<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4813 25-1669404
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
5 WEST THIRD STREET -- P.O. BOX 472
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------
DANIEL R. MILLIARD, PRESIDENT
HYPERION TELECOMMUNICATIONS, INC.
5 WEST THIRD STREET -- P.O. BOX 472
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
CARL E. ROTHENBERGER, JR., ESQUIRE
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
21ST FLOOR, 301 GRANT STREET
PITTSBURGH, PENNSYLVANIA 15219
(412) 562-8826
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
AMOUNT
TITLE OF EACH CLASS OF TO BE EXERCISE PRICE AGGREGAGTE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER WARRANT EXERCISE PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warrants each to purchase 1.8645
shares of Common Stock, $.01 per
value per share.................... 329,000 $0.018645 $6,134.27 $100.00(1)
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Common Stock, $.01 par value per
share.............................. 613,427(2) -- -- (3)
</TABLE>
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(1)Calculated pursuant to Rule 457(g). The Warrants have an initial exercise
price of $.01 per share.
(2)Subject to adjustment pursuant to anti-dilution provisions.
(3)Pursuant to Rule 457(g), no separate registration fee is required for the
securities to be issued upon the exercise of the Warrants.
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION SEPTEMBER , 1996
HYPERION TELECOMMUNICATIONS, INC.
329,000 WARRANTS TO PURCHASE AN AGGREGATE OF 613,427 SHARES OF COMMON STOCK
AND 613,427 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS
-----------
This Prospectus is being used in connection with the offering from time to
time by certain holders (the "Selling Securityholders") of warrants (the
"Warrants") each to purchase 1.8645 shares of common stock, $.01 par value per
share (the "Common Stock"), of Hyperion Telecommunications, Inc., a Delaware
corporation (together with its subsidiaries, the "Company" or "Hyperion"), at
an exercise price of $.01 per share (subject as to both the number of shares
and the exercise price to anti-dilution provisions), and the shares of Common
Stock issuable upon exercise of the Warrants (the "Warrant Shares"). This
Prospectus may also be used by the Company in connection with the issuance from
time to time of the Warrant Shares. The Warrants may be exercised at any time
after the earlier to occur of (i) May 1, 1997 or (ii) in the event of a Change
of Control (as defined), the date the Company mails notice thereof to holders
of the Warrants. Unless exercised, the Warrants will expire on April 1, 2001.
The Warrants and the Warrant Shares may be offered by the Selling
Securityholders in transactions in the over-the-counter-market at prices
obtainable at the time of sale or in privately negotiated transactions at
prices determined by negotiation. The Selling Securityholders may effect such
transactions by selling the Warrants or the Warrant Shares to or through
securities broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the Warrants or the Warrant Shares for
whom such broker-dealers may act as agent or to whom they sell as principal, or
both (which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Warrants,
Warrant Shares or interests therein as a pledgee and may, from time to time,
effect distributions of the Warrants, Warrant Shares or interests in such
capacity. See "The Selling Securityholders" and "Plan of Distribution." The
Selling Securityholders, the brokers and dealers through whom sales of the
Warrants or Warrant Shares are made and any agent or dealer who distributes
Warrants or Warrant Shares acquired as pledgee may be deemed "underwriters"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), and any profits realized by them on the sale of the Warrants or Warrant
Shares may be considered to be underwriting compensation.
The Company will receive proceeds from the exercise of the Warrants. Except
for the sale of the Warrant Shares upon exercise of the Warrants, the Company
is not selling any of the Warrants or Warrant Shares and will not receive any
of the proceeds from the sale of the Warrants or Warrant Shares being sold by
the Selling Securityholders. The cost of registering the Warrants and the
Warrant Shares is being borne by the Company.
The Company has not and does not intend to apply for the listing of the
Warrants on any securities exchange or for quotation through the Nasdaq
National Market.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS" ON PAGE 12.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. Neither the delivery
of this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to
whom it is unlawful to make such offer or solicitation.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
AVAILABLE INFORMATION
In accordance with Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Hyperion is subject to the informational
requirements of the Exchange Act and files reports and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information may be inspected and copied at the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, and will also be available at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048, and the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661.
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 under the Securities Act with respect to the securities
offered by this Prospectus. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company, reference is made to such
Registration Statement and the exhibits and schedules filed as part thereof.
The Registration Statement and the exhibits and schedules thereto filed with
the Commission may be inspected without charge at the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, and will also be available for inspection and copying at
the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048, and the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the reports and other information referred
to above and the Registration Statement may be obtained from the Public
Reference Section of the Commission upon payment of certain prescribed fees.
Electronic registration statements made through the Electronic Data Gathering,
Analysis, and Retrieval system are publicly available through the Commission's
Web site (http://www.sec.gov), which is maintained by the Commission and which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
1
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the consolidated Financial Statements and Notes thereto,
appearing elsewhere in this Prospectus. For a description of certain terms used
in this Prospectus, see the Glossary attached to this Prospectus as Appendix A.
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under
the caption "Risk Factors," which could cause actual results to differ
materially from those indicated by such forward-looking statements. References
in this Prospectus to the "Company" or "Hyperion" mean Hyperion
Telecommunications, Inc. together with its subsidiaries, except where the
context otherwise requires. Unless the context otherwise requires, references
herein to the "networks," the "Company's networks" or the "Operating Companies'
networks" mean the 13 telecommunications networks owned as of June 30, 1996 by
11 Operating Companies (which, as defined herein, are (i) wholly owned
subsidiaries of the Company and (ii) joint venture partnerships and
corporations managed by the Company and in which the Company holds less than a
majority equity interest with one or more other partners). See "--Company and
Partnership Ownership." As of June 30, 1996, nine of the Operating Companies
(comprising 11 of the 13 networks) were partnerships or corporations that were
50% or less owned by the Company, and the Operating Companies did not include
TCG of South Florida (the "South Florida Partnership"). As described more fully
herein, the Company designs, constructs, manages and operates networks on
behalf of the Operating Companies, and it is through these networks that the
Company and the Operating Companies provide telecommunications services.
THE COMPANY
Hyperion Telecommunications, Inc. ("Hyperion" or the "Company") is a leading
competitive local exchange carrier ("CLEC") that designs, constructs, operates
and manages state-of-the-art fiber optic networks and facilities. Based on its
review of information made publicly available by other CLECs, , the Company
believes it operates one of the three largest CLECs in the United States based
upon route miles and buildings connected. The Company's networks work in
conjunction with interexchange carriers ("IXCs") such as AT&T, MCI, Sprint,
WorldCom and others in order to offer small, medium and large businesses,
government and education end users a broad array of integrated, high quality
voice, video and enhanced data communications services. The Company, through
its networks, offers traditional access services, including high capacity
interconnection between (i) points of presence ("POPs") of an IXC, (ii) the
POPs of different IXCs, (iii) a Local Exchange Carrier's Central Office ("LEC-
CO") and IXC POPs, (iv) end users and their selected IXCs and (v) different
locations of particular customers ("Private Line Services"). The Company has
also installed switches or remote switching capability in five of its networks
and plans to offer switched services, including customer dial tone, in all of
its operating markets by the end of 1996. Four of the Company's networks also
offer enhanced data services to their customers such as frame relay,
Asynchronous Transfer Mode ("ATM") data transport, business video conferencing,
private line data interconnect service and LAN connection and monitoring
services in certain markets in a partnership with !NTERPRISE, a wholly owned
subsidiary of US West. These services, along with the long distance services
provided by IXCs, enable the Company to provide an integrated
telecommunications service offering to network customers that is more reliable,
has a superior level of service and is priced lower relative to that of the
incumbent local exchange carriers ("LECs") in markets served by the Company's
networks.
As of June 30, 1996, the Company managed and operated 13 networks which are
primarily clustered in three regions located in the eastern half of the United
States and which served 19 cities with populations from at least 25,000 to more
than 600,000. As of June 30, 1996, the Company also had four new networks under
construction which will serve 17 additional cities and which the Company will
manage and operate upon their expected completion in calendar year 1996. Since
June 30, 1996, the Company has added two networks serving
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14 additional cities, and one Operating Company. As of June 30, 1996, eleven of
the Company's operating networks and three of its networks under construction
were owned in partnership with several major cable television operators,
including Tele-Communications, Inc., Time Warner/Newhouse, Continental
Cablevision, TKR Cable, Lenfest Communications, InterMedia Partners and
Multimedia/Gannett, and an electric utility, PECO Energy, owner of the
Philadelphia Electric Company (collectively, the "Local Partners"). The Company
believes that working with a Local Partner significantly reduces the cost and
time in developing a network through the utilization of existing cable or
utility facilities. The remaining two operating networks and one network under
construction are wholly owned by the Company and lease fiber capacity from
Adelphia Communications Corporation ("Adelphia"), the Company's corporate
parent, to achieve similar time and cost savings in developing the networks.
The Company intends to increase the density of its existing network clusters
and expand into new geographic markets or clusters through the construction of
approximately ten new networks by the end of 1997. From the Company's inception
in October 1991 through June 30, 1996, the Company and its partners have
invested approximately $149.5 million to build and develop the network
infrastructure and operations. As of June 30, 1996, the Company's 13 operating
networks served 19 cities, and along with the four networks under construction,
included approximately 2,647 route miles of fiber optic cable and were
connected to approximately 908 buildings. For the year ended March 31, 1996 and
for the three months ended June 30, 1996, the Company's 13 networks generated
total revenues of approximately $7.8 million and $2.9 million, respectively.
The Company reports its interest in less than majority owned joint ventures
pursuant to the equity method of accounting on a basis consistent with
generally accepted accounting principles. The Company's revenues and EBITDA
were approximately $3.3 million and ($2.3) million, respectively, for the year
ended March 31, 1996. For the three months ended June 30, 1996, the Company's
revenues and EBITDA, which consists of net (loss) income before equity in net
loss of joint ventures, gain on sale of investment, interest expense, income
taxes, depreciation and amortization for the periods provided, were
approximately $1.1 million and $0.6 million.
The Company believes the passage of the Telecommunications Act of 1996 (the
"Telecommunications Act") on February 8, 1996 will substantially expand the
market opportunities for the Company and its networks. The Telecommunications
Act provides for the removal of legal barriers to entering the local exchange
telecommunications market and directs the incumbent LECs to negotiate with
CLECs to resolve network and competitive issues such as interconnection of CLEC
and incumbent LEC networks, reciprocal compensation for termination of calls
originating on a competing network, telephone number portability, access to
rights-of-way and the unbundling of network services. The Telecommunications
Act may provide an incentive for incumbent LECs to cooperate with local
facilities-based competitors, such as the Company, on interconnection issues
because the existence of an interconnection agreement with a facilities-based
competitor is a prerequisite for incumbent LEC entry into the long distance
market unless no such facilities-based competitor has requested access and
interconnection in accordance with the terms of the Telecommunications Act.
Based upon data compiled by the Federal Communications Commission (the "FCC"),
the Company believes that the passage of the Telecommunications Act increases
the potential market for CLECs from approximately $26.3 billion to
approximately $97.1 billion annually due to the opening of the market for
switched services which will permit CLECs to offer a full range of local
telecommunications services including local dial tone, local calls, custom
calling features and intraLATA toll services for both business and residential
customers. In the markets where the Company's networks are currently operating
or under construction, the Company now believes it has an addressable market
opportunity of approximately $4.8 billion, substantially all of which is
currently provided by the incumbent LECs.
COMPANY STRATEGY
The Company, through its networks, is a leading provider of integrated local
telecommunications services to small, medium and large businesses, government
and educational end users and IXCs in its existing markets. The Company
differentiates its service offerings by partnering with local cable television
operators and utility companies to develop networks that will provide customers
with greater market coverage, lower costs and
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<PAGE>
superior service. The Company's networks also leverage the IXCs' name
recognition and reputation for quality and reliability by becoming preferred
suppliers for IXCs of local telecommunications services in the Company's
markets. The IXCs market their long distance services in conjunction with the
Company's local service offerings to provide end users with a fully integrated
telecommunications service offering in all of the Company's operating markets.
Principal elements of the Company's strategy include:
Develop a Rapid Entry/Low Cost Approach with Local Partners. The Company
works with a Local Partner in order to significantly reduce the cost and time
to construct a fiber optic network, enable the Company to rapidly begin
offering services and lower the overhead associated with operating and
maintaining the Company's networks. Advantages of building the Company's
networks with Local Partners include (i) sharing the cost of building the fiber
optic network with a cable television system or utility system which the
Company believes reduces the cost of aerial fiber construction by approximately
62%, (ii) reducing the time and cost of obtaining access to rights-of-way and
building entrances and (iii) enabling the Company to leverage the Local
Partners' experience and capabilities for maintaining fiber optic cables
thereby significantly reducing the ongoing costs of a fiber optic network.
Through the partnerships, the Company has financed its expansion at a lower
cost relative to its competitors by utilizing pro rata equity investments and
Local Partner financings of a significant portion of fiber construction. Local
Partners provide most of the funds for the fiber build in a network and lease
the fiber capacity back to the partnership under long-term agreements.
Build Broad Network Coverage. The Company intends to build substantially
larger networks than the networks of the CLECs it competes with in its markets.
As of June 30, 1996, in all of the markets in which the Company and its
networks operate, management believes that the Company has the broadest network
coverage in terms of route miles of any of its CLEC competitors. The Company
believes that expanded network coverage will enable the Company to (i) provide
broader and more reliable coverage for network customers, (ii) carry a greater
amount of traffic on its own networks rather than on the networks of other
carriers thereby increasing the Company's revenues and profit margins, (iii)
increase the potential market available to the Company due to the greater
number of buildings, LEC-COs and customers that the Company's networks can
service, (iv) improve the value of the Company's networks to IXCs, cellular
providers and new telecommunications providers such as Personal Communications
Service ("PCS") operators that need wide backbone coverage, (v) offer services
in areas where there are fewer potential CLECs with facilities and (vi)
leverage the fixed cost structure of the Company's networks, particularly with
regard to network electronics such as switches.
Expansion through Development of Network Clusters. The Company intends to
build on its extensive network size by adding markets near its existing
networks and targeting markets in close proximity when establishing new
networks. Management believes that there are significant operating and
marketing advantages to locating its networks in clusters. Clustering enables
the Company to (i) take advantage of economies of scale in management,
construction, network operations and sales and marketing, (ii) optimize the
networks' switching capacity by utilizing remote switch capacity in nearby
cities, (iii) offer services to lower density traffic areas in which the
Company's networks are less likely to face strong competition from incumbent
LECs and other CLECs and (iv) increase the networks' ability to offer highly
reliable, end-to-end connectivity on a regional basis. The Company also
believes that creating regional networks will enable the Company to gain a
greater share of high margin long distance transport traffic.
Develop Strategic Relationships with IXCs. The Company, through its networks,
provides customers with an integrated, one-stop shopping approach to their
telecommunications needs through its strategic relationships with IXCs such as
AT&T, MCI, Sprint, WorldCom and others. The goal of these relationships is for
the Company's networks to offer their local services in conjunction with the
long distance services of these IXCs. Management believes that working in
partnership with IXCs instead of as a competitor will be attractive to IXCs and
enable the Company to (i) utilize extensive market information from the IXCs
regarding traffic patterns and building requirements to more optimally
construct and extend its networks, (ii) work closely with IXC account teams to
provide an integrated service approach to end users, (iii) increase market
penetration by capitalizing on
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<PAGE>
the IXCs' name recognition and (iv) lower sales and marketing costs by
utilizing the extensive marketing resources and salesforce of the IXCs to
market the networks' products and services. In pursuing this strategy, the
Company has entered into a national service agreement (the "National Service
Agreement") with a major IXC pursuant to which the Company's networks will be
the major IXC's preferred supplier of dedicated special access and switched
access transport services.
Expand Enhanced Service Offerings. Four of the Company's networks operate in
partnership with !NTERPRISE, a leading, nationwide network integrator that
designs, develops and deploys state-of-the-art data networks (including both
network services and equipment) to support and enhance the information systems
with which the networks' customers operate their businesses. Pursuant to the
partnership agreements, !NTERPRISE co-markets enhanced services, including
frame relay, ATM data transport, business video conferencing, private line data
interconnect service and LAN connection and monitoring services to the
networks' customers in the networks' respective markets. The Company believes
that the partnerships with !NTERPRISE provide the opportunity to offer network
customers a full complement of enhanced services more rapidly and without the
Company incurring the cost and overhead of establishing its own nationwide
enhanced services marketing, sales and installation effort. The Operating
Companies intend to enter into additional agreements with !NTERPRISE and other
service integrators in the future.
COMPANY AND PARTNERSHIP OWNERSHIP
The Company is an 89% owned subsidiary of Adelphia, the seventh largest cable
television company in the United States which as of June 30, 1996 owned or
managed cable television systems that served approximately 1.8 million
subscribers in 15 states. The balance of the Company is owned by senior
management which has extensive experience in the telecommunications field. As
of June 30, 1996, the Company managed and operated networks in 13 markets. The
Company owns these operating networks through (i) partnerships with seven Local
Partners (the "Operating Partnerships") and (ii) two wholly owned subsidiaries
of the Company and one corporation in which it is a minority shareholder
("Operating Corporations") (collectively the Operating Partnerships and the
Operating Corporations are referred to herein as the "Operating Companies").
The Company is responsible for the network design, construction, management and
operation of the Operating Companies, for which it receives management fees.
Prior to May 16, 1996, the Company also had an investment in a partnership
operating in southern Florida (the "South Florida Partnership") in which it had
no management responsibility.
The following is an overview of the Company's network structure as of June
30, 1996.
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED
DATE OF HYPERION
COMPANY MARKETS OPERATION(A) INTEREST LOCAL PARTNERS
- --------------- ------------ -------- -------------------------
OPERATING NETWORKS
- ------------------
<S> <C> <C> <C>
Northeast Cluster
Albany, NY(b)................... 2/95 50.0% Time Warner/Newhouse
Binghamton, NY(b)............... 3/95 20.0 Time Warner/Newhouse
Buffalo, NY..................... 1/95 40.0 Tele-Communications, Inc.
Time Warner/Newhouse
Syracuse, NY(b)................. 8/92 50.0 Time Warner/Newhouse
Vermont......................... 11/94 100.0 (c)
Mid-Atlantic Cluster
Charlottesville, VA............. 11/95 100.0 (c)
Harrisburg, PA.................. 4/95 50.0 Lenfest Communications
</TABLE>
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<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED
DATE OF HYPERION
COMPANY MARKETS OPERATION(A) INTEREST LOCAL PARTNERS
- --------------- ------------ -------- -----------------------
<S> <C> <C> <C>
New Brunswick, NJ.............. 11/95 19.7 TKR Cable(d)
Richmond, VA................... 9/93 37.0 Continental Cablevision
Mid-South Cluster
Louisville, KY................. 3/95 50.0(e) TKR Cable
Nashville, TN.................. 11/94 95.0(e) InterMedia Partners
Other Networks
Jacksonville, FL............... 9/92 20.0 Continental Cablevision
Wichita, KS.................... 9/94 49.9 Multimedia/Gannett
NETWORKS UNDER CONSTRUCTION(F)
- ------------------------------
Mid-Atlantic Cluster
Morristown, NJ................. 1996(g) 19.7 TKR Cable (d)
Philadelphia, PA............... 1996(g) 50.0 PECO Energy
Scranton/Wilkes-Barre, PA...... 1996(g) 100.0 (c)
Mid-South Cluster
Lexington, KY.................. 1996(g) 50.0(e) TKR Cable
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP; (ii) the network is capable of accepting traffic from IXCs and end
users; (iii) the Company's central office is fully functional and (iv) the
initial network SONET fiber rings have been completed.
(b) The interests in the Albany, Binghamton and Syracuse markets are all owned
by one Operating Partnership.
(c) Adelphia or its affiliate leases 100% of the fiber capacity to the
Operating Companies in these markets.
(d) Sutton Capital Associates also owns a minority interest.
(e) The Company's interest in these markets has recently changed. See "--Recent
Developments."
(f) The Company has entered into binding agreements with respect to the
construction of these networks.
(g) The Company expects each of these networks to be operational between August
1996 and December 1996.
RECENT DEVELOPMENTS
Issuance of 13% Senior Discount Notes and Warrants. On April 15, 1996, the
Company issued $329.0 million of 13% Senior Discount Notes due April 15, 2003
(the "Senior Notes") and 329,000 Warrants to purchase an aggregate of 613,427
shares of common stock. Proceeds to the Company, net of discounts, commissions,
and other transaction costs were approximately $168.6 million. Such net
proceeds were used to pay $25.0 million of the Note Payable-Adelphia, to make
loans of $3.0 million to certain key Company officers and will be used to fund
the Company's capital expenditures, working capital requirements, operating
losses and its pro-rata investments in joint ventures. Use of proceeds from the
Senior Notes also included the repayment of amounts related to capital
expenditures, working capital requirements, operating losses and pro-rata
investments in joint ventures totaling $12.8 million incurred during the period
from January 1, 1996 to April 15, 1996. These amounts had been funded during
the same time period through advances from Adelphia.
Sale of Partnership Interest in the South Florida Partnership. On May 16,
1996, the Company completed the sale of its 15.7% partnership interest in TCG
South Florida to Teleport Communications Group Inc. for an aggregate sales
price of approximately $11.6 million resulting in a pre-tax gain of
approximately $8.4 million. Amounts related to the South Florida Partnership
included in the Company's investments and equity in net loss
6
<PAGE>
of joint ventures as of and for the year ended March 31, 1996 and as of the
date of sale and the three months ended June 30, 1996 were approximately $3.4
million and ($0.8) million, respectively, and $3.2 million and ($0.2) million,
respectively. As part of the transaction, the Company was released from its
covenant not to compete with respect to the South Florida market. The Company
plans to use the proceeds from the sale to continue to expand and develop its
existing markets, complete new networks under construction and enter additional
markets.
Other Changes in Partnership Interests. The Company recently entered into
agreements pursuant to which the Company's ownership interests in certain of
the Operating Partnerships have increased in three markets. These transactions
are consistent with the Company's goal to own at least a 50% interest in its
Operating Partnerships in the future, and where appropriate the Company may
consider similar transactions from time to time in its other markets. Following
the completion of the transactions described below, Hyperion owned at least 50%
of ten of its 17 then existing markets and markets under construction.
Pursuant to a binding letter of intent with TKR, dated as of January 29,
1996, and a subsequent amendment to the related partnership agreement dated May
8, 1996, the Company has agreed to make additional capital contributions to its
Louisville, Kentucky Operating Partnership (which will also operate the network
under construction in Lexington, Kentucky) and has increased its partnership
ownership interest to 50%. As of June 30, 1996, the required additional capital
contributions were approximately $2.3 million.
Pursuant to a Purchase Agreement dated as of July 25, 1996 the Company
purchased general and limited partnership interests in the Nashville, Tennessee
Operating Partnership from InterMedia and Robin Media on August 1, 1996. The
aggregate purchase price was approximately $5 million. As a result of this
acquisition, the Company's ownership interest in this partnership was increased
to 95%.
National Service Agreement with Major IXC. The Company has entered into the
National Service Agreement with AT&T pursuant to which the Company's networks
will be the IXC's preferred supplier of dedicated special access and switched
access transport services. The National Service Agreement requires the Company
to provide such services to the IXC at a discount from the tariffed or
published incumbent LEC rates. The National Service Agreement is in effect in
all of the Company's markets. The Company believes that only four other CLECs
have comparable National Service Agreements and have passed AT&T's network
validation tests and operational readiness testing.
SUMMARY DESCRIPTION OF WARRANTS
Total Number of Warrants.... 329,000 Warrants, which when exercised would
entitle the holders thereof to acquire an
aggregate of 613,427 shares of Common Stock
of the Company, representing approximately
5.78% of the outstanding Common Stock of the
Company on a fully-diluted basis as of the
date of issuance of the Warrants.
Expiration of Warrants...... The Warrants will expire automatically on
April 1, 2001 (the "Expiration Date"). The
Company will give notice of expiration not
less than 90 nor more than 120 days prior to
the Expiration Date to the registered holders
of the then outstanding Warrants. If the
Company fails to give this Notice, the
Warrants will not expire until 90 days after
the Company gives such notice.
7
<PAGE>
Exercise.................... Each Warrant, when exercised, will entitle
the holder thereof to purchase 1.8645 shares
of the Common Stock of the Company at an
exercise price of $.01 per share. The
Warrants are exercisable at any time on or
after the earlier to occur of (i) May 1, 1997
and (ii) in the event a Change of Control
occurs, the date the Company mails notice
thereof to holders of the Warrants. The
number of shares of Common Stock of the
Company for which, and the price per share at
which, a Warrant is exercisable are subject
to adjustment upon the occurrence of certain
events, as provided in the warrant agreement
relating to the Warrants (the "Warrant
Agreement"). See "Description of Warrants."
THE OFFERING OF WARRANT SHARES
Shares of Common Stock to
be Offered by Hyperion Upon
Exercise of the Warrants....
613,427(1)
Shares of Common Stock to
be Outstanding after the
Offering of Warrant Shares..
10,613,427(1)
Use of Proceeds............. Any proceeds received by the Company upon the
exercise of the Warrants will be used for
general corporate purposes.
(1)Subject to adjustment upon the occurrence of certain events, as provided in
the Warrant Agreement. See "Description of Warrants."
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary financial data (except the unaudited information for
the fiscal years ended March 31, 1992 and 1993, and the three months ended June
30, 1995 and 1996, pro forma information, Network Data and Other Network and
Operating Data ) are derived from, and should be read in conjunction with, the
audited Consolidated Financial Statements of the Company and the related Notes
thereto contained herein. The unaudited information for the fiscal years ended
March 31, 1992 and 1993, and the three months ended June 30, 1995 and 1996, pro
forma information, Network Data and Other Network and Operating Data are
derived from other Company information. Except as noted below, the following
table includes financial and operating information relating to the South
Florida Partnership and the Company's 15.7% interest therein which was sold by
the Company on May 16, 1996. See "Recent Developments." All of the following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1995 1996
------ ------- ------- ------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Telecommunications
service and management
fee revenue........... $ -- $ 89 $ 417 $ 1,729 $ 3,322 $ 686 $ 1,102
Operating expenses:
Network operations.... 2 19 330 1,382 2,690 628 859
Selling, general and
administrative........ 211 921 2,045 2,524 3,084 831 1,027
Depreciation and
amortization.......... -- 30 189 463 1,184 250 695
------ ------- ------- ------- -------- ------- -------
213 970 2,564 4,369 6,958 1,709 2,581
------ ------- ------- ------- -------- ------- -------
Operating loss......... $ (213) $ (881) $(2,147) $(2,640) $ (3,636) $(1,023) $(1,479)
Other income (expense):
Gain on sale of
investment............ -- -- -- -- -- -- 8,405
Interest income....... -- -- 17 39 199 16 1,433
Interest expense and
fees.................. -- -- (2,164) (3,321) (6,088) (1,328) (6,169)
------ ------- ------- ------- -------- ------- -------
(Loss) income before
income taxes, equity
in net loss of joint
ventures and
cumulative effect of
change in accounting
principle............. $ (213) $(881) $(4,294) $(5,922) $ (9,525) $(2,335) $ 2,190
Income tax benefit
(expense)............. -- -- 55 29 197 19 (3)
Equity in net loss of
joint ventures........ -- (194) (528) (1,799) (4,292) (797) (1,636)
Cumulative effect of
change in accounting
for income taxes...... -- -- 42 -- -- -- --
------ ------- ------- ------- -------- ------- -------
Net (loss) income ..... $ (213) $(1,075) $(4,725) $(7,692) $(13,620) $(3,113) $ 551
====== ======= ======= ======= ======== ======= =======
Net (loss) income per
weighted average share
of common stock....... $(0.02) $ (0.11) $ (0.47) $ (0.77) $ (1.36) $ (0.31) $ 0.05
Weighted average shares
of common stock
outstanding........... 10,000 10,000 10,000 10,000 10,000 10,000 10,525
Ratio of earnings to
fixed charges(a)...... -- -- -- -- -- -- 1.09
Cash dividends
declared.............. -- -- -- -- -- -- --
Pro forma interest
expense(b)............ -- -- -- -- 27,796 -- --
Pro forma ratio of
earnings to fixed
charges(c)............ -- -- -- -- -- -- --
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
----- ------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 5 $ 118 $ -- $ -- $ -- $132,142
Working capital........ (291) (441) 1,377 936 (11,455) 133,558
Total assets........... 82 4,316 14,765 23,212 35,269 176,793
Senior Notes........... -- -- -- -- -- 168,620
Note payable--Adelphia. -- 4,814 19,968 35,541 50,855 25,855
Total liabilities...... 295 5,390 20,776 36,915 62,592 195,478
Stockholders' equity
(deficiency)........... (213) (1,074) (6,011) (13,703) (27,323) (18,685)
Book value per weighted
average share of
common stock.......... (.02) (.11) (.60) (1.37) (2.73) (1.78)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30
----------------------------------------- ---------------
1992 1993 1994 1995 1996 1995 1996
----- ------ ------- -------- ------- ------ -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER COMPANY DATA:
EBITDA(d).............. $(213) $ (851) $(1,941) $ (2,138) $(2,253) $ (757) $ 649
Capital expenditures
and Company
investments in
Operating Companies
and the South Florida
Partnership(e)........ 60 3,891 8,607 10,376 18,899 5,390 6,568
Cash used in operating
activities............ (184) (725) (2,121) (2,130) (833) (1,621) (2,657)
Cash (used in) provided
by investing
activities............ (60) (3,806) (8,607) (10,376) (18,899) (5,390) 5,050
Cash provided by
financing activities.. 248 4,645 10,609 12,506 19,732 7,011 129,749
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, JUNE 30,
1996 1996
--------- --------
<S> <C> <C>
NETWORK DATA (F):
Networks in operation....................................... 13 13
Cities served............................................... 19 19
Network clusters............................................ 3 3
Networks under construction................................. 4 4
Route miles................................................. 2,210 2,647
Fiber miles................................................. 106,080 127,063
Buildings connected......................................... 822 908
LEC-COs collocated(g)....................................... 44 69
VGE circuits(h)............................................. 186,292 279,864
Switches and remote switch modules installed................ 5 5
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED
----------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
---- ------ ------- ------- ------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT EMPLOYEE
INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
OTHER NETWORK AND OPERATING
DATA (I):
Network revenues(j).......... $ 0 $ 173 $ 1,028 $ 4,083 $12,186 $2,932
Capital expenditures(k)...... 0 2,559 27,445 33,522 57,290 7,814
Fiber lease financings during
period(l).................... 0 1,262 1,527 17,420 9,174 1,185
Employees(m)................. 4 20 40 95 155 155
</TABLE>
- --------
(a) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes, plus fixed charges excluding
capitalized interest plus amortization of deferred financing costs and (ii)
fixed charges consist of interest expensed and capitalized. For the fiscal
years ended March 31, 1992, 1993, 1994, 1995, 1996 and the three months
ended June 30, 1995, the Company's earnings were insufficient to cover
fixed charges by $0.2, $1.1, $4.8, $7.7, $13.8 and $3.1 million. For the
three months ended June 30, 1996, the Company's earnings were sufficient to
cover fixed charges by $0.5 million.
10
<PAGE>
(b) Pro forma interest expense assumes (i) repayment of $25.0 million of the
Adelphia Note (as defined) at an interest rate of 11.28%, (ii) gross
proceeds attributable to the issuance of the Senior Notes of $163.7
million, (iii) issuance of the Senior Notes at an interest rate of 13.0%
and (iv) original issue discount attributable to the Warrants.
(c) On a pro forma basis, for the year ended March 31, 1996, the Company's
earnings would have been insufficient to cover fixed charges by $35.5
million.
(d) EBITDA consists of net (loss) income before equity in net loss of joint
ventures, gain on sale of investment, interest expense, income taxes,
depreciation and amortization for the periods presented. It is a measure
commonly used in the telecommunications industry and is presented to assist
in understanding the Company's operating results. However, it is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles. See the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
(e) For the fiscal years ended March 31, 1992, 1993, 1994, 1995, 1996 and the
three months ended June 30, 1995 and 1996, the Company's capital
expenditures (including capital expenditures relating to its wholly owned
Operating Companies) were, $0.1, $2.0, $3.1, $2.9, $6.1, $1.4 and $1.8
million, respectively, and the Company's investments in its less than
wholly owned Operating Companies and the South Florida Partnership were,
$0.0, $1.9, $5.5, $7.5, $12.8, $4.0 and $4.8 million, respectively, for the
same periods. See the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
(f) Network Data is derived from the Company's records and presents information
for the Operating Companies, but does not include information for the South
Florida Partnership.
(g) LEC-CO collocated means that the Company has interconnected its network at
the LEC-CO.
(h) Voice grade equivalent circuits.
(i) Except for employees as discussed in note (m) below, the data presented
represent selected unaudited combined operating data of the Company's
Operating Companies (including the Company's two wholly owned Operating
Companies) and the South Florida Partnership, and do not include data of
the Company on a stand alone basis.
(j) Includes the total of (i) the Operating Companies' revenues and (ii) the
South Florida Partnership's revenues.
(k) Represents investments made by the Operating Companies (including
investments made by Local Partners) and the South Florida Partnership in
property, plant and equipment (including capitalized leases).
(l) Fiber Lease Financing (as defined) represents the incremental borrowings by
the Operating Companies and the South Florida Partnership regarding fiber
assets accounted for as capital leases for each period presented.
(m) Employees includes combined employees of the Operating Companies and the
Company.
11
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing Warrants or Warrant Shares in
this offering.
Absence of a Public Market for Warrants and Warrant Shares. The Warrants
were issued by the Company as part of a private placement of units in April
1996 (the "Private Placement"). Neither the Warrants nor the Warrant Shares
are listed on any securities exchange or for quotation through the Nasdaq
National Market. Accordingly, there can be no assurance as to the liquidity of
any market for the Warrants or the Warrant Shares.
Negative Cash Flow and Operating Losses; Limited History of Operations. The
Company has experienced significant losses since its inception, with operating
losses of approximately ($2.1) million, ($2.6) million and ($3.6) million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively and ($1.0)
million and ($1.5) million for the quarters ended June 30, 1995 and 1996,
respectively. The Company expects to continue to incur substantial operating
losses in the foreseeable future as it pursues its plans to expand its
networks, service offerings and customer base. There can be no assurance that
such losses will not continue indefinitely. The Company currently accounts for
its ownership interests in the Operating Companies in which it does not have
majority ownership interest using the equity method and, therefore, the
Company's consolidated financial statements include only the Company's pro
rata share of the Operating Companies' and the South Florida Partnership's net
losses as equity in net losses of joint ventures.
The Company was formed in October 1991 and, as of June 30, 1996, ten of its
13 networks had been in operation for less than 24 months. Prospective
investors therefore have limited historical financial information about the
Company upon which to base an evaluation of the Company's performance. The
development of the Company's businesses and the installation and expansion of
its networks require significant expenditures, a substantial portion of which
are made before any revenues may be realized. Certain of the expenditures,
including marketing, sales and general and administrative costs, are expensed
as incurred, while certain other expenditures, including network design and
construction, negotiation of rights-of-way and costs to obtain legal and
regulatory approval, are deferred until the applicable network is operational.
The Company will continue to incur significant expenditures in connection with
the construction, acquisition, development and expansion of the Company's and
Operating Companies' networks, services and customer base.
In light of the Company's limited operating history, its history of
significant operating losses and its expectation that it will continue to
incur significant expenses and operating losses for the foreseeable future,
there can be no assurance that the Company will be able to implement its
growth strategy, or achieve or sustain profitability.
Substantial Leverage. As of June 30, 1996, the Company's total amount of
debt outstanding was $194.5 million and the Company had a stockholders'
deficiency of $18.7 million. In addition, in each year since its inception,
the Company's earnings have been inadequate to cover its fixed charges by a
substantial margin. Commencing on October 15, 2001, semi-annual cash interest
payments of $21.4 million will be due on the Senior Notes, which substantially
exceeds the Company's gross revenues of approximately $3.3 million for the
year ended March 31, 1996.
Because the Company currently has a consolidated cash flow deficit, its
ability to make cash interest payments on the Senior Notes commencing on
October 15, 2001 and to repay its obligations on the Senior Notes at maturity
will be dependent on developing one or more sources of cash flow prior to the
date on which cash interest payment obligations begin on the Senior Notes. To
accomplish this the Company may seek to (i) refinance all or a portion of the
Senior Notes, (ii) sell all or a portion of its interests in one or more of
the Operating Companies, (iii) negotiate with its current Local Partners to
permit any excess cash generated by its Operating Companies to be distributed
to partners rather than invested in the businesses of such Operating Companies
and/or (iv) invest in companies that will make substantial cash distributions
on or before the maturity of the Senior Notes. There can be no assurance that
(i) there will be a market for the debt or equity securities of the Company in
the future, (ii) the Company will be able to sell assets in a timely manner or
on commercially
12
<PAGE>
reasonable terms or in an amount that will be sufficient to make cash interest
payments and repay the Senior Notes when due, (iii) the Company will be able
to persuade its Local Partners that cash generated by the operations of the
Operating Companies should be distributed to partners or shareholders or (iv)
the Company will be able to locate and invest in companies that will be mature
enough to make substantial cash contributions to the Company prior to the
maturity date of the Senior Notes.
Holding Company Structure; Inability to Access Cash Flow. The Company is a
holding company with substantially all of its operations conducted through the
Operating Companies and the Company expects that it could develop new networks
and operations in the future through Joint Ventures in which the Company will
own less than 50% of the equity interests. Accordingly, the Company's cash
flow and, consequently, its ability to service its debt, including the Senior
Notes, is dependent on its pro rata share of the cash flow of the Operating
Companies and the payment of funds by those Operating Companies in the form of
management fees, loans, dividends, distributions or otherwise. The Operating
Companies are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the Senior Notes
or to make any funds available therefor, whether in the form of loans,
dividends, distributions or otherwise. Furthermore, the Company may be unable
to access the cash flow of certain of the Operating Companies because it holds
a 50% or less ownership interest in certain of such entities and, therefore,
does not have the requisite control to cause such entities to make
distributions or pay dividends (as applicable) to the partners or equity
holders (as applicable). In addition, such entities will be permitted to incur
indebtedness that may severely restrict or prohibit the making of
distributions, the payment of dividends (as applicable) or the making of
loans.
Risks Associated with Joint Ventures. Most of the Operating Companies' Local
Partner Agreements (as defined) contain mandatory buy/sell provisions that,
after a certain number of years, can be initiated by either partner and result
in one partner purchasing all of the other partner's interests. Accordingly,
there can be no assurance that the Company and its subsidiaries will continue
to be in partnership with their current Local Partner, or any other partner,
in each of their respective markets, or that the Company or its subsidiaries
will have sufficient funds to purchase the partnership interest of such other
partner. In addition, if a partner triggers such buy/sell provisions and the
Company is unable to purchase the initiating partner's interests, the Company
will be forced to sell its interests to the partner, thereby terminating the
partnership, which could result in a material adverse effect on the future
cash flow of the Company.
The bankruptcy or insolvency of a Local Partner or an Operating Company
could result in the termination of the respective Local Partner Agreement and
the related Fiber Lease Agreement (as defined). The effect of such
terminations could be materially adverse to the Company and the respective
Operating Company. Similarly, all of the Management Agreements (as defined),
two of the Local Partner Agreements and five of the Fiber Lease Agreements can
be terminated by the respective Local Partner at various times during the next
seven years. While the Company believes such agreements will be renewed, there
can be no assurance that the Local Partner will not seek to terminate the
agreements. See "Business--Operating Agreements." Accordingly, the failure to
renew such agreements could materially adversely affect the Company and the
respective Operating Companies. In addition, the failure of a Local Partner to
make required capital contributions could have a material adverse effect on
the Company and the respective Operating Company.
The Indenture with respect to the Senior Notes does not restrict Operating
Companies in which the Company owns a less than 45% interest with respect to
the amount of indebtedness they can incur. Accordingly, the Company's ability
to access the cash flow and assets of such Operating Companies may be severely
limited. While none of the Operating Companies currently have a substantial
amount of indebtedness, there can be no assurance that such Operating
Companies will not incur substantial indebtedness in the future.
Significant Future Capital Requirements. Expansion of the Company's existing
networks and services and the development of new networks and services require
significant capital expenditures. The Company's operations have required and
will continue to require substantial capital investment for (i) the installation
of electronics for switched services in the Company's networks, (ii) the
expansion and improvement of the Company's NOCC and existing networks and (iii)
the design, construction and development of additional
13
<PAGE>
networks. The Company plans to make substantial capital investments and
investments in Operating Companies in connection with the deployment of
switches in all of its operating markets by the end of 1996, the expansion of
existing markets and the construction and development of new markets.
Expansion of the Company's networks will include the geographic expansion of
the Company's existing clusters and the development of new markets. The
Company expects to build networks in approximately ten additional markets by
the end of 1997. The Company estimates that it will require approximately $110
million to $115 million to fund anticipated capital expenditures, working
capital requirements and operating losses of the Company and to make
investments in existing and new Operating Companies and to enter certain
additional markets during calendar years 1996 and 1997. In order to achieve
its goal of entering ten new markets by the end of 1997, however, the Company
expects to be required to seek additional capital. The Company expects to fund
additional capital requirements through existing resources, secured credit
facilities at the Company and Operating Company levels, internally generated
funds, equity invested by Local Partners in Operating Companies, additional
Operating Companies and additional debt or equity financings, as appropriate.
The Company has also been required to fund the purchase of certain
partnership interests in the Louisville Operating Partnership and the
Nashville Operating Partnership and may be required to raise capital to
purchase the partnership interests of a Local Partner seeking to exercise its
right to sell its partnership interest. See "--Risks Associated with Joint
Ventures," "Prospectus Summary--Recent Developments" and "Business--Local
Partner Agreements." There can be no assurance, however, that the Company will
be successful in generating sufficient cash flow or in raising sufficient debt
or equity capital on terms that it will consider acceptable, or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The expectations of required future capital expenditures are based on the
Company's current estimates. There can be no assurance that actual
expenditures will not significantly exceed current estimates.
Expansion Risk. The Company is experiencing a period of rapid expansion
which the Company believes will increase further following the Offering. The
operating complexity of the Company, as well as the level of responsibility
for management personnel, has increased as a result of this expansion. The
Company's ability to manage such growth effectively will require it to
continue to expand and improve its operational and financial systems and to
expand, train and manage its employee base.
Competition. In each of the markets served by the Company's networks, the
services offered by the Company compete principally with the services offered
by the incumbent LEC serving that area. Incumbent LECs have long-standing
relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act, federal and state regulatory initiatives will provide
increased business opportunities to CLECs such as the Company, but regulators
are likely to provide incumbent LECs with increased pricing flexibility for
their services as competition increases. If incumbent LECs are allowed by
regulators to lower their rates substantially, engage in excessive volume and
term discount pricing practices for their customers, or charge CLECs excessive
fees for interconnection to the incumbent LECs' networks, the net income and
cash flow of CLECs, including the Operating Companies, could be materially
adversely affected.
The Telecommunications Act also establishes procedures under which the
Regional Bell Operating Companies ("RBOCs") can obtain authority to provide
long distance services if they comply with certain interconnection
requirements. There has been significant merger activity among the RBOCs in
anticipation of entry into the long distance market. If RBOCs are permitted to
provide such services, they will ultimately be in a position to offer single
source service. This could result in decreased market share for the major IXCs,
which are the Company networks' major customers. Such a result could have an
adverse effect on the Company.
The Company also faces, and will continue to face, competition from other
current and potential market entrants, including other CLECs, AT&T, MCI,
Sprint and other IXCs, cable television companies, electric utilities,
microwave carriers, wireless telecommunications providers and private networks
built by large end
14
<PAGE>
users. A number of markets served by the Company already are served by another
CLEC or other CLECs. In addition, all three major IXCs are expected to enter
the market for local telecommunications services. MCI has announced that it
will invest more than $2.0 billion in fiber optic rings and local switching
equipment in major metropolitan markets throughout the United States and AT&T
has filed applications with state regulatory authorities for authority to
provide local telecommunications services in all 50 states. Although the
Company has good relationships with the IXCs, there are no assurances that any
of these IXCs will not build their own facilities or resell the services of
other carriers rather than use the Company's services when entering the market
for local exchange services.
The Company also competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of
its business.
Many of the Company's current and potential competitors, particularly
incumbent LECs, have financial, personnel and other resources substantially
greater than those of the Company, as well as other competitive advantages
over the Company. See "Competition" for more detailed information on the
competitive environment faced by the Company.
Dependence on Business from IXCs. For the year ended March 31, 1996,
approximately 75% of the Operating Companies' combined revenues were
attributable to access services provided to IXCs, one of which accounted for
approximately 54% of such combined IXCs' revenues. The loss of access revenues
from IXCs in general or the loss of such single IXC as a customer could have a
material adverse effect on the Company's business. See "Business--Company
Strategy--Customer Strategy."
The Company's growth strategy assumes increased revenues from IXCs and end
users following the deployment of switches on the Company's networks and the
provision of switched access origination and termination services. In
addition, the Company competes in its markets with other CLECs for IXC
business. Accordingly, there is no assurance that the IXCs will continue to
increase their utilization of the Company's services, or will not reduce or
cease their utilization of the Company's services, either of which could have
a material adverse effect on the Company.
Furthermore, the Telecommunications Act establishes procedures under which
RBOCs can obtain authority to compete with the IXCs in the long distance
market. Due to the Operating Companies' dependence on business from IXCs, any
loss of market share by the IXCs could have a material adverse effect on the
Company.
Regulation and Risks of the Telecommunications Act. The Company is subject
to varying degrees of federal, state and local regulation. The Company is not
currently subject to price cap or rate of return regulation by the FCC, nor is
it currently required to obtain FCC authorization for the installation,
acquisition or operation of its network facilities. However, the FCC has
determined that nondominant carriers, such as the Company and the Operating
Companies, are required to file interstate tariffs on an ongoing basis. The
Telecommunications Act also requires the FCC to establish a subsidy mechanism
for universal telephone service to which the Company will be required to
contribute. The Operating Companies that provide intrastate services are also
generally subject to certification and tariff filing requirements by state
regulators and may also be subject to state reporting, customer service and
universal service requirements. Challenges to these tariffs by third parties
could cause the Company to incur substantial legal and administrative
expenses. In addition, under the Telecommunications Act, provision of switched
services by the Company could be subject to a far greater degree of regulation
than previously experienced by the Company with regard to its nonswitched
services. See "Regulation--Telecommunications Act of 1996."
Although the Telecommunications Act eliminates legal barriers to entry, no
assurance can be given that changes in current or future regulations adopted
by the FCC or state regulators or other legislative or judicial initiatives
relating to the telecommunications industry would not have a material adverse
effect on the Company. In particular, the Company's belief that the entire $97
billion local exchange market may ultimately be open to CLEC competition
depends upon favorable interpretation of the Telecommunications Act, and the
ability of the
15
<PAGE>
Company and the Operating Companies to compete in these new market segments
may be adversely affected if incumbent LECs are granted greater pricing
flexibility and other regulatory relief that enables them to impose costs on
potential competitors or otherwise restrict the Company's ability to serve its
customers and attract new customers. In addition, the Telecommunications Act
removes entry barriers for all companies and could increase substantially the
number of competitors offering comparable services in the Company's markets.
See "Regulation--Overview" for more detailed information on the regulatory
environment in which the Company and the Operating Companies operate.
Need to Obtain and Maintain Permits and Rights-of-Way. There can be no
assurance that the Company or the Operating Companies, through Local Partners,
Adelphia or their own efforts, will be able to maintain existing permits and
rights-of-way or to obtain and maintain the other permits and rights-of-way
needed to develop and operate existing and future networks. In addition, the
Company and the Operating Companies may require pole attachment agreements
with electric utilities to operate existing and future networks, and there can
be no assurance that such agreements will be obtained or will be obtainable on
reasonable terms. Failure to obtain or maintain such permits, rights-of-way
and agreements could have a material adverse effect on the Company's ability
to operate and expand its networks. See "Business--Operating Agreements--Fiber
Lease Agreements."
Control by Principal Shareholder. Adelphia owns approximately 89% of the
outstanding capital stock of the Company, with the remaining 11% owned by
certain of the Company's senior management (the "Management Shareholders").
Accordingly, Adelphia is able to control the vote on corporate matters
requiring shareholder approval, including, but not limited to, electing
directors, amending the Company's certificate of incorporation and approving
mergers or sales of substantially all of the Company's assets. In addition,
pursuant to a shareholders agreement, as amended, between the Company,
Adelphia and the Management Shareholders, Adelphia has the power to control
certain corporate transactions of the Company, including its ability to enter
into joint ventures and other business relationships, and Adelphia has the
right, under certain circumstances, to purchase the interests of the
Management Shareholders. In addition, Adelphia has agreed to vote its shares
of the Common Stock of the Company to elect the Management Shareholders to the
Company's Board of Directors. There can be no assurance that the interests of
Adelphia will not conflict with the interest of the holders of the Senior
Notes. See "Certain Relationships and Transactions."
Rapid Technological Changes. The telecommunications industry is subject to
rapid and significant changes in technology. While the Company believes that
for the foreseeable future these changes will neither materially affect the
continued use of fiber optic telecommunications networks nor materially hinder
the Company's ability to acquire necessary technologies, the effect of
technological changes on the businesses of the Company cannot be predicted.
Thus, there can be no assurance that technological developments will not have
a material adverse effect on the Company.
Dependence on Key Personnel. The success of the Company and its growth
strategy depends in large part on the Company's ability to attract and retain
key management, marketing and operations personnel. Currently, the Company's
businesses are managed by a small number of management and operating personnel
with certain other services, including financial and certain accounting
services, provided by Adelphia. There can be no assurance that the Company
will attract and retain the qualified personnel needed to manage, operate and
further develop its business. In addition, the loss of the services of any one
or more members of the Company's senior management team could have a material
adverse effect on the Company.
Anti-Takeover Provisions. The Company's Certificate of Incorporation and
Bylaws, the provisions of the Delaware General Corporation Law and the
Indenture with respect to the Senior Notes may make it difficult in some
respects to effect a change of control of the Company and replace incumbent
management. The existence of these provisions may have a negative impact on
the price of the Common Stock, may discourage third party bidders from making
a bid for the Company, or may reduce any premiums paid to stockholders for
their Common Stock. In addition, the Board has the authority to fix the rights
and preferences of and issue shares of the Company's Preferred Stock, which
may have the effect of delaying or preventing a change of control of the
Company without action by its stockholders.
16
<PAGE>
Lack of Dividend History. The Company has never declared or paid any cash
dividends on its Common Stock and does not expect to declare any such
dividends in the foreseeable future. Payment of any future dividends will
depend upon earnings and capital requirements of the Company, the Company's
debt facilities and other factors the Board of Directors considers
appropriate. The Company intends to retain its earnings, if any, to finance
the development and expansion of its business, and therefore does not
anticipate paying any dividends in the foreseeable future. In addition, the
terms of the Indenture relating to the Senior Notes prohibits the payment of
dividends.
USE OF PROCEEDS
Except for the sale of the Warrant Shares upon the exercise of the Warrants,
the Company is not selling any of the Warrants or the Warrant Shares and will
not receive any of the proceeds from the sale of the Warrants and the Warrant
Shares by the Selling Securityholders. Any proceeds received by the Company
upon the exercise of the Warrants will be used for general corporate purposes.
CAPITALIZATION
The effect from the sale of the Warrant Shares upon exercise of the Warrants
will be approximately $6.0 thousand in gross proceeds to the Company.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected financial and operating data (except the unaudited
information for the fiscal years ended March 31, 1992 and 1993 and the three
months ended June 30, 1995 and 1996, pro forma information, Network Data and
Other Network and Operating Data ) are derived from, and should be read in
conjunction with, the audited Consolidated Financial Statements of the Company
and the related Notes thereto contained herein. The unaudited information for
the fiscal years ended March 31, 1992 and 1993 and the three months ended June
30, 1995 and 1996, pro forma information, Network Data and Other Network and
Operating Data are derived from other Company information. Except as noted
below, the following table includes financial and operating information
relating to the South Florida Partnership and the Company's 15.7% interest
therein which was sold by the Company on May 16, 1996. See "Recent
Developments."All of the following information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1995 1996
------ ------- ------- ------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Telecommunications
service and management
fee revenue........... $ -- $ 89 $ 417 $ 1,729 $ 3,322 $ 686 $ 1,102
Operating expenses:
Network operations.... 2 19 330 1,382 2,690 628 859
Selling, general and
administrative........ 211 921 2,045 2,524 3,084 831 1,027
Depreciation and
amortization.......... -- 30 189 463 1,184 250 695
------ ------- ------- ------- -------- ------- -------
213 970 2,564 4,369 6,958 1,709 2,581
------ ------- ------- ------- -------- ------- -------
Operating loss......... $ (213) $ (881) $(2,147) $(2,640) $ (3,636) $(1,023) $(1,479)
Other income (expense):
Gain on sale of
investment............ -- -- -- -- -- -- 8,405
Interest income....... -- -- 17 39 199 16 1,433
Interest expense and
fees.................. -- -- (2,164) (3,321) (6,088) (1,328) (6,169)
------ ------- ------- ------- -------- ------- -------
(Loss) income before
income taxes, equity
in net loss of joint
ventures and
cumulative effect of
change in accounting
principle............. $ (213) $(881) $(4,294) $(5,922) $ (9,525) $(2,335) $ 2,190
Income tax benefit
(expense)............. -- -- 55 29 197 19 (3)
Equity in net loss of
joint ventures........ -- (194) (528) (1,799) (4,292) (797) (1,636)
Cumulative effect of
change in accounting
for income taxes...... -- -- 42 -- -- -- --
------ ------- ------- ------- -------- ------- -------
Net (loss) income ..... $ (213) $(1,075) $(4,725) $(7,692) $(13,620) $(3,113) $ 551
====== ======= ======= ======= ======== ======= =======
Net (loss) income per
weighted average share
of common stock....... $(0.02) $ (0.11) $ (0.47) $ (0.77) $ (1.36) $ (0.31) $ 0.05
Weighted average shares
of common stock
outstanding........... 10,000 10,000 10,000 10,000 10,000 10,000 10,525
Ratio of earnings to
fixed charges(a)...... -- -- -- -- -- -- 1.09
Cash dividends
declared.............. -- -- -- -- -- -- --
Pro forma interest
expense(b)............ -- -- -- -- 27,796 -- --
Pro forma ratio of
earnings to fixed
charges(c)............ -- -- -- -- -- -- --
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
----- ------- ------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 5 $ 118 $ -- $ -- $ -- $132,142
Working capital........ (291) (441) 1,377 936 (11,455) 133,558
Total assets........... 82 4,316 14,765 23,212 35,269 176,793
Senior Notes........... -- -- -- -- -- 168,620
Note payable--Adelphia. -- 4,814 19,968 35,541 50,855 25,855
Total liabilities...... 295 5,390 20,776 36,915 62,592 195,478
Stockholders' equity
(deficiency)........... (213) (1,074) (6,011) (13,703) (27,323) (18,685)
Book value per weighted
average share of
common stock.......... (.02) (.11) (.60) (1.37) (2.73) (1.78)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
----------------------------------------- ---------------
1992 1993 1994 1995 1996 1995 1996
----- ------ ------- -------- ------- ------ -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER COMPANY DATA:
EBITDA(d).............. $(213) $ (851) $(1,941) $ (2,138) $(2,253) $ (757) $ 649
Capital expenditures
and Company
investments in
Operating Companies
and the South Florida
Partnership(e)........ 60 3,891 8,607 10,376 18,899 5,390 6,568
Cash used in operating
activities............ (184) (725) (2,121) (2,130) (833) (1,621) (2,657)
Cash (used in) provided
by investing
activities............ (60) (3,806) (8,607) (10,376) (18,899) (5,390) 5,050
Cash provided by
financing activities.. 248 4,645 10,609 12,506 19,732 7,011 129,749
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, JUNE 30,
1996 1996
--------- --------
<S> <C> <C>
NETWORK DATA (F):
Networks in operation....................................... 13 13
Cities served............................................... 19 19
Network clusters............................................ 3 3
Networks under construction................................. 4 4
Route miles................................................. 2,210 2,647
Fiber miles................................................. 106,080 127,063
Buildings connected......................................... 822 908
LEC-COs collocated(g)....................................... 44 69
VGE circuits(h)............................................. 186,292 279,864
Switches and remote switch modules installed................ 5 5
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, THREE MONTHS
----------------------------------- ENDED
JUNE 30,
1992 1993 1994 1995 1996 1996
---- ------ ------- ------- ------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT EMPLOYEE
INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
OTHER NETWORK AND OPERATING
DATA (I):
Network revenues(j).......... $ 0 $ 173 $ 1,028 $ 4,083 $12,186 $2,932
Capital expenditures(k)...... 0 2,559 27,445 33,522 57,290 7,814
Fiber lease financings during
period(l).................... 0 1,262 1,527 17,420 9,174 1,185
Employees(m)................. 4 20 40 95 155 155
</TABLE>
- --------
(a) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes, plus fixed charges excluding
capitalized interest plus amortization of deferred financing costs and
(ii) fixed charges consist of interest expensed and capitalized. For the
fiscal years ended March 31, 1992, 1993, 1994, 1995, 1996 and the three
months ended June 30, 1995, the Company's earnings were insufficient to
cover fixed charges by $0.2, $1.1, $4.8, $7.7, $13.8 and $3.1 million,
respectively. For the three months ended June 30, 1996, the Company's
earnings were sufficient to cover fixed charges $0.5 million.
19
<PAGE>
(b) Pro forma interest expense assumes (i) repayment of $25.0 million of the
Adelphia Note (as defined) at an interest rate of 11.28%, (ii) gross
proceeds attributable to the issuance of the Senior Notes of $163.7
million, (iii) issuance of the Senior Notes at an interest rate of 13.0%
and (iv) original issue discount attributable to the Warrants.
(c) On a pro forma basis, for the year ended March 31, 1996, the Company's
earnings would have been insufficient to cover fixed charges by $35.5
million.
(d) EBITDA consists of net income (loss) before equity in net loss of joint
ventures, gain on sale of investment, interest expense, income taxes,
depreciation and amortization for the periods presented. It is a measure
commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. However, it is
not intended to represent cash flow or results of operations in accordance
with generally accepted accounting principles. See the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
(e) For the fiscal years ended March 31, 1992, 1993, 1994, 1995, 1996 and the
three months ended June 30, 1995 and 1996, the Company's capital
expenditures (including capital expenditures relating to its wholly owned
Operating Companies) were, $0.1, $2.0, $3.1, $2.9, $6.1, $1.4 and $1.8
million, respectively, and the Company's investments in its less than
wholly owned Operating Companies and the South Florida Partnership were,
$0.0, $1.9, $5.5, $7.5, $12.8, $4.0 and $4.8 million, respectively, for
the same periods. See the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
(f) Network Data is derived from the Company's records and presents
information for the Operating Companies, but does not include information
for the South Florida Partnership.
(g) LEC-CO collocated means that the Company has interconnected its network at
the LEC-CO.
(h) Voice grade equivalent circuits.
(i) Except for employees as discussed in note (m) below, the data presented
represent selected unaudited combined operating data of the Company's
Operating Companies (including the Company's two wholly owned Operating
Companies) and the South Florida Partnership, and do not include data of
the Company on a stand alone basis.
(j) Includes the total of (i) the Operating Companies' revenues and (ii) the
South Florida Partnership's revenues.
(k) Represents investments made by the Operating Companies (including
investments made by Local Partners) and the South Florida Partnership in
property, plant and equipment (including capitalized leases).
(l) Fiber Lease Financing (as defined) represents the incremental borrowings
by the Operating Companies and the South Florida Partnership regarding
fiber assets accounted for as capital leases for each period presented.
(m) Employees includes combined employees of the Operating Companies and the
Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's audited Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus. Unless otherwise stated or the context
otherwise requires, the following information is as of June 30, 1996.
OVERVIEW
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent LECs
in its markets. Since its inception in October 1991, the Company has
experienced substantial growth, building from its original two partnerships
which served two markets to serving 13 markets and 19 cities through its 11
Operating Companies. Since June 30, 1996, the Company has added 2 markets, 14
cities and one Operating Company. The Operating Companies' customers are
principally small, medium and large businesses and government and educational
end users as well as IXCs. The Company is also building two additional
networks which are expected to serve 3 additional cities and which it will
manage and operate upon their expected completion during calendar 1996. The
Company believes that its strategy of utilizing Local Partners to develop its
networks has allowed the Company to build networks with greater coverage,
lower upfront and ongoing costs and superior service and reliability.
The Company's Operating Companies are made up of two wholly owned
subsidiaries and 11 investments where the Company owns 50% or less as of June
30, 1996. Results of the wholly owned subsidiaries are consolidated into the
Company's financial statements in this Prospectus. The Company's pro rata
share of the
20
<PAGE>
results of the Operating Companies where the Company owns 50% or less and the
South Florida Partnership, until the date of sale, are recorded under the
caption "Equity in net loss of joint ventures" in the Company's consolidated
financial statements and results of operations in this Prospectus utilizing
the equity method of accounting. Correspondingly, the Company's initial
investments in these Operating Companies and the South Florida Partnership are
carried at cost, and subsequently are adjusted for the Company's pro rata
share of the Operating Companies' and the South Florida Partnership's net
losses, additional capital contributions to the Operating Companies and the
South Florida Partnership, and distributions from the Operating Companies and
the South Florida Partnership to the Company. The Company is responsible for
the design, construction, management and operation of the networks owned by
all of the Operating Companies and receives management fees from the Operating
Companies for its management and network monitoring services. Management fees
are determined by Local Partner Agreements and vary depending upon the market.
Management fees are accounted for as revenues of the Company. To date, the
Company's principal source of revenues has been derived through management
fees from its Operating Companies.
Since its inception, the Company, in conjunction with its Local Partners,
has made substantial investments in designing, constructing and enhancing the
Operating Companies' fiber optic networks. As of June 30, 1996, the Company's
networks and networks under construction had approximately 2,647 route miles,
approximately 127,063 fiber miles and were connected to approximately 908
buildings in 17 markets. The Operating Companies have also installed five
switches or remote modules which serve five markets, and the Company has built
its Network Operations and Control Center (the "NOCC") in Coudersport,
Pennsylvania, which provides for remote control, monitoring and diagnosis of
all of the Operating Companies' networks. Based on its review of information
made publicly available by other CLECs, the Company believes it is the third
largest CLEC in the United States based upon its Operating Companies'
networks' route miles or buildings connected. Funding for the development of
the Operating Companies has come from investments by the Company and the Local
Partners as well as from Fiber Lease Financings which enable the Company to
finance the building of fiber optic plant through long-term leases. The
combined capital invested through June 30, 1996 in (i) the Operating
Companies' networks, (ii) investments in the Company related to the NOCC and
other activities and (iii) excluding investments in the South Florida
Partnership has totaled approximately $149.5 million. Due to savings achieved
in the construction of fiber optic networks by working with Local Partners,
the Company believes that building a comparable level of network
infrastructure without Local Partners would require a substantially greater
level of capital investment.
The Company believes that as a result of the Telecommunications Act, the
potential market for its services has expanded significantly. According to the
Company's analysis of FCC data and its knowledge of the industry, the Company
estimates that the market for traditional access services and switched
services in its existing markets is approximately $4.8 billion. The Company
plans to deploy switches or remote switching modules in the balance of its
markets by the end of 1996 in order to more fully address this potential
market opportunity. See "Business" and "Regulation."
RECENT DEVELOPMENTS
Issuance of 13% Senior Discount Notes and Warrants. On April 15, 1996, the
Company issued $329.0 million of 13% Senior Discount Notes due April 15, 2003,
and 329,000 Warrants to purchase an aggregate of 613,427 shares of its common
stock. Proceeds to the Company, net of discounts, commissions, and other
transaction costs were approximately $168.6 million. Such net proceeds were
used to pay $25.0 million of the Note Payable-Adelphia, to make loans of $3.0
million to certain key Company officers and to be used to fund the Company's
capital expenditures, working capital requirements, operating losses and its
pro-rata investments in joint ventures. Use of proceeds from the Senior Notes
also included the repayment of amounts related to capital expenditures,
working capital requirements, operating losses and pro-rata investments in
joint ventures totaling $12.8 million incurred during the period from January
1, 1996 to April 15, 1996. These amounts had been funded during the same time
period through advances from Adelphia.
21
<PAGE>
Sale of Partnership Interest in the South Florida Partnership. On May 16,
1996, the Company completed the sale of its 15.7% partnership interest in TCG
South Florida to Teleport Communications Group Inc. for an aggregate sales
price of approximately $11.6 million resulting in a pre-tax gain of
approximately $8.4 million. Amounts related to the South Florida Partnership
included in the Company's investments and equity in net loss of joint ventures
as of the sale date and for the three months ended June 30, 1996 were
approximately $3.2 million and ($0.2) million, respectively. As part of the
transaction, the Company was released from its covenant not to compete with
respect to the South Florida market. The Company plans to use the proceeds
from the sale to continue to expand and develop its existing markets, complete
new networks under construction and enter additional markets.
Other Changes in Partnership Interests. As discussed below, the Company
entered into agreements pursuant to which the Company's ownership interests in
certain of the Operating Partnerships have increased in three markets. These
transactions are consistent with the Company's goal to own at least a 50%
interest in its Operating Partnerships in the future, and where appropriate
the Company may consider similar transactions from time to time in its other
markets. Following the completion of these transactions, Hyperion owned at
least 50% of ten of its 17 then existing markets and markets under
construction.
Pursuant to a binding letter of intent with TKR Cable Company dated January
29, 1996, and a subsequent amendment to the related partnership agreement
dated May 8, 1996, the Company has agreed to make additional capital
contributions to its Louisville, Kentucky Operating Partnership (which will
also operate the network under construction in Lexington, Kentucky) and as a
result has increased its partnership ownership interest to 50%. The Company
estimates that as of June 30, 1996, the required additional capital
contributions will be approximately $2.3 million.
Pursuant to a Purchase Agreement dated July 25, 1996, the Company purchased
general and limited partnership interests in the Nashville, Tennessee
Operating Partnership from InterMedia and Robin Media on August 1, 1996. The
aggregate purchase price was approximately $5.0 million. As a result of this
acquisition, the Company's ownership interest in this partnership was
increased to 95%.
National Service Agreement with Major IXC. The Company has entered into a
National Service Agreement with AT&T pursuant to which the Company's networks
will be the IXC's preferred supplier of dedicated special access and switched
access transport services. The National Service Agreement requires the Company
to provide such services to AT&T at a discount from the tariffed or published
incumbent LEC rates. The National Service Agreement is in effect in all of the
Company's markets. The Company believes that only four other CLECs have
comparable National Service Agreements and have passed AT&T's network
validation tests and operational readiness testing.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 in Comparison with Three Months Ended June
30, 1995
Revenues increased 61% to $1.1 million for the three months ended June 30,
1996 from $0.7 million for the same quarter in the prior fiscal year. Growth
in revenues of $0.3 million resulted from continued expansion in the number
and size of Operating Companies and the resultant increase in management fees.
Revenues from the Vermont Operating Company increased $0.1 million due to
increases in the customer base.
Network operations expense increased 37% to $0.9 million for the three
months ended June 30, 1996 from $0.6 million for the same quarter in the prior
fiscal year. Substantially all of the increase was attributable to the
expansion of operations at the NOCC, due to the increased number and size of
the Operating Companies resulting in increased employee related costs and
equipment maintenance costs.
Selling, general and administrative expense increased 24% to $1.0 million
for the three months ended June 30, 1996 from $0.8 million for the same
quarter in the prior fiscal year. Corporate and NOCC overhead increased to
accommodate the growth in the number of Operating Companies managed and
monitored by the Company.
22
<PAGE>
Depreciation and amortization expense increased 178% to $0.7 million during
the three months ended June 30, 1996 from $0.3 million for the same quarter in
the prior fiscal year primarily as a result of increased amortization of $0.3
million in connection with the issuance of the 13% Senior Notes and Warrants,
and increased depreciation resulting from higher capital expenditures at the
NOCC and the wholly owned Operating Companies.
Gain on sale of investment recognized in the three month period ended June
30, 1996 was $8.4 million. On May 16, 1996 the Company completed the sale of
its 15.7% partnership interest in TCG South of Florida to Teleport
Communications Group Inc. for an aggregate sales price of $11.6 million,
resulting in a pre-tax gain of $8.4 million.
Interest income for the three months ended June 30, 1996 increased by $1.4
million from the same quarter in the prior fiscal year as a result of interest
earned on the proceeds of the 13% Senior Notes and Warrants.
Interest expense and fees increased 365% to $6.2 million during the three
months ended June 30, 1996 from $1.3 million for the same period in the prior
fiscal year. The increase was directly attributable to $4.9 million of
interest associated with the 13% Senior Notes partially reduced by lower
affiliate interest expense due to decreased borrowings from Adelphia.
Equity in net loss of joint ventures increased by 105% to $1.6 million
during the three months ended June 30, 1996 from $0.8 million for the same
quarter in the prior fiscal year as more nonconsolidated Operating Companies
began operations. The net losses of the Operating Companies for the three
months ended June 30, 1996 were primarily the result of revenues only
partially offsetting startup and other costs and expenses associated with
design, construction, operation and managment of the networks of the Operating
Companies, and the effect of the typical lag time between the incurrence of
such costs and expenses and the subsequent generation of revenues by a
network.
The number of nonconsolidated Operating Companies paying management fees to
the Company increased from nine at June 30, 1995 to eleven at June 30, 1996.
These Operating Companies and networks under construction paid management and
monitoring fees to the Company aggregating approximately $0.8 million for the
three months ended June 30, 1996, an increase of approximately $0.3 million
over the same quarter in the prior fiscal year. The Operating Companies' net
losses, including networks under construction, for the three months ended June
30, 1996 aggregated approximately $3.6 million as compared to $1.7 million for
the comparable prior period.
Net (loss) income increased from ($3.1) million for the three months ended
June 30, 1995 to $0.6 million for the same quarter in the current fiscal year.
The increase was primarily attributable to higher interest income and the gain
recognized for the sale of the Company's investment in TCG of South Florida,
partially reduced by greater interest expense associated with the Senior
Notes, increased equity in the net losses of the Company's joint ventures, and
increased depreciation and amortization.
EBITDA increased to $0.6 million for the three months ended June 30, 1996
from ($0.8) million for the same quarter in the prior fiscal year. Increased
revenues from management fees and the Vermont Operating Company were offset by
increased operating costs. The increase in interest income of $1.4 million
resulted from the investment of cash and cash equivalents generated from the
issuance of the Senior Notes and Warrants. EBITDA consists of net (loss)
income before equity in net loss of joint ventures, gain on sale of
investment, interest expense, income taxes, depreciation and amortization for
the periods presented. It is a measure commonly used in the telecommunications
industry and is presented to assist in understanding the Company's operating
results. However, it is not intended to represent cash flow or result of
operations in accordance with generally accepted accounting principles.
Fiscal 1996 in Comparison with Fiscal 1995
Revenues increased 92.1% to $3.3 million for the year ended March 31, 1996
("Fiscal 1996") from $1.7 million for the prior fiscal year. Approximately $1
million of the increase resulted from continued expansion in
23
<PAGE>
the number and size of Operating Companies and the resulting increase in
management fees, and $0.6 million of the increase resulted from the Company's
first wholly owned Operating Company, which operates in the Vermont market
(the "Vermont Operating Company"), generating revenues during the entire
fiscal year.
Network operations expense increased 94.6% to $2.7 million in Fiscal 1996
from $1.4 million for the prior fiscal year. Approximately $0.8 million of the
increase was attributable to the Vermont Operating Company reporting expenses
relating to its operations for the entire fiscal year and $0.4 million was
attributable to the expansion of operations at the NOCC, including systems
upgrades.
Selling, general and administrative expense increased 22% to $3.1 million in
Fiscal 1996 from $2.5 million for the prior fiscal year. Of the increase,
approximately $0.4 million was attributable to corporate overhead increases to
accommodate the growth in the number of Operating Companies managed by the
Company, and $0.1 million was attributable to the full twelve-months of
operations at the Vermont Operating Company.
Depreciation and amortization expense increased 156% to $1.2 million in
Fiscal 1996 from $0.5 million for the prior fiscal year primarily as a result
of increased capital expenditures at the Vermont Operating Company and the
NOCC.
Interest expense and fees increased 83% to $6.1 million in Fiscal 1996 from
$3.3 million for the prior fiscal year. The increase was directly attributable
to increased borrowings from Adelphia which were used to fund investments in
Operating Companies and the South Florida Partnership, capital expenditures
and the Company's operations. All of the Company's interest expense was non-
cash and was added to amounts due to Adelphia.
Equity in net loss of joint ventures increased by 139% to ($4.3) million in
Fiscal 1996 from ($1.8) million for the prior fiscal year as two more
nonconsolidated Operating Companies began operations. The net loss for the
nonconsolidated Operating Companies and the South Florida Partnership for the
year ended March 31, 1996 aggregated approximately ($14.5) million. The net
losses of the Operating Companies for the year ended March 31, 1996 were
primarily the result of revenues only partially offsetting startup and other
costs and expenses associated with the design, construction, operation and
management of the networks of the Operating Companies, and the effect of the
typical lag time between the incurrence of such costs and expenses and the
subsequent generation of revenues by a network.
The number of nonconsolidated Operating Companies paying management fees to
the Company increased from nine at March 31, 1995 to eleven at March 31, 1996.
Such eleven Operating Companies and the networks under construction paid
management and monitoring fees to the Company aggregating approximately $2.4
million for Fiscal 1996, an increase of approximately $1.1 million over Fiscal
1995.
Net income (loss) increased from ($7.7) million for Fiscal 1995 to ($13.6)
million for the current fiscal year. The increase was primarily attributable
to greater interest expense, increased equity in the net losses of the
Company's joint ventures, and increased depreciation and amortization, as
noted above.
EBITDA decreased 5% to ($2.3) million in Fiscal 1996 from ($2.1) million for
the prior fiscal year. Increased revenues from management fees and the Vermont
Operating Company were more than offset by increased operating costs.
Fiscal 1995 in Comparison with Fiscal 1994
Revenues increased 315% from $0.4 million to $1.7 million from the year
ended March 31, 1994 ("Fiscal 1994") to the year ended March 31, 1995 ("Fiscal
1995"). Approximately $1.0 million of the increase in
24
<PAGE>
revenues resulted from growth in the number of Operating Companies and the
resulting management fees. The number of nonconsolidated Operating Companies
paying management fees to the Company increased from three at March 31, 1994
to nine at March 31, 1995. Approximately $.2 million of the increase was due
to the Vermont Operating Company which commenced operations during Fiscal
1995.
Network operations expense increased 319% from $0.3 million in Fiscal 1994
to $1.4 million in Fiscal 1995. Approximately $0.8 million of the increase was
the result of the expansion of the Company's NOCC staff and technical
resources staff required to support an increasing number of Operating
Companies that were operating during Fiscal 1995 and the expansion of the
Vermont Operating Company staff.
Selling, general, and administrative expense increased 23% from $2.0 million
in Fiscal 1994 to $2.5 million in Fiscal 1995. The change was primarily due to
increases in accounting, regulatory and marketing personnel to support
increased management and monitoring operations and, to a lesser extent, to
additional personnel and related costs for the commencement of operations at
the Vermont Operating Company.
Depreciation and amortization expense increased by 145% from $0.2 million in
Fiscal 1994 to $0.5 million in Fiscal 1995. Approximately two-thirds of the
increase was attributable to the addition of telecommunications monitoring
equipment totaling $1.5 million and the expansion of the telecommunications
networks in the Company's wholly owned Operating Companies.
Interest expense and fees increased by 53% from $2.2 million in Fiscal 1994
to $3.3 million in Fiscal 1995. The increase was primarily due to the increase
in borrowings from Adelphia to fund investments in Operating Companies and the
South Florida Partnership, capital expenditures and the Company's operations.
All of the Company's interest expense was non-cash and was added to amounts
due to Adelphia.
Equity in net loss of joint ventures increased by ($1.3) million from ($0.5)
million in Fiscal 1994 to ($1.8) million in Fiscal 1995. The increase was
primarily due to the six nonconsolidated Operating Companies beginning
operations in Fiscal 1995, resulting in a total of nine nonconsolidated
Operating Companies at year end. The net loss for such nine Operating
Companies and the South Florida Partnership for the year ended March 31, 1995
was approximately ($7.3) million. The net losses of the Operating Companies
for Fiscal 1995 were primarily the result of revenues only partially
offsetting startup and other costs and expenses associated with the design,
construction, operation and management of the networks of the Operating
Companies, and the effect of the typical lag time between the incurrence of
such costs and expenses and the subsequent generation of revenues by a
network. The nine nonconsolidated Operating Companies and networks under
construction paid the Company an aggregate of approximately $1.3 million in
management and monitoring fees for Fiscal 1995, an increase of $1.0 million
over Fiscal 1994.
Net income (loss) increased ($3.0) million from ($4.7) million in Fiscal
1994 to ($7.7) million in Fiscal 1995. This increase was primarily the result
of the increase in the Company's operating loss, greater interest expense and
increased equity in the net losses of the Company's joint ventures, as noted
above.
EBITDA decreased by $0.2 million or 10% from ($1.9) million in Fiscal 1994
to ($2.1) million in Fiscal 1995. This decrease was the result of increasing
expenses incurred in advance of new networks becoming operational, which more
than offset increased revenues.
SUPPLEMENTARY OPERATING COMPANY REVENUE ANALYSIS
The Company believes that working with Local Partners to develop markets
enables the Company to build larger networks in a rapid and cost effective
manner. In pursuit of this strategy, the Company has entered into nine joint
ventures with Local Partners where the Company owns 50% or less of each
partnership or corporation. As a result of the Company's ownership position in
these joint ventures, a substantial portion of the Operating Companies'
results are reported by the Company on the equity method of accounting for
investments which only reflects the Company's pro rata share of net income or
loss of the Operating Companies. Because all of the assets,
25
<PAGE>
liabilities and results of operations of the Operating Companies are not
presented in the Company's consolidated financial statements, financial
analysis of these Operating Companies based upon the Company's results does
not represent a complete measure of the growth or operations of the Operating
Companies.
In order to provide an additional measure of the growth and performance of
all of the Company's networks, management of the Company analyzes a variety of
financial information including revenues. Revenues of the Operating Companies
indicate the level of activity in the Company's networks. Capital expenditures
of the Operating Companies along with network construction statistics, such as
route miles and buildings connected, indicate the extensiveness of the
Company's construction and expansion efforts in those markets. The financial
information set forth below, however, is not indicative of the Company's
overall financial position and investors should not place undue reliance on
such information when considering an investment in the Senior Notes.
The Operating Companies have shown substantial growth in revenues since the
Company's inception in October 1991. Total combined revenues for the Operating
Companies has increased approximately 83% from approximately $1.6 million for
the three months ended June 30, 1995 to $2.9 million during the three months
ended June 30, 1996. The Operating Companies' revenues for the fiscal quarter
ended March 31, 1996 were approximately $2.4 million. There can be no
assurance, however, that the Operating Companies will continue to experience
revenue growth at this rate, or at all. See "Risk Factors--Negative Cash Flow
and Operating Losses; Limited History of Operation." Furthermore, there can be
no assurance that the Company will be able to benefit from such growth in
revenues if such growth occurs. See "Risk Factors--Holding Company Structure;
Inability to Access Cash Flow."
<TABLE>
<CAPTION>
REVENUES
----------------------------------
THREE MONTHS
ENDED JUNE 30
FISCAL FISCAL FISCAL
CLUSTER 1994 1995 1996 1995 1996
- ------- ------ ------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Northeast.................................... $706 $1,492 $3,991 $ 796 $1,271
Mid-Atlantic................................. 4 288 735 175 345
Mid-South.................................... -- 70 473 75 239
Other Networks............................... 255 1,401 2,564 555 1,077
---- ------ ------ ------ ------
Total...................................... $965 $3,251 $7,763 $1,601 $2,932
==== ====== ====== ====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The development of the Company's business and the installation and expansion
of the Operating Companies' networks, combined with the construction of the
Company's NOCC, have resulted in substantial capital expenditures and
investments during the past several years. Capital expenditures by the Company
were $3.1 million, $2.9 million and $6.1 million for Fiscal 1994, Fiscal 1995
and Fiscal 1996, respectively and $1.4 million and $1.8 million for the three
months ended June 30, 1995 and 1996, respectively. Further, investments made
in the Company's nonconsolidated Operating Companies and the South Florida
Partnership by the Company were $5.5 million, $7.5 million and $12.8 million
in Fiscal 1994, Fiscal 1995 and Fiscal 1996, respectively, and $4.0 million
and $4.8 million for the three months ended June 30, 1995 and 1996,
respectively. The Company expects that it will continue to have substantial
capital and investment requirements. The Company also expects to have to
continue to fund operating losses as the Company develops and grows its
business. See "Risk Factors--Significant Future Capital Requirements."
Through June 30, 1996, Adelphia had made loans and advances totaling
approximately $64.8 million, including accrued interest, in the Company and
$6.7 million in fiber network construction leased to certain Operating
Companies. During April 1996, the Company repaid $37.8 million of such loans
and advances. In addition, Local Partners have invested approximately $57.4
million as their pro rata investment in those networks. These amounts exclude
previous investments in the South Florida Partnership which were sold on May
26
<PAGE>
16, 1996. These partners have also provided additional capital of $20.6
million for the construction of the Company's networks through the partnership
agreements by funding the fiber construction of the network and leasing the
fiber to the partnership under long-term, renewable agreements. Collectively,
Adelphia's and the Company's partners' investments and the Fiber Lease
Financings have totaled $149.5 million from the Company's inception through
June 30, 1996.
The Company has experienced negative cash flow since its inception. A
combination of operating losses, the substantial capital investments required
to build the Company's wholly owned networks and its state-of-the-art NOCC,
and incremental investments in the Operating Companies has resulted in
substantial negative cash flow. See "Risk Factors--Negative Cash Flow and
Operating Losses; Limited History of Operations." For the fiscal years ended
March 31, 1994, 1995 and 1996, cash used in operating activities totalled $2.1
million, $2.1 million and $.8 million, respectively, cash used in investing
activities totalled $8.6 million, $10.4 million and $18.9 million,
respectively, and cash provided by financing activities totalled $10.6
million, $12.5 million and $19.7 million, respectively. For the three month
periods ended June 30, 1995 and 1996, cash used in investing activities
totalled $5.4 million and cash provided by investing activities totalled $5.1
million, respectively. Cash provided by financing activities totalled $7.0
million and $129.7 million, respectively, for the three month periods ended
June 30, 1995 and 1996. Prior to April 15, 1996, funding of the Company's cash
flow deficiency was principally accomplished through additional borrowings
from Adelphia. Prior to April 15, 1996, interest and fees on this unsecured
credit facility were based upon the weighted average cost of unsecured
borrowings of Adelphia. The average interest rate charged for all periods was
11.3% through April 15, 1996 (excluding fees charged which were based on the
amount borrowed) and 16.5% for the period since April 16, 1996.
The Company repaid $25.0 million of its indebtedness to Adelphia from the
proceeds of the Offering on April 15, 1996. As of April 15, 1996,
approximately $26.1 million of outstanding indebtedness owed to Adelphia was
evidenced by an unsecured subordinated note due April 16, 2003, that accrues
interest at 16.5% and is subordinated to the Senior Notes. Interest on the
subordinated note is payable quarterly in cash, through the issuance of
identical subordinated notes, or in any combination thereof, at the option of
the Company. Also, proceeds from the Offering were used on April 29, 1996 to
repay amounts related to capital expenditures, working capital requirements,
operating losses and pro-rata investments in joint ventures totalling $12.8
million incurred during the period January 1, 1996 to April 15, 1996, which
amounts had been funded during the same period through advances from Adelphia.
See "Certain Relationships and Transactions."
The competitive local telecommunication service business is a capital-
intensive business. The Company's operations have required and will continue
to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's networks, (ii) the
expansion and improvement of the Company's NOCC and (iii) the design,
construction and development of additional networks. The Company plans to make
substantial capital investments and investments in Operating Companies in
connection with the deployment of switches in all of its operating markets by
the end of 1996, the expansion of existing markets and the construction and
development of new markets. Expansion of the Company's networks will include the
geographic expansion of the Company's existing clusters and the development of
new markets. The Company expects to build networks in approximately ten
additional markets by the end of 1997. The Company estimates that it will
require approximately $110 million to $115 million to fund anticipated capital
expenditures, working capital requirements and operating losses of the Company
and to make investments in existing and new Operating Companies during calendar
1996 and 1997. The Company expects that it will have adequate resources to fund
such expenditures through the proceeds from the sale of the Units and internal
sources of funds including cash flow from operations. The Company also expects
to raise additional capital through a private or public equity placement in the
next 12 to 18 months. There can be no assurance, however, as to the availability
of funds from internal cash flow or from the private or public equity markets.
See "Risk Factors--Significant Future Capital Requirements." On May 16, 1996,
the Company sold its interests in the South Florida Partnership and increased
its interests in three other markets. See "Prospectus Summary--Recent
Developments."
27
<PAGE>
In addition, the Company expects that pro rata investments by the Company
and its Local Partners as well as Fiber Lease Financings and anticipated
vendor financings will be adequate to fund the requirements of the Operating
Companies for capital expenditures, operating losses and working capital for
existing networks, networks currently under construction and certain of the
Company's planned additional markets during calendar years 1996 and 1997.
There can be no assurance as to the availability of funds from internal cash
flow, the Local Partners or other external sources or as to the terms of such
financings. In addition, the Indenture provides certain restrictions upon the
Company's ability to incur additional indebtedness. The Company's inability to
fund pro rata investments required for the Operating Companies could result in
a dilution of the Company's interest in the individual Operating Companies or
could otherwise have a material adverse effect upon the Company and/or the
Operating Companies.
EFFECT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 121, the Company reviews the carrying amounts of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. The adoption of SFAS No. 121 in the year ended March 31,
1995 had no effect on the consolidated financial statements of the Company.
IMPACT OF INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations or on the operations of the Operating
Companies over the past three fiscal years.
BUSINESS
INDUSTRY HISTORY
Deregulation, technological change and the increasingly information
intensive nature of the United States economy have significantly expanded the
role of telecommunications in business. In particular these changes have
accelerated the growth of certain aspects of the telecommunications market.
For example, industry sources estimate that voice traffic is growing at a rate
of approximately seven percent per year while data communications are growing
at three to five times that rate due to the increase in computerized
transaction processing and video applications, the movement to distributed
data processing and the rise of decentralized management structures, all of
which require the transmission of large amounts of information with speed,
accuracy and reliability.
The present structure of the U.S. telecommunications market resulted largely
from the divestiture of the "Bell System" in 1984 (the "Divestiture"). As part
of the Divestiture, seven RBOCs were created to offer services in
geographically defined areas called LATAs. The RBOCs were separated from the
long distance provider, AT&T, resulting in the creation of two distinct
industries: local exchange and interexchange (commonly known as long
distance). The Divestiture facilitated direct, open competition in the long
distance segment of the telecommunications market; however, it did not promote
competition in the local telecommunications market. Nonetheless, several
factors have served to promote competition in the local telecommunications
market and the emergence of competitive access providers ("CAPs"), including
(i) the incumbent LECs' monopoly position and regulated pricing structure,
which provided little incentive for incumbent LECs to reduce prices, improve
service or upgrade their networks, (ii) customer demand for an alternative to
the incumbent LEC monopoly, which demand grew rapidly and was spurred in part
by the development of competitive activities in the long distance market and
increasing demand for high quality,
28
<PAGE>
reliable services, (iii) the advancement of fiber optic and digital electronic
technologies (such as ATM and SONET), which combined the ability to transmit
voice, data and video at high speeds with greatly increased capacity and
reliability as compared to the incumbent LECs' copper-based networks and (iv)
the significant fees, called "access charges," IXCs are required to pay to
incumbent LECs for originating and terminating calls on the incumbent LEC
networks.
Established in the mid 1980s, CAPs were among the first competitors in the
local telecommunications market. CAPs provided non-switched services (i.e.,
dedicated special access and private line) by installing fiber optic
facilities connecting IXCs POPs within a metropolitan area and, in some cases,
connecting end users (primarily large businesses and government agencies) with
IXCs. CAPs used the substantial capacity and economies of scale inherent in
fiber optic cable to offer customers service that was generally less expensive
and of a higher quality than could be obtained from incumbent LECs. In
addition, CAPs offered customers shorter installation and repair intervals and
improved service reliability in comparison to incumbent LECs.
The Telecommunications Act, which was adopted on February 8, 1996, is
considered to be the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934 and will
substantially affect the development of competition for local telephone
services. Among the more significant provisions of the Telecommunications Act
are (i) the removal of legal barriers to entry in local telephone markets,
(ii) the requirement that incumbent LECs "interconnect" with competitors,
(iii) the establishment of procedures for incumbent LEC entry into new
markets, such as long distance and cable television, (iv) the relaxation of
the regulation of telecommunication services provided by incumbent LECs and
others and (v) the establishment of a subsidy mechanism for the preservation
of universal telephone service. The Company believes the Telecommunications
Act will position the competitive local telecommunications business for
significant growth as CAPs evolve into CLECs by expanding their networks and
service offerings. Of the $32 billion of access fees paid by IXCs to LECs in
1994, CAPs accounted for $294 million, or less than 1%. The Company expects
that the anticipated entry of incumbent LECs into the long distance business
will increase this penetration rate if IXCs seek alternatives to incumbent
LECs as sources of access to their customers. BOCs entering the inter-exchange
market also may use CAP facilities in areas outside their home regions.
Regulatory reform, together with increasing customer demand, will create more
opportunities for CLECs to introduce additional services, expand their
networks and address a larger customer base. The Company believes that these
changes afford CLECs the potential to grow significantly over the next several
years. The Company believes, based on data compiled by the FCC, that the
passage of the Telecommunications Act combined with earlier state regulatory
developments have increased the potential market for CLECs from approximately
$26.3 billion to approximately $97.1 billion annually due to the opening of
the market for switched services. This new market opportunity will permit
CLECs to offer a full range of local telecommunications services including
local dial tone, local calls, custom calling features and intraLATA toll
services for both business and residential customers. See "Competition" and
"Regulation--Overview."
THE COMPANY
Hyperion is a leading CLEC that designs, constructs, operates and manages
state-of-the-art, fiber optic networks and facilities. Based on its review of
information made publicly available by other CLECs, the Company believes it
operates one of the three largest CLECs in the United States based upon route
miles and buildings connected. The Company's networks work in conjunction with
IXCs such as AT&T, MCI, Sprint, WorldCom and others in order to offer small,
medium and large businesses, government and education end users a broad array
of integrated, high quality voice, video and enhanced data communications
services. The Company, through its 13 networks, currently offers traditional
access services and has also installed switches or remote switching capability
in five of its networks and plans to offer switched services, including
customer dial tone, in all of its operating markets by the end of 1996. Four
of the Company's networks also offer enhanced data services to their customers
such as frame relay and ATM data transport. These services, along with the
long distance services provided by IXCs, enable the Company to provide an
integrated telecommunications service offering to network customers that is
more reliable, has a superior level of service and is priced lower relative to
that of the incumbent LECs in the markets served by the Company's networks.
29
<PAGE>
As of June 30, 1996, the Company managed and operated 13 networks which were
primarily clustered in three regions located in the eastern half of the United
States and which served 19 cities with populations from at least 25,000 to
more than 600,000. The Company also has four new networks under construction
which will serve 17 additional cities and will be managed and operated by the
Company upon their expected completion in calendar year 1996. Eleven of the
Company's networks and three of its networks under construction are owned in
partnership with several major cable television operators including Tele-
Communications, Inc., Time Warner/Newhouse, Continental Cablevision, TKR
Cable, Lenfest Communications, InterMedia Partners and Multimedia/Gannett, and
an electric utility, PECO Energy, owner of the Philadelphia Electric Company.
The Company believes that working with Local Partners significantly reduces
the cost and time in developing a network through utilization of existing
cable or utility facilities. The remaining two operating networks and one
network under construction are wholly owned by the Company and lease fiber
capacity from Adelphia to achieve similar time and cost savings in developing
the networks. Due to savings achieved in the construction of fiber optic
networks by working with Local Partners, the Company believes that building a
comparable level of network infrastructure without Local Partners would
require a substantially greater level of capital investment.
The Company has targeted markets primarily in the eastern half of the United
States where it can leverage the Company's existing network infrastructure and
take advantage of the economies of scale associated with operating networks in
contiguous markets. Since the Company's inception in October 1991 through June
30, 1996, the Company and its partners have invested approximately $149.5
million to build and develop the overall network infrastructure. As of June
30, 1996, the Company's 13 operating networks served 19 cities, and along with
the four networks under construction, included approximately 2,674 route miles
of fiber optic cable and were connected to approximately 908 buildings. The
Company intends to increase the density of its existing network clusters and
expand into new geographical markets or clusters through the construction of
approximately ten additional networks by the end of 1997. The Company will
continue to focus on developing networks in conjunction with Local Partners
and managing and operating these networks on behalf of the Operating
Companies. The Company's goal for future partnerships is to maintain at least
a 50% equity interest in these networks. The Company has recently entered into
a partnership agreement amendment with TKR and an agreement with InterMedia
and increased its equity interests to 50% in the Louisville and Lexington
markets and to 95% in the Nashville market. Following the completion of these
transactions, Hyperion owned at least 50% of ten of its 17 then existing
markets and markets under construction. See "Prospectus Summary--Recent
Developments."
COMPANY STRATEGY
The Company, through its networks, is a leading provider of integrated local
telecommunications services to small, medium and large businesses, government
and educational end users and IXCs in its existing markets. The Company
differentiates its service offering by partnering with local cable television
operators and utility companies to develop networks that will provide
customers with greater market coverage, lower costs and superior service. The
Company's networks leverage the IXCs' name recognition and reputation for
quality and reliability by becoming preferred suppliers for IXCs of local
telecommunications services in the Company's markets. The IXCs market their
long distance services in conjunction with the Company's local service
offerings to provide end users with a fully integrated telecommunications
service offering in all of the Company's operating markets. Principal elements
of the Company's network, market and customer strategies include:
Network Strategy
Develop a Rapid Entry/Low Cost Approach with Local Partners. The Company
works with a Local Partner in order to significantly reduce the cost and time
to construct a fiber optic network, enable the Company to rapidly begin
offering services and lower the overhead associated with operating and
maintaining the Company's networks. Advantages of building the Company's
networks with Local Partners include (i) sharing the cost of building the
fiber optic network with a cable television system or utility system which the
Company believes reduces the cost of aerial fiber construction by
approximately 62%, (ii) reducing the time and cost of
30
<PAGE>
obtaining access to rights-of-way and building entrances and (iii) enabling
the Company to leverage the Local Partners' experience and capabilities for
building and maintaining fiber optic cables thereby significantly reducing the
upfront and ongoing costs of a fiber optic network. Through the partnerships,
the Company has financed its expansion at a lower cost relative to its
competitors by utilizing pro rata equity investments and Local Partner
financings of a significant portion of fiber construction. Local Partners
provide most of the funds for the fiber build in a network and lease the fiber
capacity back to the partnership under long-term agreements. The partnership
purchases and owns the electronic and customer premises equipment associated
with the networks.
The Company is able to lower the cost of building fiber optic networks by
working with Local Partners who own existing communications networks and
organizations that design, build and maintain these networks. The Company
achieves savings in the design, construction and maintenance of these fiber
optic networks because a substantial portion of these activities are shared
with existing efforts of the Local Partner. A significant portion of the
upfront savings is achieved in the construction of the fiber optic network.
The Company believes that, based upon its experience of building fiber optic
networks with Local Partners, the Company is able to achieve approximately a
62% reduction in aerial fiber optic construction costs versus constructing an
aerial fiber optic network without a Local Partner. The Company estimates that
approximately 70% of its network construction will be aerial and that the
Company can achieve similar savings in underground construction where conduit
is available. These estimates are based upon historical experience, and there
can be no assurance that the Company will be able to achieve similar results
in future efforts. These cost savings are achieved primarily through the
sharing of pole attachment costs ("Pole Attachment Costs") and the elimination
of costs of the engineering and rearrangement of cables to prepare telephone
poles for the attachment of new fiber optic cable ("Make Ready Costs"). An
analysis of the estimated cost savings for the Company for one mile of aerial
construction is set forth in the following table.
<TABLE>
<CAPTION>
COSTS WITH LOCAL PARTNER WITHOUT LOCAL PARTNER
- ----- ------------------ ---------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Make Ready Costs........... $ 0.0(a) $18.0(b)
Pole Attachment Costs...... 3.4(c) 5.0
Fiber Costs................ 8.0(d) 8.0
Splicing Costs............. 0.6(e) 0.6
----- -----
Total.................... $12.0(f) $31.6
===== =====
</TABLE>
- --------
(a) Assumes a fiber overlash of existing cable plant.
(b) Assumes an average cost of $200 per pole, 40 poles per mile, to move the
telephone and cable television wires in the communications space and the
replacement of two poles per mile.
(c) Assumes the payment of a pro rata portion (approximately 33%) of such
costs by the Local Partner with respect to capacity to be available for
such partner's use.
(d) Represents the cost of the Operating Company's fiber that is installed on
the pole.
(e) Represents the cost of cutting and integrating new fiber components.
(f) In the above analysis, this would be the amount amortized by an applicable
Fiber Lease Financing between an Operating Company and its Local Partner.
Build Broad Network Coverage. The Company intends to build substantially
larger networks than the networks of the CLECs it competes with in its
markets. As of June 30, 1996, in all of the markets in which the Company and
its networks operate, management believes that the Company has the broadest
network coverage in terms of route miles of any of its CLEC competitors. The
Company believes that expanded network coverage will enable the Company to (i)
provide broader and more reliable coverage for network customers, (ii) carry a
greater amount of traffic on its own networks rather than on the networks of
other carriers thereby increasing the Company's revenues and profit margins,
(iii) increase the potential market available to the Company due to the
greater number of buildings, LEC-COs and customers that the Company's networks
can service, (iv) improve the value of the Company's networks to IXCs,
cellular providers and new telecommunications providers such as PCS operators
that need wide backbone coverage, (v) offer services in areas where there are
fewer potential
31
<PAGE>
CLECs with facilities and (vi) leverage the fixed cost structure of the
Company's networks, particularly with regard to network electronics such as
switches.
Market Strategy
Expansion through Development of Network Clusters. The Company's networks
are located primarily in the eastern half of the United States. The Company
expects to continue to focus on this region due to the eastern location of the
Company's existing networks and the Company's NOCC and headquarters. The
Company also believes that the eastern half of the United States, particularly
the Northeast, has greater concentrations of large business, government and
education end users and telecommunications traffic. The Company intends to
build networks in ten additional markets located near existing clusters or in
one or more new clusters by the end of 1997. Management believes that there
are significant operating and marketing advantages to locating its networks in
clusters. Clustering enables the Company to (i) take advantage of economies of
scale in management, construction, network operations and sales and marketing,
(ii) optimize the networks' switching capacity by utilizing remote switch
capacity in nearby cities that do not have switches, (iii) offer services to
lower density traffic areas in which the Company's networks are less likely to
face strong competition from incumbent LECs and other CLECs and (iv) increase
the networks' ability to offer highly reliable, end-to-end connectivity on a
regional basis. The Company also believes that creating regional networks will
enable the Company to gain a greater share of higher margin long distance
transport traffic.
Customer Strategy
Develop Strategic Relationships with IXCs. The Company, through its
networks, provides customers with an integrated, one-stop shopping approach to
their telecommunications needs through its strategic relationships with IXCs
such as AT&T, MCI, Sprint, WorldCom and others. The goal of these
relationships is for the Company's networks to offer their local services in
conjunction with the long distance services of these relationship IXCs.
Management believes that working in partnership with IXCs instead of as a
competitor will be attractive to IXCs and enable the Company to (i) utilize
extensive market information from the IXCs regarding traffic patterns and
building requirements to more optimally construct and extend its networks,
(ii) work closely with IXC account teams to provide an integrated service
approach to end users, (iii) increase market penetration by capitalizing on
the IXCs' name recognition and (iv) lower sales and marketing costs by
utilizing the extensive marketing resources and salesforce of the IXCs to
market the networks' products and services. In pursuing this strategy, the
Company has entered into the National Service Agreement with a major IXC
pursuant to which the Company's networks will be the IXC's preferred supplier
of dedicated special access and switched access transport services. The
National Service Agreement requires the Company to provide such services to
the IXC at a discount from the tariffed or published LEC rates. The National
Service Agreement is currently in effect in all of the Company's markets. See
"Prospectus Summary--Recent Developments."
Expand Enhanced Service Provider Offerings. Four of the Company's networks
operate in partnership with !NTERPRISE, a leading, nationwide network
integrator that designs, develops and deploys state-of-the-art data networks
(including both network services and equipment) to support and enhance the
information systems with which the networks' customers operate their
businesses. Pursuant to the partnership agreements, !NTERPRISE co-markets
enhanced services, including frame relay, ATM data transport, business video
conferencing, private line data interconnect service and LAN connection and
monitoring services to the networks' customers in the networks' respective
markets. The Company believes that the partnerships with !NTERPRISE provide
the opportunity to offer network customers a full complement of enhanced
services more rapidly and without the Company incurring the cost and overhead
of establishing its own nationwide enhanced services marketing, sales and
installation effort. The Operating Companies intend to enter into additional
agreements with !NTERPRISE and other service integrators in the future.
COMPANY SERVICES
Traditional Access Services
Special Access and Private Line Services. Non-switched dedicated
connections, including high capacity interconnections between (i) POPs of an
IXC, (ii) the POPs of different IXCs, (iii) large end users and their
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<PAGE>
selected IXCs and (iv) different locations of particular customers. These
services are billed at a flat, non-usage sensitive, monthly rate.
Collocated Special Access Services. A dedicated line carrying switched
transmissions from the IXC POP, through the LEC-CO to the end user.
Switched Access Transport Services. A dedicated line carrying switched
transmissions from the LEC-CO to an IXC POP.
Long Distance Transport Services. Non-switched, high capacity
interconnection services sold on a wholesale basis to IXCs and cellular and
PCS operators.
Switched Services
Local Exchange Services. Switched services providing dial tone to business
customers.
Long Distance Services. Switching and transport of interexchange traffic,
including voice, data and video billed on a minutes-of-use basis. The Company
intends to offer this service to its customers in conjunction with IXCs with
which it has developed strategic relationships.
Enhanced Services
The Company and the Operating Companies currently offer, or intend to offer,
their customers a broad array of high bandwidth, enhanced data services,
including frame relay, ATM transport services, business Internet access and
high speed video conferencing. Operating Companies currently offer some of
those services to customers in four markets through partnerships with
!NTERPRISE. !NTERPRISE is a wholly owned subsidiary of US West that provides
enhanced data services to end users throughout the country. The Company
intends to service additional markets through joint ventures with !NTERPRISE
or other enhanced service providers. See "--Customer Strategy."
MARKET SIZE
The following table sets forth the Company's estimate, based upon an
analysis of industry sources including industry projections and FCC data, of
the market size in the Company's current operating markets and markets under
construction for the services the Company offered in calendar year 1995. The
estimates, however, do not include estimates for long distance transport and
enhanced services which the Company expects will provide substantial revenue
opportunities. See "--Company Services." There is currently limited direct
information relating to these markets and therefore a significant portion of
the information set forth below is based upon estimates and assumptions made
by the Company. Management believes that these estimates are based upon
reliable information and that its assumptions are reasonable. There can be no
assurance, however, that these estimates will not vary substantially from the
actual market data. Investors should not place undue reliance on this
information in making an investment decision.
<TABLE>
<CAPTION>
TRADITIONAL TOTAL REVENUE(B)
CLUSTER ACCESS SERVICES(A) SWITCHED SERVICES POTENTIAL
- ------- ------------------ ----------------- ----------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Northeast................. $ 67.9 $1,591.2 $1,659.1
Mid-Atlantic.............. 109.3 1,884.5 1,993.8
Mid-South................. 28.1 600.9 629.0
Other Networks............ 23.4 480.4 503.8
------ -------- --------
Total................... $228.7 $4,557.0 $4,785.7
====== ======== ========
</TABLE>
- --------
(a) Excludes long distance transport.
(b) Excludes the potential market for enhanced services.
33
<PAGE>
THE COMPANY'S MARKETS
Overview
The Company currently manages and operates 13 networks. The networks are
owned by the Operating Companies, eight of which are Operating Partnerships
and three of which are Operating Corporations. Two of the Operating
Corporations are wholly owned subsidiaries of the Company. The Company manages
and operates these networks through a combination of local management and
through the Company's headquarters and NOCC in Coudersport, Pennsylvania, and
the Company's marketing offices in Pittsburgh, Pennsylvania. The following
operating network market statistics are as of June 30, 1996.
OPERATING NETWORK MARKET STATISTICS
<TABLE>
<CAPTION>
DATE HYPERION
COMPANY MARKETS OPERATIONAL(A) INTEREST LOCAL PARTNERS
- --------------- -------------- -------- -------------------------
OPERATING NETWORKS
- ------------------
<S> <C> <C> <C>
Northeast Cluster
Albany, NY(b)............. 2/95 50.0% Time Warner/Newhouse
Binghamton, NY(b)......... 3/95 20.0 Time Warner/Newhouse
Buffalo, NY............... 1/95 40.0 Tele-Communications, Inc.
Time Warner/Newhouse
Syracuse, NY(b)........... 8/92 50.0 Time Warner/Newhouse
Vermont................... 11/94 100.0 (c)
Mid-Atlantic Cluster
Charlottesville, VA....... 11/95 100.0 (c)
Harrisburg, PA............ 4/95 50.0 Lenfest Communications
New Brunswick, NJ......... 11/95 19.7 TKR Cable(d)
Richmond, VA.............. 9/93 37.0 Continental Cablevision
Mid-South Cluster
Louisville, KY............ 3/95 50.0(e) TKR Cable
Nashville, TN............. 11/94 95.0(e) InterMedia Partners
Other Networks
Jacksonville, FL.......... 9/92 20.0 Continental Cablevision
Wichita, KS............... 9/94 49.9 Multimedia/Gannett
NETWORKS UNDER
CONSTRUCTION(F)
- ---------------
Mid-Atlantic Cluster
Morristown, NJ............ 1996(g) 19.7 TKR Cable(d)
Philadelphia, PA.......... 1996(g) 50.0 PECO Energy
Scranton/Wilkes-Barre, PA. 1996(g) 100.0 (c)
Mid-South Cluster
Lexington, KY............. 1996(g) 50.0(e) TKR Cable
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP; (ii) the network is capable of accepting traffic from IXCs and
end users; (iii) the Company's central office is fully functional and (iv)
the initial network SONET fiber rings have been completed.
(b) The interests in the Albany, Binghamton and Syracuse markets are all owned
by one Operating Partnership.
34
<PAGE>
(c) Adelphia or its affiliate leases 100% of the fiber capacity to the
Operating Companies in these markets.
(d) Sutton Capital Associates also owns a minority interest.
(e) The Company's interest in these markets has recently changed. See
"Prospectus Summary--Recent Developments."
(f) The Company has entered into binding agreements with respect to the
construction of these networks.
(g) The Company expects each of these networks to be operational between
August 1996 and December 1996.
CLUSTER STATISTICS(A)
<TABLE>
<CAPTION>
LATEST
ROUTE FIBER BUILDINGS QUARTER
CLUSTER MILES MILES CONNECTED VGES(B) REVENUES(C)
- ------- ----- ------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
Northeast........................... 937 44,990 265 94,608 $1,271
Mid-Atlantic........................ 699 33,557 189 59,088 345
Mid-South........................... 364 17,472 157 36,408 239
Other Networks...................... 647 31,044 297 90,360 1,077
----- ------- --- ------- ------
Total............................. 2,647 127,063 908 279,864 $2,932
===== ======= === ======= ======
</TABLE>
- --------
(a) Non-financial information is as of June 30, 1996.
(b) Voice grade equivalents circuits.
(c) Latest Quarter Revenues is for the Operating Companies for the quarter
ended June 30, 1996.
OPERATING AGREEMENTS
Generally, subsidiaries of the Company enter into partnership agreements
with Local Partners to take advantage of the benefits of building networks in
conjunction with local cable television or utility operators. The typical
Operating Partnerships are formed and operated pursuant to three key
agreements: (i) a partnership agreement between the Company or one of its
wholly owned subsidiaries and a cable television operator or electric utility
(the "Local Partner Agreement"); (ii) a fiber capacity lease agreement between
the Local Partner and the Operating Partnership (the "Fiber Lease Agreement");
and (iii) a management agreement between the Operating Company and the Company
or one of its subsidiaries (the "Management Agreement"). One of the Operating
Partnerships and two of the Operating Corporations have also entered into
agreements with !NTERPRISE, a wholly owned subsidiary of US West, to co-market
enhanced services.
Local Partner Agreements
Each Local Partner Agreement establishes the structure of the applicable
Operating Partnership by determining, among other things, the partner's
capital contribution requirements, capital structure, purpose and scope of
business activities, transfer restrictions, dissolution procedures, duration
and competition restrictions, as well as the voting and buy/sell rights and
rights of first refusal of the partners of the Operating Partnership.
Ownership and Capital Contributions. The initial capital contributions and
percentage of ownership of the Operating Partnerships vary. Some of the Local
Partner Agreements establish maximum capital contributions such that each
partner's ultimate aggregate capital contribution is determined at the
Operating Partnership's inception. Initial capital contributions are paid on
an installment basis as determined by a management committee. Unless a
majority vote of the partners determines otherwise, capital contributions in
excess of the initial capital contribution are not required. Generally, the
percentage of ownership is also fixed at the Operating
35
<PAGE>
Partnership's inception. Absent an agreement by the partners, generally, the
only circumstances that result in the dilution of such partner's ownership
interest are a partner's failure to make a capital contribution or its failure
to exercise a right of first refusal.
Matters Requiring a Vote. Most partner votes of an Operating Partnership
require only a majority vote; however, a unanimous vote of the partners is
required for, among other things, expansion of the scope of the business
activities in the defined business area, admission of additional partners and
merger or consolidation with any other entity if the Operating Partnership is
not the surviving entity.
Distributions. Generally, the Local Partner Agreements allow for
distributions to the partners; however, the Local Partner Agreements vary with
regard to the procedure for determining if, when and how much of a
distribution should be made. In one Local Partnership Agreement, the Company,
through its affiliate, controls such determinations. In the remaining Local
Partner Agreements, the partners or the partnership's Managing Committee makes
such determinations by either majority approval or unanimous consent.
Transfer of Ownership. The Local Partner Agreements generally prohibit the
transfer of partnership interests, including most changes in control.
Generally, transfers of entire partnership interests to subsidiaries of a
partner's parent corporation and the sale or disposition of all or
substantially all of the stock or assets of a partner's parent are expressly
permitted in the typical Local Partner Agreement.
Rights of First Refusal; Buy/Sell Agreements. The partners of most of the
Operating Partnerships also retain certain rights of first refusal and
buy/sell rights. Generally, after a specified period of time, either partner
may transfer its interest to an unrelated third party if such partner first
offers its interest to the other partner at the same terms and the other
partner elects not to purchase the interest. In addition, in most of the
Operating Partnerships, either partner can, after a specified period of time,
make an offer to the other partner(s) to sell its own interest. Within 30 days
of submitting a price, the other partner must respond to the offer indicating
its election to either accept the offer to buy or sell at the offered price.
Certain partners in two of the partnerships have the right after a specified
period of time to put their interest in the respective partnership (i) to the
other partners at an amount equal to the fair market value of such partner's
interest pursuant to one agreement and (ii) to the Company at an amount equal
to the partner's capital contributions plus interest less any distributions
pursuant to the other agreement.
Term. Most of the Operating Partnerships were created in the last three and
half years and have a duration of 10 to 25 years unless earlier dissolved. Two
of the Local Partner Agreements contain provisions whereby the respective
Local Partner can terminate its interest, at such Local Partner's sole
discretion, prior to 2003. See "Risk Factors--Risks Associated with Joint
Ventures." Generally, each partner and certain of its affiliates are
restricted from competing with the Operating Partnership in the defined
business area so long as the partner is a partner plus two or three years
thereafter.
Fiber Lease Agreements
Generally, the Operating Partnerships lease fiber optic capacity from their
Local Partners. In some instances, the Operating Partnerships lease existing
fiber optic capacity and in other instances, the Operating Partnerships
request the Local Partners to construct new fiber optic capacity. Monthly
lease payments in both instances are based on the amortization of the Local
Partner's cost of construction and material costs over the term of the Fiber
Lease Agreement. Because construction and material costs are amortized over
the then current term of the Fiber Lease Agreement, it is possible for the
amount of a monthly lease payment to be significantly lower during a renewal
term unless the construction of additional fiber optic cable is scheduled for
such renewal term. Typically, the amount of the lease payments in a renewal
period equals the amount of monthly maintenance costs for the leased fiber
optic cable.
Each of the Fiber Lease Agreements is in its initial term. The initial terms
vary from 5 to 25 years in length. The Fiber Lease Agreements contain various
renewal options. Generally, either party can terminate the Fiber
36
<PAGE>
Lease Agreement at the end of the then current term if the terminating party
provides prior written notice to the other party.
Throughout the term of the Fiber Lease Agreements and thereafter, title to
the fiber optic cable remains with the Local Partner. Similarly, the Operating
Partnerships retain title to all of their own electronics and switches that
become a part of the network. A Local Partner cannot sell the fiber subject to
the Fiber Lease Agreement to a third party unless its obligations under the
Fiber Lease Agreement are assumed by the third party.
Management Agreements
Generally, the Company or a wholly owned subsidiary of the Company provides
the Operating Partnerships with the following services pursuant to the
Management Agreement for a specified fee: general management, monitoring,
marketing, regulatory processing, accounting, engineering designing, planning,
construction, maintenance, operations, service ordering and billing. The term
of the typical Management Agreement is three or five years and automatically
renews for continuous one-year periods unless one party provides the other
with written notice that it intends to terminate the agreement.
Enhanced Service Agreements
Four of the Operating Companies have entered into partnership with
!NTERPRISE (the "!NTERPRISE Partnerships") in order to provide enhanced
services such as frame relay, ATM data transport, business video conferencing,
private line data interconnect service and LAN connection and monitoring
services. The partners in the !NTERPRISE Partnerships are required to
contribute equal amounts in order to retain their 50% ownership interests. The
business area serviced by the !NTERPRISE Partnerships is the same as that
serviced by the applicable Operating Partnership. The partners and their
respective affiliates are also prohibited from competing for as long as the
partners are partners plus two years thereafter. In addition, the partners
have a right of first refusal with regard to the sale of partnership interests
and, under certain circumstances, may put their interest to the partnership.
Generally, the !NTERPRISE Partnerships have a 20 year duration.
MAJOR IXC CERTIFICATION
AT&T, the major IXC with which the Company has entered into the National
Service Agreement, has established a certification process called Operational
Readiness Testing ("ORT") in order to determine whether a supplier's network,
systems and processes are capable of providing a level of service which meets
such major IXC's standards. ORT is a lengthy process comprised of the
following components: (i) Operational Readiness Assessment ("ORA"), (ii)
Network Validation Testing ("NVT") and (iii) Switch Network Validation Testing
("SNVT"). CLECs must pass such major IXC's ORT for access services to provide
access services to the major IXC and such major IXC's ORT for switched
services to provide switched services to such major IXC.
ORA is a one-time, in-depth evaluation to review all of the Operating
Company's processes and to verify that procedures are in place to govern
operations from initial design and construction through day-to-day operations
and maintenance. ORA is meant to ensure that every aspect of the Operating
Company's operations can deliver a product of high quality and reliability.
NVT is an ongoing evaluation process that continually evaluates existing
markets and potential markets. NVT reviews the networks' redundancy of power
supplies; the temperature, humidity and ambient condition controls; the fire
protection; the route diversity of the fiber network; the design of
electronics; the security and general appearance of the Operating Company's
facilities.
SNVT is an ongoing review that evaluates the performance and quality of the
Operating Company's switching capabilities.
The Company has successfully passed the NVT in Jacksonville and Louisville.
Passing these evaluations enables the Company's networks in such markets to
carry traditional dedicated access and switched access
37
<PAGE>
transport. The Company is currently preparing for an ORA of its switch
installations and a NVT of its switch operations in two of its other markets.
Passing the ORA and the NVT of its switch operations in each market will
enable the Company's networks in those markets to carry switched traffic for
such major IXC. The Company believes that certifying the Operating Companies'
switching operations will significantly enhance the market opportunity for the
Operating Companies' services.
SALES AND MARKETING
The Company targets its network sales and marketing activities at IXCs and
business, government and educational end users. The Company's IXC targets
include the major IXCs as well as smaller and regional IXCs. IXCs utilize the
Operating Companies' services primarily as a local component of their own
service offerings to end users. The Company also targets end users which
include small, medium and large businesses as well as government and
educational institutions. In many cases, the Company works in conjunction with
IXCs when marketing to these end users in order to leverage the name
recognition, marketing reputation and resources of IXCs. In order to increase
the value of the Company's networks to IXCs, the Company's networks do not
offer a competing long distance service offering to end users. The Company's
networks offer their services in accordance with tariffs filed with the FCC
for interstate services and state regulatory authorities for intrastate
services. The Operating Companies are classified as non-dominant carriers by
the FCC and therefore have substantial pricing flexibility and in many cases
may enter into customer and product specific agreements.
IXC Customers
The Company has national supplier agreements with all of the major IXCs. The
Company believes it can effectively provide IXCs with a full complement of
traditional access services as well as switched services. Factors that
increase the value of the Company's networks to IXCs include reliability,
state-of-the-art technology, route diversity, ease of ordering and customer
service. The Company also generally prices the services of an Operating
Company at a discount relative to the incumbent LEC. In order to further
complement the services provided to the IXCs, the Company integrates its
networks with IXC networks to enable the IXC to (i) access service, billing
and other data directly from the Company and (ii) electronically send
automated service requests to the Company.
An important component of the Company's strategy is to work with major IXCs
to develop an integrated local and long distance service offering to end
users. The Company believes this strategy will provide greater access to the
IXCs' large customer base and enable the Operating Companies to leverage the
IXCs' name recognition and reputation for reliability and quality. In pursuing
this strategy, the Company has entered into the National Service Agreement
with AT&T pursuant to which the Company's networks will be AT&T's preferred
supplier of dedicated special access and switched access transport services in
all of the Company's markets. The National Service Agreement requires the
Company to provide such services to AT&T at a discount from the tariffed or
published LEC rates.
The Company currently utilizes national account representatives to market to
IXC customers since the major IXCs have established national or regional
groups to manage and coordinate their purchasing of access services. These
groups assess CLECs not only upon price, quality, service and ease of
provisioning in a particular market, but also upon size, scope of operations
and financial stability in order to maximize the leverage of their CLEC
relationships. The Company focuses on serving the Operating Companies' IXC
customers in all of the Company's markets with a view to establishing national
preferred vendor relationships. The terms and conditions applicable to
services ordered by IXCs are generally specified in agreements under which
some services can be terminated by the IXC on 60 days or less notice. The
Company believes that the Operating Companies are well positioned to serve the
IXCs and that the Operating Companies generally have good relationships with
their respective IXC.
38
<PAGE>
End Users
Each Operating Company works in conjunction with IXCs to offer an integrated
package of local and long distance service offerings to end users. Initially,
the Operating Company offers high quality access services to these end users
in combination with an IXC's long distance offerings. Building on its success
with the end users, the Operating Company attempts to increase the size and
number of service offerings it provides by working with customers to analyze
the customers' local telecommunications needs. In particular, the typical
Operating Company offers end users a variety of services, including local dial
tone, frame relay, ATM transport, business video conferencing and other
services. The Company believes that, based upon the Operating Companies'
reputation developed in conjunction with major IXCs, the Operating Companies
will be able to systematically increase their share of the end users'
telecommunications expenditures. The Company believes the networks will be
able to compete for end users' needs based upon price, reliability, product
diversity, service and custom solutions to end user needs. A significant
component of an Operating Company's reliability will be its ability to offer
customers end-to-end SONET ring construction for many localized applications.
The Operating Companies' construction of SONET rings combined with the
Company's large network size will enable the Operating Companies to offer
superior coverage to the incumbent LEC and many CLECs especially in second and
third tier markets.
End users are currently marketed through Company direct sales
representatives in each market. The national sales organization also provides
support for the local sales groups and develops new product offerings and
customized telecommunications applications and solutions which address the
specific requirements of particular customers. In addition, the Company
markets the Operating Companies' products through advertisements, media
relations, direct mail and participation in trade conferences. End users
typically commit to a service agreement for a term of three to five years
which is either renegotiated or automatically converted to a month-to-month
arrangement at the end of the contract term.
Hyperion Enhanced Networks
The Company develops applications in conjunction with the Operating
Companies that are not specific to an IXC's traditional business or to a
particular partnership metropolitan area as special bid Hyperion Enhanced
Networks ("HENs"). HEN services include special construction of IXC networks,
campus networks, private carriage networks and other similar network
applications. HEN customers are currently marketed through Company national
account representatives in conjunction with special IXC or information service
provider groups that manage special network, campus, or junction applications.
The terms and conditions for HENs are generally specified in agreements with
three to five year terms which automatically renew to month-to-month
arrangements at the end of contract terms.
NETWORK DEVELOPMENT AND DESIGN
Prior to any network construction in a particular market, the Company's
corporate development staff reviews the demographic, economic, competitive and
telecommunications demand characteristics of the market. These characteristics
generally include market location, the size of the telecommunications market,
the number and size of business, institutional and government end users and
the economic prospects for the area. In addition, the Company also carefully
analyzes demand information provided by IXCs, including demand for end user
special access and volume of traffic from the LEC-CO and the IXC POPs. The
Company also analyzes market size utilizing a variety of data, including
available estimates of the number of interstate access and intrastate private
lines in the region. Such information is available from the FCC.
If a particular market targeted for development is deemed to have
sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, the Company's network planning and
design personnel, working in conjunction with the Company's Local Partner, or
Adelphia or one of Adelphia's affiliates, design a large regional network
targeted to provide access to the identified business, government and
institutional end user revenue base and to the IXC POPs and the LEC-COs in the
geographic area covered by the proposed network.
39
<PAGE>
The actual network design is influenced by a number of market, cost and
technical factors including:
. Availability and ease of fiber deployment
. Location of IXC POPs
. Density of telecommunication revenue based upon IXC information
. The Company's market information
. Cost of construction
The objective of the network design is to maximize revenue derived from
service to IXC POPs, LEC-COs and important customers in consideration of
network construction costs. In most cases, the Local Partner bears the costs
of construction for the required fiber, retains ownership of the fiber and
leases the fiber to the Operating Company. The fiber lease costs are
determined by amortizing the Operating Company's portion of the Local
Partner's cost of construction over the term of the Fiber Lease Agreement at
an assumed interest rate. This structure generally allows the Operating
Company to better match its capital costs to cash flows. See "--Fiber Lease
Agreements."
NETWORK CONSTRUCTION
The Company's networks are constructed to cost-effectively access areas of
significant end user telecommunications traffic, as well as the POPs of most
IXCs and the majority of the LEC-COs. The Company establishes with its Local
Partner or Adelphia general requirements for network design including,
engineering specifications, fiber type and amount, construction timelines and
quality control. The Company's engineering personnel provide project
management, including contract negotiation and overall supervision of the
construction, testing and certification of all facilities. The construction
period for a new network varies depending upon the number of route miles to be
installed, the initial number of buildings targeted for connection to the
network, the general deployment of the network and other factors. Networks
that the Company has installed to date have generally become operational
within six to ten months after the beginning of construction.
NETWORK OPERATING CONTROL CENTER
In Coudersport, Pennsylvania, the Company has built a NOCC that is equipped
with state-of-the-art system monitoring and control technology. The NOCC is a
single point interface for monitoring all of the Company's networks and
provisioning all services and systems necessary to operate the networks. The
NOCC currently supports all of the Company's networks including the management
of over 908 building connections, five switches or remote switching modules
and approximately 2,647 network route miles. The NOCC is designed to
accommodate the Company's anticipated growth in all existing markets as well
as in all the markets the Company plans to enter.
The NOCC is utilized for a variety of network management and control
functions including monitoring, managing and diagnosing the Company's SONET
networks, central office equipment, customer circuits and signals and the
Company's switches and associated equipment. The NOCC is also the location
where the Company provisions, coordinates, tests and accepts all orders for
switched and dedicated circuit orders. In addition, the NOCC maintains the
database for the Company's circuits and network availability. Network
personnel at the NOCC also develop and distribute a variety of software
utilized to manage and maintain the networks.
EQUIPMENT SUPPLY
The Company and the Operating Companies purchase fiber optic transmission
and other electronic equipment from Lucent Technologies, formerly AT&T Network
Systems ("Lucent"), Fujitsu, Tellabs, and other suppliers at negotiated
prices. The Company expects that fiber optic cable, equipment and supplies for
the construction and development of its networks will continue to be readily
available from Lucent, Fujitsu and other suppliers as required. The Company
has negotiated multi-year contracts for equipment with Lucent, Fujitsu, and
40
<PAGE>
Tellabs. The Company and the Operating Companies have deployed two Lucent 5ESS
Switches ("5ESSs") and three remote switching modules in five of their current
markets. The Company and the Operating Companies plan to deploy eight
additional 5ESSs or remote switching modules during calendar 1996 and
additional 5ESSs and remote switching modules in each of the Company's future
operational markets.
CONNECTIONS TO CUSTOMER LOCATIONS
Office buildings are connected by network backbone extensions to one of a
number of physical rings of fiber optic cable, which originate and terminate
at the Operating Company's central office. Signals are sent simultaneously on
both primary and alternate protection paths through a network backbone to the
Operating Company's central office. Within each building, Operating Company-
owned internal wiring connects the Operating Company's fiber optic terminal
equipment to the customer premises. Customer equipment is connected to
Operating Company-provided electronic equipment generally located where
customer transmissions are digitized, combined and converted to an optical
signal. The traffic is then transmitted through the network backbone to the
Operating Company's central office where it can be reconfigured for routing to
its ultimate destination on the network.
The Operating Company locates its fiber optic equipment in space provided by
the building owner or, more typically, on a customer's premises. IXCs often
enter into discussions with building owners to allow the Company to serve the
IXCs' customers. This network configuration enables the Company to share
electronic equipment among multiple customers, causes little interruption for
customers during installation and maintenance and allows the Company to
introduce new services rapidly and at low incremental cost.
EMPLOYEES
As of June 30, 1996, the Operating Companies and the Company employed a
total of 92 and 93 full-time employees, respectively, in support of the
Operating Companies' and the Company's operations. The Company also regularly
uses the services of its Local Partners, employees and contract technicians
for the installation and maintenance of its networks. None of the Operating
Companies' or the Company's employees is represented by a collective
bargaining agreement. The Company believes that the Operating Companies' and
the Company's relations with their respective employees are good.
PROPERTIES
The Company leases its principal executive offices in Coudersport,
Pennsylvania and its offices in Pittsburgh, Pennsylvania. Additionally, the
Company owns its NOCC facilities, and leases certain office space from
Adelphia, in Coudersport, Pennsylvania.
All of the fiber optic cable, fiber optic telecommunications equipment and
other properties and equipment used in the networks, are owned or leased by
the applicable Operating Company. See "--Company's Markets." Fiber optic cable
plant used in providing service is primarily on or under public roads,
highways or streets, with the remainder being on or under private property. As
of June 30, 1996, the Company's total telecommunications equipment in service
consists of fiber optic telecommunications equipment, fiber optic cable,
furniture and fixtures, leasehold improvements and construction in progress.
Such properties do not lend themselves to description by character and
location of principal units.
Substantially all of the fiber optic telecommunications equipment used in
the Company's networks is housed in multiple leased facilities in various
locations throughout the metropolitan areas served by the Company. The Company
believes that its properties and those of its Operating Companies are adequate
and suitable for their intended purpose.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings except for
claims and lawsuits arising in the normal course of business. The Company does
not believe that these claims or lawsuits will have a material effect on the
Company's financial condition or results of operations.
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COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. In each of the
areas served by an Operating Company, services similar to those offered by the
Operating Company are offered by the incumbent LEC serving that area.
Incumbent LECs have long-standing relationships with their customers, have far
greater technical and financial resources and provide services that an
Operating Company may not currently be authorized by state regulators to
offer. See "Regulation--State Regulation." Following the enactment of the
Telecommunications Act, there has been significant merger activity among the
RBOCs which will result in competitors with even greater financial resources
and geographic scope than currently faced by the Company. In addition, in many
markets, the incumbent LEC currently is excused from paying license or
franchise fees or pays fees materially lower than those required to be paid by
the Operating Companies.
While new business opportunities will be made available to the Company
through the Telecommunications Act and other federal and state regulatory
initiatives, regulators are likely to provide the incumbent LECs with an
increased degree of flexibility with regard to pricing of their services as
competition increases. If the incumbent LECs elect to lower their rates and
can sustain lower rates over time, this may adversely affect the revenues of
the Operating Companies and the Company by placing downward pressure on the
rates the Operating Companies can charge. The Company believes this effect
will be offset by the increased revenues available by offering new services,
but if future regulatory decisions afford the incumbent LECs excessive pricing
flexibility or other regulatory relief, such decisions could have a material
adverse effect on the Company.
Competition for the Company's and the Operating Companies' services are
based on price, quality, network reliability, service features and
responsiveness to customer needs. The Company believes that its management
expertise, coupled with its highly reliable, state-of-the-art digital networks
and back-office infrastructure, which offer significant transmission capacity
at competitive prices, will allow it to compete effectively with the incumbent
LECs, which may not yet have fully deployed fiber optic networks in many of
the Company's target markets. The Company believes that the Operating
Companies price their services at a modest discount compared to the prices of
incumbent LECs while providing a higher level of customer service. The
Company's networks provide diverse access routing and redundant electronics,
design features not widely deployed by the incumbent LEC networks at the
present time. However, as incumbent LECs continue to upgrade their networks,
any competitive advantage held by the Company due to the superiority of its
facilities may diminish.
Other current or potential competitors of the Company's networks include
other CLECs, IXCs, wireless telecommunications providers, microwave carriers,
satellite carriers, private networks built by large end users and cable
television operators or utilities in markets in which the Company has not
partnered with one or the other. In many markets served by the Company, one or
more CLECs already are providing service. Furthermore, the three major IXCs
have announced ambitious plans to enter the local exchange market. There is no
assurance that these IXCs will choose to obtain local services from the
Operating Companies in the Company's markets. In addition, the
Telecommunications Act requires all local exchange providers, including new
entrants, to offer their services for resale. See "Regulation--
Telecommunications Act of 1996." This requirement permits companies to enter
the market for local telecommunications services without investing in new
facilities, thereby increasing the number of likely competitors in any given
market, and enables the IXCs to provide local services by reselling the
service of the incumbent LEC rather than using services provided by the
Company.
REGULATION
OVERVIEW
Telecommunications services provided by the Company and its networks are
subject to regulation by federal, state and local government agencies. At the
federal level, the FCC has jurisdiction over interstate services, which
constitute a majority of the Operating Companies' current services. Interstate
services, for the purpose of determining FCC jurisdiction, are communications
that originate in one state and terminate in another
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<PAGE>
state or foreign country. State regulatory commissions exercise jurisdiction
over intrastate services. Intrastate services are communications that
originate and terminate in the same state. Additionally, municipalities and
other local government agencies may regulate limited aspects of the Company's
business, such as use of rights-of-way.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the Telecommunications Act of 1996 was signed into law
and is considered to be the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. The
Telecommunications Act will result in substantial changes in the marketplace
for voice, data and video services. These changes will open the local exchange
market to competition and will result in a substantial increase in the
addressable market for the Company's networks. Among its more significant
provisions, the Telecommunications Act (i) removes legal barriers to entry in
local telephone markets, (ii) requires incumbent LECs to "interconnect" with
competitors, (iii) establishes procedures for incumbent LEC entry into new
markets, such as long distance and cable television, (iv) relaxes regulation
of telecommunications services provided by incumbent LECs and all other
telecommunications service providers, and (v) directs the FCC to establish a
subsidy mechanism for the preservation of universal service.
Removal of Entry Barriers
Prior to enactment of the Telecommunications Act, many states limited the
services that could be offered by a company competing with the incumbent LEC.
See "--State Regulation." In these states, the incumbent LEC retained a
monopoly over basic local exchange services pursuant to state statute or
regulatory policy. In states with these legal barriers to entry, the Company
had been limited to the provision of dedicated telecommunications services,
which constitutes only a small portion of the local telephone market.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect
of prohibiting any person from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers.
This provision of the Telecommunications Act should enable the Operating
Companies to provide a full range of local telecommunications services in any
state. The Operating Companies will continue their policy of not providing
long distance services that compete with the major IXCs in order to enable the
Company to work with IXCs to provide an integrated local and long distance
service offering to end users. Although the Operating Companies will be
required to obtain certification from the state regulatory commission in
almost all cases, the Telecommunications Act limits substantially the ability
of a state commission to deny a request for certification filed by an
Operating Company. While this provision of the Telecommunications Act expands
significantly the markets available to the Operating Companies, it also
reduces the barriers to entry by other potential competitors and therefore
increases the level of competition the Operating Companies will face in all
their markets. See "Competition."
Access and Interconnection with LEC Facilities
A company cannot compete effectively with the incumbent LEC in the market
for switched local telephone services unless it is able to connect its
facilities with the incumbent LEC and obtain access to certain essential
services and resources under reasonable rates, terms and conditions. Incumbent
LECs historically have been reluctant to provide these services voluntarily
and generally have done so only when ordered to by state regulatory
commissions.
The Telecommunications Act imposes a number of access and interconnection
requirements on all local exchange providers, including CLECs, with additional
requirements imposed on incumbent LECs. These requirements will provide access
to certain networks under reasonable rates, terms and conditions.
Specifically,
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the Telecommunications Act requires the FCC to adopt rules within six months
under which LECs must provide the following:
Telephone Number Portability. Telephone number portability enables a
customer to keep the same telephone number when the customer switches local
exchange carriers. New entrants are at a competitive disadvantage without
telephone number portability because of inconvenience and costs to customers
that must change numbers.
Dialing Parity. All LECs must provide dialing parity, which means that a
customer calling to or from a CLEC network cannot be required to dial more
digits than is required for a comparable call originating and terminating on
the LEC's network.
Reciprocal Compensation. The duty to provide reciprocal compensation means
that LECs must terminate calls that originate on competing networks in
exchange for a given level of compensation and that they are entitled to
termination of calls that originate on their network for which they must pay a
given level of compensation.
Resale. A LEC may not prohibit or place unreasonable restrictions on the
resale of its services. In addition, incumbent LECs must offer services to
resellers at a wholesale rate that is less than the retail rate charged to end
users.
Access to Rights-of-Way. A LEC must provide access to its poles, ducts,
conduits and rights-of-way on a reasonable, nondiscriminatory basis.
Unbundling of Network Services. Incumbent LECs must offer unbundled access
to the various elements of their network. This requirement allows new entrants
to purchase elements of an incumbent LEC's network that may be necessary to
provide service to customers not located in the new entrants' networks.
On July 2, 1996 the FCC released its First Report and Order and Further
Notice of Proposed Rulemaking promulgating rules and regulations to implement
Congress' statutory directive concerning number portability (the "Number
Portability Order"). The FCC ordered all LECs to begin phased development of a
long-term service provider portability method in the 100 largest Metropolitan
Statistical Areas ("MSAs") no later than October 1, 1997, and to complete
deployment in those MSAs by December 31, 1998. Number portability must be
provided in those areas by all LECs to all requesting telecommunications
carriers. After December 31, 1998, each LEC must make number portability
available within six months after receiving a specific request by another
telecommunications carrier in areas outside the 100 largest area MSAs in which
the requesting carrier is operating or plans to operate. Until long-term
service portability is available, all LECs must provide currently available
number portability measures as soon as reasonably possible after a specific
request from another carrier. As new carriers are at a competitive
disadvantage without telephone number portability, the Number Portability
Order should enhance the Company's ability to offer service in competition
with the incumbent LECs, but it is uncertain how effective these regulations
will be in promoting number portability. The Number Portability Order does not
address how the costs of implementing long-term service portability will be
recovered. This issue is subject to an additional comment period and is not
expected to be decided until 1997.
On August 8, 1996 the FCC released its First Report and Order and Second
Report and Order and Memorandum Opinion and Order promulgating rules and
regulations to implement Congress' statutory directive concerning the
interconnection of CLEC and incumbent LEC networks and incumbent LEC pricing
of unbundled elements (the "Local Competition Orders"). The Local Competition
Orders adopt a national framework for interconnection but leaves to the
individual states the task of implementing the FCC's rules. Because
implementation of the Local Competition Orders will be at the state level, it
is uncertain how these new requirements will affect the Company. The Local
Competition Orders indicate that the FCC intends to take up access charge
reform as early as the fourth quarter of 1996 with new rules in place as early
as the first quarter of 1997. To the extent that the Local Competition Orders
reduce the ability of incumbent LECs to impose non-cost-based access charges
of IXCs, the Company's competitive advantage in providing customers with
access services will decrease. However, to the extent that CLECs are able to
interconnect with incumbent LEC networks on favorable terms, the Company's
ability to provide competitive local exchange services will increase.
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Although the Number Portability Order, the Local Competition Order and the
underlying statutory requirements are intended to benefit new entrants in the
local exchange market, such as the Operating Companies, it is uncertain how
effective these requirements will be until the FCC completes all of its
rulemaking proceedings under the Telecommunications Act and state regulators
begin to implement the FCC's requirements. In particular, if CLECs are unable
to obtain favorable agreements with the incumbent LEC regarding call
termination and resale of incumbent LEC facilities and services through
negotiation with the incumbent LEC or arbitration at state public utility
commissions, there is a diminished likelihood that an Operating Company will
be successful in its local exchange market.
Moreover, these requirements place burdens on an Operating Company when it
provides switched local exchange services that will benefit potential
competitors. In particular, the obligation to offer services for resale means
that a company can resell the Operating Company's services without investing
in facilities. Similarly, the obligation to provide access to rights-of-way is
of limited benefit to the Operating Companies, which already have such access
through their Local Partners, but benefits other potential competitors to a
far greater degree.
LEC Entry into New Markets
The Company's principal competitor in each market it enters is the incumbent
LEC. See "Competition." Prior to enactment of the Telecommunications Act,
incumbent LECs generally were prohibited from providing cable television
service pursuant to the "telco/cable cross-ownership prohibition" contained in
the Communications Act of 1934. In addition, the RBOCs generally were
prohibited by the MFJ (as defined) from providing interLATA (i.e., long
distance) services within the region in which they provide local exchange
service.
The Telecommunications Act repeals the telco/cable cross-ownership
prohibition and permits incumbent LECs to provide cable television service.
With this prohibition removed, incumbent LECs are more likely to invest in
fiber optic networks because those facilities will be able to generate a
revenue stream previously unavailable to the incumbent LECs. While incumbent
LEC entry into the video market may be the motivating factor for construction
of new facilities, these facilities also can be used by an incumbent LEC to
provide services that compete with the Company's networks.
The Telecommunications Act also eliminates the prospective effect of the MFJ
and establishes procedures under which an RBOC can enter the market for
interLATA services within its telephone service area. Before an RBOC can enter
the interLATA market, it must enter into a state-approved interconnection
agreement with a company that provides local exchange service to business and
residential customers predominantly over its own facilities. Alternatively, if
no such competitor requests interconnection, the RBOC can request authority to
provide interLATA services if it offers interconnection under state-approved
terms and conditions. The interconnection offered or provided by the RBOC must
comply with a "competitive checklist" that is comparable to the
interconnection requirements discussed above. See "--Telecommunications Act of
1996--Access and Interconnection with LEC Facilities."
The ability of the RBOCs to provide interLATA services enables them to
provide customers with a full range of local and long distance
telecommunications services. The provision of interLATA services by RBOCs is
expected to reduce the market share of the major long distance carriers, who
are the Company's networks' primary customers. Consequently, the entry of the
RBOCs into the long distance market may have adverse consequences on the
ability to generate revenues from the IXCs.
Relaxation of Regulation
A long-term goal of the Telecommunications Act is to increase competition
for telecommunications services, thereby reducing the need for regulation of
these services. To this end, the Telecommunications Act requires the FCC to
streamline its regulation of incumbent LECs and permits the FCC to forbear
from regulating particular classes of telecommunications services or
providers. Since the Company is lightly regulated by the
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FCC, the potential for regulatory forbearance likely will be more beneficial
to the incumbent LECs than the Company in the long run.
Pursuant to the forbearance provisions of the Telecommunications Act, the
Company has filed a petition requesting that the FCC reinstate its forbearance
policy with regard to tariff filing requirements for competitive providers of
interstate access services, such as the Company. See "--Federal Regulation."
This would relieve the Company of its biggest existing federal regulatory
burden. The FCC has not set a timetable for action on the Company's petition.
The Telecommunications Act eliminates the requirement that LECs obtain FCC
authorization before constructing new facilities for interstate services. The
Telecommunications Act also limits the FCC's ability to review LEC tariff
filings. These changes will increase the speed with which incumbent LECs are
able to introduce new service offerings and new pricing of existing services,
thereby increasing the incumbent LECs' ability to compete with the Company.
Preservation of Universal Service
One of the primary goals of the original Communications Act of 1934 was to
extend telephone service to all the citizens of the United States. This goal
has been achieved largely by keeping the rates for basic local exchange
service at a reasonable level. It was traditionally thought that incumbent
LECs were able to keep basic residential rates reasonable by subsidizing them
with revenues from business and IXC customers, and by subsidizing rural
service at the expense of urban customers. The existence and level of these
subsidies has been widely disputed in recent years because they are so
difficult to quantify.
The Telecommunications Act continues the goal of advancing and preserving
universal service by requiring the FCC to establish an explicit mechanism for
subsidizing service to those who might otherwise drop off the public switched
network. Although the details will be determined by the FCC, all carriers will
be required to contribute and carriers that serve eligible customers will be
able to receive subsidies. In addition, subsidies likely will be available for
companies that provide service to schools, libraries and hospitals.
Depending on how the FCC implements its statutory mandate, this subsidy
mechanism may provide an additional source of revenue to those LECs willing
and able to provide service to markets that are less desirable, either because
of the high cost of providing service or the limited revenues that might be
available. This could be advantageous to the Company or it could be beneficial
to the Company's competitors, depending on the geographic areas and type of
customers for which subsidies are available. For example, if distributions are
limited to companies that provide service to residential customers, the
Company may contribute more than it receives from the universal service fund
due to its focus on business customers.
FEDERAL REGULATION
Through a series of regulatory proceedings, the FCC has established
different levels of regulation for "dominant carriers" and "non-dominant
carriers." Only incumbent LECs are classified as dominant; all other providers
of domestic interstate services, including the Operating Companies, are
classified as non-dominant carriers. As a non-dominant carrier the Operating
Companies are subject to relatively limited regulation by the FCC. The
Operating Companies must offer interstate services at just and reasonable
rates in a manner that is not unreasonably discriminatory, subject to the
complaint provisions of the Communications Act of 1934, as amended.
Presently, the Company is required to file tariffs listing the terms,
conditions and rates for its services. The FCC's policy of forbearing from
requiring non-dominant carriers to file tariffs was rejected by the U.S.
Supreme Court and its policy of permitting carriers to file tariffs listing a
range of rates for each service was rejected by the U.S. Court of Appeals for
District of Columbia Circuit. Under the Telecommunications Act, the FCC has
authority to reinstate its forbearance policy for non-dominant carriers. The
Company has filed a petition
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requesting the FCC to take this action with regard to competitive providers of
interstate access services, but there can be no assurance that it will do so.
The FCC has adopted rules requiring incumbent LECs to provide "virtual
collocation" to CAPs for the purpose of interconnecting their competing
networks. These rules enable the Operating Companies to carry a portion of a
customer's interstate traffic to an IXC even if the customer is not located on
the Company's network. The Company has requested collocation in some, but not
all, of its markets. The incumbent LECs have proposed interconnection rates
that are being investigated by the FCC to determine whether they are
excessive. If the FCC orders the incumbent LECs to reduce these rates,
collocation will be a more attractive option for CLECs. Based on the press
release issued by the FCC on the Local Competition Order, incumbent LECs will
be required to provide both virtual collocation and actual collocation at
their switching offices.
Under the Telecommunications Act, an Operating Company may become subject to
additional federal regulatory obligations when it provides local exchange
service in a market. All LECs, including CLECs, must make their services
available for resale by other carriers, provide nondiscriminatory access to
rights-of-way, offer reciprocal compensation for termination of traffic and
provide dialing parity and telephone number portability. In addition, the
Telecommunications Act requires all telecommunications carriers to contribute
to the universal service mechanism established by the FCC and to ensure that
their services are accessible to and usable by persons with disabilities.
Because the FCC has yet to adopt all of the rules necessary to implement the
Telecommunications Act, it is uncertain how burdensome these requirements will
be for the Company and the Operating Companies. The obligation to provide
services for resale by others potentially limits any competitive advantage
held by the Company by virtue of its state-of-the-art facilities because other
carriers, including the incumbent LEC and the IXCs, can simply resell the
Operating Companies' services. Similarly, the obligation to provide access to
rights-of-way benefits certain competitors more than the Company, which
already has such access through its Local Partners. Most of the other
obligations impose costs on the Operating Companies that also will be borne by
competing carriers so the competitive implication of these requirements should
not be significant if they are implemented fairly by the FCC.
As part of its decision requiring incumbent LECs to provide virtual
collocation, the FCC also granted incumbent LECs flexibility to reduce their
rates for interstate access services in markets where a CAP is collocated.
This flexibility includes the ability to offer volume and term discounts and
to deaverage access rates in different "zones" in a state based on the level
of traffic. In addition, the FCC has granted two incumbent LECs further
flexibility in their most competitive markets and the FCC could grant in the
future similar waivers in markets served by the Operating Companies. The FCC
also is considering granting incumbent LECs additional pricing flexibility in
its pending proceeding regarding incumbent LEC price caps. With the passage of
the Telecommunications Act and the anticipated increase in the level of
competition faced by incumbent LECs, the FCC could grant incumbent LECs
substantial pricing flexibility with regard to interstate access services. It
is also anticipated that the prices incumbent LECs charge for access services
will be substantially reduced as a result of the FCC's reform of the current
access charge regime and the adoption of universal service rules. A Federal-
State Joint Board mandated by the Telecommunications Act is required to make
recommendations regarding universal service by November 8, 1996, and new
universal service rules must be in place by May 8, 1997. The FCC has stated
that it intends to tie access charge reform to universal service reform, with
a notice of proposed rulemaking to be issued in November and an order in the
first half of 1997. To the extent these regulatory initiatives enable or
require incumbent LECs to offer selectively reduced rates for access services,
the rates the Operating Companies may charge for access services will be
constrained. The Operating Companies' rates also will be constrained by the
fact that competitors other than the incumbent LECs are subject to the same
streamlined regulatory regime as the Operating Companies and can price their
services to meet competition.
STATE REGULATION
Most state public utility commissions require companies that wish to provide
intrastate common carrier services to be certified to provide such services.
These certifications generally require a showing that the carrier
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has adequate financial, managerial and technical resources to offer the
proposed services in a manner consistent with the public interest.
Operating Companies have been certificated to provide telecommunications
services in Florida, Kansas, Kentucky, New York, Pennsylvania, Tennessee,
Vermont and Virginia. The New Jersey Operating Company currently has an
application for initial operating authority pending before the New Jersey
Board of Public Utilities. The certificates in New York, Florida and Tennessee
permit the Operating Companies to provide a full range of local
telecommunications services, including basic local exchange service. In light
of the Telecommunications Act, the Operating Companies will request removal of
any restrictions that now exist on its certificates in the remaining states
and anticipate that requests will be granted. See "--Telecommunications Act of
1996--Removal of Entry Barriers." In addition, the Telecommunications Act will
enable the Company to enter new states providing a full range of local
services upon certification. In certain states, each of the Company, its
subsidiaries and the Operating Companies may be subject to additional state
regulatory requirements, including tariff filing requirements, in order to
begin offering the telecommunications services for which such entities have
been certificated. Many states also may have additional regulatory
requirements such as reporting and customer service requirements and universal
service contributions.
In addition to obtaining certification, an Operating Company must negotiate
terms of interconnection with the incumbent LEC before it can begin providing
switched services. Most states in which the Company operates have not adopted
rules governing the interconnection of competing networks. Under the
Telecommunications Act, the FCC has adopted interconnection requirements. See
"--Telecommunications Act of 1996--Access and Interconnection with LEC
Facilities." These rules establish guidelines for the states to follow when
reviewing interconnection agreements and should greatly facilitate the
negotiation of interconnection agreements, although it is anticipated that
some incumbent LECs may remain reluctant to comply with interconnection
requests, thereby delaying an Operating Company's ability to provide switched
services. State regulators are responsible for resolving any disputes that
cannot be resolved through negotiation between carriers.
The Operating Companies are not presently subject to price regulation or
rate of return regulation in any state, although there can be no assurance
this will not change when the Operating Companies begin providing switched
services in some states. In most states, an Operating Company is required to
file tariffs setting forth the terms, conditions and prices for intrastate
services. In some states, an Operating Company's tariff lists a rate range or
set prices on an individual case basis.
Several states have allowed incumbent LECs rate and tariff flexibility,
particularly for services deemed subject to competition. This pricing
flexibility increases the ability of the incumbent LEC to compete with an
Operating Company and constrains the rates an Operating Company may charge for
its services. In light of the additional competition that is expected to
result from the Telecommunications Act, states may grant incumbent LECs
additional pricing flexibility. At the same time, some incumbent LECs may
request increases in local exchange rates to offset revenue losses due to
competition.
LOCAL GOVERNMENT AUTHORIZATIONS
An Operating Company may be required to obtain from municipal authorities
street opening and construction permits to install and expand its fiber optic
networks in certain cities. In some cities, the Local Partners or
subcontractors may already possess the requisite authorizations to construct
or expand the Company's networks. An Operating Company or its Local Partners
also must obtain a license to attach facilities to utility poles in order to
build and expand facilities. Because utilities that are owned by a cooperative
or municipality are not subject to federal pole attachment regulation, there
are no assurances that an Operating Company or its Local Partners will be able
to obtain pole attachments from these utilities at reasonable rates, terms and
conditions.
In some of the areas where the Operating Companies provide service, their
Local Partners pay license or franchise fees based on a percent of gross
revenue. In addition, in areas where the Company does not use
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facilities constructed by a Local Partner, the Operating Company may be
required to pay such fees. There are no assurances that certain municipalities
that do not currently impose fees will not seek to impose fees in the future,
nor is there any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many markets, other
companies providing local telecommunications services, particularly the
incumbent LECs, currently are excused from paying license or franchise fees or
pay fees that are materially lower than those required to be paid by the
Operating Company or Local Partner. The Telecommunications Act requires
municipalities to charge nondiscriminatory fees to all telecommunications
providers, but it is uncertain how quickly this requirement will be
implemented by particular municipalities in which the Company operates or
plans to operate or whether it will be implemented without a legal challenge
initiated by the Company or another CLEC.
If any of the existing Local Partner Agreements or Fiber Lease Agreements
held by a Local Partner or an Operating Company for a particular market were
terminated prior to its expiration date and the Local Partner or Operating
Company were forced to remove its fiber optic cables from the streets or
abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
John J. Rigas............... 71 Chairman and Director
James P. Rigas.............. 38 Vice Chairman, Executive Vice President and
Director
Michael J. Rigas............ 42 Vice Chairman, Executive Vice President and
Director
Timothy J. Rigas............ 40 Vice Chairman, Executive Vice President,
Treasurer
and Director
Daniel R. Milliard.......... 49 President, Secretary and Director
Charles R. Drenning......... 51 Vice President and Director
Paul D. Fajerski............ 47 Vice President and Director
Randolph S. Fowler.......... 44 Vice President and Director
</TABLE>
John J. Rigas is the Chairman of the Board of the Company. He also is the
founder, Chairman, Chief Executive Officer and President of Adelphia. Mr.
Rigas has owned and operated cable television systems since 1952. Among his
business and community service activities, Mr. Rigas is Chairman of the Board
of Directors of Citizens Bank Corp., Inc., Coudersport, Pennsylvania and a
member of the Board of Directors of the Charles Cole Memorial Hospital. He is
a director of the National Cable Television Association and a member of its
Pioneer Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the Board of Directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company.
James P. Rigas is Vice Chairman and Executive Vice President of the Company,
Executive Vice President, Strategic Planning of Adelphia and a Vice President
of Adelphia's other subsidiaries. He has been with Adelphia since 1986. Mr.
Rigas graduated from Harvard University (magna cum laude) in 1980 and received
a Juris Doctor degree and an M.A. degree in Economics from Stanford University
in 1984. From June 1984 to February 1986, he was a consultant with Bain & Co.,
a management consulting firm.
Michael J. Rigas is Vice Chairman and Executive Vice President of the
Company, Executive Vice President, Operations of Adelphia and a Vice President
of Adelphia's other subsidiaries. He has been with
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Adelphia since 1981. From 1979 to 1981, he worked for Webster, Chamberlain &
Bean, a Washington, D.C. law firm. Mr. Rigas graduated from Harvard University
(magna cum laude) in 1976 and received his Juris Doctor degree from Harvard
Law School in 1979.
Timothy J. Rigas is Vice Chairman and Executive Vice President and Treasurer
of the Company, Executive Vice President, Chief Financial Officer, Chief
Accounting Officer and Treasurer of Adelphia, and a Vice President of
Adelphia's other subsidiaries. He has been with Adelphia since 1979. Mr. Rigas
graduated from the University of Pennsylvania, Wharton School, with a B.S.
degree in Economics (cum laude) in 1978.
Daniel R. Milliard is President and Secretary of Hyperion, and Senior Vice
President and Secretary of Adelphia and its subsidiaries. Mr. Milliard
currently spends approximately 95% of his time on concerns of the Company. He
has been with Adelphia since 1982. He served as outside general counsel to
Adelphia's predecessors from 1979 to 1982. Mr. Milliard graduated from
American University in 1970 with a B.S. degree in Business Administration. He
received an M.A. degree in Business from Central Missouri State University in
1971, where he was an Instructor in the Department of Finance, School of
Business and Economics, from 1971-73, and received his Juris Doctor degree
from the University of Tulsa School of Law in 1976. He is a member of the
Board of Directors of Citizens Bank Corp., Inc. in Coudersport, Pennsylvania
and is President of the Board of Directors of the Charles Cole Memorial
Hospital.
Charles R. Drenning is Vice President, Engineering operations. Prior to
joining Hyperion in this capacity in October 1991, Mr. Drenning was a District
Sales manager for Penn Access Corporation. In addition, he has over 22 years
experience with AT&T and the Bell System, where he served in a number of
executive level positions in sales and marketing, accounting, data processing,
research and development, and strategic planning. Mr. Drenning began his
career with AT&T as a member of the technical staff of Bell Laboratories in
Columbus, Ohio. His seven years of research work at the laboratories included
both hardware and software development for central office switching equipment.
Mr. Drenning holds a B.S. in Electrical Engineering and an M.S. in Computer
Information Science from Ohio State University. He is a member of the
Pennsylvania Technical Institute and IEEE.
Paul D. Fajerski is Vice President, Marketing and Sales. Prior to joining
Hyperion in this capacity in October 1991, Mr. Fajerski was a District Sales
Manager for Penn Access Corporation, a competitive access provider in
Pittsburgh, Pennsylvania. In addition, he has over 13 years experience with
AT&T and the Bell System where he served in a number of executive level
positions in sales and marketing. Mr. Fajerski holds a B.S. in Business
Administration from the College of Steubenville.
Randolph S. Fowler is Vice President, Business Development and Regulatory
Affairs. Prior to joining Hyperion in this capacity in October 1991, Mr.
Fowler was Vice President of Marketing for Penn Access Corporation, a
competitive access provider in Pittsburgh, Pennsylvania. He previously served
for four years as Director of Technology Transfer and Commercial Use of Space
in two NASA-sponsored technology transfer programs. In addition, he has over
17 years experience with AT&T and the Bell System, where he served in a number
of executive level positions in sales and marketing, operations, human
resources, business controls, and strategy development. Mr. Fowler holds a
B.S. in Business Administration from the University of Pittsburgh. He has
developed and taught courses in Marketing, Network Management, and Regulation
for the University of Pittsburgh's Graduate Program in Telecommunications. Mr.
Fowler is a contributing author for the Encyclopedia of Telecommunications.
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EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the Company's last three
fiscal years ending March 31, 1996 to the Company's President and the other
most highly compensated executive officers whose total annual salary and bonus
exceeds $100,000.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION(A) FISCAL YEAR SALARY BONUS ALL OTHER COMPENSATION
- ------------------------------ ----------- -------- ------- ----------------------
<S> <C> <C> <C> <C>
Daniel R. Milliard...... 1996 $207,474 $ -- $5,250(c)
President and Secretary 1995 187,412(b) -- 5,350(c)
1994 183,484(b) -- 5,250(c)
Charles R. Drenning..... 1996 $139,982 $25,000 $ --
Vice President 1995 128,254 17,345 --
1994 105,379 21,250 --
Paul D. Fajerski........ 1996 $139,982 $25,000 $ --
Vice President 1995 128,254 17,345 --
1994 105,379 21,250 --
Randolph S. Fowler...... 1996 $139,982 $25,000 $ --
Vice President 1995 128,254 17,345 --
1994 105,379 21,250 --
</TABLE>
- --------
(a) James P. Rigas, Michael J. Rigas and Timothy J. Rigas are not employed by
the Company, and the Company does not reimburse Adelphia for any services
they provide to the Company.
(b) Daniel R. Milliard is not employed by the Company, but is compensated by
Adelphia for his services to the Company pursuant to an employment
agreement with Adelphia. The Company, however, reimburses Adelphia for Mr.
Milliard's base salary, insurance premium payments and other benefits paid
by Adelphia.
(c) Fiscal 1996, 1995 and 1994 amounts include (i) life insurance premiums
paid during each respective fiscal year pursuant to the employment
agreement of Daniel R. Milliard with Adelphia, in the premium payment
amounts of $4,500 during Fiscal 1996, $4,600 during Fiscal 1995, and
$4,500, during Fiscal 1994, on policies owned by Mr. Milliard and (ii)
$750 in matching contributions for Mr. Milliard under Adelphia's 401(k)
savings plan for each of Fiscal 1996, 1995 and 1994.
DIRECTOR COMPENSATION
The directors do not receive any compensation for services rendered to the
Company in their capacities as directors.
EMPLOYMENT CONTRACTS
Each of Messrs. Drenning, Fajerski and Fowler (the "Management
Shareholders") have employment agreements with the Company which expire on
October 20, 1998. The employment agreements provide for base salary, bonuses
and benefits, and contain noncompetition and nondisclosure provisions. The
employment agreements also provide for base pay and bonuses to be paid to each
Management Shareholder that are comparable to industry average base pay and
bonuses paid by comparable companies for comparable positions. Mr. Milliard is
also a senior vice president and secretary of Adelphia and has an employment
agreement with Adelphia which provides for base salary and insurance premium
payments and benefits. The Company reimburses Adelphia for Mr. Milliard's base
salary, insurance premium payments and benefits paid by Adelphia.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company was founded in October 1991. From the Company's inception
through March 31, 1996, Adelphia, which owns 89% of the Company's outstanding
common stock, provided all the equity capital to the Company and also made
loans and advances totaling approximately $50.9 million. The Company repaid
$25 million of such indebtedness to Adelphia from the proceeds of the Offering
on April 15, 1996, on which date the
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<PAGE>
remaining $26.1 million, including accrued interest and fees of approximately
$1.2 million for the period January 1, 1996 through April 15, 1996, was
evidenced by an unsecured subordinated note due April 16, 2003 that accrues
interest at an annual rate of 16.5% and is subordinated to the Senior Notes
upon Senior Note defaults. Interest on the subordinated note is payable
quarterly in cash, through the issuance of identical subordinated notes or in
any combination thereof, at the option of the Company. Interest (excluding
fees relating to amounts borrowed) accrued on the indebtedness to Adelphia at
an annual rate of 11.3% prior to April 15, 1996.
Messrs. Drenning, Fajerski and Fowler together hold 11% of the Company's
outstanding common stock, and are parties to a shareholder agreement, as
amended ("Shareholder Agreement") with Adelphia. The Shareholder Agreement
provides, among other things, (i) that upon the earlier of (a) the termination
of employment of any Management Shareholder or (b) after October 7, 1998, such
Management Shareholder may put his shares to Adelphia for fair market value,
unless such put rights are terminated as a result of the registration of the
Company's Common Stock under the Securities Act; (ii) for Adelphia to vote its
shares in the Company to elect each Management Shareholder to the Board of
Directors of the Company; and (iii) for certain buy/sell and termination
rights and duties among Adelphia and the Management Shareholders.
The Company has also entered into Term Loan and Stock Pledge Agreements
("Loan Agreements") with each of the Management Shareholders. Pursuant to the
Loan Agreements, each Management Shareholder has borrowed $1 million from the
Company. Each of these loans accrues interest at the average rate at which the
Company can invest cash on a short-term basis, is secured by a pledge of the
borrower's common stock in the Company, and matures upon the earlier of (i)
October 8, 1998 or (ii) the date when the Company's common stock is registered
under the 1933 Act and the Management Shareholders have the right to sell
their shares pursuant to the registration rights agreement discussed below.
Each Loan Agreement also provides that any interest accruing on a loan from
the date six months after the date of such loan shall be offset by a bonus
payment which shall be paid when principal and interest thereon are due and
which shall include additional amounts to pay income taxes applicable to such
bonus payment. The Company has also agreed to provide the Management
Shareholders with one collective demand registration right and certain
piggyback registration rights in an initial public offering of the Company's
common stock.
During Fiscal 1994, 1995, 1996 and the three months ended June 30, 1996, the
Company incurred charges from Adelphia of $0.2, $0.2, $0.3 and $0.01 million,
respectively, for the provision to the Company of shared corporate overhead
services in areas such as personnel, payroll, management information services,
shared use of office and network facilities and support equipment. The Company
expects that charges for the provision of similar services by Adelphia to the
Company, or by the Company to Adelphia, will continue to be incurred or
charged by the Company in the future. The transactions related to the
provision of these services have been based on allocation of Adelphia's costs
incurred for these services, and do not necessarily represent the cost to the
Company had these services been provided on an arm's length basis. During
Fiscal 1995, 1996 and the three months ended June 30, 1996, the Company paid
Adelphia or certain of Adelphia's affiliates, fiber lease payments of $0.3,
$1.0 and $0.3 million, respectively.
OWNERSHIP OF CAPITAL STOCK
The Company previously had authorized capital consisting of 1,000 shares of
Common Stock, par value of $1.00 per share. Prior to the closing of the
Offering of the Units, the Company recapitalized (the "Recapitalization") by
(i) amending its authorized capital to consist of 30,000,000 shares of Common
Stock, par value $0.01 per share ("Common Stock") 5,000,000 shares of
Preferred Stock, par value $0.01 per share ("Preferred Stock"), and (ii)
declaring a stock split resulting in 10,000,000 shares of Common Stock being
outstanding. As of the date hereof, Adelphia owns 8,900,020 shares of Common
Stock and Messrs. Drenning, Fajerski and Fowler each own 366,660 shares of
Common Stock. In connection with the closing of the Offering of the Units, the
Company issued Warrants which will be exercisable to purchase 613,427 shares
of Common Stock at an exercise price of $0.01 per share. In addition, Adelphia
and Messrs. Drenning, Fajerski and Fowler are parties to a shareholders
agreement. See "Certain Relationships and Transactions."
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<PAGE>
The following table provides information, as of September 1, 1996, with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to be a beneficial owner of more than 5% of any
class of the Company's voting securities, (ii) the directors and executive
officers and (iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF
COMMON STOCK COMMON STOCK
------------ -------------
<S> <C> <C>
Adelphia Communications Corporation (1).............. 8,900,020 89.0%
Charles R. Drenning (2).............................. 366,660 3.67%
Paul D. Fajerski (2)................................. 366,660 3.67%
Randolph S. Fowler (2)............................... 366,660 3.67%
All executive officers and directors as a group
(eight persons)..................................... 1,099,980 11.0%
</TABLE>
- --------
(1) The business address of Adelphia Communications Corporation is the same as
the Company. In their capacity as executive officers of Adelphia, the
following persons share or may be deemed to share voting and dispositive
power over the shares of Common Stock, subject to the discretion of the
Board of Directors of Adelphia: John J. Rigas, Michael J. Rigas, Timothy
J. Rigas, James P. Rigas and Daniel R. Milliard.
(2) The business address of each such holder is 2570 Boyce Plaza, Pittsburgh,
Pennsylvania 15241.
DESCRIPTION OF THE CAPITAL STOCK
The following description of the capital stock of Hyperion and certain
provisions of Hyperion's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by Hyperion's Certificate of Incorporation
and Bylaws, which documents are filed as exhibits to the Registration
Statement of which this Prospectus is a part and are incorporated herein by
reference.
Hyperion's authorized capital stock consists of 30,000,000 shares of Common
Stock, par value $.01 per share, and 5,000,000 shares of Preferred Stock, par
value $0.01 per share.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive dividends ratably, if any such dividends are declared,
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Restrictions." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior rights of the holders of the Preferred Stock
then outstanding. There are no redemption or sinking fund provisions available
to the Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be issued upon completion of
this offering will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time such shares of Preferred Stock, in one or more classes or series. Each
class or series of Preferred Stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by the Board of
Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights. The ownership and control of the Company by the
holders of Common Stock would be diluted if the Company were to issue
Preferred Stock that had voting rights or that was convertible into Common
Stock. In addition, the holders of Preferred Stock issued by the Company would
be entitled by law to vote on certain transactions such as a merger or
consolidation, and thus the issuance of Preferred Stock could dilute the
voting rights of the holders of Common Stock on such issues.
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<PAGE>
The Company currently has no shares of Preferred Stock outstanding. At
present, the Company has no plans to issue any shares of Preferred Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
Delaware General Corporation Law
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation, the voting stock of which is generally publicly traded (i.e.,
listed on a national securities exchange or authorized for quotation on an
inter-dealer quotation system of a registered national securities association)
or held of record by more than 2,000 stockholders, from engaging in any
"business combination" with any "interested stockholder" for a period of three
years following the time that such stockholder became an interested
stockholder, unless (i) prior to such time, the Board of Directors of the
corporation approved either such business combination or the transaction which
resulted in such stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in such stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time such transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (y) by persons who are directors and also
officers and (z) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) at or subsequent
to such time, such business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transactions involving the corporation beneficially-
owned by the interested stockholder; or (v) the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning (or within the past three years having owned) 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
Certificate of Incorporation
The Company's Certificate of Incorporation, as amended, by means of a "blank
check preferred" provision authorizes the Board of Directors, at any time, to
divide any or all of the shares of Preferred Stock into one or more series and
to fix and determine the number of shares and the designation of such series
so as to distinguish it from the shares of all other series. Further, the
Board of Directors, when issuing a series of Preferred Stock, may fix and
determine the voting rights, designations, preferences, qualifications,
privileges, limitations, options, conversion rights, restrictions and other
special or relative rights of the Preferred Stock of such series.
This blank check preferred provision gives the Board of Directors
flexibility in dealing with methods of raising capital and responding to
possible hostile takeover attempts. The provision may have the effect of
making it more difficult for a third party to acquire the Company, discourage
a third party from attempting to acquire the Company or deter a third party
from paying a premium to acquire a majority of the outstanding voting stock of
the Company. Additionally, depending on the rights and preferences of any
series of Preferred Stock issued and outstanding, the issuance of Preferred
Stock may adversely affect the voting and other rights of the holders of the
Common Stock, including the possibility of the loss of voting control to
others.
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<PAGE>
DIVIDEND RESTRICTIONS
The terms of the Indenture for the Senior Notes contain restrictions on the
ability of the Company to pay dividends on the Common Stock. The payment of
dividends on the Common Stock is also subject to the preferences that may be
applicable to any then outstanding Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is the Company. The
Transfer Agent and Registrar for the Warrants is Bank of Montreal Trust
Company, New York, New York.
DESCRIPTION OF WARRANTS
The Warrants were issued pursuant to the Warrant Agreement between the
Company and Bank of Montreal Trust Company, as warrant agent (the "Warrant
Agent") on April 15, 1996 as part of a private placement by the Company of
329,000 units consisting of $329.0 million aggregate principle amount at
maturity of Senior Notes and Warrants to purchase an aggregate of 613,427
shares of Common Stock of the Company. The following summary of certain
provisions of the Warrant Agreement and the Warrants does not purport to be
complete and is qualified in its entirety by reference to the Warrant
Agreement and the Warrants, including the definitions therein of certain
terms. As used in this section, the term "Company" refers only to Hyperion
Telecommunications, Inc. and not to its subsidiaries.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to purchase
1.8645 Warrant Shares at the Exercise Price of $0.01 per share. The Exercise
Price and the number of Warrant Shares issuable on exercisable of a Warrant
are both subject to adjustment in certain cases referred to below. The
Warrants are exercisable at any time on or after the earlier to occur of (i)
May 1, 1997 and (ii) in the event a Change of Control occurs, the date the
Company mails notice thereof to holders of the Senior Notes and to the holders
of the Warrants, Warrant Shares and any other securities issued or issuable
with respect thereto. Unless exercised, the Warrants will automatically expire
on April 1, 2001, the Expiration Date. The Warrants will entitle the holders
thereof to purchase in the aggregate approximately 5.78% of the outstanding
Common Stock of the Company on a fully-diluted basis as of the date of
issuance of the Warrants. The Company will give notice of expiration not less
than 90 and not more than 120 days prior to the Expiration Date to the
registered holders of the then outstanding Warrants. If the Company fails to
give such notice, the Warrants will not expire until 90 days after the Company
gives such notice. In no event will holders be entitled to any damages or
other remedy for the Company's failure to give such notice other than any such
extension.
The Warrants may be exercised by surrendering to the Company the Warrant
certificates evidencing such Warrants, if any, with the accompanying form of
election to purchase, properly completed and executed, and upon payment of the
Exercise Price. Payment of the Exercise Price may be made in cash or by
certified or official bank check, payable to the order of the Company, or by
surrender of additional Warrants. Upon surrender of the Warrant certificate
and payment of the Exercise Price, the Warrant Agent will deliver or cause to
be delivered, to or upon the written order of such holder, stock certificates
representing the number of whole Warrant Shares or other securities or
property to which such holder is entitled under the Warrants and Warrant
Agreement, including without limitation any cash payment to adjust for
fractional interests in Warrant Shares issuable upon such exercise of
Warrants. If less than all of the Warrants evidenced by a Warrant certificate
are exercised, a new Warrant certificate will be issued for the remaining
number of Warrants.
No fractional Warrant Share will be issued upon exercise of the Warrants. If
any fraction of a Warrant Share would, except for the foregoing provision, be
issuable on the exercise of any Warrants (or specified portion thereof), the
Company must pay to the holder an amount in cash equal to the then current
market price per Warrant Share, as determined on the day immediately preceding
the date the Warrant is exercised, multiplied by such fraction, computed to
the nearest whole cent.
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<PAGE>
Certificates for Warrants will be issued in registered form only, and no
service charge will be made for registration of transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration or transfer or exchange of Warrant
certificates.
The holders of the Warrants have no right to vote on matters submitted to
the stockholders of the Company and have no right to receive cash dividends.
The holders of the Warrants are not entitled to share in the assets of the
Company in the event of the liquidation, dissolution or winding up of the
Company's affairs.
ADJUSTMENTS
The number and kind of Warrant Shares purchasable upon the exercise of the
Warrants and the Exercise Price both will be subject to adjustment in certain
events including: (i) the payment by the Company of dividends (or other
distributions) on Common Stock of the Company payable in Common Stock of the
Company or other shares of the Company's capital stock, (ii) subdivisions,
combinations and reclassifications of Common Stock of the Company, (iii) the
issuance to all holders of Common Stock of the Company of rights, options or
warrants that entitled them to subscribe for Common Stock of the Company, or
of securities convertible into or exchangeable for shares of Common Stock of
the Company, in either case for a consideration per share of Common Stock
which is less than the current market price per share (as defined) of Common
Stock of the Company and (iv) the distribution to all holders of Common Stock
of the Company of any of the Company's assets, debt securities or any rights
or warrants to purchase securities (excluding those rights and warrants
referred to in clause (iii) above and excluding cash dividends or other cash
distributions from current or retained earnings).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price, provided, however, that any adjustment which is not made will
be carried forward and taken into account in any subsequent adjustment.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each Warrant shall thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrants been exercised immediately prior thereto.
RESERVATION OF SHARES
The Company has authorized and reserved for issuance and will at all times
reserve and keep available such number of shares of Common Stock as will be
issuable upon the exercise of all outstanding Warrants. Such shares of Common
Stock, when paid for and issued, will be duly and validly issued, fully paid
and non-assessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issued thereof.
AMENDMENT
From time to time, the Company and the Warrant Agent, without consent of the
holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making
changes that do not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants requires the written
consent of the holders of a majority of the then outstanding Warrants. The
consent of each holder of the Warrants affected is required for any amendment
pursuant to which the Exercise Price would be increased or the number of
Warrant Shares purchasable upon exercise of Warrants would be decreased (other
than pursuant to adjustments provided in the Warrant Agreement as generally
described above).
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<PAGE>
REPORTS
Whether or not required by the rules and regulation of the Commission, so
long as any of the Warrants remain outstanding, the Company shall cause copies
of (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by the Company's
certified independent accountants; (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports; and (iii) on a quarterly basis, certain
financial information and operating data with respect to each Subsidiary and
Joint Venture engaged in a Telecommunications Business in the form specified
by Section E of the Indenture with respect to the Senior Notes to be filed
with the Warrant Agent and the Commission and mailed to the holders at their
addresses appearing in the register of Warrants maintained by the Warrant
Agent.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Warrants to be resold as set
forth herein have been issued in the form of one Global Warrant. The Global
Warrant has been deposited with, or on behalf of, the Depositary and
registered in the name of the Global Warrant Holder.
Warrants that were issued as described below under "Certificated Securities"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer to a qualified institutional
buyer of Certificated Securities initially issued to a purchaser of the
Warrants who does not hold its interest in the Warrants (a "Non-Global
Purchaser"), such Certificated Securities may, unless the Global Warrant has
previously been exchanged for Certificated Securities, be exchanged for an
interest in the Global Warrant representing the amount of warrants being
transferred
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in
the Global Warrant may, upon request to the Trustee, exchange such beneficial
interest for Warrants in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such Person or Persons (or
the nominee of any thereof). All such certificated Senior Notes would be
subject to the legend requirements described herein under "Notice of
Investors." In addition, if (i) the Company notifies the Trustee in writing
that the Depositary is no longer willing or able to act as a depositary and
the Company is unable to locate a qualified successor within 90 days or (ii)
the Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Warrants in the form of Certificated Securities under
the Indenture, then, upon surrender by the Global Warrant Holder of its Global
Warrant, Warrants in such form will be issued to each Person that the Global
Warrant Holder and the Depositary identify as being the beneficial owner of
the related Warrants.
57
<PAGE>
Neither the Company nor the Trustee will be liable for any delay by the
Global Warrant Holder or the Depositary in identifying the beneficial owners
of Warrants and the Company and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the Global Warrant Holder or the
Depositary for all purposes.
THE SELLING SECURITYHOLDERS
The following table sets forth, as of September 24, 1996 certain information
regarding the Selling Securityholders' ownership of the Company's Common Stock
and of the Warrants. Except as disclosed in the footnotes to the above table,
no Selling Securityholder has held any position, office or had any other
material relationship with the Company, its predecessors or affiliates during
the past three years. To the knowledge of the Company, except as disclosed in
the table below, the selling Securityholders did not own, nor have any rights
to acquire, any other shares of Common Stock as of the date of this
Prospectus.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
- ----------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------
BENEFICIALLY BENEFICIALLY
BENEFICIALLY OWNED BENEFICIALLY OWNED OWNED
NAME OF SELLING OWNED PRIOR TO OFFERED AFTER THIS PRIOR TO THIS OFFERED AFTER THIS
SECURITYHOLDER THIS OFFERING FOR SALE OFFERING OFFERING FOR SALE OFFERING
- ----------------------------------------------------------------------------------------------------
NUMBER PERCENT NUMBER PERCENT
OF OF OF OF
SHARES SHARES WARRANTS WARRANTS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cede & Co.
(and TOTAL) 613,427 5.78% 613,427 0 329,000 100% 329,000 0
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Warrants owned by the Selling Securityholders represent all of the
Warrants covered by the Registration Statement. Many of the Selling
Securityholders acquired their Warrants in April 1996, pursuant to the private
placement by the Company of units, each unit consisting of a $1,000 principal
amount at maturity of 13% senior discount notes due 2003 (the "Notes") and one
Warrant. In September 1996, the Notes were exchanged for 13% Series B senior
discount notes due 2003 (the "Series B Notes"). The Series B Notes and the
Warrants may be separately traded.
PLAN OF DISTRIBUTION
The Warrants or the Warrant Shares may be offered by the Selling
Securityholders in transactions in the over-the-counter-market at prices
obtainable at the time of sale or in privately negotiated transactions at
prices determined by negotiation. The Selling Securityholders may effect such
transactions by selling the Warrants or the Warrant Shares to or through
securities broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling
Securityholders and/or the purchasers of the Warrants or the Warrant Shares
for whom such broker-dealers may act as agent or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). Additionally, agents or dealers may
acquire Warrants, Warrant Shares or interests therein as a pledgee and may,
from time to time, effect distributions of the Warrants, Warrant Shares or
interests in such capacity.
The Selling Securityholders, the brokers and dealers through whom sales of
the Warrants or Warrant Shares are made and any agent or dealer who
distributes Warrants or Warrant Shares acquired as pledgee may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and profit on any resale of the Warrants or
Warrant Shares as principal might be deemed to be underwriting discounts and
commissions under the Securities Act.
58
<PAGE>
LEGAL MATTERS
The validity of the Warrants and Warrant Shares will be passed upon on
behalf of the Company by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania.
EXPERTS
The financial statements as of March 31, 1995 and 1996 and for each of the
three years in the period ended March 31, 1996 included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to a change in the method of
accounting for income taxes), and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
59
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets, March 31, 1995 and 1996, and June 30, 1996
(Unaudited)............................................................... F-3
Consolidated Statements of Operations, Years Ended March 31, 1994, 1995 and
1996, and
Three Months Ended June 30, 1995 and 1996 (Unaudited)..................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency), Years Ended
March 31, 1994,
1995 and 1996, and Three Months Ended June 30, 1996 (Unaudited)........... F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1994, 1995 and
1996, and
Three Months Ended June 30, 1995 and 1996 (Unaudited)..................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hyperion Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of Hyperion
Telecommunications, Inc. and subsidiaries as of March 31, 1995 and 1996 and
the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hyperion Telecommunications,
Inc. and subsidiaries at March 31, 1995 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the consolidated financial statements, effective
April 1, 1993, the Company changed its method of accounting for income taxes.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
June 28, 1996 (August 12, 1996 as to Note 4 and the
sixth paragraph of Note 6)
F-2
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
---------------- JUNE 30,
1995 1996 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents...................... $ -- $ -- $132,142
Other current assets........................... 511 282 304
Due from affiliates--net....................... 1,799 -- 2,115
------- ------- --------
Total current assets......................... 2,310 282 134,561
Investments...................................... 12,564 21,087 20,988
Property, plant and equipment--net............... 7,538 12,561 14,044
Other assets--net................................ 712 1,045 6,906
Deferred income taxes--net....................... 88 294 294
------- ------- --------
Total........................................ $23,212 $35,269 $176,793
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY):
- ------------------------------------
Current liabilities:
Accounts payable............................... $ 1,169 $ 2,529 $ 492
Due to affiliates--net......................... -- 8,707 --
Other current liabilities...................... 205 501 511
------- ------- --------
Total current liabilities.................... 1,374 11,737 1,003
13% Senior Discount Notes due 2003............... -- -- 168,620
Note payable--Adelphia........................... 35,541 50,855 25,855
------- ------- --------
Total liabilities............................ 36,915 62,592 195,478
------- ------- --------
Commitments and contingencies (Note 6)
Stockholders' equity (deficiency):
Common stock, $.01 par value, 30,000,000 shares
authorized, 10,000,000 shares outstanding..... 100 100 100
Warrants....................................... -- -- 11,087
Loans to Stockholders.......................... -- -- (3,000)
Accumulated deficit............................ (13,803) (27,423) (26,872)
------- ------- --------
Total stockholders' equity (deficiency)...... (13,703) (27,323) (18,685)
------- ------- --------
Total........................................ $23,212 $35,269 $176,793
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
-------------------------- ---------------
1994 1995 1996 1995 1996
------- ------- -------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 417 $ 1,729 $ 3,322 $ 686 $1,102
------- ------- -------- ------- ------
Operating expenses:
Network operations.............. 330 1,382 2,690 628 859
Selling, general and
administrative.................. 2,045 2,524 3,084 831 1,027
Depreciation and amortization... 189 463 1,184 250 695
------- ------- -------- ------- ------
Total......................... 2,564 4,369 6,958 1,709 2,581
------- ------- -------- ------- ------
Operating loss.................... (2,147) (2,640) (3,636) (1,023) (1,479)
Other income (expense):
Gain on sale of investment...... -- -- -- -- 8,405
Interest income................. 17 39 199 16 1,433
Interest expense and fees....... (2,164) (3,321) (6,088) (1,328) (6,169)
------- ------- -------- ------- ------
(Loss) income before income taxes,
equity in net loss of joint
ventures and cumulative effect of
change in accounting principle... (4,294) (5,922) (9,525) (2,335) 2,190
Income tax benefit (expense)...... 55 29 197 19 (3)
------- ------- -------- ------- ------
(Loss) income before equity in net
loss of joint ventures and
cumulative effect of change in
accounting principle............. (4,239) (5,893) (9,328) (2,316) 2,187
Equity in net loss of joint
ventures.......................... (528) (1,799) (4,292) (797) (1,636)
------- ------- -------- ------- ------
(Loss) income before cumulative
effect of change in accounting
principle........................ (4,767) (7,692) (13,620) (3,113) 551
Cumulative effect of change in
accounting for income taxes...... 42 -- -- -- --
------- ------- -------- ------- ------
Net (loss) income................. $(4,725) $(7,692) $(13,620) $(3,113) $ 551
======= ======= ======== ======= ======
(Loss) income per weighted average
share of common stock before
cumulative effect of change in
accounting principle............. $ (0.48) $ (0.77) $ (1.36) $ (0.31) $ 0.05
Cumulative effect per weighted
average share of common stock of
change in accounting for income
taxes............................ 0.01 -- -- -- --
------- ------- -------- ------- ------
Net (loss) income per weighted
average share of common stock.... $ (0.47) $ (0.77) $ (1.36) $ (0.31) $ 0.05
======= ======= ======== ======= ======
Weighted average shares of common
stock outstanding................. 10,000 10,000 10,000 10,000 10,525
======= ======= ======== ======= ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON LOANS TO ACCUMULATED STOCKHOLDERS'
STOCK WARRANTS STOCKHOLDERS DEFICIT EQUITY (DEFICIENCY)
------ -------- ------------ ----------- -------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993. $100 $ -- $ -- $ (1,386) $ (1,286)
Net loss.............. -- -- -- (4,725) (4,725)
---- ------- ------- -------- --------
Balance, March 31, 1994. 100 -- -- (6,111) (6,011)
Net loss.............. -- -- -- (7,692) (7,692)
---- ------- ------- -------- --------
Balance, March 31, 1995 100 -- -- (13,803) (13,703)
Net loss.............. -- -- -- (13,620) (13,620)
---- ------- ------- -------- --------
Balance, March 31, 1996. 100 -- -- (27,423) (27,323)
Proceeds from issuance
of stock
warrants (unaudited). -- 11,087 -- -- 11,087
Loans to stockholders'
(unaudited).......... -- -- (3,000) -- (3,000)
Net income (unau-
dited)............... -- -- -- 551 551
---- ------- ------- -------- --------
Balance, June 30, 1996
(unaudited)............ $100 $11,087 $(3,000) $(26,872) $(18,685)
==== ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
CASH FLOWS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
--------------------------- -----------------
1994 1995 1996 1995 1996
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income............ $(4,725) $( 7,692) $(13,620) $(3,113) $ 551
Adjustments to reconcile net
(loss) income to net cash
used in operating
activities:
Depreciation............... 183 397 1,061 214 335
Amortization............... 6 66 123 36 360
Equity in net loss of joint
ventures.................. 528 1,799 4,292 797 1,636
Non-cash interest expense.. 2,164 3,321 6,088 1,328 4,915
Cumulative effect of
accounting change......... (42) -- -- -- --
Deferred income taxes...... (9) (37) (206) -- --
Gain on sale of investment. -- -- -- -- (8,405)
Changes in operating assets
and liabilities:
Other assets--net........ (535) (550) (227) 26 (22)
Accounts payable......... 223 499 1,360 (966) (2,037)
Other liabilities--net... 86 67 296 57 10
------- -------- -------- ------- --------
Net cash used in operating
activities.................... (2,121) (2,130) (833) (1,621) (2,657)
------- -------- -------- ------- --------
Cash flows from investing
activities:
Expenditures for property,
plant and equipment........ (3,097) (2,850) (6,084) (1,370) (1,818)
Proceeds from sale of
investment................. -- -- -- -- 11,618
Investments in joint
ventures................... (5,510) (7,526) (12,815) (4,020) (4,750)
------- -------- -------- ------- --------
Cash (used in) provided by
investing activities.......... (8,607) (10,376) (18,899) (5,390) 5,050
------- -------- -------- ------- --------
Cash flows from financing
activities:
Proceeds from debt.......... -- -- -- -- 163,705
Proceeds from issuance of
stock warrants............. -- -- -- -- 11,087
Costs associated with debt
financing.................. -- -- -- -- (6,221)
Loans to stockholders....... -- -- -- -- (3,000)
Borrowings on (repayment of)
note payable--Adelphia..... 12,990 12,252 9,226 5,524 (25,000)
Advances from (to) related
parties.................... (2,381) 254 10,506 1,487 (10,822)
------- -------- -------- ------- --------
Net cash provided by financing
activities.................... 10,609 12,506 19,732 7,011 129,749
------- -------- -------- ------- --------
Net (decrease) increase in cash
and cash equivalents.......... (119) -- -- -- 132,142
Cash and cash equivalents
beginning of period........... 119 -- -- -- --
------- -------- -------- ------- --------
Cash and cash equivalents end
of period..................... $ -- $ -- $ -- $ -- $132,142
======= ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The consolidated financial statements include the accounts of Hyperion
Telecommunications, Inc. and its wholly owned subsidiaries (the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company was formed in 1991 and is an 89% owned subsidiary
of Adelphia Communications Corporation ("Adelphia"). The remaining 11% is
owned by certain key Company officers.
The Company provides telecommunications service through its subsidiaries and
joint ventures, in which it has less than a majority equity interest. The
Company's efforts have been directed primarily toward becoming an owner and
manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company
generally partners with a local cable television or utility company, whose
fiber facilities are located in the market areas, to build competitive access
fiber optic networks. The Company then operates the networks for a management
fee. Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and
management fees from its unconsolidated joint ventures.
Joint ventures in which the Company does not have a majority interest are
accounted for under the equity method of accounting.
Unaudited Interim Information
In the opinion of management, all adjustments, consisting of only normal
recurring accruals necessary to present fairly the unaudited results of
operations for the three months ended June 30, 1995 and 1996, have been
included.
Cash and cash equivalents
Cash and cash equivalents generally consist of highly liquid instruments
with an initial maturity date of three months or less.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with
network engineering, design and construction.
Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.
The estimated useful lives of the Company's principal classes of property,
plant and equipment are as follows:
<TABLE>
<S> <C>
Telecommunications networks...................................... 10-20 years
Network monitoring equipment..................................... 5-10 years
Other............................................................ 3-10 years
</TABLE>
F-7
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Revenue Recognition
The Company recognizes revenues related to management and network monitoring
of the joint ventures in the month that the related services are provided. The
Company recognizes revenue from telecommunications services in the month the
related service is provided. Revenues on billings to customers for services in
advance of providing such services are deferred and recognized when earned.
Income (Loss) Per Common Share
The computation of income (loss) per common share is based upon the weighted
average number of common shares outstanding. All references in the
accompanying consolidated financial statements to the number of shares of
common stock have been retroactively restated to reflect the stock split (See
Note 5).
Income Taxes
Deferred income taxes are recognized for the tax effects of temporary
differences between financial statement and income tax bases of assets and
liabilities and for loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established
to reduce deferred tax assets to the net amount that management believes will
more likely than not be realized. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Other Assets
Costs incurred in developing new networks or expanding existing networks,
including network design, negotiating rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Pre-operating costs represent certain nondevelopment costs incurred during the
pre-operating phase of a newly constructed network and are amortized over
five-year periods commencing with the start of operations.
Asset Impairments
The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.
Financial Instruments
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentration of
credit risk with respect to accounts receivable is limited due to the
dispersion of the Company's customer base among different entities and
geographic areas. The carrying value of the Note Payable--Adelphia (see Note
4) at March 31, 1995 and 1996 approximates its fair value based upon the terms
of the note in comparison with other similar instruments.
F-8
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1)THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
For the years ended March 31, 1994, 1995 and 1996, certain amounts have been
reclassified to conform with the June 30, 1996 presentation.
(2)PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------
JUNE 30,
1995 1996 1996
------ ------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Telecommunications networks................. $1,704 $ 6,312 $ 6,668
Network monitoring equipment................ 3,244 5,267 6,332
Construction in process..................... 2,910 2,245 2,636
Other....................................... 270 388 394
------ ------- -----------
8,128 14,212 16,030
Less accumulated depreciation............... (590) (1,651) (1,986)
------ ------- -----------
Total..................................... $7,538 $12,561 $ 14,044
====== ======= ===========
</TABLE>
(3)INVESTMENTS
The equity method of accounting is used to account for investments in joint
ventures in which the Company owns less than a majority interest. Under this
method, the Company's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or losses of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
F-9
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3)INVESTMENTS, CONTINUED
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------
OWNERSHIP JUNE 30,
PERCENTAGE 1995 1996 1996
---------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
EQUITY BASIS INVESTMENTS:
Continental Fiber Technologies
(Jacksonville)..................... 20% $ 1,467 $ 4,701 $ 5,399
Multimedia Hyperion
Telecommunications (Wichita)....... 49.9% 1,445 2,620 2,719
Louisville Lightwave............... 50% 531 996 1,640(1)
NewChannels Hyperion
Telecommunications (Albany)........ 50% 924 999 924
NewChannels Hyperion
Telecommunications (Binghamton).... 20% 355 504 504
NHT Partnership (Buffalo).......... 40% 1,369 2,457 2,937
NewChannels Hyperion
Telecommunications (Syracuse)...... 50% 2,957 3,140 3,215
Hyperion of Harrisburg............. 50% 701 1,600 1,919
Hyperion of Tennessee (Nashville).. 25% 695 1,345 1,345
Alternet of Virginia (Richmond).... 37% 1,633 3,406 3,813
New Jersey Fiber Technologies (New
Brunswick)......................... 19.7% 9 956 1,231
TCG of South Florida............... 15.7% 2,981 4,679 --
PECO-Hyperion (Philadelphia) ...... 50% -- -- 1,692
Other ............................. Various 18 497 622
------- ------- -----------
15,085 27,900 27,960
Cumulative equity in net losses.... (2,521) (6,813) (6,972)
------- ------- -----------
Total Investments.................. $12,564 $21,087 $ 20,988
======= ======= ===========
</TABLE>
(1) As discussed in Note 6, the Company has committed to make additional
capital contributions of approximately $2,300 relating to the increase in
its ownership percentage.
Summarized unaudited combined financial information for the Company's
investments being accounted for using the equity method of accounting as of
and for the years ended March 31, 1994, 1995, 1996, and the three months ended
June 30, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
JUNE 30,
1994 1995 1996 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Current assets............................. $ 7,278 $ 6,842 $ 5,709 $ 7,075
Non-current assets......................... 29,410 59,870 109,583 85,182
Current liabilities........................ 10,345 6,444 11,683 7,580
Non-current liabilities.................... 2,743 20,858 25,912 19,427
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30,
------------------------- --------------------
1994 1995 1996 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 1,028 $ 3,894 $11,513 $1,435 $2,651
Net loss.................... (2,059) (7,319) (14,475) (1,619) (3,572)
</TABLE>
F-10
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3) INVESTMENTS, CONTINUED
Amounts shown above as of and for the years ended March 31, 1994, 1995 and
1996 include TCG of South Florida. Amounts shown above as of and for the three
months ended June 30, 1995 and 1996 exclude TCG of South Florida.
On May 16, 1996, the Company sold its 15.7% interest in TCG of South Florida
to a third party for approximately $11,618 cash resulting in a pre-tax gain of
approximately $8,400. Amounts related to TCG of South Florida included in the
Company's investments and equity in net loss of joint ventures as of and for
the year ended March 31, 1996 were $3,422 and $778, respectively. The
Company's equity in net loss of joint ventures included a loss of $221 for TCG
of South Florida for the three months ended June 30, 1996.
(4)FINANCING ARRANGEMENTS
Note Payable--Adelphia
The Company has an unsecured credit arrangement with Adelphia which had no
repayment terms prior to April 15, 1996. On April 15, 1996, $25,000 of the
proceeds from the sale of the 13% Senior Discount Notes and Warrants discussed
below were used to repay a portion of this obligation. Interest expense and
fees on this credit arrangement were based upon the weighted average cost of
unsecured borrowings of Adelphia during the corresponding periods.
Interest at 11.28% per annum plus fees was charged on the Note Payable--
Adelphia for the years ended March 31, 1994, 1995 and 1996. The total amount
of interest converted to note principal at March 31, 1996 and June 30, 1996 is
$9,007.
Effective April 15, 1996, the remaining balance due on the Note Payable--
Adelphia is evidenced by an unsecured subordinated note due April 16, 2003.
This obligation bears interest at 16.5% per annum with interest payable
quarterly in cash; by issuing additional subordinated notes; or a combination
of cash and additional subordinated notes, all of which is at the Company's
option.
13% Senior Discount Notes and Warrants
On April 15, 1996, the Company issued $329,000 of 13% Senior Discount Notes
(the "Senior Notes") due April 15, 2003 and 329,000 warrants to purchase an
aggregate of 613,427 shares of its common stock. Proceeds to the Company, net
of discounts, commissions, and other transaction costs were approximately
$168,600. Such
net proceeds were used to pay $25,000 of the Note Payable--Adelphia discussed
above, to make loans of $3,000 to certain key Company officers (see Note 5)
and to fund the Company's capital expenditures, working capital requirements,
operating losses and its pro-rata investments in joint ventures. Use of
proceeds from the Senior Notes also included the repayment of amounts related
to capital expenditures, working capital requirements, operating losses and
pro-rata investments in joint ventures totaling $12,800 incurred during the
period from January 1, 1996 to April 15, 1996. These amounts had been funded
during the same time period through advances from Adelphia.
Prior to April 15, 2001, interest on the Senior Notes is not payable in
cash, but is added to principal. Thereafter, interest is payable semi-annually
commencing October 15, 2001. The Senior Notes are unsecured and are senior to
the Note Payable--Adelphia and all future subordinated indebtedness. On or
before April 15,
F-11
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1966 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4) FINANCING ARRANGEMENTS, CONTINUED
1999 and subject to certain restrictions, the Company may redeem, at its
option, up to 25% of the aggregate principal amount of the Senior Notes at a
price of 113% of the Accreted Value (as defined in the Indenture). On or after
April 15, 2001, the Company may redeem, at its option, all or a portion of the
Senior Notes at 106.5% which declines to par in 2002, plus accrued interest.
The holders of the Senior Notes may put the Senior Notes to the Company at
any time at a price of 101% upon the occurrence of a Change of Control (as
defined in the Indenture). In addition, the Company will be required to offer
to purchase Senior Notes at a price of 100% with the proceeds of certain asset
sales (as defined in the Indenture).
The Indenture stipulates, among other things, limitations on additional
borrowings, issuance of equity instruments, payment of dividends and other
distributions, repurchase of equity interests or subordinated debt, sale--
leaseback transactions, liens, transactions with affiliates, sales of Company
assets, mergers and consolidations.
In accordance with a registration rights agreement, the Company filed a
registration statement offering to exchange the Senior Notes for Series B
Senior Discount Notes registered under the Securities Act of 1933, as amended
(the "Securities Act"). Terms of the Series B Senior Discount Notes are
substantially the same as the Senior Notes. The above exchange was consummated
within the time periods stipulated in the agreement. The Company's filing
became effective as of August 12, 1996 and the Company did not incur any
liquidated damages.
The Warrants are exercisable at $.01 per share upon the earlier of May 1,
1997 or a Change of Control. Unless exercised, the Warrants expire on April 1,
2001. The number of shares and the exercise price for which a warrant is
exercisable are subject to adjustment under certain circumstances. In
accordance with a registration rights agreement, the Company has agreed to
file shelf registration statements under the Securities Act covering the
Warrants and the Warrant Shares. Under certain circumstances, if the shelf
registrations are not effective within the time period specified in the
agreement, the Company must pay liquidated damages to the holders of the
Warrants or Warrant Shares ranging from $.0025 to $.0125 per week per Warrant
or per Warrant Share then issuable based on the amount of additional time
required to accomplish the shelf registrations.
If the Senior Notes and Warrants had been issued on April 1, 1995, interest
expense would have been approximately $27,796 for the year ended March 31,
1996.
(5)STOCKHOLDERS' EQUITY
The common stock of the Company held by Adelphia and certain key Company
officers (the "Officers") is subject to sale and transfer restriction
provisions. These provisions state that none of the Officers may transfer any
shares unless they have offered to sell such shares to Adelphia (or the other
remaining Officers if Adelphia declines) at a price per share equal to the
terms of the proposed third party sale or exchange.
In accordance with a shareholder agreement, upon termination of employment
or at any time after October 7, 1996, the Officers could have required
Adelphia to purchase all their outstanding shares (the "Officers' Option"). At
any time after October 7, 2001, Adelphia could have required the Officers to
sell all of their outstanding shares to Adelphia (the "Adelphia Option"). The
price per share shall be equal to the fair market value of the shares as
determined by a nationally recognized financial advisor selected by Adelphia
and the Officers.
F-12
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5) STOCKHOLDERS' EQUITY, CONTINUED
On March 19, 1996, such shareholder agreement was amended primarily to (i)
grant the Officers certain registration rights regarding their common stock;
(ii) extend the Officers' Option date until after October 7, 1998; (iii)
extend the Adelphia Option date until after October 7, 2003 and (iv) provide
for aggregate loans to the Officers of $3,000 from the proceeds received from
the private placement of the Senior Notes and Warrants discussed in Note 4.
Such loans, including accrued interest at a rate equal to the rate which the
Company is able to invest cash on a short-term basis, are secured by a pledge
of each Officer's common stock in the Company and are payable to the Company
on the earlier of October 8, 1998 or the date of the registration of an equity
security of the Company as described below. Also, an amount equal to the
interest that accrues on such loans from the date six months after the date
the loans are made until due and payable will be satisfied through additional
compensation to the Officers. The shareholder agreement is terminated upon the
registration of an equity security of the Company under the Securities Act or
the Securities Exchange Act of 1934, as amended, which equity security is of
the same class as the equity security held by the Officers.
On March 19, 1996, the Board of Directors of the Company approved a ten
thousand-for-one stock split of its common stock and the reduction of the par
value from $1.00 per share to $.01 per share. All references in the
accompanying consolidated financial statements to the number of shares of
common stock and the par value have been retroactively restated to reflect
this stock split and par value reduction. In addition, on March 19, 1996, the
Board of Directors approved charter amendments to increase the Company's
authorized shares of common stock from 1,000 shares to 30,000,000 shares and
authorized 5,000,000 shares of preferred stock with terms of such preferred
stock to be determined by the Board of Directors of the Company. No preferred
stock has been issued by the Company.
(6)COMMITMENTS AND CONTINGENCIES
The Company rents office space, node space and fiber under leases with terms
which are generally less than one year or under agreements that are generally
cancelable on short notice. Total rental expense under all operating leases
aggregated $65, $478 and $1,210 for the years ended March 31, 1994, 1995 and
1996, respectively.
The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1996 are approximately:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1997................................................. $140
1998................................................. 14
1999................................................. 13
2000................................................. 4
2001................................................. 4
Thereafter........................................... --
</TABLE>
Under certain investment agreements, the Company has committed to make
specific capital contributions to the joint ventures. Total capital
commitments to be made as a result of these agreements at March 31, 1996 was
$2,299. Total capital commitments to be made as of June 30, 1996 increased to
$15,405 due to additional commitments related to the PECO-Hyperion
(Philadelphia) investment.
F-13
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) COMMITMENTS AND CONTINGENCIES, CONTINUED
Certain investors in two of the joint ventures have the right after a
specified period of time to sell their interest to the Company. Under one
agreement, the sales price represents the investor's aggregate capital
contribution less distributions plus interest accrued at the prime rate. The
Company's obligation under this commitment at March 31 and June 30, 1996 was
approximately $2,946 and $3,079 respectively. The sales price under the second
agreement is equal to the fair market value of such investor's interest.
The Company has agreed that it will make all required capital contributions
to Louisville Lightwave that are necessary to increase its ownership to 50%.
As of June 30, 1996, the Company expects these capital contributions will
aggregate approximately $2,300.
On August 1, 1996, the Company purchased additional general and limited
partnership interests in Hyperion of Tennessee for approximately $5,000, which
increases the Company's ownership of Hyperion of Tennessee to 95%. The
following unaudited financial information of the Company for the year ended
March 31, 1996 assumes that this acquisition had occurred on April 1, 1995:
<TABLE>
<S> <C>
Revenues $ 3,963
Net loss before extraordinary items 15,239
Net loss 15,239
Net loss per weighted average share of common
stock $1.52
</TABLE>
The Company has entered into employment agreements with certain key Company
officers, the terms of which expire on October 20, 1998, as amended. The
employment agreements provide for base salary, benefits and bonuses payable if
specified management goals are attained. In addition, the employment
agreements contain noncompetition and nondisclosure provisions.
The President of the Company has an employment agreement with Adelphia where
he is a vice president and secretary. His agreement provides for base salary,
benefits and insurance premium payments. The Company reimburses Adelphia for
such payments.
The Company's operations and the operations of its joint ventures may be
adversely affected by changes and developments in governmental regulation,
competitive forces and technology. The telecommunications industry is subject
to extensive regulation at the federal, state and local levels. On February 8,
1996, President Clinton signed the Telecommunications Act of 1996 (the
"Telecommunications Act"), the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934.
The more significant provisions of the Telecommunications Act and certain
of its possible effects are as follows:
The Telecommunications Act removes legal barriers of entry in local
telephone markets. This provision should enable the Company to provide a
full range of services in any state while potentially increasing the level
of competition the Company faces in all its markets.
The Telecommunications Act requires incumbent Local Exchange Company's
("LECs") to "interconnect" with competitors which will provide access to
certain networks under reasonable rates, terms and conditions. It is
uncertain how effective these requirements will be or their impact on the
Company until the FCC completes its rulemaking proceedings requiring the
LECs to provide telephone number portability, dialing parity, reciprocal
compensation, resale, access to rights-of-way and unbundling of network
services.
F-14
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) COMMITMENTS AND CONTINGENCIES, CONTINUED
The Telecommunications Act establishes procedures for LEC and Bell
Operating Company ("BOC") entry into new markets, including long distance
and cable television service. The Company's management believes LECs are
now more likely to invest in fiber optic networks and enter the video
market which will generate a revenue stream previously unavailable to them.
These facilities can then also be used to provide services that compete
with the Company. By allowing the BOC to enter the long distance market,
this may reduce the market share of the major long distance carriers (the
Company's joint ventures' primary customers) and have adverse consequences
on the Company's joint ventures' ability to generate revenues from the long
distance carriers.
The Telecommunications Act eliminates the requirement that LECs obtain FCC
authorization before constructing new facilities for interstate services
and limits the FCC's ability to review LEC tariff filings. The changes will
increase the speed with which the LECs are able to introduce new service
offerings and new pricing of existing services, thereby increasing the
LEC's ability to compete with the Company.
The Telecommunications Act requires the FCC to establish an explicit
mechanism for subsidizing service to markets that are less desirable,
either because of the high cost of providing service or the limited
revenues that might be available. This could be advantageous to the Company
or it could be beneficial to the Company's competitors depending on the
geographic areas and the type of customers for which subsidies are
available.
On July 2, 1996 the FCC released its First Report and Order and Further
Notice of Proposed Rulemaking promulgating rules and regulations to
implement Congress' statutory directive concerning number portability (the
"Number Portability Order"). The FCC ordered all LECs to begin phased
development of a long-term service provider portability method in the 100
largest Metropolitan Statistical Areas ("MSAs") no later than October 1,
1997, and to complete deployment in those MSAs by December 31, 1998. Number
portability must be provided in those areas by all LECs to all requesting
telecommunications carriers. As new carriers are at a competitive
disadvantage without telephone number portability, the Company believes the
Number Portability Order should enhance the Company's ability to offer
service in competition with the incumbent LECs, but it is uncertain how
effective these regulations will be in promoting number portability. The
Number Portability Order does not address how the costs of implementing
long-term service portability will be recovered. This issue is subject to
an additional comment period and is not expected to be decided until 1997.
On August 8, 1996 the FCC released its First Report and Order and Second
Report and Order and Memorandum Opinion and Order promulgating rules and
regulations to implement Congress' statutory directive concerning the
interconnection of CLEC and incumbent LEC networks and incumbent LEC
pricing of unbundled elements (the "Local Competition Orders"). The Local
Competition Orders adopt a national framework for interconnection but
leaves to the individual states the task of implementing the FCC's rules.
Because implementation of the Local Competition Orders will be at the state
level, it is uncertain how these new requirements will affect the Company.
The Local Competition Orders indicate that the FCC intends to take up
access charge reform as early as the fourth quarter of 1996 with new rules
in place as early as the first quarter of 1997. To the extent that the
Local Competition Orders reduce the ability of incumbent LECs to impose
non-cost-based access charges on IXCs, the Company's competitive advantage
in providing customers with access services will decrease. However, to the
extent that CLECs are able to interconnect with incumbent LEC networks on
favorable terms, the Company believes its ability to provide competitive
local exchange services will increase.
F-15
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(7)RELATED PARTY TRANSACTIONS
The following table summarizes the transactions with related parties which
are included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE
MARCH 31, 30,
-------------------- -------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES:
Management fees........................ $ 261 $1,045 $1,950 $ 373 $ 679
Network monitoring fees................ 51 217 446 99 119
Special access fees.................... -- 189 651 188 180
------ ------ ------ ------ ------
Total.................................. $ 312 $1,451 $3,047 $ 660 $ 978
====== ====== ====== ====== ======
EXPENSES:
Interest expense and fees.............. $2,164 $3,321 $6,088 $ 773 $1,254
Allocated corporate costs.............. 214 209 250 52 80
Fiber leases........................... -- 303 1,022 255 282
------ ------ ------ ------ ------
Total.................................. $2,378 $3,833 $7,360 $1,080 $1,616
====== ====== ====== ====== ======
</TABLE>
Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial,
legal, regulatory and other administrative services.
Network monitoring fees represent fees received by the Company for technical
support for the monitoring of each individual joint venture's
telecommunications system.
Special access fees represent amounts charged to joint ventures for use of
the network of a wholly owned subsidiary of the Company.
Interest expense and fees relate to the Note Payable--Adelphia (See Note 4).
Allocated corporate costs represent costs incurred by Adelphia on behalf of
the Company for the administration and operation of the Company. These costs
include charges for office space and shared services such as finance
activities, information systems, computer services, human resources, and
taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs required for these services.
Fiber lease expense represents amounts paid to various subsidiaries of
Adelphia for the utilization of existing cable television plant for
development and operation of the consolidated operating networks.
Interest income charged on certain affiliate receivable balances with joint
ventures was $0, $65, $199, $16 and $13 for the periods ended March 31, 1994,
1995, and 1996 and the three months ended June 30, 1995 and 1996,
respectively.
F-16
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8)INCOME TAXES
The Company and its corporate subsidiaries adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
effective April 1, 1993. The cumulative effect of adopting SFAS No. 109 at
April 1, 1993 was to decrease net loss by $42 for the year ended March 31,
1994. Adoption of SFAS No. 109 had no other effect on net loss for the year
ended March 31, 1994.
Adelphia and its corporate subsidiaries (including the Company) file a
consolidated federal income tax return. For financial reporting purposes,
current and deferred income tax assets and liabilities are computed on a
separate company basis. The valuation allowance is adjusted for benefits
associated with filing a consolidated income tax return, similar to provisions
of the Internal Revenue Code. At March 31, 1996, the Company had net operating
loss carryforwards for federal income tax purposes of $23,100 expiring through
2011.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carryforwards.
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences between book and tax basis of intangible
assets................................................... $ 404 $ 119
Net operating loss carryforwards........................ 4,823 9,302
Investment in Partnerships.............................. 327 1,401
Other................................................... 27 134
------- --------
Total.................................................. 5,581 10,956
Valuation allowance..................................... (5,295) (10,459)
------- --------
Total.................................................. 286 497
------- --------
DEFERRED TAX LIABILITIES:
Differences between book and tax basis of property,
plant and
equipment.............................................. 198 203
------- --------
Net deferred tax asset................................... $ 88 $ 294
======= ========
</TABLE>
The net change in the total valuation allowance for the years ended March
31, 1995 and 1996 was an increase of $3,111 and $5,164, respectively.
Income tax benefit for the years ended March 31, 1994, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current....................................................... $46 $(8) $ (9)
Deferred...................................................... 9 37 206
--- --- ----
Total......................................................... $55 $29 $197
=== === ====
</TABLE>
F-17
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995, 1996 AND THE THREE MONTHS ENDED JUNE
30, 1995 AND 1996 (INFORMATION AS TO THE THREE MONTHS ENDED JUNE 30, 1995 AND
1996 IS UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8)INCOME TAXES, CONTINUED
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35.0% 35.0% 35.0%
Change in valuation allowance............................ (42.0) (39.0) (34.6)
State taxes, net of federal benefit and other............ 8.1 4.4 1.0
----- ----- -----
Income tax benefit....................................... 1.1% .4% 1.4%
===== ===== =====
</TABLE>
F-18
<PAGE>
APPENDIX A
GLOSSARY
Access Charges--The fees paid by long distance carriers to LECs for
originating and terminating long distance calls over the LECs' local networks.
ATM (Asynchronous Transfer Mode)--A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits
of a standard fifty-three bit-long packet or cell. ATM-based packet transport
was specifically developed to allow switching and transmission of mixed voice,
data and video (sometimes referred to as "multi-media" information) at varying
rates. The ATM format can be used by many different information systems,
including LANs.
Broadband--Broadband communications systems can transmit large quantities of
voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television
station signal, that transmits high resolution audio and video signals into
the home. Broadband connectivity is also an essential element for interactive
multimedia applications.
CAP (Competitive Access Provider)--A company that provides its customers
with an alternative to the incumbent local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services. CAPs are also referred to in the industry
as alternative local telecommunications service providers (ALTs), metropolitan
area network providers (MANs) and alternative access vendors (AAVs).
Central Offices or LEC-COs--The switching centers or central switching
facilities of the LECs or CLECs.
Centrex--Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the
carrier's premises and not at the premises of the customer. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value-added
service that LECs and CLECs can provide to a wide range of customers who do
not have the size or the funds to support their own on-site PBX.
CLEC (Competitive Local Exchange Carrier)--A CAP that also provides switched
local telecommunications services.
Collocation--The ability of a CAP, IXC or end user to connect its network to
a LEC-COs. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC-COs. Virtual collocation is an alternative
to physical collocation pursuant to which the LEC permits a CAP to connect its
network to the LEC-COs on comparable terms, even though the CAP's network
connection equipment is not physically located inside the central offices.
Dedicated Lines--Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the public switched network).
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.
A-1
<PAGE>
Dialing Parity--Dialing parity exists when a customer calling to or from the
network of a CLEC is not required to dial any more digits than for a
comparable call originating and terminating on the incumbent LEC's network.
Diverse Access Routing--A telecommunications network configuration in which
signals are transported simultaneously along two different paths so that if
one cable is cut, traffic can continue in the other direction without
interruption to its destination. The Company's networks generally provide
diverse access routing.
DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
FCC--Federal Communications Commission
Fiber Mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
Fiber Optics--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. A strand of
fiber optic cable is as thick as a human hair yet is said to have more
bandwidth capacity than copper cable the size of a telephone pole.
Fiber Optic Ring Network--Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture known as SONET.
Frame Relay--Frame relay is a high speed data packet switching service used
to transmit data between computers. Frame relay supports data units of
variable lengths at access speeds ranging from 56 kilobits to 1.5 megabits.
This service is appropriate for connecting LANs, but is not appropriate for
voice and video applications due to the variable delays which can occur. Frame
relay was designed to operate at higher speeds on modern fiber optic networks.
Frame Relay Service--Data communications service that functions as a fast
packet transport service of variable length data packets between customer
designated locations and supports the establishment of software defined
logical connections and circuits that act as private facilities on a public
platform.
Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
Interconnection Decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC-COs to any CAP, IXC or end user seeking such
interconnection for the provision of interstate special access and switched
access transport services.
lnterLATA Calls--InterLATA calls are calls that pass from one LATA to
another. Typically, these calls are referred to as long distance calls. The
Telecommunications Act establishes procedures under which the RBOCs can
receive authority to provide interLATA services.
A-2
<PAGE>
IntraLATA Calls--IntraLATA calls, also known as short haul calls, are those
calls that originate and terminate within the same LATA. All states allow
intraLATA competition, but dialing parity still does not exist in most states
and very little LEC intraLATA revenue has been won by competitors.
IXC (Interexchange or Long Distance Carriers)--Usually referred to as long
distance carriers. There are many facilities-based IXCs, including AT&T, MCI,
WorldCom and Sprint, as well as a select few CAPs that provide interexchange
service.
Kilobit--One thousand bits of information. The information-carrying capacity
(i.e., bandwidth of a circuit may be measured in "kilobits per second.")
LANs (Local Area Networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as work stations, printers
and high-speed modems. LANs may include dedicated computers or file servers
that provide a centralized source of shared files and programs.
LATAs--The geographically defined Local Access and Transport Areas in which
LECs are authorized by the MFJ to provide local exchange services. These LATAs
roughly reflect the population density of their respective states (for example
California has 11 LATAs while Wyoming has one). There are 164 LATAs in the
United States.
LEC (Local Exchange Carrier)--A company providing local telephone services.
LEC-COs--Local Exchange Carrier's central office.
Local Exchange Areas--A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without
toll charges to the calling or called party.
Megabit--One million bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "megabits per second."
MFJ (Modified Final Judgment)--The MFJ was a consent decree entered into in
1982 between AT&T and the Department of Justice which forced the breakup of
the old Bell System through the divestiture of the seven separate Regional
Bell Operating Companies (RBOCs) from AT&T. Divestiture resulted in two
distinct segments of the telecommunications service market: local and long
distance. This laid the groundwork for intense competition in the long
distance industry, but essentially created seven separate regionally-based
local exchange service monopolies. The Telecommunications Act removes most MFJ
restrictions on a prospective basis from AT&T and the RBOCs.
Network Systems Integration--Involves the creation of a turnkey
telecommunications network including (i) route and site selection and
obtaining rights of way and legal authorizations to install the network; (ii)
design and engineering of the system, including technology and vendor
assessment and selection, determining fiber optic circuit capacity, and
establishing reliability/flexibility standards; and (iii) project and
construction management, including contract negotiations, purchasing and
logistics, installation as well as testing and construction management.
Number Portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
Off-Net--A customer that is not physically connected to one of the Company's
networks but who is accessed through interconnection with a LEC network.
On-Net--A customer that is physically connected to one of the Company's
networks.
A-3
<PAGE>
PCS (Personal Communications Service)--A type of wireless telephone system
that uses light, inexpensive handheld sets and communicates via low power
antennas.
PBX--A Private Branch Exchange is a switching system within an office
building which allows calls from outside to be routed directly to the
individual instead of through a central number. A PBX also allows for calling
within an office by way of four digit extensions. Centrex is a service which
can simulate this service from an outside switching source, thereby
eliminating the need for a large capital expenditure on a PBX.
Physical Collocation--Physical Collocation occurs when a CAP places its own
network connection equipment inside the LEC-CO. The Telecommunications Act
gives the FCC authority to mandate physical collocation. See Virtual
Collocation.
POPs (Points of Presence)--Locations where an IXC has installed transmission
equipment in a service area that serves as, or relays calls to, a network
switching center of that IXC.
Private Line--A private, dedicated telecommunications connection between
different end user locations (excluding IXC POPs).
Private Line Data Interconnect Service--A data transport service utilizing
data products and on-net private line facilities that are packaged together
with data products.
Public Switched Network--That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Public Utility Commission--A state regulatory body which regulates
utilities, including telephone companies providing intrastate services. In
some states this regulatory body may have a different name, such as public
service commission.
RBOCs (Regional Bell Operating Companies)--The seven local telephone
companies established by the MFJ. The RBOCs were prohibited from providing
interLATA services and from manufacturing telecommunications equipment under
the MFJ, but the Telecommunications Act of 1996 establishes procedures for
lifting these restrictions.
Reciprocal Compensation--The compensation paid by a local carrier for
termination of a local call on the network of a competing carrier which is
obligated to pay a comparable charge to terminate traffic on the network of
the first carrier. Reciprocal compensation is distinct from the one way access
charges by which the IXCs compensate LEC's for originating or terminating
traffic.
Redundant Electronics--A telecommunications facility using two separate
electronic devices to transmit a telecommunications signal so that if one
device malfunctions, the signal may continue without interruption.
Route Miles--The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
Second and Third Tier Markets--Metropolitan markets in the United States
with population bases ranging from 250,000 to two million.
Special Access Services--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CAP, which lines or
circuits run to or from the IXC POPs. Examples of special access services are
telecommunications lines running between POPs of a single IXC, from one IXC
POP to the POP of another IXC or from an end user to its IXC POP. Special
access services do not require the use of switches.
A-4
<PAGE>
SONET (Synchronous Optical Network)--SONET is the electronics and network
architecture which enable transmission of voice, video and data (multimedia)
at very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by re-routing calls within the network. If the line is cut,
the traffic is simply reversed and sent to its destination around the other
side of the ring.
Switch--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
Switched Access Transport Services--Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
Switched Services--Services which utilize a switch, as opposed to dedicated
services which are non-switch. These services are the greatest source of
revenue for carriers.
Switched Traffic--Telecommunications traffic along a switched network.
Virtual Collocation--Virtual collocation is an alternative to physical
collocation in which the CAPs connect their equipment to the LECs facilities
from a remote location and request that the LEC install the necessary
electronics in its central office which is then leased by the LEC to the CAP
for charges which are generally higher than the charges for physical
collocation. However, the CAP avoids payment of the initial capital costs for
the leased facilities which the CAP must incur under physical collocation.
Voice Grade Equivalent Circuit--One DS-0. One voice grade equivalent circuit
is equal to 64 kilobits of bandwidth per second.
A-5
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE HYPERION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF HYPERION SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
------------
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Available Information....................................................... 1
Prospectus Summary.......................................................... 2
Risk Factors................................................................ 12
Use of Proceeds............................................................. 17
Capitalization.............................................................. 17
Selected Consolidated Financial and
Operating Data............................................................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 20
Business.................................................................... 28
Competition................................................................. 42
Regulation.................................................................. 42
Management.................................................................. 49
Certain Relationships and Transactions...................................... 51
Ownership of Capital Stock.................................................. 52
Description of the Capital Stock............................................ 53
Description of the Warrants................................................. 55
The Selling Securityholders................................................. 58
Plan of Distribution........................................................ 58
Legal Matters............................................................... 59
Experts..................................................................... 59
Index to Financial Statements............................................... F-1
Glossary.................................................................... A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO of Hyperion Telecommunications, Inc.]
329,000 WARRANTS TO PURCHASE AN
AGGREGATE OF 613,427 SHARES OF
COMMON STOCK AND 613,427 SHARES OF
COMMON STOCK ISSUABLE UPON
EXERCISE OF THE WARRANTS
----------------
PROSPECTUS
----------------
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an estimate of expenses which will be incurred in
connection with the issuance and distribution of the securities being
registered.
<TABLE>
<CAPTION>
PAYABLE BY
THE COMPANY
-----------
<S> <C>
SEC filing fee................................................ $100
Legal fees and expenses....................................... *
Printing and engraving fees................................... *
Accounting fees and expenses.................................. *
Blue sky legal fees, filing fees and expenses................. *
Transfer agent and registrar fees............................. *
Miscellaneous expense......................................... *
----
Total....................................................... $ *
====
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in general that
a corporation may indemnify its directors, officers, employees or agents
against expenditures (including judgments, fines, amounts paid in settlement
and attorneys' fees) made by them in connection with certain lawsuits to which
they may be made parties by reason of their being directors, officers,
employees or agents and shall so indemnify such persons against expenses
(including attorneys' fees) if they have been successful on the merits or
otherwise. The bylaws of Hyperion provide for indemnification of the officers
and directors of Hyperion to the full extent permissible under Delaware law.
Hyperion's Certificate of Incorporation also provides, pursuant to Section
102(b)(7) of the Delaware General Corporation Law, that directors of Hyperion
shall not be personally liable to Hyperion or its stockholders for monetary
damages for breach of fiduciary duty as a director for acts or omissions,
provided that directors shall nonetheless be liable for breaches of the duty
of loyalty, bad faith, intentional misconduct, knowing violations of law,
unlawful distributions to stockholders, or transactions from which a director
derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On April 15, 1996, the Company issued 329,000 Units consisting of $329.0
million aggregate principal amount at maturity of 13% Senior Discount Notes
due April 15, 2003 (the "Senior Notes") and 329,000 Warrants to purchase an
aggregate of 613,427 shares (prior to adjustment) of common stock (the
"Warrants") in a private placement to institutional investors pursuant to the
exemptions from registration under Section 4(2) of the 1933 Act and Rule 144A.
Gross proceeds were approximately $175.3 million and net proceeds to the
Company were approximately $168.6 million after discounts and commissions of
approximately $6.1 million and other transactions costs. The initial
purchasers for the Unit placement were Bear, Stearns & Co. Inc., Chase
Securities Inc. and NationsBanc Capital Markets, Inc.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- ---------
<S> <C> <C>
2.1 Purchase Agreement effective as of May Incorporated herein by reference is
13, 1996 between Teleport Exhibit 2.1 to Registration Statement
Communications Group Inc. and Hyperion No. 333-06957 on Form S-4.
Telecommunications of Florida, Inc.
3.1 Certificate of Incorporation of Incorporated herein by reference is
Registrant, together with all Exhibit 3.1 to Registration Statement
amendments thereto. No. 333-06957 on Form S-4.
3.2 Bylaws of Registrant. Incorporated herein by reference is
Exhibit 3.2 to Registration Statement
No. 333-06957 on Form S-4.
4.1 Indenture, dated as of April 15, 1996, Incorporated herein by reference is
between the Registrant and Bank of Exhibit 4.1 to Registration Statement
Montreal Trust Company. No. 333-06957 on Form S-4.
4.2 First Supplemental Indenture, dated as Filed herewith.
of September 11, 1996, between, the
Registrant and Bank of Montreal Trust
Company
4.3 Form of 13% Senior Discount Note. Filed herewith.
4.4 Registration Rights Agreement dated as Incorporated herein by reference is
of April 15, 1996, between the Exhibit 4.3 to Registration Statement
Registrant and the Initial Purchasers. No. 333-06957 on Form S-4.
4.5 Subordinated Note dated April 15, 1996 Incorporated herein by reference is
by the Company in favor of Adelphia. Exhibit 4.4 to Registration Statement
No. 333-06957 on Form S-4.
5.1 Opinion of Buchanan Ingersoll To be filed by amendment.
Professional Corporation.
10.1 Purchase Agreement dated as of April Incorporated herein by reference is
10, 1996 between the Registrant and Exhibit 1.1 to Registration Statement
Bear, Stearns & Co. Inc., Chase No. 333-06957 on Form S-4.
Securities Inc. and NationsBanc
Capital Markets, Inc. (collectively,
the "Initial Purchasers").
10.2 Employment Agreement between the Incorporated herein by reference is
Registrant and Charles R. Drenning. Exhibit 10.1 to Registration Statement
No. 333-06957 on Form S-4.
10.3 Employment Agreement between the Incorporated herein by reference is
Registrant and Paul D. Fajerski. Exhibit 10.2 to Registration Statement
No. 333-06957 on Form S-4.
10.4 Employment Agreement between the Incorporated herein by reference is
Registrant and Randolph S. Fowler. Exhibit 10.3 to Registration Statement
No. 333-06957 on Form S-4.
10.5 Employment Agreement dated July 1, Incorporated herein by reference is
1986 between Adelphia and Daniel R. Exhibit
Milliard. 10.5 to Adelphia's Registration
Statement No. 33-6974 on Form S-1.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION REFERENCE
----------- ----------- ---------
<C> <S> <C>
10.6 Pre-Incorporation and Shareholder Incorporated herein by reference is
Restrictive Agreement between Exhibit 10.5 to Registration Statement
Adelphia, Paul D. Fajerski, Charles R. No. 333-06957 on Form S-4.
Drenning and Randolph S. Fowler.
10.7 Term Loan Note dated May 10, 1996 Incorporated herein by reference is
between Charles R. Drenning in favor Exhibit 10.6 to Registration Statement
of Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.8 Term Loan Note dated May 10, 1996 Incorporated herein by reference is
between Paul D. Fajerski in favor of Exhibit 10.7 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.9 Term Loan Note dated May 10, 1996 Incorporated herein by reference is
between Randolph S. Fowler in favor of Exhibit 10.8 to Registration Statement
Registrant in the amount of No. 333-06957 on Form S-4.
$1,000,000.
10.10 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Exhibit 10.9 to Registration Statement
Registrant and Charles R. Drenning. No. 333-06957 on Form S-4.
10.11 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Exhibit 10.10 to Registration
Registrant and Paul D. Fajerski. Statement No. 333-06957 on Form S-4.
10.12 Term Loan and Stock Pledge Agreement Incorporated herein by reference is
dated May 10, 1996 between the Exhibit 10.11 to Registration
Registrant and Randolph S. Fowler. Statement No. 333-06957 on Form S-4.
10.13 Letter Agreement dated March 19, 1996 Incorporated herein by reference is
between the Registrant, Charles R. Exhibit 10.12 to Registration
Drenning, Paul D. Fajerski, Randolph Statement No. 333-06957 on Form S-4.
S. Fowler and Adelphia.
10.14 Warrant Agreement dated as of April Incorporated herein by reference is
15, 1996, by and among Hyperion Exhibit 10.13 to Registration
Telecommunications, Inc. and Bank of Statement No. 333-06957 on Form S-4.
Montreal Trust Comapny.
10.15 Warrant Registration Rights Agreement Incorporated herein by reference is
dated as of April 15, 1996, by and Exhibit 10.14 to Registration
among Hyperion Telecommunications, Statement No. 333-06957 on Form S-4.
Inc. and the Initial Purchasers.
10.16 Form of Management Agreement. Incorporated herein by reference is
Exhibit 10.15 to Registration
Statement No. 333-06957 on Form S-4.
21.1 Subsidiaries of the Registrant. Incorporated herein by reference is
Exhibit 21.1 to Registration Statement
No. 333-06957 on Form S-4.
23.1 Consent of Buchanan Ingersoll To be filed by amendment.
Professional Corporation (contained in
its opinion filed as Exhibit 5.1
hereto).
23.2 Consent of Deloitte & Touche LLP. Filed herewith.
24.1 Power of Attorney (appearing on Filed herewith.
Signature Page).
27.1 Financial Data Schedule. Incorporated herein by reference is
Exhibit 27.01 to Registrant's Form 10-
Q for the Quarter ended June 30, 1996.
</TABLE>
- --------
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes to respond to requests for information that
is incorporated by reference into the prospectus pursuant to Item 4, 10(b),
11, or 13 of this form, within one business day of receipt of such request,
and to send the incorporated documents by first-class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at such time shall be
deemed to be the initial bona fide offering thereof.
(2) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (3)(i) and (3)(ii) above do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(3) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Coudersport,
Commonwealth of Pennsylvania, on the 24th day of September, 1996.
HYPERION TELECOMMUNICATIONS, INC.
/s/ Daniel R. Milliard
By: ________________________________
Daniel R. Milliard President and
Chief Executive Officer
POWER OF ATTORNEY
Known All Men By These Presents that each person whose signature appears
below constitutes and appoints James J. Rigas, Timothy J. Rigas and Daniel R.
Milliard, and each of them, such person's true and lawful attorneys-in-fact
and agents, with full power of substitution and revocation, for such person
and in such person's name, place and stead, in any and all amendments
(including post-effective amendments to this Registration Statement) and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the power and authority to do and perform each and every act
and thing requisite and necessary to be done, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/s/ John J. Rigas Chairman and Director September 24,
- ------------------------- 1996
John J. Rigas
/s/ Michael J. Rigas Vice Chairman, Executive Vice September 24,
- ------------------------- President and Director 1996
Michael J. Rigas
/s/ Timothy J. Rigas Vice Chairman, Executive Vice September 24,
- ------------------------- President, Treasurer, Chief 1996
Timothy J. Rigas Financial Officer and Director
/s/ James P. Rigas Vice Chairman, Executive Vice September 24,
- ------------------------- President and Director 1996
James P. Rigas
/s/ Daniel R. Milliard President, Secretary, Chief September 24,
- ------------------------- Executive Officer and Director 1996
Daniel R. Milliard
/s/ Charles R. Drenning Vice President and Director September 24,
- ------------------------- 1996
Charles R. Drenning
/s/ Paul D. Fajerski Vice President and Director September 24,
- ------------------------- 1996
Paul D. Fajerski
/s/ Randolph S. Fowler Vice President and Director September 24,
- ------------------------- 1996
Randolph S. Fowler
/s/ Edward E. Babcock Chief Accounting Officer September 24,
- ------------------------- 1996
Edward E. Babcock
II-5
<PAGE>
EXHIBIT 4.2
FIRST SUPPLEMENTAL INDENTURE, dated as of September 12, 1996 (the "First
Supplemental Indenture"), to the Indenture, dated as of April 15, 1996 (the
"Indenture") between HYPERION TELECOMMUNICATIONS, INC., a Delaware corporation
(the "Company"), and BANK OF MONTREAL TRUST COMPANY, a trust company organized
under the laws of the State of New York (the "Trustee").
WHEREAS, the Company has duly authorized the execution and delivery of the
Indenture to provide for the issuance of 13% Senior Discount Notes due 2003,
Series A and Series B (the "Notes"); and
WHEREAS, the Company desires and has requested the Trustee to join it in
the execution and delivery of this First Supplemental Indenture in order to
correct an error in the legend on the face of the form of Note at the request of
the Company; and
WHEREAS, Section 9.01 of the Indenture provides that a supplemental
indenture may be entered into by the Company and the Trustee to cure a defect in
the Indenture or the Senior Notes without the consent of any holder of any Note
provided certain conditions are met; and
WHEREAS, the conditions set forth in the Indenture for the execution and
delivery of this First Supplemental Indenture have been complied with; and
WHEREAS, all things necessary to make this First Supplemental Indenture a
valid agreement of the Company and the Trustee, in accordance with its terms,
and a valid amendment of, and supplement to, the Indenture, have been done;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein, the Company agrees with the Trustee that the Indenture is supplemented
and amended, solely to the extent and for the purposes expressed herein, as
follows:
Section 1. Definitions. Any capitalized term used herein and not
------------
otherwise defined herein shall have the meaning given in the Indenture.
<PAGE>
Section 2. Correction of Original Issue Discount Legend. The second
--------------------------------------------
paragraph of the legend appearing on the face of the form of Note attached as
Exhibit A to the Indenture shall hereby be corrected and restated to read in its
entirety as follows:
FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL
ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE
ISSUE PRICE IS $497.59, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS
$762.41, THE ISSUE DATE IS ____________, 1996 AND THE YIELD TO
MATURITY IS 14.07% PER ANNUM.
Section 3. Replacement of Facing Page of Series A Global Notes. The
---------------------------------------------------
Trustee shall replace the facing pages of the Global Series A Notes currently in
its custody to reflect the foregoing correction, pursuant to the written order
and instructions provided by the Company.
[The rest of this page is left blank intentionally.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed, and attested, all as of the date and first year
above written.
ATTEST: HYPERION TELECOMMUNICATIONS,
INC.
/s/ Randall S. Fowler By: /s/ Daniel R. Milliard
- -------------------------------- ----------------------------------
Assistant Secretary President
ATTEST: BANK OF MONTREAL TRUST COMPANY,
as Trustee
/s/ Frances Busakowsky By: /s/ Therese Gaballah
----------------------------- ----------------------------------
Assistant Secretary Vice President
<PAGE>
EXHIBIT 4.3
EXHIBIT A
(Face of Senior Note)
THE SENIOR NOTES EVIDENCED BY THIS CERTIFICATE ARE NOT TRANSFERABLE SEPARATELY
FROM THE WARRANTS ORIGINALLY SOLD AS A UNIT WITH SUCH SENIOR NOTES UNTIL THE
EARLIER OF (i) 90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS THE BEAR,
STEARNS & CO. INC, CHASE SECURITIES INC. AND NATIONSBANC CAPITAL MARKETS, INC.
MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii) IN THE EVENT A CHANGE OF
CONTROL (AS DEFINED IN THE INDENTURE) OCCURS, THE DATE THE COMPANY MAILS NOTICE
THEREOF TO HOLDERS OF THE SENIOR NOTES AND (iv) THE DATE ON WHICH THE EXCHANGE
OFFER (AS DEFINED IN THE INDENTURE) IS CONSUMMATED.
FOR PURPOSES OF SECTION 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT;
FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $497.59,
THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $762.41, THE ISSUE DATE IS __________,
1996 AND THE YIELD TO MATURITY IS 14.07% PER ANNUM.
13% Series [A/B] Senior Discount Notes due 2003
No. $_______________
CUSIP NO.
__________
HYPERION TELECOMMUNICATIONS, INC.
promises to pay to
_____________________________________
or registered assigns,
the principal sum of $
dollars on April 15, 2003.
Interest Payment Dates: April 15 and October 15, of each year, commencing
October 15, 2001.
Record Dates: April 1 and October 1
Dated: __________,1996
HYPERION TELECOMMUNICATIONS, INC.
By:______________________________
Name: Daniel R. Milliard
Title: President and Secretary
By:______________________________
Name: Randolph S. Fowler
Title: Vice President and Assistant Secretary
(SEAL)
This is one of the Global
Senior Notes referred to in the
within-mentioned Indenture:
BANK OF MONTREAL TRUST COMPANY
as Trustee
By:__________________________________
Name:
Title:
<PAGE>
(Back of Senior Note)
13% Series [A/B] Senior Discount Notes due 2003
[Unless and until it is exchanged in whole or in part for Senior Notes
in definitive form, this Senior Note may not be transferred except as a whole by
the Depository to a nominee of the Depository or by a nominee of the Depository
to the Depository or another nominee of the Depository or by the Depository or
any such nominee to a successor Depository or a nominee of such successor
Depository. Unless this certificate is presented by an authorized
representative of The Depository Trust Company (55 Water Street, New York, New
York) ("DTC"), to the issuer or its agent for registration of transfer, exchange
or payment, and any certificate issued is registered in the name of Cede & Co.
or such other name as may be requested by an authorized representative of DTC
(and any payment is made to Cede & Co. or such other entity as may be requested
by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co., has an interest herein.]/1/
THE SENIOR NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND THE SENIOR NOTE EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THE SENIOR NOTE EVIDENCED HEREBY IS HEREBY
NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION PROVIDED BY RULE
144A UNDER THE SECURITIES ACT. THE HOLDER OF THE SENIOR NOTE EVIDENCED
HEREBY AGREES FOR THE BENEFIT OF HYPERION TELECOMMUNICATIONS, INC. (THE
"COMPANY") THAT (A) SUCH SENIOR NOTE MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1) (A) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES
IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN OF RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (B)
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT, (C) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF
THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER
IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SENIOR NOTE EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (1) ABOVE.
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. Interest. Hyperion Telecommunications, Inc., a Delaware corporation
(the "Company"),
- -------------
1. This paragraph should be included only if the Senior Note is issued in
global form.
<PAGE>
promises to pay interest on the principal amount of this Senior Note in the
manner specified below. Interest will not accrue prior to April 15, 2001.
Thereafter, interest will accrue at the rate of 13% per annum from April 15,
2001 until maturity (including any additional interest required to be paid
pursuant to the provisions of the Registration Rights Agreement) and will be
payable semi-annually in cash on April 15 and October 15 of each year, or if any
such day is not a Business Day, on the next succeeding Business Day (each an
"Interest Payment Date"), commencing April 15, 2001. Interest on the Senior
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance; provided that if there
is no existing Default in the payment of interest, and if this Senior Note is
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date or if no interest has been paid, from April 15,
2001. The Company will pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal and premium, if any,
from time to time on demand at a rate that is 1% per annum in excess of the rate
then in effect; it will pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest and
Liquidated Damages (without regard to any applicable grace periods) from time to
time on demand at the same rate to the extent lawful. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months.
2. Method of Payment. The Company will pay interest on the Senior Notes
(except defaulted interest) to the Persons who are registered Holders of Senior
Notes at the close of business on the April 1 or October 1 next preceding the
Interest Payment Date, even if such Senior Notes are cancelled after such record
date and on or before such Interest Payment Date, except as provided in Section
2.13 of the Indenture with respect to defaulted interest. The Senior Notes
shall be payable as to principal, premium and interest at the office or agency
of the Company maintained for such purpose within or without the City and State
of New York, or, at the option of the Company, payment of interest may be made
by check mailed to the Holders at their addresses set forth in the register of
Holders; provided that payment by wire transfer of immediately available funds
shall be required with respect to principal of, and interest and premium on, all
Global Notes and all other Senior Notes the Holders of which shall have provided
wire transfer instructions to the Company or the Paying Agent. Such payment
shall be in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts.
3. Paying Agent and Registrar. Initially, Bank of Montreal Trust Company,
the Trustee under the Indenture, shall act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
4. Indenture. The Company issued the Senior Notes under an Indenture
dated as of April 15, 1996 ("Indenture") between the Company and the Trustee.
The terms of the Senior Notes include those stated in the Indenture and those
made a part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA"). The Senior Notes are
subject to all such terms, and Holders are referred to the Indenture and the TIA
for a statement of such terms. The Senior Notes are senior unsecured
obligations of the Company limited to $329.0 million in aggregate principal
amount at maturity.
<PAGE>
5. Optional Redemption.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Senior Notes prior to April 15,
2001. Thereafter, the Company shall have the option to redeem the Senior Notes,
in whole or in part, upon not less than 30 nor more than 60 days notice, at the
redemption prices (expressed as percentages of principal amount, of, if such
redemption occurs prior to April 15, 2001, the Accreted Value) set forth below
plus accrued and unpaid interest thereon and Liquidated Damages, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on April 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2001................................. 106.5%
2002 and thereafter.................. 100.0%
</TABLE>
(b) Notwithstanding the foregoing, the Company, on or prior to April 15,
1999, may redeem up to a maximum of 25% of the aggregate principal amount of the
Senior Notes then outstanding at a redemption price of 113.0% of the Accreted
Value thereof, with the net proceeds from either (i) an Initial Public Offering
of the common stock of the Company or (ii) a sale of the Capital Stock (other
than Disqualified Stock) of the Company to a Strategic Investor in a single
transaction or a series of related transactions for at least $25.0 million;
provided that, in either case, at least 75% in aggregate principal amount of the
Senior Notes remain outstanding immediately after the occurrence of such
redemption; and provided, further, that such redemption shall occur within 90
days of the date of the closing of such Initial Public Offering or such sale to
a Strategic Investor, as the case may be.
6. Mandatory Redemption.
Except as set forth in paragraph 7 below, the Company shall not be required
to make mandatory redemption or sinking fund payments with respect to the Senior
Notes.
7. Repurchase at Option of Holder.
(a) Upon the occurrence of a Change of Control, the Company shall be
required to make an offer (a "Change of Control Offer") to each Holder of the
Senior Notes to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such Holder's Senior Notes at a purchase price equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of repurchase (or, in the case of
repurchases of the Senior Notes prior to April 15, 2001, at a purchase price
equal to 101% of the Accreted Value thereof as of the date of repurchase) (in
either case, the "Change of Control Payment"). Within ten days following any
Change of Control, the Company shall mail a notice to each Holder setting forth
the procedures governing the Change of Control Offer as required by the
Indenture.
(b) If the Company or any Subsidiary consummates any Asset Sales, within
five Business Days of each date on which the aggregate amount of Excess Proceeds
exceeds $2.5 million, the Company shall offer to purchase from all Holders of
Senior Notes (an "Asset Sale Offer") pursuant to Section 3.09 of the Indenture
the maximum principal amount of Senior Notes that may be purchased out of the
Excess Proceeds at an offer price in cash equal to 100% of aggregate principal
amount thereof, plus accrued and unpaid interest to the date of repurchase (or,
in the case of repurchases of the Senior Notes prior to
<PAGE>
April 15, 2001, at a purchase price equal to 100% of the Accreted Value thereof
as of the date of repurchase), in accordance with the procedures set forth in
the Indenture. To the extent that the aggregate amount thereof, plus accrued and
unpaid interest to the date of repurchase (or, in the case of repurchases of the
Senior Notes prior to April 15, 2001, at a purchase price equal to 100% of the
Accreted Value thereof as of the date of repurchase) is less than the Excess
Proceeds, the Company may use such remaining Excess Proceeds for any purpose not
prohibited by the Indenture. If the aggregate amount of Senior Notes surrendered
by Holders thereof plus accrued and unpaid interest to the date of repurchase
(or, in the case of repurchases of Senior Notes prior to April 15, 2001, the
Accreted Value thereof as of the date of repurchase) exceeds the amount of
Excess Proceeds, the Trustee shall select the Senior Notes to be purchased on a
pro rata basis. Holders of the Senior Notes that are the subject of an offer to
purchase shall receive an Asset Sale Offer from the Company prior to any related
purchase date and may elect to have such Senior Notes purchased by completing
the form titled "Option of Holder to Elect Purchase" on the reverse of the
Senior Notes.
8. Notice of Redemption. Notice of redemption shall be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Senior Notes are to be redeemed at its registered address. Senior Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Senior Notes held by a Holder are to be
redeemed. On and after the redemption date, interest ceases to accrue on the
Senior Notes or portions thereof called for redemption.
9. Denominations, Transfer, Exchange. The Senior Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of the Senior Notes may be registered and the Senior Notes
may be exchanged as provided in the Indenture. The Registrar and the Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture. The Company need not
exchange or register the transfer of any Senior Note or portion of a Senior Note
selected for redemption, except for the unredeemed portion of any Senior Note
being redeemed in part. Also, it need not exchange or register the transfer of
any Senior Notes for a period of 15 days before a selection of Senior Notes to
be redeemed or during the period between a record date and the corresponding
Interest Payment Date.
10. Persons Deemed Owners. The registered Holder of a Senior Note may be
treated as its owner for all purposes.
11. Amendment, Supplement and Waiver. Subject to certain exceptions, the
Indenture or the Senior Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Senior Notes, and any existing default or compliance with any provision of the
Indenture or the Senior Notes may be waived with the consent of the Holders of a
majority in aggregate principal amount of the then outstanding Senior Notes.
Without the consent of any Holder of a Senior Note, the Indenture or the Senior
Notes may be amended or supplemented to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Notes in addition to or in
place of certificated Senior Notes, to provide for the assumption of the
Company's obligations to Holders of the Senior Notes in case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of the Senior Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with the
requirements of the SEC in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act.
12. Defaults and Remedies. Events of Default include: (i) default for 30
days in the payment
<PAGE>
when due of interest on, or Liquidated Damages with respect to, the Senior
Notes; (ii) default in payment when due of principal of or premium, if any, on
the Senior Notes when the same becomes due and payable at maturity, upon
redemption (including in connection with an offer to purchase) or otherwise,
(iii) failure by the Company to comply with Section 4.07, 4.10, 4.15 or 5.01 of
the Indenture; (iv) failure by the Company to comply with Section 4.09 of the
Indenture; provided that in the event that the Company fails to comply with
Section 4.09 of the Indenture because indebtedness is deemed to be incurred by a
Restricted Joint Venture solely as a result of such Restricted Joint Venture
ceasing to be a Restricted Joint Venture as a result of (x) the loss of a Local
Partner or (y) the loss of management control of such Restricted Joint Venture,
and such failure continues for 90 days; (v) failure by the Company for 30 days
after notice to the Company by the Trustee or the Holders of at least 25% in
principal amount of the Senior Notes then outstanding to comply with certain
other agreements in the Indenture or the Senior Notes; (vi) default under
certain other agreements relating to Indebtedness of the Company which default
results in the acceleration of such Indebtedness prior to its express maturity;
(vii) certain final judgments for the payment of money that remain undischarged
for a period of 60 days; and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Significant Subsidiaries or any of its
Joint Ventures that would, if it were a Subsidiary, constitute a Significant
Subsidiary. If any Event of Default occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount of the then outstanding Senior
Notes may declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, any of
its Significant Subsidiaries or any Joint Venture that would, if it were a
Subsidiary constitute a Significant Subsidiary, or any group of Subsidiaries or
Joint Ventures that, taken together, would, constitute a Significant Subsidiary,
all outstanding Senior Notes shall become due and payable without further action
or notice. Holders of the Senior Notes may not enforce the Indenture or the
Senior Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Senior Notes may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of the Senior Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest. The Holders of a majority in aggregate principal amount
of the Senior Notes then outstanding by notice to the Trustee may on behalf of
the Holders of all of the Senior Notes waive any existing Default or Event of
Default and its consequences under the Indenture, except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the Senior
Notes. The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
13. Trustee Dealings with Company. The Trustee, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services
for the Company or its Affiliates, and may otherwise deal with the Company or
its Affiliates, as if it were not the Trustee.
14. No Recourse Against Others. A director, officer, employee, incorporator
or stockholder, of the Company, as such, shall not have any liability for any
obligations of the Company under the Senior Notes or the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Senior Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Senior Notes.
15. Authentication. This Senior Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
<PAGE>
16. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. Additional Rights of Holders of Transfer Restricted Securities. In
addition to the rights provided to Holders of the Senior Notes under the
Indenture, Holders of Transferred Restricted Securities shall have all the
rights set forth in the Registration Rights Agreement dated as of April 15,
1996, between the Company and the parties named on the signature pages thereof
(the "Registration Rights Agreement").
18. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Senior Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to the Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Senior Notes or as contained in any notice of redemption and reliance may be
placed only on the other identification numbers placed thereon.
The Company shall furnish to any Holder upon written request and without
charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Hyperion Telecommunications, Inc.
5 West Third Street
Coudersport, Pennsylvania 16915
Telecopy: (814) 274-8631
Attention: Daniel R. Milliard
<PAGE>
Assignment Form
To assign this Senior Note, fill in the form below: (I) or (we) assign and
transfer this Senior Note to
(Insert assignee's soc. sec. or tax I.D. no.)
(Print or type assignee's name, address and zip code)
and irrevocably appoint
to transfer this Senior Note on the books of the Company. The agent may
substitute another to act for him.
Date:
Your Signature:
(Sign exactly as your name appears on the face of this Senior Note)
Signature Guarantee.
<PAGE>
Option of Holder to Elect Purchase
If you want to elect to have this Senior Note purchased by the Company
pursuant to Section 4.10 or 4.15 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Senior Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased: $___________
Date: Your Signature:
(Sign exactly as your name appears on the Senior Note)
Tax Identification No.:____________________
Signature Guarantee.
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF SENIOR
NOTES
Re: 13% Senior Discount Notes due 2003 of Hyperion Telecommunications, Inc.
This Certificate relates to $329,000,000 principal amount of Senior Notes
held in * ________ book-entry or *_______ definitive form by ___________________
(the "Transferor").
The Transferor*:
[ ] has requested the Trustee by written order to deliver in exchange for its
beneficial interest in the Global Note held by the Depository a Senior Note or
Senior Notes in definitive, registered form of authorized denominations in an
aggregate principal amount equal to its beneficial interest in such Global Note
(or the portion thereof indicated above); or
[ ] has requested the Trustee by written order to exchange or register the
transfer of a Senior Note or Senior Notes.
In connection with such request and in respect of each such Senior Note,
the Transferor does hereby certify that Transferor is familiar with the
Indenture relating to the above captioned Senior Notes and as provided in
Section 2.06 of such Indenture, the transfer of this Senior Note does not
require registration under the Securities Act (as defined below) because:*
[ ] Such Senior Note is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 2.06(a)(ii)(A) or Section
2.06(d)(i)(A) of the Indenture).
<PAGE>
[ ] Such Senior Note is being transferred to a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act")) in reliance on Rule 144A (in satisfaction of Section
2.06(a)(ii)(B), Section 2.06(b)(i) or Section 2.06(d)(i)(B) of the Indenture).
_______________
*Check applicable box.
<PAGE>
[ ] Such Senior Note is being transferred in accordance with Rule 144 under
the Securities Act, or pursuant to an effective registration statement under the
Securities Act (in satisfaction of Section 2.06(a)(ii)(B) or Section
2.06(d)(i)(B) of the Indenture).
[ ] Such Senior Note is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Securities Act,
other than Rule 144A or Rule 144 under the Securities Act. An Opinion of
Counsel to the effect that such transfer does not require registration under the
Securities Act accompanies this Certificate (in satisfaction of Section
2.06(a)(ii)(C) or Section 2.06(d)(i)(C) of the Indenture).
[INSERT NAME OF TRANSFEROR]
By:
Date:
_______________
*Check applicable box.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Hyperion
Telecommunications, Inc., on Form S-1 of our report dated June 28, 1996
(August 12, 1996 as to Note 4 and the sixth paragraph of Note 6) (which
expresses an unqualified opinion and includes an explanatory paragraph
referring to a change in the method of accounting for income taxes), appearing
in the Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
September 24, 1996
