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increased operating expenses from acquired sys-
For the year ended March 31, 1996, the increase is
tems, increased programming costs and incremen-
attributable to a combination of acquisitions, an
tal costs associated with increased subscribers.
increase in subscriber rates, internal subscriber
Because of regulatory limitations on the timing and
growth and the expansion of advertising and other
extent to which costs increases may be passed on to
non-cable services, partially offset by increased pro-
customers, operating and programming expenses
gramming, general and administrative costs.
during the ¬scal years ended 1995 and 1996 have
increased at a greater magnitude than correspond-
ing revenue increases. As a result of recent FCC reg- Rate Regulation Expenses.
ulatory rulemaking decisions, the Company intends The ¬scal year ended March 31, 1996 includes a
to implement a systematic program of rate increases $5,300 charge representing management™s esti-
to reverse this trend. Consistent with such a pro- mate of the total costs associated with the resolution
gram, the Company intends to increase rates in of subscriber rate disputes. Such costs include, (i) an
most markets, in accordance with FCC guidelines, estimate of credits to be extended to customers in
during the second quarter of ¬scal 1997. future periods of up to $2,700 (ii) legal and other
583
Credit Analysis and Distress Prediction




14-31 Part 2 Business Analysis and Valuation Tools




costs incurred during the ¬scal year ended March pany™s ¬nancing agreements contain ¬nancial
Adelphia Communications Corporation




31, 1996, and (iii) an estimate of legal and other covenants based on EBITDA .
costs to be incurred associated with the ultimate res-
Interest Expense.
olution of this matter.
Interest expense increased approximately 7.4%
and 7.7% for the years ended March 31, 1995 and
Depreciation and Amortization.
1996, respectively, compared with the respective
Depreciation and amortization was higher for the
prior year. Approximately 56% of the increase for
years ended March 31, 1995 and 1996, compared
¬scal 1995 was due to additional interest cost asso-
with the respective prior year, primarily due to
ciated with incremental debt related to acquisitions.
increased depreciation and amortization related to
For the year ended March 31, 1996, interest
acquisitions consummated during the years ended
expense increased due to incremental debt out-
March 31, 1994, 1995, and 1996 as well as
standing during the period, partially offset by a
increased capital expenditures made during the past
decrease in the average interest rate on outstanding
several years.
debt during ¬scal 1996 compared with the prior ¬s-
cal year. Approximately 27% of the increase in inter-
Priority Investment Income.
est expense in ¬scal 1996 as compared with the
Priority investment income is comprised of pay-
prior year was attributable to incremental debt
ments received from Olympus of accrued priority
related to acquisitions. Interest expense includes
return on the Company™s investment in PLP Interests
non-cash accretion of original issue discount and
in Olympus. Priority investment income increased
non-cash interest expense totaling $1,680,
during the year ended March 31, 1996 as com-
$14,756, and $16,288 for the years ended March
pared with the prior two ¬scal years due to
31, 1994, 1995 and 1996, respectively.
increased payments by Olympus.
Equity in Loss of Joint Ventures.
EBITDA.
The equity in loss of joint ventures represents pri-
EBITDA (earnings before interest, income taxes,
marily (i) the Company™s pro rata share of Olym-
depreciation and amortization, equity in loss of joint
pus™ losses and the accretion requirements of
ventures, other non-cash charges, extraordinary loss
Olympus™ preferred limited partner interests, and (ii)
and cumulative effect of change in accounting prin-
Hyperion™s pro rata share of its less than majority
ciple) amounted to $207,936, $225,890 and
owned partnerships™ operating losses. The increase
$247,999 for the years ended March 31, 1994,
in the year ended March 31, 1995, compared with
1995 and 1996, respectively. The increase of 8.6%
the prior year, is primarily attributable to the impact
and 9.8% for the years ended March 31, 1995 and
of the sale by Olympus of Northeast Cable and
1996, compared with the respective prior ¬scal
lower operating margins at Olympus. The increase
years is primarily due to the acquisition of cable sys-
in the loss during the year ended March 31, 1996,
tems during the years ended March 31, 1995 and
compared with the prior year, is due to an increase
1996 and increased priority investment income from
in the losses of certain investments in the CLEC busi-
Olympus during the year ended March 31, 1996.
ness in which the Company is a less than majority
Increased revenues and operating expenses for the
partner partially offset by improved operating per-
years ended March 31, 1995 and 1996, compared
formance in the Olympus partnership.
with the respective prior years, primarily re¬‚ect the
impact of acquisitions consummated during ¬scal Net Loss.
1995 and 1996. While EBITDA is not an alternative The Company reported net losses of $187,860,
to operating income as de¬ned by generally $106,284 and $119,894 for the years ended
accepted accounting principles, the Company™s March 31, 1994, 1995 and 1996, respectively. Net
management believes EBITDA is a meaningful mea- loss for ¬scal 1994 included the cumulative effect of
sure of performance as substantially all of the Com- the change in accounting for income taxes by the
584 Credit Analysis and Distress Prediction




14-32
Credit Analysis and Distress Prediction




tures related to faster than expected growth of Hype-
Company of $89,660. Excluding the effect of this




Adelphia Communications Corporation
rion. Management expects capital expenditures for
item, net loss increased by $8,084 for ¬scal 1995
¬scal 1997 to be somewhat higher than ¬scal 1996
compared with the prior ¬scal year. The increase in
due to the further expansion of cable plant rebuilds
net loss in ¬scal 1995 when compared with ¬scal
and due to further expansion by Hyperion.
1994 was primarily due to an increase in the equity
in net loss of joint ventures (primarily Olympus) and
Financing Activities.
higher non-cash interest expense, partially offset by
The Company™s ¬nancing strategy has been to
higher operating income. The increase in net loss of
maintain its public long-term debt at the parent
$13,610 in ¬scal 1996 when compared with the
holding company level while the Company™s consol-
prior year was due primarily to an increase in inter-
idated subsidiaries have their own senior and subor-
est expense and the impact of rate regulation
dinated credit arrangements with banks and
expenses, partially offset by an increased operating
insurance companies. The Company™s ability to
income and priority investment income from
generate cash adequate to meet its future needs will
Olympus.
depend generally on its results of operations and the
continued availability of external ¬nancing. During
Liquidity and Capital Resources.
the three-year period ended March 31, 1996, the
The cable television business is capital intensive
Company funded its working capital requirements,
and typically requires continual ¬nancing for the
capital expenditures, and investments in Olympus
construction, modernization, maintenance, expan-
and other af¬liates and entities through long-term
sion and acquisition of cable systems. During the
borrowings primarily from banks and insurance
three ¬scal years in the period ended March 31,
companies, short-term borrowings, internally gener-
1996, the Company committed substantial capital
ated funds and the issuance of parent company
resources for these purposes and for investments in
public debt and equity. The Company generally has
Olympus and other af¬liates and entities. These
funded the principal and interest obligations on its
expenditures were funded through long-term bor-
long-term borrowings from banks and insurance
rowings and, to a lesser extent, internally generated
companies by re¬nancing the principal with new
funds. The Company™s ability to generate cash to
loans or through the issuance of parent company
meet its future needs will depend generally on its
debt securities, and by paying the interest out of
results of operations and the continued availability
internally generated funds. Adelphia has funded the
of external ¬nancing.
interest obligations on its public borrowings from
Capital Expenditures. internally generated funds.
The Company has developed an innovative ¬ber-
Most of Adelphia™s directly-owned subsidiaries
to-feeder network architecture which is designed to
have their own senior credit agreements with banks
increase channel capacity and minimize future capi-
and/or insurance companies. Typically, borrowings
tal expenditures, while positioning the Company to
under these agreements are collateralized by the
take advantage of future opportunities. Manage-
stock in and, in some cases, by the assets of the bor-
ment believes its capital expenditures program has
rowing subsidiary and its subsidiaries and, in some
resulted in higher levels of channel capacity and
cases, are guaranteed by such subsidiary™s subsid-
addressability in comparison to other cable televi-
iaries. At March 31, 1996, an aggregate of
sion operators.
$1,096,675 in borrowings was outstanding under
these agreements. These agreements contain cer-
Capital expenditures for the years ended
tain provisions which, among other things, provide
March 31, 1994, 1995, and 1996, were $75,894,
for limitations on borrowings of and investments by
$92,082 and $100,089, respectively. The increase
the borrowing subsidiaries, transactions between the
in capital expenditures for ¬scal 1994, 1995, and
borrowing subsidiaries and Adelphia and its other
1996, compared to each respective prior year, was
subsidiaries and af¬liates, and the payment of divi-
primarily due to the acceleration of the rebuilding of
dends and fees by the borrowing subsidiaries. Sev-
plant using ¬ber-to-feeder technology, and expendi-
585
Credit Analysis and Distress Prediction




14-33 Part 2 Business Analysis and Valuation Tools




eral of these agreements also contain certain cross- limitations and restrictions similar to those men-
Adelphia Communications Corporation




default provisions relating to Adelphia or other sub- tioned above. See Note 3 to the Adelphia Commu-
sidiaries. These agreements also require the mainte- nications Corporation Consolidated Financial
nance of certain ¬nancial ratios by the borrowing Statements. The Company is in compliance with the
subsidiaries. In addition, at March 31, 1996, an ¬nancial covenants and related ¬nancial ratio
aggregate of $128,000 in subordinated and unse- requirements contained in its various credit agree-
cured borrowings by Adelphia™s subsidiaries was ments, based on operation results for the period
outstanding under credit agreements containing ended March 31, 1996.




INDEPENDENT AUDITOR™S REPORT

Adelphia Communications Corporation:
We have audited the accompanying consolidated balance sheets of Adelphia Com-
munications Corporation and subsidiaries as of March 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders™ equity (de¬ciency) and cash
¬‚ows for each of the three years in the period ended March 31, 1996. These ¬nancial
statements are the responsibility of the Company™s management. Our responsibility is to
express an opinion on the ¬nancial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards required that we plan and perform the audit to obtain reasonable assur-
ance about whether the ¬nancial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the ¬nancial statements. An audit also includes assessing the accounting principles used
and signi¬cant estimates made by management, as well as evaluating the overall ¬nan-
cial statement presentation. We believe that our audits provide a reasonable basis for our

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