authorized shares of capital stock from 455,000,000 to
1,250,000,000, the authorized number of Class A common stock from 300,000,000
to
A-32
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
800,000,000, the authorized number of shares of Class B common stock from
150,000,000 to 400,000,000, and the authorized number of shares of Preferred
Stock from 5,000,000 to 50,000,000.
Changes in the number of shares outstanding for the Company's common stock
are as follows:
Class A Class B
Common Stock Common Stock
------------ ------------
Shares Outstanding, March 31, 1998.................. 396,500 32,500,000
Issuance of Class A common stock.................... 19,816,667 --
Exercise of Class A common stock warrant............ 731,624 --
Issuance of Class B common stock for warrant
exercise........................................... 1,187,541
Conversion of Class B common stock for Class A
common stock....................................... 1,372,780 (1,372,780)
Other............................................... 58,500 --
---------- ----------
Shares Outstanding, December 31, 1998............... 22,376,071 32,314,761
---------- ----------
Issuance of Class A common stock.................... 8,750,000 --
Issuance of Class B common stock.................... -- 5,181,350
Issuance of Class B common stock for warrant
exercise........................................... -- 413,530
Conversion of Class B common stock for Class A
common stock....................................... 2,538,182 (2,538,182)
Other............................................... 402,324 --
---------- ----------
Shares Outstanding, December 31, 1999............... 34,066,587 35,371,459
---------- ----------
Issuance of Class A common stock for purchase of
telecommunications network......................... 330,000 --
Issuance of Class A common stock for warrant
exercise........................................... 913,380 --
Issuance of Class B common stock for warrant
exercise........................................... -- 209,056
Conversion of Class B common stock for Class A
common stock....................................... 436,656 (436,656)
Other............................................... 101,743 --
---------- ----------
Shares Outstanding, December 31, 2000............... 35,848,366 35,143,859
========== ==========
Warrants
Class A Common Stock Warrants
On February 12, 1998, the Company consummated an agreement with Lenfest
Telephony, Inc. ("Lenfest") whereby Lenfest received a warrant to obtain
731,624 shares of Class A common stock of the Company (the "Lenfest Warrant")
in exchange for its partnership interest in the Harrisburg, Pennsylvania
network. The Lenfest Warrant was exercised during May 1998 for no additional
consideration.
Class B Common Stock Warrants
The Class B common stock warrants were issued on April 15, 1996 in
connection with the issuance of the Senior Discount Notes (See Note 5).
Adelphia Warrant
On June 13, 1997, the Company entered into agreements with MCI. Pursuant to
these agreements the Company is designated MCI's preferred provider for new end
user dedicated access circuits and conversions of end user dedicated access
circuits as a result of conversions from the incumbent LEC in the Company's
A-33
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
markets. Adelphia Business Solutions also has certain rights of first refusal
to provide MCI with certain communications services. Under this arrangement,
the Company issued a warrant to purchase 913,380 shares of Class A common stock
for $6.15 per share to MCI (the "MCI Warrant") representing 2 1/2% of the
common stock of the Company on a fully diluted basis. MCI could receive
additional warrants to purchase up to an additional 6% of the shares of the
Company's Class A common stock, on a fully diluted basis, at fair value, if MCI
met certain purchase volume thresholds over the term of the agreement.
In connection with the IPO and the related over-allotment option, the
Company and MCI entered into an agreement that provides as follows with respect
to the MCI Warrant and MCI's right to receive additional MCI warrants as a
result of the IPO (the "Additional MCI Warrants"): (i) the Additional MCI
Warrants, totaling 508,121 shares, issued with respect to the shares sold to
the public in the IPO, the over-allotment option and with respect to the
Adelphia shares purchased will have an exercise price equal to the lower of
$6.15 per share or the price per share to the public in the IPO (the "IPO
Price"), and (ii) Adelphia purchased from MCI the MCI Warrant and the
Additional MCI Warrants for a purchase price equal to the number of Class A
common stock shares issuable under the warrants being purchased times the IPO
Price minus the underwriting discount, less the aggregate exercise price of
such warrants. Furthermore, in consideration of the obligations undertaken by
Adelphia to facilitate the agreements between MCI and Adelphia Business
Solutions, the Company paid to Adelphia a fee of $500 and issued a warrant to
Adelphia, which expires three years after its issuance, to purchase 200,000
shares of Class A common stock at an exercise price equal to the IPO Price.
During June 2000, Adelphia exercised a warrant to purchase 913,380 shares of
Class A Common Stock of the Company at a price of $6.15 per share. Total
proceeds to the Company were $5,611.
Long Term Incentive Compensation Plan
On October 3, 1996, the Board of Directors and stockholders of the Company
approved the Company's 1996 Long-Term Incentive Compensation Plan (the "1996
Plan"). The 1996 Plan provides for the grant of (i) options which qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (ii) options which do not so qualify, (iii)
share awards (with or without restrictions on vesting), (iv) stock appreciation
rights and (v) stock equivalent or phantom units. The number of shares of Class
A common stock available for issuance initially was 5,687,500. Such number is
to increase each year by 1% of outstanding shares of all classes of the
Company's common stock, up to a maximum of 8,125,000 shares. Options, awards
and units may be granted under the 1996 Plan to directors, officers, employees
and consultants. The 1996 Plan provides the incentive stock options must be
granted with an exercise price of not less than the fair market value of the
underlying common stock on the date of grant. Options outstanding under the
Plan may be exercised by paying the exercise price per share through various
alternative settlement methods.
In August 1999, the Company issued under the 1996 Plan to each of John J.
Rigas, Michael J. Rigas, Timothy J. Rigas and James P. Rigas (i) stock options
(the "Rigas Options") covering 100,000 shares of Class A common stock, which
options will vest in equal one-third amounts on the third, fourth and fifth
year anniversaries of grant (vesting conditioned on continued service as an
employee or director) and which shall be exercisable at $16.00 per share and
(ii) stock awards (the "Rigas Grants") covering 100,000 shares of Class A
common stock, which stock awards will vest in equal one-third amounts on the
third, fourth and fifth year anniversaries of grant (vesting conditioned on
continued service as an employee or director).
In addition to the Rigas Options, certain employees have been granted
options to purchase shares of Class A common stock at prices equal to the fair
market value of the shares on the date the option was granted. Options are
exercisable beginning from immediately after granting and have a maximum term
of ten years.
A-34
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The following table summarizes stock option activity under all plans:
Number of Weighted Average
shares subject Exercise price
to options Per share
-------------- ----------------
Outstanding, December 31, 1998............... -- $ --
Granted...................................... 600,417 15.13
-------
Outstanding, December 31, 1999............... 600,417 15.13
Granted...................................... 216,050 32.71
-------
Outstanding, December 31, 2000............... 816,467 19.78
=======
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2000
Options outstanding Options exercisable
- ------------------------------------------- ----------------------------
Weighted Weighted Weighted Weighted
average average average average
remaining exercise remaining exercise
Exercise Number contractual price Number contractual price
price per of life per of life per
share shares (years) share shares (years) share
--------- ------- ----------- -------- ------- ----------- --------
$8.69--$61.63 816,467 5.4 $19.78 361,667 6.9 $23.59
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
requires the Company to disclose pro forma information regarding option grants
made to its employees. SFAS 123 specifies certain valuation techniques that
produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's statement
of operations, because the Company applies the provisions of APB 25,
"Accounting for Stock Issued to Employees," which specifies that no
compensation charge arises when the exercise price of the employees' stock
options equals or exceeds the market value of the underlying stock at the grant
date, as in the case of options granted to the Company's employees.
SFAS 123 pro forma numbers are as follows:
Year Ended December
31,
--------------------
1999 2000
--------- ---------
Net loss-as reported................................. $(165,466) $(309,824)
Net loss-pro forma applying SFAS 123................. (167,800) (315,726)
Basic and diluted net loss per common share-as
reported under ABP 25............................... (3.47) (4.93)
Basic and diluted net loss per common share-pro forma
under SFAS 123....................................... (3.51) (5.01)
A-35
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Under SFAS 123, the fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model with the following
weighted average assumptions
Employee Stock
Options Year
Ended December 31,
-------------------
1999 2000
-------------------
Expected dividend yield................................. 0% 0%
Risk-free interest rate................................. 6.93% 5.10% -6.20%
Expected volatility..................................... 50% 106% -116%
Expected life (in years)................................ 5.2 9.1
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's options.
In addition to the stock options and Rigas Grants, the Company issued 58,500
and 98,500 shares of Class A common stock to certain employees for the nine
months ended December 31,1998 and the year ended December 31, 2000,
respectively, resulting in the recognition of $761 and $387 of compensation
expense, respectively.
7. Commitments and contingencies
The Company rents office space, node space and fiber under leases with terms
which are generally less than one year or under agreements that are generally
cancelable on short notice. Total rental expense under all operating leases
aggregated $1,893, $10,166 and $22,606 for the nine months ended December 31,
1998 and the years ended December 31, 1999 and 2000, respectively.
The minimum future lease obligations under the noncancelable operating
leases as of December 31, 2000 are approximately:
Period ending December 31,
--------------------------
2001............................................................... $ 25,851
2002............................................................... 25,639
2003............................................................... 26,067
2004............................................................... 25,281
2005............................................................... 23,538
Thereafter......................................................... 109,552
During July 1999, the Company purchased the naming rights to the NFL
Football Tennessee Titans stadium in Nashville, Tennessee. The term of the
naming rights contract is for 15 years and requires the Company to pay $2,000
per year.
The communications industry and Adelphia Business Solutions are subject to
extensive regulation at the federal, state and local levels. On February 8,
1996, President Clinton signed the Telecommunications Act of 1996
("Telecommunications Act"), the most comprehensive reform of the nation's
telecommunications laws
A-36
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
since the Communications Act of 1934. Management of the Company is unable to
predict the effect that the Telecommunications Act, related rulemaking
proceedings or other future rulemaking proceedings will have on its business
and results of operations in future periods.
Adelphia Business Solutions has entered into a series of agreements with
several local and long-haul fiber optic network providers. These agreements
provide the Company with ownership or an IRU to local and long-haul fiber optic
cable. The Company believes this will allow it to expand its business strategy
to include on-net provisioning of regional, local and long distance, internet
and data communications and to cost-effectively further interconnect its
markets in the eastern half of the United States.
The estimated obligations under these arrangements as of December 31, 2000
are approximately
2001................................................................ $111,270
2002................................................................ 22,408
2003................................................................ 895
2004................................................................ 897
2005................................................................ 898
Thereafter.......................................................... 13,107
In addition to the amounts due under the agreements for the fiber optic
cable, the Company is also required to pay certain fiber optic network
providers for pro-rated maintenance and rights of ways fees on a yearly basis.
8. Related Party Transactions
The following table summarizes the Company's transactions with related
parties:
Nine Months Year Ended
Ended December 31,
December 31, --------------
1998 1999 2000
------------ ------ -------
Revenues:
Management fees................................... $2,135 $4,948 $ 7,596
Telecommunications service revenue................ 363 1,840 8,581
Network monitoring fees........................... 586 -- --
------ ------ -------
Total........................................... $3,087 $6,788 $16,177
====== ====== =======
Interest Income..................................... $8,395 $8,483 $ 6,282
====== ====== =======
Expense
Interest expense.................................. $ 737 $ -- $ 7,003
Allocated corporate costs......................... 2,981 8,587 18,519
Fiber leases...................................... 139 236 306
Amortization of deferred debt financing cost...... -- -- 1,800
------ ------ -------
Total........................................... $3,857 $8,823 $27,628
====== ====== =======
Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial, legal,
regulatory, network design, construction and other administrative services.
A-37
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Telecommunications services revenue from related parties represents fees
received by the Company from Adelphia for providing switched services to
various Adelphia offices, including Coudersport, Pennsylvania.
Network monitoring fees represent fees received by the Company for technical
support for the monitoring of each individual joint venture's
telecommunications system.
Interest income represents interest charged on certain affiliate receivable
balances with joint ventures and with Adelphia.
Interest expense relates to the Note payable-Adelphia and the Note Payable
(See Note 5).
Allocated corporate costs represent costs incurred by Adelphia on behalf of
the Company for the administration and operation of the Company. These costs
include charges for office space, corporate aircraft and shared services such
as finance activities, information systems, computer services, human resources,
and taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs that would be incurred if the Company were to secure
such services on its own.
Fiber lease expense represents amounts paid to various subsidiaries of
Adelphia for the utilization of existing cable television plant for development
and operation of the consolidated operating networks.
Amortization of deferred debt financing costs for the year ended December
31, 2000 relate to the amortization of the $15,000 placement fee paid to a
subsidiary of Adelphia.
During the nine months ended December 31, 1998 and the years ended December
31, 1999 and 2000, the Company paid $1,044, $7,577 and $11,387 respectively, to
entities owned by certain shareholders of Adelphia primarily for property,
plant and equipment and services at market rates.
During the nine months ended December 31, 1998 and the years ended December
31, 1999 and 2000, the Company made demand advances to Adelphia. At December
31, 1998, 1999 and 2000, $4,950, $392,629 and $0, respectively were outstanding
under this agreement. The Company received interest on such advances at a rate
of between 5.15% and 6.33%, which is included in interest income--affiliate in
the consolidated statement of operations. Demand advances represent cash held
by Adelphia's centralized cash management system immediately available to the
Company for any corporate purpose on demand.
During December 2000, the Company sold to a subsidiary of Adelphia certain
network and telecommunications assets. The assets sold related to six markets
in Virginia, Colorado, California and Ohio which the Company has decided not to
pursue as part of the revised business plan. Network or market information
presented in this proxy statement includes these six markets. The aggregate
purchase price for these transactions was approximately $87,500plus the
assumption of certain liabilities. The Company will manage these networks for
Adelphia on a going forward basis.
9. Employee Benefit Plan
The Company participates in the Adelphia 401(k) and stock value plan which
provides that eligible full-time employees may contribute from 2% to 16% of
their pre-tax compensation subject to certain limitations. The Company matches
contributions up to 1.5% of each participant's pre-tax compensation. For the
Nine Months ended December 31, 1998 and the years ended December 31, 1999 and
2000, the Company's matching contributions were $87, $401 and $855,
respectively. The 401(k) and stock value plans also provide for certain stock
incentive awards on an annual basis.
A-38
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
In addition to the 401(k) and stock value plan, the Company participates in
an Adelphia stock incentive plan which provides certain management level
employees with compensation bonuses based on a weighted average of Adelphia
Class A common stock and Adelphia Business Solutions Class A common stock
performance. Costs to the Company associated with this plan were approximately
$1,746 and $261 for the years ended December 31, 1999 and 2000, respectively.
10. Income Taxes
For the nine months ended December 31, 1998 and the years ended December 31,
1999 and 2000, Adelphia Business Solutions will not be included within
Adelphia's consolidated federal income tax return. Deferred income taxes
reflect the net tax effects of (a) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and (b) operating loss carryforwards.
At December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of $573,127, which expire as follows:
Year of expiration:
2007 $ 626 2012 $42,386 2017 $ --
2008 3,504 2013 -- 2018 106,783
2009 4,840 2014 -- 2019 140,930
2010 7,588 2015 -- 2020 251,176
2011 15,294 2016 --
The Company's net deferred tax asset included in other assets--net is
comprised of the following
December 31,
--------------------
1999 2000
--------- ---------
Deferred tax asset:
Differences between book and tax basis of intangible
assets................................................ $ 1,562 $ 4,874
Net operating loss carryforwards....................... 142,993 234,685
Allowance for doubtful accounts and other.............. 4,384 21,720
--------- ---------
Total................................................ 148,939 261,279
Valuation allowance.................................... (114,043) (239,597)
--------- ---------
Total................................................ 34,896 21,682
--------- ---------
Deferred tax liabilities:
Differences between book and tax basis of property,
plant and equipment................................... 34,626 21,645
Investment in partnerships............................. 233 --
--------- ---------
Total................................................ 34,859 21,645
--------- ---------
Net deferred tax asset................................. $ 37 $ 37
========= =========
The net change in the valuation allowance for the years ended December 31,
1999 and 2000 was an increase of $65,297 and $125,554, respectively. The
Company recorded the valuation allowance to reduce the deferred tax asset to
zero because the Company does not believe that it is more likely than not that
it will realize its deferred tax asset.
A-39
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Income tax expense for the nine months ended December 31, 1998 and the years
ended December 31, 1999 and 2000 are as follows:
Nine Months Year Ended
Ended December 31,
December 31, --------------
1998 1999 2000
------------ ------ ------
Current.......................................... $-- $ 1 $ --
Deferred......................................... -- -- --
--- ------ ------
Total.......................................... $-- $ 1 $ --
=== ====== ======
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
Nine Months Year Ended
Ended December 31,
December 31, --------------
1998 1999 2000
------------ ------ ------
Statutory federal income tax rate............... 35.0% 35.0% 35.0%
Change in federal valuation allowance........... (35.0) (35.0) (35.0)
State taxes, net of federal benefit............. -- -- --
----- ------ ------
Income Tax Expense.............................. --% --% --%
===== ====== ======
11. Restructuring Charges
During December 2000, the Company initiated a plan to reduce its network
expansion plan from its former target of 175 to 200 markets nationwide by the
end of 2001 to a new target of approximately 80 markets, thereby canceling
plans to enter or continue operations in approximately 120 markets. In January
2001, the Company reduced its national staff by approximately 8% as a result of
the Company's revised business plan. Most of the affected employees were
located in markets in which the Company has stopped expansion. For the year
ended December 31, 2000, the Company recorded a charge of approximately $5,420
to cover a portion of the costs associated with this revised business plan.
Approximately $4,568 of the charge relates to cash expenses relating to the
termination of lease contracts in the eliminated markets.
Approximately $852 of the charge relates to severance for certain executive
employees. No amounts were recorded for severance for terminated non-executive
employees as of December 31, 2000. In addition, no amounts were recorded for
the disposal of assets as most equipment deployed in the terminated markets can
be redeployed in the Company's surviving markets, at little or no incremental
costs.
A-40
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
12. Quarterly Financial Data (unaudited)
The following tables summarize the financial results of the Company for each
of the quarters in the years ended December 31, 1999 and 2000:
Three Months Ended
--------------------------------------------
Year Ended December 31, 1999 March 31 June 30 September 30 December 31
- ---------------------------- -------- -------- ------------ -----------
Revenues............................. $ 21,438 $ 34,215 $ 43,347 $ 55,575
-------- -------- -------- --------
Operating expenses:
Network operations................. 8,504 11,671 15,862 22,488
Selling, general and
administrative.................... 21,009 32,637 39,972 48,997
Depreciation and amortization...... 13,535 13,586 18,168 19,955
-------- -------- -------- --------
Total............................ 43,048 57,894 74,002 91,440
Operating loss....................... (21,610) (23,679) (30,655) (35,865)
Other income (expense):
Interest income.................... 1,998 14,780 2,867 288
Interest income--affiliate......... 2,828 2,779 1,336 1,540
Interest expense................... (15,533) (21,805) (19,045) (17,931)
-------- -------- -------- --------
Loss before income taxes and equity
in net loss of joint ventures....... (32,317) (27,925) (45,497) (51,968)
Income tax (expense) benefit......... -- (4) -- 3
-------- -------- -------- --------
Loss before equity in net loss of
joint ventures...................... (32,317) (27,929) (45,497) (51,965)
Equity in net loss of joint
ventures............................ (3,803) (3,291) (246) (418)
-------- -------- -------- --------
Net loss............................. (36,120) (31,220) (45,743) (52,383)
Dividend requirements applicable to
preferred stock..................... (7,479) (7,720) (7,979) (8,450)
-------- -------- -------- --------
Net loss applicable to common
stockholders........................ $(43,599) $(38,940) $(53,722) $(60,833)
======== ======== ======== ========
Basic and diluted net loss per
weighted average share of common
stock............................... $ (0.79) $ (0.70) $ (0.97) $ (1.01)
======== ======== ======== ========
Weighted average shares of common
stock outstanding (in thousands).... 55,497 55,497 55,497 60,453
======== ======== ======== ========
A-41
ADELPHIA BUSINESS SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Three Months Ended
--------------------------------------------
Year Ended December 31, 2000 March 31 June 30 September 30 December 31
- ---------------------------- -------- -------- ------------ -----------
Revenues............................. $ 69,301 $ 80,214 $ 93,551 $ 108,908
-------- -------- -------- ---------
Operating expenses:
Network operations................. 33,732 41,661 50,893 57,028
Selling, general and
administrative.................... 58,846 63,348 67,205 87,799
Restructuring charges.............. -- -- -- 5,420
Depreciation and amortization...... 19,438 26,689 27,103 41,384
-------- -------- -------- ---------
Total............................ 112,016 131,698 145,201 191,631
Operating loss....................... (42,715) (51,484) (51,650) (82,723)
Other income (expense):
Interest income.................... 404 1,020 1,247 1,229
Interest income--affiliate......... 5,023 1,259 -- --
Interest expense................... (12,930) (15,264) (14,557) (38,822)
Interest expense--affiliate........ -- -- (2,191) (4,812)
-------- -------- -------- ---------
Loss before income taxes and equity
in net (loss) income of joint
ventures and extraordinary gain..... (50,218) (64,469) (67,151) (125,128)
Income tax expense................... -- -- -- --
-------- -------- -------- ---------
Loss before equity in net (loss)
income of joint ventures............ (50,218) (64,469) (67,151) (125,128)
Equity in net (loss) income of joint
ventures............................ (105) (346) 381 (2,788)
-------- -------- -------- ---------
Net loss............................. (50,323) (64,815) (66,770) (127,916)
Dividend requirements applicable to
preferred stock..................... (8,497) (8,771) (9,053) (9,344)
-------- -------- -------- ---------
Net loss applicable to common
stockholders........................ $(58,820) $(73,586) $(75,823) $(137,260)
======== ======== ======== =========
Basic and diluted net loss per
weighted average share of common
stock............................... $ (0.85) $ (1.06) $ (1.08) $ (1.94)
======== ======== ======== =========
Weighted average shares of common
stock outstanding (in thousands).... 69,431 69,503 70,531 70,683
======== ======== ======== =========
A-42
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDERS MATTERS
Market Performance
The Company's Class A common stock is quoted on the National Association of
Securities Dealers Automated Quotations System National Market System (NASDAQ-
NMS). Adelphia Business Solutions' NASDAQ-NMS symbol is "ABIZ". Prior to
October 25, 1999, the Company's NASDAQ-NMS symbol was "HYPT".
The following table sets forth the range of high and low closing bid prices
of the Class A common stock on NASDAQ/NMS. Such bid prices represent inter-
dealer quotations, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
CLASS A COMMON STOCK
HIGH LOW
---- ----
QUARTER ENDED:
March 31, 1999.......................................... $16 3/8 $ 8 5/8
June 30, 1999........................................... $18 7/8 $11
September 30, 1999...................................... $25 $15 1/2
December 31, 1999....................................... $51 1/4 $24 11/16
March 31, 2000.......................................... $67 1/2 $46 1/2
June 30, 2000........................................... $60 $21 1/4
September 30, 2000...................................... $23 $ 8
December 31, 2000....................................... $10 3/8 $ 3 7/16
As of March 28, 2001 there were 416 holders of record of the Company's Class
A common stock, par value $0.01 per share and 23 holders of record of the
Company's Class B common stock, par value $0.01 per share.
Dividends
The Company has never declared any cash dividends on any of its respective
equity securities. Covenants in the indenture pursuant to which the Company's
Senior Discount Notes, Senior Secured Notes and Senior Subordinated Notes were
issued restrict the ability of the Company to pay cash dividends on its capital
stock.
Sale of Unregistered Securities
During June 2000, Adelphia exercised a warrant to purchase 913,380 shares of
Class A common stock of the Company at a price of $6.15 per share. Adelphia
purchased the warrant in May 1998 from WorldCom in connection with the
Company's IPO. Total proceeds to the Company were $5.6 million. These shares
were sold in reliance on the exemption under section 4(2) of the Securities
Act.
In July 2000, Adelphia Business Solutions issued 330,000 shares of Class A
common stock to Allegheny in exchange for its interest in a jointly owned
network located in State College, Pennsylvania. These shares were sold in
reliance on the exemption under section 4(2) of the Securities Act.
On March 19, 2001, Adelphia Business Solutions issued and sold 25,322 shares
of Class A common stock to the public in a rights offering at a price of $7.28
per share. Simultaneously, in a private placement in reliance on the exemption
under section 4(2) of the Securities Act, Adelphia purchased 11,820,070 and
51,459,624 shares of Class A and Class B Common Stock, respectively, in the
rights offering at a price of $7.28 per share. The net proceeds of
approximately $460.9 million will be used to pay down the Company's outstanding
borrowings under its revolving bank credit facility, all of which, subject to
the terms and maturity of that credit facility, may be re-borrowed and used by
the Company for general corporate purposes.
A-43
APPENDIX B
Adelphia Business Solutions, Inc.
Charter of the Audit Committee of the Board of Directors
I. Audit Committee Purpose
The Audit Committee is appointed by the Board of Directors of Adelphia
Business Solutions, Inc. (the "Company") to assist the Board in fulfilling its
oversight responsibilities. The Audit Committee's primary duties and
responsibilities are to:
. Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal
compliance.
. Monitor the independence and performance of the Company's independent
auditors and internal auditing department.
. Provide an avenue of communication among the independent auditors,
management, the internal auditing department, and the Board of
Directors.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities, and it has direct access to the
independent auditors as well as anyone in the organization. The Audit Committee
has the ability to retain, at the Company's expense, special legal, accounting,
or other consultants or experts it deems necessary in the performance of its
duties.
II. Audit Committee Composition and Meetings
Audit Committee members shall meet the applicable independence and
experience requirements, in effect from time to time, of the National
Association of Securities Dealers, Inc. ("NASD") or such other applicable stock
exchange or association on which the Company's common stock is then listed. The
Audit Committee shall be comprised of three or more directors as determined by
the Board. All members of the Committee shall have a basic understanding of
finance and accounting and be able to read and understand fundamental financial
statements, and at least one member of the Committee shall have accounting or
related financial management expertise.
Audit Committee members shall be appointed by the Board on recommendation of
the Nominating Committee. If an Audit Committee Chair is not designated or
present, the members of the Committee may designate a Chair by majority vote of
the Committee membership.
The Committee shall meet at least four times annually, or more frequently as
circumstances dictate. The Audit Committee Chair shall prepare and/or approve
an agenda in advance of each meeting. Audit Committee members may attend
meetings in person, by telephone conference or similar communications
equipment, or as otherwise permitted by law. The Committee should meet
privately in executive session at least annually with management, the director
of the internal auditing department, the independent auditors, and as a
committee to discuss any matters that the Committee or each of these groups
believe should be discussed.
III. Audit Committee Responsibilities and Duties
Review Procedures
1. Review and reassess the adequacy of this Charter at least annually. Submit
the Charter to the Board of Directors for approval and have the document
published in accordance with applicable Securities and Exchange Commission
("SEC") and NASD regulations.
2. Review the Company's annual audited financial statements prior to filing or
distribution. Review should include discussion with management and
independent auditors of major issues regarding accounting principles,
practices, and judgments that could significantly affect the Company's
financial statements.
B-1
3. In consultation with management, the independent auditors, and the internal
auditors, consider the integrity of the Company's financial reporting
processes and controls. Discuss any significant financial risk exposures and
the steps management has taken to monitor, control, and report such
exposures. Review significant findings prepared by the independent auditors
and the internal auditing department together with management's responses.
4. Review with financial management and the independent auditors the Company's
quarterly financial results prior to the release of earnings and the
Company's quarterly financial statements prior to filing or distribution.
Discuss any significant changes to the Company's accounting principles and
any items required to be communicated by the independent auditors in
accordance with Statement on Auditing Standards No. 61 ("SAS 61") (see item
9). The Chair of the Committee may represent the entire Audit Committee for
purposes of this review.
Independent Auditors
5. The independent auditors are ultimately accountable to the Audit Committee
and the Board of Directors. The Audit Committee shall review the
independence and performance of the auditors and annually recommend to the
Board of Directors the appointment of the independent auditors or approve
any discharge of auditors when circumstances warrant.
6. Approve the fees and other significant compensation to be paid to the
independent auditors.
7. On an annual basis, the Committee should review and discuss with the
independent auditors all significant relationships they have with the
Company that could impair the auditors' independence.
8. Review the independent auditors audit plan--discuss scope, staffing,
reliance upon management, and internal audit and general audit approach.
9. Prior to releasing the year-end earnings, discuss the results of the audit
with the independent auditors. Discuss certain matters required to be
communicated to audit committees in accordance with SAS 61.
10. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
Internal Audit Department and Legal Compliance
11. Review the budget, plan, changes in plan, activities, organizational
structure, and qualifications of the internal audit department, as needed.
12. Review the appointment and performance of, and any decision to replace, the
senior internal audit executive.
13. Review significant reports prepared by the internal audit department
together with management's response and follow-up to these reports.
14. On at least an annual basis, review with the Company's counsel, any legal
matters that could have a significant impact on the organization's
financial statements, the Company's system for monitoring compliance with
applicable laws and regulations, including response to any material
inquiries received from regulators or governmental agencies.
Other Audit Committee Responsibilities
15. Annually prepare a report to shareholders as required by the Securities and
Exchange Commission. The report will be included in the Company's annual
proxy statement as required by the applicable rules of the SEC and NASD.
16. Perform any other activities consistent with this Charter, the Company's
by-laws, and governing law, as the Committee or the Board deems necessary
or appropriate.
17. Periodically report to the Board of Directors on significant results of the
foregoing activities.
B-2
Scope of Duties
18. While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan, direct or
conduct audits, or to determine whether the Company's financial statements
are complete and accurate and are in accordance with generally accepted
accounting principles. These are the responsibilities of management and/or
the independent auditors. Nor is it the duty of the Audit Committee to
conduct investigations, to resolve disagreements, if any, between
management and the independent auditors or to assure compliance with laws
and regulations and any internal rules or codes of conduct of the Company.
B-3
PROXY
ADELPHIA BUSINESS SOLUTIONS, INC.
This Proxy is Solicited On Behalf Of The Board Of Directors Of The Company
The undersigned hereby appoints John J. Rigas, James P. Rigas, Timothy J. Rigas
and Michael J. Rigas, or any one or more of them, with power of substitution to
each, as proxies to represent and to vote as designated on the reverse all the
shares of Class A Common Stock, Class B Common Stock and Preferred Stock held of
record at the close of business on June 25, 2001 by the undersigned at the
annual meeting of the stockholders of Adelphia Business Solutions, Inc. to be
held at the Coudersport Theater, Main Street, Coudersport, Pennsylvania on
August 7, 2001 at 11:30 a.m. and at any adjournment thereof.
(Please sign on reverse side and return promptly)
Please Detach and Mail in the Envelope Provided
[X] Please mark your votes
as in this example
WITHHOLD The Board of Directors
FOR AUTHORITY recommends a vote "FOR"
all nominees to vote for all proposals numbered 1 and 2.
listed at right nominees listed
at right
[ ] [ ]
1. Election of Directors Nominees:
(Instructions: To withhold authority John J. Rigas, James P. Rigas,
to vote for any individual nominee, Michael J. Rigas, Timothy J. Rigas,
strike a line through that Pete J. Metros, James L. Gray,
nominee's name.) Peter L. Venetis and Edward S. Mancini
2. In their discretion vote upon such other matters [ ] [ ] [ ]
as may properly come before the meeting or
any adjournment thereof.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. Unless otherwise specified in the squares
provided, the proxies shall vote in the election of directors for the nominees
listed at left, and shall have discretionary power to vote upon such other
matters as may properly come before the meeting or any adjournment thereof.
A majority of such proxies who shall be present and shall act at the meeting (or
if only one shall be present and act, then that one) may exercise all powers
hereunder.
PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE-PAID
RETURN ENVELOPE.
Signature ______________________ Signature __________________ Dated:______, 2001
IF HELD JOINTLY
NOTE: Stockholder sign here exactly as name appears hereon.