SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 1996
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to _____________
Commission File Number: 333-06957
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1669404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 West Third Street
P.O. Box 472
Coudersport, PA 16915
(Address of principal (Zip code)
executive offices)
814-274-9830
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At August 14, 1996, 10,000,000 shares of Common Stock, par value $0.01, of the
registrant were outstanding.
<TABLE>
<CAPTION>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets - March 31, 1996 and June 30, 1996...................................................3
Consolidated Statements of Operations - Three Months Ended June 30, 1995
and 1996.................................................................................................4
Consolidated Statements of Cash Flows - Three Months Ended June 30, 1995 and 1996................................5
Notes to Interim Consolidated Financial Statements...............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................................18
Item 2. Changes in Securities..........................................................................................18
Item 3. Defaults Upon Senior Securities..............................................................................18
Item 4. Submission of Matters to a Vote of Security Holders..........................................................18
Item 5. Other Information............................................................................................18
Item 6. Exhibits and Reports on Form 8-K...............................................................................18
SIGNATURES..............................................................................................................19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share amounts)
March 31, June 30,
ASSETS: 1996 1996
-------- ---------
Current assets:
Cash and cash equivalents $ -- $ 132,142
Due from affiliates - net -- 2,115
Other current assets 282 304
-------- ---------
Total current assets 282 134,561
Investments 21,087 20,988
Property, plant and equipment - net 12,561 14,044
Other assets - net 1,045 6,906
Deferred income taxes - net 294 294
-------- ---------
Total $ 35,269 $ 176,793
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable $ 2,529 $ 492
Due to affiliates - net 8,707 --
Other current liabilities 501 511
-------- ---------
Total current liabilities 11,737 1,003
13% Senior Discount Notes due 2003 -- 168,620
Note payable - Adelphia 50,855 25,855
-------- ---------
Total liabilities 62,592 195,478
Commitments and contingencies (Note 5)
Stockholders' equity (deficiency):
Common stock, $.01 par value, 30,000,000 shares
authorized and 10,000,000 shares outstanding 100 100
Warrants -- 11,087
Loans to Stockholders -- (3,000)
Accumulated deficit (27,423) (26,872)
-------- ---------
Total stockholders' equity (deficiency) (27,323) (18,685)
-------- ---------
Total $ 35,269 $ 176,793
======== =========
See notes to interim consolidated financial statements.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,
---------------------
1995 1996
-------- ---------
Revenues $ 686 $ 1,102
-------- --------
Operating expenses:
Network operations 628 859
Selling, general and administrative 831 1,027
Depreciation and amortization 250 695
-------- --------
Total 1,709 2,581
-------- --------
Operating loss (1,023) (1,479)
Other income (expense):
Gain on sale of investment -- 8,405
Interest income 16 1,433
Interest expense and fees (1,328) (6,169)
-------- --------
(Loss) income before income taxes and equity in net
loss of joint ventures (2,335) 2,190
Income tax benefit (expense) 19 (3)
-------- --------
(Loss)income before equity in net loss of joint ventures (2,316) 2,187
Equity in net loss of joint ventures (797) (1,636)
-------- --------
Net (loss) income $ (3,113) $ 551
======== ========
Net (loss) income per weighted average share
of common stock $ (0.31) $ 0.06
======== ========
Weighted average shares of
common stock outstanding (in thousands) 10,000 10,000
======== ========
See notes to interim consolidated financial statements.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months
Ended June 30,
---------------------
1995 1996
--------- ----------
Cash flows from operating activities:
Net (loss) income $(3,113) $ 551
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation 214 335
Amortization 36 360
Noncash interest expense 1,328 4,915
Equity in net loss of joint ventures 797 1,636
Gain on sale of investment -- (8,405)
Change in operating assets and liabilities:
Other assets - net 26 (22)
Accounts payable and other current liabilities (909) (2,027)
------- ---------
Net cash used in operating activities (1,621) (2,657)
------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment (1,370) (1,818)
Proceeds from sale of investment -- 11,618
Investments in joint ventures (4,020) (4,750)
------- ---------
Net cash (used in) provided by investing activities (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)
Borrowing on (repayment of) note payable - Adelphia 5,524 (25,000)
Advances from (to) related parties 1,487 (10,822)
------- ---------
Net cash provided by financing activities 7,011 129,749
------- ---------
Increase in cash and cash equivalents -- 132,142
Cash and cash equivalents, beginning of period -- --
------- ---------
Cash and cash equivalents, end of period $ -- $ 132,142
======= =========
See notes to interim consolidated financial statements.
<PAGE>
===============================================================================
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
===============================================================================
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands)
Hyperion Telecommunications, Inc. is an 89% owned subsidiary of
adelphia Communications Corporation ("Adelphia"). The accompanying unaudited
interim financial statements of Hyperion Telecommunications, Inc. and its
majority owned subsidiaries (the "Company") have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission.
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. These interim consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements included in its
Registration Statement No. 333-06957 on Form S-4 Amendment No. 3 filed August
12, 1996.
1. Significant Events Subsequent to March 31, 1996:
On April 15, 1996, the Company issued $329,000 of 13% Senior Discount
Notes due April 15, 2003 and 329,000 warrants to purchase an aggregate of
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, to make loans of
$3,000 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 13% Senior
Discount Notes ("Senior Discount 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.
On May 16, 1996, the Company completed the sale of its 15.7%
partnership interest in TCG of South Florida ("TCG of South Florida" or the
"South Florida Partnership") to Teleport Communications Group Inc. for an
aggregate sales price of approximately $11,618 resulting in a pre-tax gain of
approximately $8,405. 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.
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 Louisville Lightwave (which will also operate the network under
construction in Lexington, Kentucky) and as a result has increased its
partnership ownership interest to 50%. As of June 30, 1996, the required
additional capital contributions will be approximately $2,300.
Pursuant to a Purchase Agreement dated July 25, 1996, the Company
purchased general and limited partnership interests in Hyperion of Tennessee
from InterMedia and Robin Media on August 1, 1996. The aggregate purchase price
was approximately $5,000. As a result of this acquisition, the Company's
ownership interest in this partnership was increased to 95%.
<PAGE>
2. Investments:
The equity method of accounting is used to account for investments in
joint ventures. 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.
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
Ownership March 31, June 30,
Percentage 1996 1996
---------- --------- ---------
Investments accounted for using the equity method:
<S> <C> <C> <C>
Continental Fiber Technologies (Jacksonville) 20.0 $ 4,701 $ 5,399
Multimedia Hyperion Telecommunications (Wichita) 49.9 2,620 2,719
Louisville Lightwave 50.0 996 1,640(1)
NewChannels Hyperion Telecommunications (Albany) 50.0 999 924
NewChannels Hyperion Telecommunications (Binghamton) 20.0 504 504
NHT Partnership (Buffalo) 40.0 2,457 2,937
NewChannels Hyperion Telecommunications (Syracuse) 50.0 3,140 3,215
Hyperion of Harrisburg 50.0 1,600 1,919
Hyperion of Tennessee (Nashville) 25.0 1,345 1,345
Alternet of Virginia (Richmond) 37.0 3,406 3,813
New Jersey Fiber Technologies (New Brunswick) 19.7 956 1,231
TCG of South Florida 15.7 4,679 --
PECO-Hyperion 50.0 -- 1,692
Other Various 497 622
-------- --------
27,900 27,960
Cumulative equity in net losses (6,813) (6,972)
-------- --------
Total Investments $ 21,087 $ 20,988
======== ========
<FN>
(1) As discussed in Note 1, the Company has committed to make additional
capital contributions of approximately $2,300 relating to the increase
in its ownership percentage.
</FN>
</TABLE>
<PAGE>
Summarized combined unaudited financial information for the Company's
investments being accounted for using the equity method of accounting,
excluding TCG of South Florida, is as follows:
March 31, June 30,
1996 1996
---------------- ----------------
Current assets $ 3,289 $ 7,075
Non-current assets 79,449 85,182
Current liabilities 6,655 7,580
Non-current liabilities 19,092 19,427
Three Months Ended
June 30,
----------------------------------
1995 1996
---------------- ----------------
Revenues $ 1,435 $ 2,651
Net loss (1,619) (3,572)
3. Income Taxes:
The income tax expense for the three months ended June 30, 1996 was
$3, which is comprised entirely of current tax expense.
4. Supplemental Cash Flow Information:
There were no cash payments made for interest for the three months
ended June 30, 1995 and 1996, respectively.
5. Commitments and Contingencies
Reference is made to Management's Discussion and Analysis of
Financial Condition and Results of Operations for a discussion of material
commitments and contingencies.
<PAGE>
- -------------------------------------------------------------------------------
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
(Dollars in thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with: (i) the Company's unaudited Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Form 10-Q and (ii) Form S-4 Amendment
No. 3 filed August 12, 1996 ("Form S-4").
Overview
Unless otherwise stated, the information contained in this Form 10-Q
is as of and for the three months ended June 30, 1996. This Form 10-Q, including
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains certain statements of a forward looking nature relating to
future events or the future financial performance of the Company which are
forward looking statements under Section 21E of the Securities Exchange Act of
1934. Persons reading this Form 10-Q are cautioned that such statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors identified in this Form 10-Q, which could cause actual events or results
to differ materially from those indicated by such forward looking statements.
The "Company" or "Hyperion" mean Hyperion Telecommunications, Inc.
together with its wholly-owned subsidiaries, except where the context otherwise
requires. Unless specifically defined elsewhere in this document, capitalized
terms should be read in conjunction with definitions as defined in the Form S-4.
Unless the context otherwise requires, references herein to the "networks," the
"Company's networks" or the "Operating Companies' networks" mean the 13
operating 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).
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent local
exchange carriers ("LECs") in its markets. Since its inception in October 1991
through June 30, 1996, 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 Interchange or
Long Distance Carriers ("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 12 investments in which 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. The Company's pro rata share of the results of
the Operating Companies where the Company owns 50% or less and the South Florida
Partnership through May 16, 1996 are recorded under the caption "Equity in net
loss of joint ventures" in the Company's consolidated financial statements and
results of operations utilizing the equity method of accounting.
Correspondingly, the Company's initial investments in these Operating Companies
and the South Florida Partnership have been carried at cost, and subsequently
have been 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 these 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 plan to
deploy switches or remote switching modules in the balance of their markets by
the end of 1996. 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. 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 by the Company related to the
NOCC and other activities and (iii) excluding investments in the South Florida
Partnership has totaled approximately $149,500.
The Company believes that as a result of the Telecommunications Act
of 1996 ("Telecommunications Act"), the potential market for its services has
expanded significantly. According to the Company's analysis of Federal
Communications Commission ("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.
Recent Developments
Issuance of 13% Senior Discount Notes and Warrants. On April 15,
1996, the Company issued $329,000 of 13% Senior Discount Notes due April 15,
2003 and 329,000 warrants to purchase an aggregate of 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, to make loans of $3,000 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 13% Senior Discount 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.
Sale of Partnership Investment. On May 16, 1996, the Company
completed the sale of its 15.7% partnership interest in TCG of South Florida to
Teleport Communications Group Inc. for an aggregate sales price of approximately
$11,618 resulting in a pre-tax gain of approximately $8,405. 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 $2,300.
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 $5,000. As a result of this
acquisition, the Company's ownership interest in this partnership was increased
to 95%.
Results of Operations
Revenues increased 61% to $1,102 for the three months ended June 30,
1996 from $686 for the same quarter in the prior fiscal year. Growth in revenues
of $326 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 $74 due to increases in the customer base.
Network operations expense increased 37% to $859 for the three months
ended June 30, 1996 from $628 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 $1,027
for the three months ended June 30, 1996 from $831 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.
Depreciation and amortization expense increased 178% to $695 during
the three months ended June 30, 1996 from $250 for the same quarter in the prior
fiscal year primarily as a result of increased amortization of $255 in
connection with the issuance of the 13% Senior Discount 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 $8,405. 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 $11,618, resulting in a pre-tax gain
of $8,405.
Interest income for the three months ended June 30, 1996 increased by
$1,417 to $1,433 from $16 for the same quarter in the prior fiscal year as a
result of interest earned on the proceeds of the 13% Senior Discount Notes and
Warrants.
Interest expense increased 365% to $6,169 during the three months
ended June 30, 1996 from $1,328 for the same period in the prior fiscal year.
The increase was directly attributable to $4,915 of interest associated with the
13% Senior Discount 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 $1,636
during the three months ended June 30, 1996 from $797 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 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 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 $798 for the three
months ended June 30, 1996, an increase of approximately $326 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 $3,572.
Net income (loss) increased from ($3,113) for the three months ended
June 30, 1995 to $551 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
Discount Notes, increased equity in the net losses of the Company's joint
ventures, and increased depreciation and amortization.
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, 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 only 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. 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, may not be indicative of the Company's overall
financial position.
The Operating Companies have shown substantial growth in revenues
since the Company's inception in October 1991. Total combined revenues for all
Operating Companies has increased 83% from $1,601 for the quarter ended June 30,
1995 to $2,932 during the quarter ended June 30, 1996. There can be no
assurance, however, that the Operating Companies will continue to experience
revenue growth at this rate, or at all. Furthermore, there can be no assurance
that the Company will be able to benefit from such growth in revenues if such
growth occurs.
Revenues
--------------------------------------
Three Months Ended
-------------------
Fiscal Fiscal June 30, June 30,
Cluster 1995 1996 1995 1996
-------- -------- -------- --------
Northeast $ 1,492 $ 3,991 $ 796 $ 1,271
Mid-Atlantic 288 735 175 345
Mid-south 70 473 75 239
Other Networks 1,401 2,564 555 1,077
-------- -------- -------- --------
Total $ 3,251 $ 7,763 $ 1,601 $ 2,932
======== ======== ======== ========
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 $1,370 and $1,818 for the three months ended June 30, 1995 and 1996,
respectively. Further, investments made by the Company in nonconsolidated
Operating Companies and the South Florida Partnership were $4,020 and $4,750 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.
Through June 30, 1996, Adelphia had made loans and advances totaling
approximately $64,800, including accrued interest, in the Company and $6,700 in
fiber network construction leased to certain Operating Companies. During April
1996, the Company repaid $37,800 of such loans and advances. In addition, Local
Partners have invested approximately $57,400 as their pro rata investment in
those networks. These amounts exclude previous investments in the South Florida
Partnership which were sold on May 16, 1996. These partners have also provided
additional capital of $20,600 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 $149,500 from the Company's inception
through June 30, 1996.
The Company has experienced negative cash flow since its inception. A
combination of operating losses, 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. 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 through April 15,
1996 was 11.3% (excluding fees charged which were based on the amount borrowed)
and 16.5% for the period since April 16, 1996.
The Company repaid $25,000 of its indebtedness to Adelphia from the
proceeds of the 13% Senior Discount Notes and Warrants on April 15, 1996. Also,
as of April 15, 1996, approximately $25,900 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 Discount 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.
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 in Operating Companies in connection with: (i) the
deployment of switches in all of its operating markets by the end of 1996, (ii)
the expansion of existing markets and (iii) 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
$110,000 to $115,000 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 13% Senior Discount Notes and Warrants and
internal sources of funds including cash flow from operations. The Company also
expects to raise additional capital through an initial public equity offering
during the Company's third or fourth quarter of fiscal 1997 provided favorable
market conditions exist for such an offering. There can be no assurance,
however, as to the availability of funds from internal cash flow or from private
or public equity markets.
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 Senior Discount Notes provide 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.
Regulatory and Competitive Matters
On February 8, 1996, the Telecommunications Act of 1996 (the
"Telecommunications Act") 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 Local
Exchange Carriers ("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. The more significant provisions of the Telecommunications Act
and certain of its possible effects are as follows:
The Telecommunications Act removes legal barriers to entry in local
telephone markets. This 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 LECs to "interconnect" with
competitors and to provide access to certain network elements under
reasonable rates, terms and conditions. It is uncertain how effective
these requirements will be in promoting competition or how they will
affect 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. As described below, the FCC has issued
several orders addressing these issues which are generally favorable to
competitors, but these orders are subject to reconsideration and appeal.
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. Allowing the BOC to enter the long distance
market 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.
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. Following the
enactment of the Telecommunications Act, there has been significant merger
activity among the BOCs 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 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. 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.
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 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's ability to provide
competitive local exchange services will increase.
<PAGE>
===============================================================================
HYPERION TELECOMMUNICATIONS , INC. AND SUBSIDIARIES
===============================================================================
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.01 Financial Data Schedule (supplied for the information
of the Commission).
(b) Reports on Form 8-K:
None
<PAGE>
===============================================================================
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
===============================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYPERION TELECOMMUNICATIONS, INC.
(Registrant)
Date: August 20, 1996 By: /s/ Timothy J. Rigas
----------------------
Timothy J. Rigas
Vice Chairman, Executive Vice President
(authorized officer), Treasurer and
Chief Financial Officer
Date: August 20, 1996 By: /s/ Edward E. Babcock, Jr.
--------------------------
Chief Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 132,142
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 134,561
<PP&E> 14,044
<DEPRECIATION> 0
<TOTAL-ASSETS> 176,793
<CURRENT-LIABILITIES> 1,003
<BONDS> 168,620
0
0
<COMMON> 100
<OTHER-SE> (18,785)
<TOTAL-LIABILITY-AND-EQUITY> 176,793
<SALES> 0
<TOTAL-REVENUES> 1,102
<CGS> 0
<TOTAL-COSTS> 2,581
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,169)
<INCOME-PRETAX> 2,190
<INCOME-TAX> 3
<INCOME-CONTINUING> 2,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 551
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
