Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(****Mark One)**

** **
| **x**                                                  | **QUARTERLY REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                   |
| **For the quarterly period ended September  30, 2008** |

** **

**or**

** **
| o | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------|

 

**For the transition period from                          to                        **

** **

**Commission File Number: 000-53209**

 

**Adelphia Recovery Trust**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **11-6615508**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

| **919  North Market Street, 17****th**** Floor, PO Box 705  Wilmington, Delaware** |
|-----------------------------------------------------------------------------------------|
| (Address  of principal executive offices) (Zip Code)                                    |

 

| **302-652-4100  Attn: Dean Ziehl**                         |
|------------------------------------------------------------|
| (Registrant’s  telephone number, including area code) |

 

 

(Former name, former addressand former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.                                                                        x Yes  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o                                                                                        | Accelerated filer o         |
|-------------------------------------------------------------------------------------------------------------------|-----------------------------|
| Non-accelerated  filer   x      (Do not check  if a smaller reporting company) | Smaller reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

o  Yes  No  x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.

o  Yes  No  o

 

 

 

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ADELPHIA RECOVERY TRUST

FORM 10-Q

INDEX

 
| PART I – FINANCIAL INFORMATION                                                                                                                                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                  |   |
| ITEM  1. FINANCIAL STATEMENTS (unaudited)                                                                                                                                                                                                             |   |
|                                                                                                                                                                                                                                                  |   |
| Condensed Balance Sheets as of September 30, 2008 and  December 31, 2007                                                                                                                                                                    |   |
|                                                                                                                                                                                                                                                  |   |
| Condensed Statements of Operations for the three months ended  September 30, 2008 and 2007 and for the nine months ended  September 30, 2008 and for the periods from February 13, 2007 (date  established) to September 30, 2007 |   |
|                                                                                                                                                                                                                                                  |   |
| Condensed Statements of Cash Flows for the nine months ended  September 30, 2008 and for the period from February 13, 2007 (date  established) to September 30, 2007                                                                   |   |
|                                                                                                                                                                                                                                                  |   |
| Notes to Condensed Financial Statements                                                                                                                                                                                                               |   |
|                                                                                                                                                                                                                                                  |   |
| ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                                                                                                         |   |
|                                                                                                                                                                                                                                                  |   |
| ITEM 4. CONTROLS AND PROCEDURES                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                                  |   |
| PART II                                                                                                                                                                                                                                          |   |
|                                                                                                                                                                                                                                                  |   |
| ITEM 1. LEGAL PROCEEDINGS                                                                                                                                                                                                                             |   |
|                                                                                                                                                                                                                                                  |   |
| ITEM 1A. RISK FACTORS                                                                                                                                                                                                                                 |   |
|                                                                                                                                                                                                                                                  |   |
| ITEM 6. EXHIBITS                                                                                                                                                                                                                                      |   |
|                                                                                                                                                                                                                                                  |   |
|                                                                                                                                                                                                                                                  |   |
| SIGNATURES                                                                                                                                                                                                                                            |   |
|                                                                                                                                                                                                                                                  |   |
| CERTIFICATIONS                                                                                                                                                                                                                                        |   |

 

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**PART 1-  FINANCIAL INFORMATION**

 

Item 1  Financial Statements

 

**Adelphia Recovery Trust**

**UnauditedCondensed Balance Sheets**

 
| ** **                           | ** ** | **September 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|--------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                           | ** ** | ** **                       | ** **  | ** **                      | ** ** |
| **Assets**                           |       |                             |        |                            |       |
| Cash and cash equivalents            |       | $                                | 166,599,397 |                            | $          | 189,684,573 |   |
| Prepaid insurance                    |       | 527,426                          |        | 124,670                         |       |
| Note and accrued interest receivable |       | 5,291,275                        |        | 4,998,757                       |       |
| Total assets                         |       | $                                | 172,418,098 |                            | $          | 194,808,000 |   |
|                                 |       |                             |        |                            |       |
| **Liabilities  and net assets**      |       |                             |        |                            |       |
| Accrued expenses                     |       | $                                | 866,767     |                            | $          | 6,819,802 |   |
| Total liabilities                    |       | 866,767                          |        | 6,819,802                       |       |
|                                 |       |                             |        |                            |       |
| Net assets                           |       | 171,551,331                      |        | 187,988,198                     |       |
|                                 |       |                             |        |                            |       |
| **Total liabilities and net assets** |       | $                                | 172,418,098 |                            | $          | 194,808,000 |   |

 

See accompanying notes to thecondensed financial statements.

 

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**Adelphia Recovery Trust**

**UnauditedCondensed Statements of Operations**

 
| ** **                              | ** ** | **For the  quarter ended  September 30, 2008** | ** ** | **For the  quarter ended  September 30, 2007** | ** ** | **For the  nine months ended  September 30, 2008** | ** ** | **For the Period from  February 13, 2007  (date established) to  September 30, 2007** | ** **  |
|-----------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|-------------|
|                                    |       |                                                               |       |                                                               |       |                                                                        |       |                                                                                                                               |        |
| **Revenues**                            |       |                                                               |       |                                                               |       |                                                                        |       |                                                                                                                               |        |
| Litigation - court approved settlements |       | $                                                                  | —     |                                                               | $          | 172,375,250                                                                 |       | $                                                                                                                                  | 200,206     |   | $ | 172,375,250 |   |
| Litigation - other settlements          |       | —                                                             |       | —                                                             |       | 910,194                                                                     |       | —                                                                                                                             |        |
| Interest income                         |       | 1,034,219                                                          |       | 1,649,145                                                          |       | 3,825,198                                                                   |       | 2,124,046                                                                                                                          |        |
| Total revenues                          |       | 1,034,219                                                          |       | 174,024,395                                                        |       | 4,935,598                                                                   |       | 174,499,296                                                                                                                        |        |
|                                    |       |                                                               |       |                                                               |       |                                                                        |       |                                                                                                                               |        |
| **Operating expenses**                  |       |                                                               |       |                                                               |       |                                                                        |       |                                                                                                                               |        |
| General and administrative expenses     |       | 481,901                                                            |       | 509,358                                                            |       | 1,930,382                                                                   |       | 1,320,597                                                                                                                          |        |
| Professional expenses - litigation      |       | 5,589,722                                                          |       | 5,809,634                                                          |       | 17,577,987                                                                  |       | 19,431,414                                                                                                                         |        |
| Professional expenses - administrative  |       | 199,329                                                            |       | 466,531                                                            |       | 1,864,096                                                                   |       | 1,857,118                                                                                                                          |        |
| Total operating expenses                |       | 6,270,952                                                          |       | 6,785,523                                                          |       | 21,372,465                                                                  |       | 22,609,129                                                                                                                         |        |
|                                    |       |                                                               |       |                                                               |       |                                                                        |       |                                                                                                                               |        |
| **Net income (loss)**                   |       | $                                                                  | (5,236,733 | )                                                                  | $          | 167,238,872                                                                 |       | $                                                                                                                                  | (16,436,867 | ) | $ | 151,890,167 |   |

 

See accompanying notes to the condensedfinancial statements.

 

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**Adelphia Recovery Trust**

**UnauditedCondensed Statements of Cash Flows**

 
| ** **                                                                                       | ** ** | **For the  nine months ended  September 30, 2008** | ** **  | **For the Period from  February 13, 2007  (date established) to  September 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|-------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | ** **                                                             | ** **  | ** **                                                                                                                         | ** ** |
| **Operating activities**                                                                         |       |                                                                   |        |                                                                                                                               |       |
| Net income (loss)                                                                                |       | $                                                                      | (16,436,867 | )                                                                                                                                  | $          | 151,890,167 |   |
| Adjustments to reconcile net income (loss)  to net cash provided (used) by operating activities: |       |                                                                   |        |                                                                                                                               |       |
| Insurance funded by Debtor                                                                       |       | —                                                                 |        | 1,043,750                                                                                                                          |       |
| Changes in operating assets and  liabilities:                                                    |       |                                                                   |        |                                                                                                                               |       |   |
| Prepaid insurance                                                                                |       | (402,756                                                               | )           | (391,406                                                                                                                           | )          |
| Note and accrued interest receivable                                                             |       | (292,518                                                               | )           | (4,901,251                                                                                                                         | )          |
| Accrued expenses                                                                                 |       | (5,953,035                                                             | )           | 12,407,088                                                                                                                         |       |
| Net cash (used) provided by operating  activities                                                |       | (23,085,176                                                            | )           | 160,048,348                                                                                                                        |       |
|                                                                                             |       |                                                                   |        |                                                                                                                               |       |
| **Financing activities**                                                                         |       |                                                                   |        |                                                                                                                               |       |
| Contribution from Debtor - cash                                                                  |       | —                                                                 |        | 25,000,000                                                                                                                         |       |
| Net cash provided by financing activities                                                        |       | —                                                                 |        | 25,000,000                                                                                                                         |       |
|                                                                                             |       |                                                                   |        |                                                                                                                               |       |
| **Net change in cash and cash equivalents**                                                      |       | (23,085,176                                                            | )           | 185,048,348                                                                                                                        |       |
| **Cash and cash equivalents, beginning of  period**                                              |       | 189,684,573                                                            |        | —                                                                                                                             |       |
| **Cash and cash equivalents, end of period**                                                     |       | $                                                                      | 166,599,397 |                                                                                                                               | $          | 185,048,348 |   |

 

See accompanying notes to thecondensed financial statements.

 

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ADELPHIA RECOVERY TRUST

 

Notes to theCondensed Financial Statements – September 30, 2008 (Unaudited)

 

1                                          Background

 

The Adelphia Recovery Trust (the “ART”) was formed as a Delawarestatutory trust pursuant to that certain First Modified Fifth Amended JointChapter 11 Plan of Reorganization (the “Plan”) of AdelphiaCommunications Corporation (“Adelphia”) and certain of its subsidiaries.The purpose of the ART is to prosecute the various causes of action transferredto the ART pursuant to the Plan (the “Causes of Action”) and distributeto the owners (the “Holders”) of the interests in the ART (“Interests”)the net proceeds of such Causes of Action (“Distributions”), accordingto the relative priorities established pursuant to the Plan, subject to theretention of various amounts to fund the prosecution of those Causes of Actionand operations of the ART. Pursuant to the Plan, in addition to the Causes ofAction, Adelphia transferred $25 million in cash to the ART in order to fundthe initial expenses of operation.

 

As set forth in the Plan, the ART is administered by five trustees (the“Trustees”) who are responsible for carrying out the purposes of theART. Quest Turnaround Advisors, L.L.C. (“Quest”) is the planadministrator (in such capacity, the “Plan Administrator”) of Adelphia.Quest and Adelphia together have agreed to provide certain administrativeservices to the ART. In order to facilitate the provision of suchadministrative services, the ART has appointed Quest as the trust administratorof the ART (in such capacity, the “Trust Administrator”).

 

2                                          Basisof Presentation

 

The accompanying interim unaudited condensedfinancial statements of the ART have been prepared in accordance with generallyaccepted accounting principles in the United States of America (“US GAAP”)and with the instructions to Form 10-Q. As such, they do not include all of the information and footnotesrequired by US GAAP for complete financial statements.  In the opinion of the Trustees, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation of the interim unaudited condensed financial statementshave been included.  These condensedfinancial statements should be read in conjunction with the ART’s auditedfinancial statements as of December 31, 2007 and for the period from February 13,2007 (date established) to December 31, 2007 included in its Form 10as filed on April 30, 2008 and as amended on July 2, 2008.

 

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3                                          RelatedParty Transactions

 

The Trust Administrator and Adelphia continueto provide administrative support to the ART including maintaining electronicdata and paper documents used in prosecuting the Causes of Action, financialreporting and support for Distributions when they might occur (includingmaintenance of data related to the implementation of Plan provisions). Theseservices have and will continue to be provided at no cost to the ART under theterms of various agreements between the Trust Administrator and Adelphia. TheART financial statements do not reflect any amounts for these services.

 

4                                          Causesof Action and Contingencies

 

Except as set forth below, there have been nomaterial developments in the legal proceedings described in the ART’s Form 10as filed April 30, 2008 and as amended July 2, 2008 or as updated inthe ART’s Form 10-Q for the quarter ended June 30, 2008 as filed on August 11,2008.

 

Bank Litigation

 

On June 18, 2008, the District Courtdismissed certain fraudulent transfer claims, voidable preference claims, andequitable subordination and disallowance claims.  Motions to dismiss other claims remainpending. Certain defendants have moved for entry of a final judgment as to theclaims dismissed against them.  Thosemotions are pending.  Under the currentscheduling order, the trial on the remaining claims will commence on February 22,2010.

 

Motorola Litigation

 

On August 22, 2007, plaintiffs moved forsummary judgment to disallow a portion of the defendants’ claims againstcertain Adelphia debtors. Plaintiffs’ motion is pending. Discovery is ongoingand the bankruptcy court has ordered the parties to be ready for trial on theclaims for equitable subordination and equitable disallowance on April, 202009.

 

Prestige and FPL Litigation

 

The Prestige action seeks to recoverfraudulent transfers in connection with Adelphia’s purchase of the assets ofPrestige Communications of N.C., Inc., an acquisition that closed on July 5,2000, as well as a claim that the owners of the Prestige Cable Systems aidedand abetted breaches of fiduciary duty on the part of the Rigas family inconnection with the transaction. The District Court has not set a trial date inthe Prestige action.

 

The FPL action seeks to recover an allegedfraudulent transfer arising out of Adelphia’s repurchase of certain of itsstock from FPL in January 1999 for $149.5 million. The trial date in theFPL action is June 7, 2010.

 

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At this time, the ART cannot predict theoutcome of these proceedings or estimate the possible financial effect of theseproceedings on the ART’s financial statements.

 

5                                          SubsequentEvents

 

Subsequent to September 30 and before November 10, 2008,there have been no events that would be material to the financial statements ofthe ART, including Cause of Action settlements or judgments or Distributions ordecisions concerning future Distributions.

 

Item 2                                        ManagementDiscussion and Analysis

 

Overview

 

The Adelphia Recovery Trust was formed as a Delaware statutory trustpursuant to that certain First Modified Fifth Amended Joint Chapter 11 Plan ofReorganization of Adelphia and certain of its subsidiaries. The purpose of theART is to prosecute the various causes of action transferred to the ARTpursuant to the Plan and distribute to the owners of the interests in the ARTthe net proceeds of such Causes of Action, according to the relative prioritiesestablished pursuant to the Plan, subject to the retention of various amountsto fund the prosecution of those Causes of Action and operations of the ART.Pursuant to the Plan, in addition to the Causes of Action, Adelphia transferred$25 million in cash to the ART in order to fund the initial expenses ofoperation.

 

Adelphia and certain of its subsidiaries filed for Chapter 11bankruptcy protection in June 2002. During the bankruptcy, on July 31,2006 the assets of Adelphia were sold for a combination of cash and stock inTime Warner Cable, Inc. (“TWC”). In late 2006, representatives ofvarious groups of creditors reached agreement on the allocation anddistribution of the cash, TWC stock, other proceeds from the sale of estateassets and relative priorities to any Distributions arising from the Causes ofAction contributed to the ART. This agreement was embodied in the Plan, whichwas confirmed in January 2007 and became effective on February 13,2007 (the “Effective Date”). Under the Plan, the creditors and equityholders of Adelphia and certain of its subsidiaries received one or more of thefollowing: cash, TWC stock, rights to future Distributions up to payment infull and the Interests.

 

The ART will dissolve upon the earlier of the resolution of all Causesof Action and the distribution of all of its assets to the Holders or the fifthanniversary of its creation. However, the Bankruptcy Court may approve anextension of the term if deemed necessary for the purposes of resolving theCauses of Action and distributing the net proceeds to Holders.

 

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As set forth in the Plan and the Declaration of Trust for the ART, asamended (the “Declaration”), the ART is administered by five Trustees.These Trustees are authorized to carry out the purposes of the ART. Inparticular, the Trustees are responsible for protecting, maintaining, liquidatingto cash and maximizing the value of the Causes of Action contributed to theART, whether by litigation, settlement or otherwise.

 

Distributions

 

Pursuant to the Plan and the Declaration, Distributions to Holders arenet of any costs and expenses incurred by the ART in connection withadministering, litigating or otherwise resolving the various Causes of Action.Such amounts withheld before Distribution may also include fees and expenses ofthe Trustees, premiums for directors and officers insurance, and otherinsurance and fees and expenses of attorneys and consultants. Distributionswill be made only from assets of the ART and only to the extent that the ARThas sufficient assets (over amounts retained for contingent liabilities andfuture costs and expenses, among other things) to make such payments inaccordance with the Plan and the Declaration. No Distribution is required to bemade to any Holder unless such Holder is to receive in such Distribution atleast $25.00 per ART certificate held or unless such Distribution is the finalDistribution to such Holder pursuant to the Plan and the Declaration.

 

Distributions will be made at the sole discretion of the Trustees inaccordance with the provisions of the Plan and the Declaration. As of the datehereof, the Trustees have determined the present best course of action is toretain the existing cash in reserve to administer the ART and fund theprosecution of the Causes of Action. Consequently, there have been noDistributions through the filing date of this Form 10-Q and none have beenplanned.

 

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On the Effective Date, the ART was formed. Asof September 30, 2008, the number of Interests outstanding in each serieseligible to receive a Distribution is as follows:

 
| Series of Interest:   |   |          |   |
|----------------------------|--------|---------------|--------|
| Series RF             |   | 115,000,000   |   |
| Series Arahova        |   | 722,639,681   |   |
| Series FrontierVision |   | 86,600,001    |   |
| Series FPL            |   | 25,575,129    |   |
| Series Olympus        |   | 17,000,001    |   |
| Series ACC-1          |   | 4,839,988,165 |   |
| Series ACC-2(2)       |   | 281,960,771   |   |
| Series ACC-3          |   | 119,430,302   |   |
| Series ESL(1)         |   | 17            |   |
| Series ACC-4          |   | 1,790,968,272 |   |
| Series ACC-5  (1)     |   | 458           |   |
| Series ACC-6B         |   | 150,000,000   |   |
| Series ACC-6B1(1)     |   | 3             |   |
| Series ACC-6D         |   | 575,000,000   |   |
| Series ACC-6D1(1)     |   | 229,004       |   |
| Series ACC-6E/F       |   | 935,812,456   |   |
| Series ACC-6E/F1(1)   |   | 277,210       |   |
| Series ACC-7          |   | 217,022,640   |   |
| Series ACC-7A  (1)    |   | 1,537,766,752 |   |

 

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| (1) | For each of these categories of Interests  (which include disputed claims), each holder of a disputed claim was awarded  one Interest. The number of Interests is expected to change based on the  resolution of disputed claims. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | For this category of Interests (which  include disputed claims), the number of Interests outstanding could change  based on the resolution of disputed claims.                                                                    |

 

**Results of Operations**

** **

The ART operates pursuant to the Plan and theDeclaration. The ART was formed as a Delaware statutory trust to prosecutevarious claims originally owned by Adelphia and, if any of the prosecutions aresuccessful or are settled in a manner which provides economic benefit to theART, to distribute excess proceeds to the Holders. It is not possible todetermine at this time if there will be any excess proceeds available for aDistribution.

 

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*Third Quarter 2008 compared to the ThirdQuarter 2007*

* *

There were no court approved or otherlitigation settlements in the three months ended September 30, 2008.  In the prior year for the same quarter therewere court approved settlements with Deloitte and Touche LLP (the “DeloitteLitigation”) for $167.5 million and other parties for $4.9 million. Therewere no other settlements in the three months ended September 30, 2007.The nature of ART revenues causes significant fluctuations in quarterlyperformance and these fluctuations are expected to continue. Both quartersended September 30, 2008 and September 30, 2007 reflect interestincome from invested cash balances of the ART. The decrease in interest incomeof approximately $615,000 for the quarter ended September 30, 2008compared to the same quarter in the prior year is due to lower invested cashbalances caused by ART operating costs reducing cash balances as well asreduced investment yields. Operating expenses of the ART for the quarter ended September 30,2008 are similar to the same period in 2007 due to ongoing costs associatedwith prosecuting the outstanding Causes of Action and operating the ART. As aresult of reduced settlement revenue of $172.4 million in the three monthsended September 30, 2008 compared to the same period in 2007 along withreduced interest income of approximately $615,000 offset by slightly decreasedoperating expenses of approximately $515,000, the ART recognized a loss of $5.2million.

 

*Nine months ended September 30, 2008versus the period from February 13, 2007 (date established) to September 30,2007*

* *

Litigation settlements for the nine monthsended September 30, 2008 are significantly reduced from the previous yearfor the period from February 13, 2007 (date established) through September 30,2007 due to the aforementioned litigation settlements totaling $172.4 millionthat occurred in the third quarter of 2007. This compares to litigationsettlements for the nine months ended September 30, 2008 that totaled $1.1million. The 2008 revenues include the recovery of a claim from a previousAdelphia vendor for $850,194 in the second quarter of 2008, Tow Settlementproceeds of $200,206 in the first quarter of 2008 and other settlements of$60,000 in the first quarter of 2008. Interest income was $1.7 million higherfor the nine months ended September 30, 2008 compared to the period from February 13,2007 to September 30, 2007 due to significantly higher average investedcash balances derived from the Deloitte Litigation settlement that occurred in August2007.

 

Operating expenses for the nine months ended September 30,2008 are approximately $1.2 million less than those incurred from February 13,2007 through September 30, 2007. Professional expenses incurred to pursuethe Causes of Action have decreased $1.9 million over the same period primarilydue to the settlement of the Deloitte Litigation. This settlement caused anincrease in legal and expert professional costs for the period from February 13,2007 through September 30, 2007 that did not recur in the nine monthsended September 30, 2008. The decreases in professional expense wereoffset by increases in general and administrative expenses. Specifically,general and administrative expenses (including professional administrativecosts) have increased approximately $610,000 due to increases in Trusteecompensation and expenses of $455,000, increase audit and tax costs ofapproximately $171,000, increases of approximately $110,000 for banking relatedexpenses and other increases of approximately $21,000 offset by a reduction ininsurance costs of approximately $147,000.

 

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Net income was $151.9 million for the periodfrom February 13, 2007 to September 30, 2007 compared to a net lossof $16.4 million for the nine months ended September 30, 2008 due topreviously discussed revenue reductions over the same period of $169.6 millionoffset by total operating expense reductions, as discussed above, of $1.2million.

 

**Financial Condition and Cash Flows**

 

The ART’s sources of liquidity result from (a) the$25 million transferred to the ART by Adelphia pursuant to the Plan on theEffective Date, (b) the successful resolution of Causes of Action and (c) earningson invested cash balances. Receipts from these sources are used to payprofessional and operating expenses of the ART and as Distributions to theHolders after reserving cash required to pay future professional and operatingexpenses of the ART. After careful evaluation of future needs it has beendetermined that a Distribution at this time should not occur. No Distributionshave been made through September 30, 2008 and none are expected.

 

Given cash and cash equivalent balances as ofSeptember 30, 2008 totaling approximately $166.6 million and expectedexpenses and other potential disbursements, the ART does not expect adeficiency in liquidity in the next twelve months. Due to the uncertain natureof future revenues and expenses beyond twelve months, it is not possible to becertain that current liquidity will be adequate to cover all the futurefinancial needs of the ART. Incurring debt, creating contingent obligationagreements and or seeking methods to reduce legal professional andadministrative costs are all strategies that could be undertaken to addressliquidity issues should they arise. These strategies could impact the ART’sability to maximize recoveries from settlements.

 

The nature of the ART’s operation does notgive rise to capital expenditures and there are no current or expectedcommitments for capital expenditures in the next twelve months. Should a needfor capital expenditures arise, the ART would fund the requirement fromexisting assets. Additionally, the ART currently has no long-term contracts orother long-term obligations.

 

Cash and cash equivalent balances at September 30,2008 of approximately $166.6 million are approximately $23.1 million lower thanDecember 31, 2007 due to a net loss for the nine months ended September 30,2008 of approximately $16.5 million and an additional use of cash by operatingactivities of approximately $6.6 million, primarily related to the payment of$5.9 million in accrued expenses. Other uses of cash from operating activitiesinclude the purchase of prepaid insurance and the accrual of interest on asettlement receivable. Available cash is invested in either FDIC insureddeposit accounts or a federally insured money market fund invested inshort-term U.S. Treasury 

 

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and government agency securities. The money market fund manager haselected to participate in the Treasury Department’s temporary guaranteeinsurance program for money market funds.

 

**Debt and Other Long-term Obligations**

** **

The ART has no debt, capital or operatinglease or other long-term obligations and has no current plans to incur suchobligations.

 

**Cautionary Statement Regarding Risks andUncertainties That May Affect Future Results**

** **

This report on Form 10-Q containsforward-looking statements about the business, financial condition andprospects of the ART. The actual results of the ART could differ materiallyfrom those indicated by the forward-looking statements because of various risksand uncertainties, including, without limitation, the number and amounts oflitigations and/or settlements which are successful, delays in obtainingproceeds, the amount of funding required for the litigations and otheroperating expenses, economic conditions, changes in tax and other governmental rules andregulations applicable to the ART, and other risks identified and described inthe Form 10 filed with the SEC on April 30, 2008 and amended on July 2,2008. These risks and uncertainties are beyond the ability of the ART tocontrol, and in many cases, the ART cannot predict the risks and uncertaintiesthat could cause its actual results to differ materially from those indicatedby the forward-looking statements. When used in this report the words “believes,”“estimates,” “plans,” “expects,” and “anticipates” and similar expressions asthey relate to the ART or its management are intended to identifyforward-looking statements.

 

Item 4                                                                Controlsand Procedures

 

*Evaluation of Disclosure Controls andProcedures*

 

The ART maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in its reports filed under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. Disclosure controls and procedures include controls and proceduresdesigned to ensure that such information is accumulated and communicated to ARTTrustees and the Trust Administrator as appropriate, to allow timely decisionsregarding required financial disclosure.

 

The Trusteesand the Trust Administrator have completed an evaluation of the effectivenessof the design and operation of disclosure controls and procedures as of thequarter ended September 30, 2008. Based on their evaluation of theeffectiveness of the design and operation of the ART’s disclosure controls andprocedures, the Trustees and the Trust Administrator concluded that as of September 30,2008, the ART’s disclosure controls and procedures were effective.

 

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*Limitations on the Effectiveness of Controls*

* *

The Trustees and the TrustAdministrator do not expect that the ART’s disclosure controls will prevent ordetect all errors and all fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, if any,within the Trust have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Controls can also be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the controls. The design of any system of controls isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions. Over time, controls maybecome inadequate because of changes in conditions or deterioration in thedegree of compliance with associated policies or procedures. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

 

*Changes inInternal Control over Financial Reporting*

* *

During the quarter ended September 30,2008, there were no changes in the ART’s internal control over financialreporting for the quarter then ended that have materially affected, or arereasonably likely to materially affect, internal control over financialreporting.

 

**PART II**

** **

Item 1                                                                LegalProceedings

 

Except as setforth below, there have been no material developments in the legal proceedingsdescribed in the ART’s Form 10 as filed April 30, 2008 and as amendedJuly 2, 2008 or as updated in the ART’s Q2 10Q filed on August 11,2008.

 

BankLitigation

 

On June 18, 2008, the District Courtdismissed certain fraudulent transfer claims, voidable preference claims, andequitable subordination and disallowance claims.  Motions to dismiss other claims remainpending. Certain defendants have moved for entry of a final judgment as to theclaims dismissed against them.  Thosemotions are 

 

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pending.  Under the currentscheduling order, the trial on the remaining claims will commence on February 22,2010.

 

Motorola Litigation

 

On August 22, 2007, plaintiffs moved forsummary judgment to disallow a portion of the defendants’ claims againstcertain Adelphia debtors. Plaintiffs’ motion is pending. Discovery is ongoingand the bankruptcy court has ordered the parties to be ready for trial on theclaims for equitable subordination and equitable disallowance on April, 202009.

 

Prestige and FPL Litigation

 

The Prestige action seeks to recover fraudulenttransfers in connection with Adelphia’s purchase of the assets of PrestigeCommunications of N.C., Inc., an acquisition that closed on July 5,2000, as well as a claim that the owners of the Prestige Cable Systems aidedand abetted breaches of fiduciary duty on the part of the Rigas family inconnection with the transaction. The District Court has not set a trial date inthe Prestige action.

 

The FPL action seeks to recover an allegedfraudulent transfer arising out of Adelphia’s repurchase of certain of itsstock from FPL in January 1999 for $149.5 million. The trial date in theFPL action is June 7, 2010.

 

At this time, the ART cannot predict theoutcome of these proceedings or estimate the possible financial effect of theseproceedings on the ART.

 

Item 1A.                                                   Risk Factors

 

As of the dateof this filing there have been no material changes from the risk factorspreviously disclosed in our “Risk Factors” in the Form 10 as filed April 30,2008 and as amended July 2, 2008.

 

Item 6                                                                Exhibits

 
| 31.1 |   | Section 302 Certification of Trustee                                                                                                                   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Section 302 Certification of Trust  Administrator                                                                                                      |
| 32.1 |   | Certification of Trustee pursuant to 18  U.S.C. 1350 Section 1350, as adopted pursuant to Section 906 of the  Sarbanes Oxley Act of 2002          |
| 32.2 |   | Certification Trust Administrator pursuant  to 18 U.S.C. 1350 Section 1350, as adopted pursuant to Section 906  of the Sarbanes Oxley Act of 2002 |

 

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**SIGNATURES**

** **

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisReport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| Date:  November 10, 2008                          |   |
|--------------------------------------------------------|--------|
|                                                   |   |
| By: Quest  Turnaround Advisors, LLC                    |   |
| as Trust  Administrator of the Adelphia Recovery Trust |   |
|                                                   |   |
| /s/ Jeffrey  A. Brodsky                                |   |
| Jeffrey A.  Brodsky                                    |   |
| Member                                                 |   |

 

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