Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**or**

 

o          **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                  to                  **

 

**Commission File Number: 000-53209**

 

**AdelphiaRecovery Trust**

(Exact name of registrant as specified in its charter)

 

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

 

**919 North Market Street, 17th Floor, PO Box 8705**

**Wilmington, Delaware 19899**

(Address of principal executive offices) (Zip Code)

 

**302-652-4100 Attn: Dean Ziehl**

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since lastreport)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.    x Yes No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate website, if any, every interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).    oYes No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).    o Yes No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed bya court.    o Yes No o

 

 

 

----

Table of Contents

 

ADELPHIA RECOVERY TRUST

FORM 10-Q

INDEX

 
| PART I  — FINANCIAL INFORMATION |                                                                                                 |
|-------------------------------------------|------------------------------------------------------------------------------------------------------|
|                                      |                                                                                                 |
|                                      | ITEM 1. FINANCIAL STATEMENTS  (unaudited)                                                            |   |
|                                      |                                                                                                 |   |   |
|                                      |                                                                                                 | Condensed Balance Sheets as of  June 30, 2010 and December 31, 2009 |   |
|                                      |                                                                                                 |   |   |
|                                      |                                                                                                 | Condensed Statements of  Operations for the three and six months ended June 30, 2010 and 2009 |   |
|                                      |                                                                                                 |   |   |
|                                      |                                                                                                 | Condensed Statements of Cash  Flows for the six months ended June 30, 2010 and 2009 |   |
|                                      |                                                                                                 |   |   |
|                                      |                                                                                                 | Notes to  Condensed Financial Statements |   |
|                                      |                                                                                                 |   |   |
|                                      | ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS |   |
|                                      |                                                                                                 |   |
|                                      | ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  |   |
|                                      |                                                                                                 |   |
|                                      | ITEM 4. CONTROLS  AND PROCEDURES                                                                     |   |
|                                      |                                                                                                 |   |
| PART II                              |                                                                                                 |
|                                      |                                                                                                 |   |
|                                      | ITEM 1. LEGAL  PROCEEDINGS                                                                           |   |
|                                      |                                                                                                 |   |
|                                      | ITEM 1A. RISK FACTORS                                                                                |   |
|                                      |                                                                                                 |   |
|                                      | ITEM 6. EXHIBITS                                                                                     |   |
|                                      |                                                                                                 |   |
| SIGNATURES                                |                                                                                                 |
|                                      |                                                                                                 |   |
| CERTIFICATIONS                            |                                                                                                 |

 

2

----

Table of Contents

 

**PART 1- FINANCIAL INFORMATION**

 

Item1   Financial Statements

 

**Adelphia Recovery Trust**

**UnauditedCondensed Balance Sheets**

** **
| ** **                           | ** ** | **As of  June 30, 2010** | ** **  | **As of   December 31, 2009** | ** ** |
|--------------------------------------|------------|-------------------------------|-------------|------------------------------------|------------|
|                                 |       |                          |        |                               |       |
| **Assets**                           |       |                          |        |                               |       |
| Cash and cash equivalents            |       | $                             | 62,236,621  |                               | $          | 164,327,745 |   |
| Temporary investments                |       | 83,073,211                    |        | —                             |       |
| Prepaid assets                       |       | 357,259                       |        | 611,363                            |       |
| Note and accrued interest receivable |       | 5,973,817                     |        | 5,778,805                          |       |
| Total assets                         |       | $                             | 151,640,908 |                               | $          | 170,717,913 |   |
|                                 |       |                          |        |                               |       |
| **Liabilities and net assets**       |       |                          |        |                               |       |
| Accrued expenses                     |       | $                             | 466,137     |                               | $          | 3,311,521 |   |
| Total liabilities                    |       | 466,137                       |        | 3,311,521                          |       |
|                                 |       |                          |        |                               |       |
| Net assets                           |       | 151,174,771                   |        | 167,406,392                        |       |
|                                 |       |                          |        |                               |       |
| **Total liabilities and net assets** |       | $                             | 151,640,908 |                               | $          | 170,717,913 |   |

 

See accompanying notes to the condensed financial statements.

 

3

----

Tableof Contents

 

**Adelphia Recovery Trust**

**UnauditedCondensed Statements of Operations**

** **
| ** **                                  | ** ** | **For the  three months  ended  June 30, 2010** | ** ** | **For the  three months  ended  June 30, 2009** | ** ** | **For the  six months  ended  June 30, 2010** | ** ** | **For the  six months  ended  June 30, 2009** | ** **  |
|---------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|-------------|
|                                        |       |                                                 |       |                                                 |       |                                               |       |                                               |        |
| Revenues                                    |       |                                                 |       |                                                 |       |                                               |       |                                               |        |
| Litigation - court approved settlements     |       | $                                                    | 0          |                                                 | $          | 0                                                  |       | $                                                  | 0           |   | $ | 0 |   |
| Litigation - other settlements              |       | 0                                                    |       | 0                                                    |       | 0                                                  |       | 0                                                  |        |
| Interest income                             |       | 159,911                                              |       | 199,254                                              |       | 309,877                                            |       | 528,166                                            |        |
| Total revenues                              |       | 159,911                                              |       | 199,254                                              |       | 309,877                                            |       | 528,166                                            |        |
|                                        |       |                                                 |       |                                                 |       |                                               |       |                                               |        |
| Operating expenses                          |       |                                                 |       |                                                 |       |                                               |       |                                               |        |
|                                        |       |                                                 |       |                                                 |       |                                               |       |                                               |        |
| General and administrative expenses         |       | 480,650                                              |       | 457,473                                              |       | 1,241,335                                          |       | 1,209,797                                          |        |
| Professional expenses - litigation          |       | 6,989,391                                            |       | 8,789,310                                            |       | 14,982,676                                         |       | 14,923,509                                         |        |
| Professional expenses — administrative |       | 155,262                                              |       | 60,467                                               |       | 317,487                                            |       | 170,668                                            |        |
| Total operating expenses                    |       | 7,625,303                                            |       | 9,307,250                                            |       | 16,541,498                                         |       | 16,303,974                                         |        |
|                                        |       |                                                 |       |                                                 |       |                                               |       |                                               |        |
| Net loss                                    |       | $                                                    | (7,465,392 | )                                                    | $          | (9,107,996                                         | )          | $                                                  | (16,231,621 | ) | $ | (15,775,808 | ) |

 

See accompanying notes to the condensed financial statements.

 

4

----

Tableof Contents

 

**Adelphia Recovery Trust**

**UnauditedCondensed Statements of Cash Flows**

** **
| ** **                                              | ** ** | **For the  six months  ended  June 30, 2010** | ** **  | **For the  six months  ended  June 30, 2009** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|-------------|----------------------------------------------------|------------|
|                                                    |       |                                               |        |                                               |       |
| **Operating activities**                                |       |                                               |        |                                               |       |
| Net loss                                                |       | $                                                  | (16,231,621 | )                                                  | $          | (15,775,808 | ) |
| Changes in operating assets and liabilities:            |       |                                               |        |                                               |       |
| Prepaid assets                                          |       | 254,104                                            |        | 282,738                                            |       |
| Note and accrued interest receivable                    |       | (195,012                                           | )           | (195,012                                           | )          |
| Accrued expenses                                        |       | (2,845,384                                         | )           | 1,892,190                                          |       |
| Net cash used by operating activities                   |       | (19,017,913                                        | )           | (13,795,892                                        | )          |
|                                                    |       |                                               |        |                                               |       |
| Investing activities                                    |       |                                               |        |                                               |       |
| Purchase of temporary investments and accrued  interest |       | (83,073,211                                        | )           | —                                             |       |
| Net cash used by investing activities                   |       | (83,073,211                                        | )           | —                                             |       |
|                                                    |       |                                               |        |                                               |       |
| **Net change in cash and cash  equivalents**            |       | (102,091,124                                       | )           | (13,795,892                                        | )          |
| **Cash and cash equivalents,  beginning of period**     |       | 164,327,745                                        |        | 161,057,351                                        |       |
| **Cash and cash equivalents, end of  period**           |       | $                                                  | 62,236,621  |                                               | $          | 147,261,459 |   |

 

See accompanying notes to the condensed financial statements.

 

5

----

 

Table of Contents

 

ADELPHIA RECOVERY TRUST

 

Notes to the CondensedFinancial Statements — June 30, 2010 (Unaudited)

 

1                                          Background

 

The Adelphia Recovery Trust (the “ART”) wasformed as a Delaware statutory trust pursuant to that certain First ModifiedFifth Amended Joint Chapter 11 Plan of Reorganization (the “Plan”) ofAdelphia Communications Corporation (“Adelphia” or “ACC” ) andcertain of its subsidiaries (collectively the “Debtor”). The purpose ofthe ART is to prosecute the various causes of action transferred to the ARTpursuant to the Plan (the “Causes of Action”) and distribute to theowners (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 connection withits formation, in order to fund the initial expenses of operation.

 

As set forth in the Plan, the ART is administered byfive trustees (the “Trustees”) who are responsible for carrying out thepurposes of the ART. Quest Turnaround Advisors, L.L.C. (“Quest”) is theplan administrator (in such capacity, the “Plan Administrator”) ofAdelphia. 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                                          Basis ofPresentation

 

The accompanying interim unaudited condensedfinancial statements of the ART have been prepared in accordance with generallyaccepted accounting principles in the United States of America for interimperiods (“US GAAP”) and with the instructions to Form 10-Q. As such, they do not include all of the information and disclosures required byUS GAAP for complete financial statements.  In the opinion of theTrustees, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation of the interim unaudited condensed financialstatements have been included.  These condensed financial statementsshould be read in conjunction with the ART’s audited financial statements forthe year ended December 31, 2009 included in its Form 10-K filed withthe Securities and Exchange Commission (“SEC”) on March 10, 2010.Interim results are not necessarily indicative of the results for the completefiscal year. The unaudited condensed balance sheet as of December 31, 2009was derived from the audited financial statements for the year then ended.

 

6

----

Table of Contents

 

3                                          Related PartyTransactions

 

The Trust Administrator and Adelphia continue toprovide administrative support to the ART including maintaining electronic dataand 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                                          Causes ofAction and Contingencies

 

Except as set forth below, there have been nomaterial developments in the legal proceedings described in the ART’sForm 10-K as filed on March 10, 2010 or as updated in the ART’s Form 10-Qfiled on May 7, 2010.

 

BankLitigation

 

On May 14, 2010, the United States District Court for the SouthernDistrict of New York  ( the “DistrictCourt” ) denied the ART’s motion to reconsider or in the alternative,certify for immediate appeal of the District Court’s December 21, 2009 orderholding that the ART lacks standing to pursue claims on behalf of ACC and mayassert only claims on behalf of certain ACC subsidiaries ( the “ObligorDebtors” ).

 

On May 26, 2010, the Second Circuit affirmed in a summary order theDistrict Court’s June 18, 2008 order and subsequent final judgment, dismissingcertain fraudulent transfer claims, voidable preference claims, and equitablesubordination and disallowance claims. On August 3, 2010, the United StatesSupreme Court granted the ART an extension of time to October 7, 2010 in whichto file a petition for writ of certiorari from the Second Circuit’s order.

 

On June 1, 2010, the ART filed its oppositions to various summaryjudgment motions filed by Defendants on March 2, 2010.  The District Court has scheduled oral argumenton those motions to begin August 10, 2010.

 

Under the schedule established by the District Court, trial on thepending tort, fraudulent conveyance, and BHCA claims will commence on October25, 2010.

 

At this time, the ART cannot predict the outcome of these proceedingsor estimate the possible financial effect of these proceedings on the ART’sfinancial statements.

 

LitigationIndemnification Fund Litigation

 

  On May 7,2010, the Bankruptcy Court for the Southern District of New York (the “BankruptcyCourt”) approved a Stipulation and Consent Order by and among Adelphia,ART, and claimant Societe Generale, S.A. resolving Adelphia’s and ART’s motionto disallow Societe Generale, S.A.’s fee claims.  An evidentiary hearing on the pending motionsshall be scheduled with respect to the remaining parties.

 

7

----

Tableof Contents

 

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

 

5                                          Fair Value ofFinancial Instruments

 

As of June 30, 2010, the ART had temporaryinvestments in FDIC insured six-month bank certificates of deposit (“CDs”)which had a carrying value of approximately $83.1 million. The carrying valuerepresents the original investment of approximately $83.0 million, plus accruedinterest of $73,211 through June 30, 2010. The carrying value approximates thefair value for these temporary investments as of June 30, 2010. The six-monthCDs will mature on various dates in the third and fourth quarter of 2010.

 

The fair value of the note receivable and accruedinterest has been determined using unobservable units (i.e. Level 3, as definedin Accounting Standards Codification 820-10) and approximates $4.7 million asof June 30, 2010 and $4.4 million as of December 31, 2009. The fair value wasderived by discounting to June 30, 2010 and December 31, 2009 the projectedmaturity value of the note including accrued interest. The projected maturityvalues, including interest were calculated using life expectancy tables. Thediscount rate is based on the yield on the notes issued by the life insurancecompanies underwriting the life insurance policies and various risk factorsassociated with the note.

 

The carrying values were approximately $6.0 millionas of June 30, 2010 and approximately $5.8 million as of December 31,2009. The note bears 8% simple interest and is recourse only to the proceeds ofvarious life insurance policies on Mr. and Mrs. Leonard Tow totalingapproximately $28 million.

 

6                                          SubsequentEvents

 

Events subsequent to June 30, 2010 have beenevaluated through August 9, 2010, the date the accompanying financialstatements were issued. Other than as discussed herein, there have been nosubsequent events that would be material to the financial statements of theART, including Cause of Action settlements or judgments or Distributions ordecisions concerning future Distributions.

 

Item 2                                          **Management Discussion and Analysis**

 

Overview

 

The Adelphia Recovery Trust was formed as a Delawarestatutory trust pursuant to that certain First Modified Fifth Amended JointChapter 11 Plan of Reorganization of 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 and distribute to the owners of the Interestsin the ART the net proceeds of such Causes of Action, according to the relativepriorities established pursuant to the Plan, subject to the retention ofvarious amounts to fund the prosecution of those Causes of Action andoperations of the ART. Pursuant to the Plan, in addition to the Causes ofAction, Adelphia transferred $25 million in cash to the ART in connection withits formation in order to fund the initial expenses of operation.

 

8

----

Tableof Contents

 

Adelphia and certain of its subsidiaries filed forChapter 11 bankruptcy protection in June 2002. During the bankruptcy, onJuly 31, 2006 the assets of Adelphia were sold for a combination of cashand stock in Time Warner Cable, Inc. (“TWC”). In late 2006,representatives of various groups of creditors reached agreement on theallocation and distribution of the cash, TWC stock, other proceeds from thesale of estate assets and relative priorities to any Distributions arising fromthe Causes of Action contributed to the ART. This agreement was embodied in thePlan, which was confirmed in January 2007 and became effective onFebruary 13, 2007 (the “Effective Date”). Under the Plan, thecreditors and equity holders of Adelphia and certain of its subsidiariesreceived one or more of the following: cash, TWC stock, rights to futureDistributions up to payment in full and the Interests.

 

The ART will dissolve upon the earlier of the resolutionof all Causes of Action and the distribution of all of its assets to theHolders or the fifth anniversary of its creation. However, the Bankruptcy Courtmay approve an extension of the term if deemed necessary for the purposes ofresolving the Causes of Action and distributing the net proceeds to Holders.

 

As set forth in the Plan and the Declaration ofTrust for the ART, as amended (the “Declaration”), the ART isadministered by five Trustees. These Trustees are authorized to carry out thepurposes of the ART. In particular, the Trustees are responsible forprotecting, maintaining, liquidating to cash and maximizing the value of theCauses of Action contributed to the ART, whether by litigation, settlement orotherwise.

 

Distributions

 

Pursuant to the Plan and the Declaration,Distributions to Holders are net of any costs and expenses incurred by the ARTin connection with administering, litigating or otherwise resolving the variousCauses of Action. Such costs and expenses 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 or unless such Distribution is the final Distribution to suchHolder pursuant to the Plan and the Declaration.

 

Distributions will be made at the sole discretion ofthe Trustees in accordance with the provisions of the Plan and the Declaration.As of the date hereof, the Trustees have determined the present best course ofaction is to retain the existing cash in reserve to administer the ART and fundthe prosecution of the Causes of Action. Consequently, there have been noDistributions through the filing date of this Form 10-Q and none have beenplanned.

 

As of June 30, 2010, the number of Interestsoutstanding in each series eligible to receive a Distribution is as follows:

 

9

----

Table of Contents

 
| **CVV Series of Interest:** | ** ** | **As of****June 30****, 2010** | ** ** |
|----------------------------------|------------|--------------------------------|------------|
| 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                |       | 339,207,075                    |       |
| 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                  |       |

 

----

(1) Foreach of these categories of Interests (which include disputed claims), eachholder of a disputed claim was awarded one Interest. The number of Interests isexpected to 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 over amounts retained to fund theprosecution of the Causes of Action and operations of the ART, to the Holders.It is not possible to determine at this time if there will be any excessproceeds available for a Distribution.

 

*Second Quarter 2010 vs SecondQuarter 2009*

 

Total revenues consisting solely of interestdecreased to approximately $160,000 in the second quarter of 2010 fromapproximately $199,000 in the second quarter of 2009. The decrease ofapproximately $39,000  was caused by areduction in investment yields and average cash balances in the second quarterof 2010 compared to the second quarter of 2009. The Trust adjusted itsinvestment strategy in the first quarter of 2010 to nominally improve yields asmore fully described below in “Financial Condition and Cash Flow”. There wereno settlements or related revenues for the second quarter of 2010 or for thesecond quarter of 2009.

 

10

----

Table of Contents

 

Total operating expenses for the ART decreased toapproximately $7.6 million in the second quarter of 2010 from approximately$9.3 million in the second quarter of 2009. The decrease of approximately$1.7 million was caused by decreased professional litigation costs offset byincreased general and administrative and professional administrative costs inthe second quarter of 2010 versus the second quarter of 2009.

 

Professional litigation costs decreased byapproximately $1.8 million in the second quarter of 2010 compared to the secondquarter of 2009 due to decreased professional activity related to the Bank andPrestige Causes of Action.

 

General and administrative costs increasedapproximately $23,000 in the second quarter of 2010 when compared to the secondquarter of 2009. The ART experienced increased costs of approximately $42,000in the second quarter of 2010 for ART tax and SEC filings (“Regulatory Costs”)and Trustee expenses but had offsetting decreased costs of approximately$19,000 for insurance and other miscellaneous items between the same comparableperiods.

 

Professional administrative costs increasedapproximately $95,000 in the second quarter of 2010 compared to the secondquarter of 2009. The increased costs in the second quarter of 2010 relateprimarily to increased ART Regulatory Costs for compliance.

 

As a result of the decrease in total revenues ofapproximately $39,000 and the decrease in total operating expenses ofapproximately $1.7 million in the second quarter of 2010 compared to the secondquarter of 2009, the net loss of approximately $7.5 million for the quarterended June 30, 2010 was approximately $1.6 million lower than the net loss forthe quarter ended June 30, 2009.

 

*Six months ended June 30, 2010 versus the six months ended June 30,2009*

 

Total revenues consisting solely of interestdecreased to approximately $310,000 for the six months ended June 30, 2010 fromapproximately $528,000 for the six months ended June 30, 2009. The decrease ofapproximately $218,000 was caused by a reduction in investment yields duringthe six months ended June 30, 2010 compared to the six month period ended June30, 2009. The Trust adjusted its investment strategy in the first quarter of2010 to improve yields as more fully described below in “Financial Conditionand Cash Flow”. There were no settlements or related revenues for the sixmonths ended June 30, 2010 or for the six months ended June 30, 2009.

 

Total operating expenses for the ART increased toapproximately $16.5 million for the six months ended June 30, 2010 compared to$16.3 million for the six months ended June 30, 2009. The increase ofapproximately $0.2 million was caused by increased professional litigation,general and administrative and professional administrative costs between thesame comparable periods.

 

Professional litigation costs increasedapproximately $59,000 for the six months ended June 30, 2010 when compared tothe six months ended June 30, 2009. There were increased 

 

11

----

Table ofContents

 

costsfor the Bank Cause of Action totaling approximately $273,000 and offsettingdecreased costs of approximately $214,000 for the other Causes of Action forthe six months ended June 30, 2010 when compared to the six months ended June30, 2009. The changes in costs were caused by changes in activity levelsrelated to the various Causes of Action.

 

General and administrative costs increasedapproximately $32,000 for the six months ended June 30, 2010 when compared tothe six months ended June 30, 2009. The ART experienced increased costs ofapproximately $117,000 for the six months ended June 30, 2010 for ART bankfees,  Trustee expenses and Trusteeadditional service compensation but had offsetting decreased costs ofapproximately $85,000 for insurance, Regulatory Costs and other miscellaneousitems between the same timeframes.

 

Professional administrative costs increasedapproximately $147,000 for the six months ended June 30, 2010 compared to thesix months ended June 30, 2009. The increased costs relate primarily toincreased costs for ART regulatory compliance and Cause of Action oversight.

 

As a result of the decrease in total revenues ofapproximately $218,000 and the increase in total operating expenses ofapproximately $238,000 for the six months ended June 30, 2010 compared to thesix months ended June 30, 2009, the net loss of approximately $16.2 million forthe six months ended June 30, 2010 was approximately $0.5 million higher thanthe net loss for the six months ended June 30, 2009.

 

**Financial Condition and Cash Flows: Liquidity**

 

The ART’s sources of liquidity are 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) earnings on invested cash balances. Receipts from these sources areused to pay professional and operating expenses of the ART and to fundDistributions to the Holders after reserving cash required to pay futureprofessional and operating expenses of the ART. The Trustees regularly evaluatethe future financial needs of the ART. After careful evaluation of futurefinancial needs, the Trustees have determined that the present best course ofaction is to retain the existing cash in reserve to administer the ART and fundthe prosecution of the Causes of Action. Consequently, there have been noDistributions through the date of this 10-Q and none have been announced.

 

Based upon cash and cash equivalent balances as ofJune 30, 2010 totaling approximately $62.2 million and temporary investmentstotaling approximately $83.1 million along with expected expenses and otherpotential disbursements, the ART expects to meet its obligations as they comedue during the next twelve months. Due to the uncertain nature of futurerevenues and expenses beyond twelve months, it is not possible to be certainthat cash will be available to cover all the future financial needs of the ART.Incurring debt, creating contingent obligation agreements and seekingmethods to reduce legal professional and administrative costs are allstrategies that could be undertaken to address liquidity issues should theyarise. These strategies could impact the ART’s ability to maximize recoveriesfrom settlements.

 

12

----

 

Table of Contents

 

The nature of the ART’s operation does not give riseto capital expenditures and there are no current or expected commitments forcapital expenditures in the next twelve months. Should a need for capitalexpenditures arise, the ART would fund the requirement from existing assets.Additionally, the ART currently has no long-term contracts or other long-termobligations.

 

Cash and cash equivalent balances at June 30,2010 of approximately $62.2 million are $102.1 million lower than as ofDecember 31, 2009. This reduction is due to a use of cash and cashequivalents for operating activities of $19.0 million and for investingactivities of $83.1 million to purchase CDs with six-month maturity dates. SuchCDs are classified as temporary investments. The $19.0 million use of cash foroperating activities included a net loss for the six months ended June 30,2010 of approximately $16.2 million and a decrease in accrued expenses ofapproximately $2.8 million. The decrease in accrued expenses is due to thetiming of vendor payments. Operating activities include the accrual of intereston a note receivable during the six months ended June 30, 2010 ofapproximately $0.2 million and the amortization of prepaid assets ofapproximately $0.3 million. Investing activities during the six months ended June 30,2010 included the investment of $83.0 million of available cash and cashequivalents into CDs with a six-month maturity when purchased. These CDs have acarrying value at June 30, 2010 that includes accrued interest of $73,211.

 

As of June 30, 2010,the ART has moved a total of $129.0 million of cash and cash equivalentsconsisting of U.S. Treasury and government agency securities money market fundto three-month and six-month FDIC fully-insured bank CDs in order to improvethe yields on invested cash. The $129.0 million of CDs is comprised of $83.0million of six-month CDs classified as temporary investments and $46.0 millionof three-month CDs that remain classified as cash and cash equivalents. Thetotal of $62.2 million in cash and cash equivalents at June 30, 2010includes the $46.0 million of 3-month CDs and $16.2 million of otherinvestments and accrued interest. The ART considers all highlyliquid investments purchased with a maturity of three months or less to be cashequivalents. As such, the three-month CDs have been classified as cashequivalents and the six-month CDs are classified as temporary investments. All investments during the quarter were fullycompliant with the ART investment policy.

 

**Debt and Other Long-termObligations**

 

The ART has no debt, capital or operating lease orother long-term obligations and has no current plans to incur such obligations.

 

**Cautionary Statement Regarding Risks and UncertaintiesThat 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 of and proceedsfrom litigations and/or settlements which are successful, delays in obtainingproceeds, the amount of funding required for the litigations and otheroperating expenses, economic conditions, 

 

13

----

Table ofContents

 

changesin tax and other governmental rules and regulations applicable to the ART,and other risks identified and described in the Form 10-K filed with theSEC on March 10, 2010. These risks and uncertainties are beyond theability of the ART to control, and in many cases, the ART cannot predict therisks and uncertainties that could cause its actual results to differmaterially from those indicated by the forward-looking statements. When used inthis report the words “believes,” “estimates,” “plans,” “expects,” and “anticipates”and similar expressions as they relate to the ART or its management areintended to identify forward-looking statements.

 

Item3                                          **Quantitative and Qualitative Disclosures about Market Risk**

 

The ART invests cash and cash equivalents in eitherFDIC insured deposit accounts, FDIC insured bank CDs or a money market fundinvested in short-term U.S. Treasury and government agency securities includingrepurchase agreements collateralized fully by U.S. Treasury and governmentagency securities. The CDs have 3 or 6 month maturity terms and as of June 30,2010 the money market fund has a 35 day effective maturity for the underlyingsecurities. Interest income from these investments is subject to interest ratefluctuations.

 

Item4                                                              **Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures*

 

The ART maintains disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in itsreports filed under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include controls and procedures designed toensure that such information is accumulated and communicated to ART Trusteesand the Trust Administrator as appropriate, to allow timely decisions regardingrequired financial disclosure.

 

The Trustees and the Trust Administrator havecompleted an evaluation of the effectiveness of the design and operation ofdisclosure controls and procedures as of June 30, 2010. Based on theirevaluation, the Trustees and the Trust Administrator concluded that as of June 30,2010, the ART’s disclosure controls and procedures were effective.

 

*Limitations on the Effectivenessof Controls*

 

The Trustees and the Trust Administrator do notexpect that the ART’s disclosure controls will prevent or detect all errors andall fraud. A control system, no matter how well designed and operated, canprovide only reasonable, not absolute, assurance that the control system’sobjectives will be met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the ART havebeen detected. These inherent limitations include the realities that judgmentsin decision-making can be faulty, and that breakdowns can occur because ofsimple error or mistake. Controls can also be circumvented by the individualacts of some 

 

14

----

Table ofContents

 

persons,by collusion of two or more people, or by management override of the controls.The design of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions. Over time, controls may become inadequate because of changes inconditions or deterioration in the degree of compliance with associatedpolicies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

 

*Changes in Internal Control overFinancial Reporting*

 

During the quarter ended June 30, 2010, therewere no changes in the ART’s internal control over financial reporting thathave materially affected, or are reasonably likely to materially affect, theART’s internal control over financial reporting.

 

**PART II**

 

Item **1       LegalProceedings**

 

Except as set forth below, there have been nomaterial developments in the legal proceedings described in the ART’sForm 10-K as filed on March 10, 2010 or as updated in the ART’s Form 10-Qfiled on May 7, 2010.

 

BankLitigation

 

On May 14, 2010, the District Court denied the ART’s motion toreconsider or in the alternative, certify for immediate appeal of the DistrictCourt’s December 21, 2009 order holding that the ART lacks standing topursue claims on behalf of ACC and may assert only claims on behalf of theObligor Debtors.

 

On May 26, 2010, the Second Circuit affirmed in a summary orderthe District Court’s June 18, 2008 order and subsequent final judgment,dismissing certain fraudulent transfer claims, voidable preference claims, andequitable subordination and disallowance claims. On August 3, 2010, theUnited States Supreme Court granted the ART an extension of time to October 7,2010 in which to file a petition for writ of certiorari from the Second Circuit’sorder.

 

On June 1, 2010, the ART filed its oppositions to various summaryjudgment motions filed by Defendants on March 2, 2010.  The District Court has scheduled oral argumenton those motions to begin August 10, 2010.

 

Under the schedule established by the District Court, trial on thepending tort, fraudulent conveyance, and BHCA claims will commence on October 25,2010.

 

At this time, the ART cannot predict the outcome of these proceedingsor estimate the possible financial effect of these proceedings on the ART’sfinancial statements.

 

15

----

Tableof Contents

 

LitigationIndemnification Fund Litigation

 

On May 7, 2010, the Bankruptcy Court approved aStipulation and Consent Order by and among Adelphia, ART, and claimant SocieteGenerale, S.A. resolving Adelphia’s and ART’s motion to disallow SocieteGenerale, S.A.’s fee claims.  Anevidentiary hearing on the pending motions shall be scheduled with respect tothe remaining parties.

 

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

 

Item 1A**.                Risk Factors**

 

As of the date of this filing there have been nomaterial changes from the risk factors previously disclosed in our “RiskFactors” in the ART’s Form 10-K for the year ended December 31, 2009as filed with the SEC on March 10, 2010.

 

16

----

Table of Contents

 
| Item 6  **Exhibits** | ** ** |
|---------------------------|------------|
|                      |       |   |
|                      | 2.1*       | First  Modified Fifth Amended Joint Chapter 11 Plan of Reorganization of Adelphia  Communications Corporation and Certain of its Affiliated Debtors, effective  February 13, 2007 |
|                      |       |   |
|                      | 3.1*       | Restated  Certificate of Trust, dated February 13, 2007 |
|                      |       |   |
|                      | 3.2*       | Amendment  to Restated Certificate of Trust, dated March 15, 2007 |
|                      |       |   |
|                      | 3.3*       | Second  Amended and Restated Declaration of Trust, dated June 4, 2008 |
|                      |       |   |
|                      | 3.4*       | Rules and  Procedures of Adelphia Recovery Trust |
|                      |       |   |
|                      | 4.1*       | Form of  Certificate Evidencing Undivided Beneficial Interests in the Assets of the  Adelphia Recovery Trust (Global Certificate) |
|                      |       |   |
|                      | 4.2*       | Form of  Certificate Evidencing Undivided Beneficial Interests in the Assets of the  Adelphia Recovery Trust (Book Entry Certificate) |
|                      |       |   |
|                      | 10.1*      | Plan  Administrator Agreement, dated February 12, 2007 |
|                      |       |   |
|                      | 10.2*      | Trustee  Compensation Agreement |

 

----

*Incorporatedby reference to the Form 10 of Adelphia Recovery Trust (FileNo. 000-53209) filed April 30, 2008 and the amended Form 10filed July 2, 2008.

 
| 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 |

 

17

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Date:  August  9, 2010                            |
|--------------------------------------------------------|
|                                                   |
| By:  Quest Turnaround Advisors, LLC                    |
| as  Trust Administrator of the Adelphia Recovery Trust |
| /s/  Jeffrey A. Brodsky                                |   |
| Jeffrey  A. Brodsky                                    |
| Member                                                 |

 

18

----