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 September 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 X No
---- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At November 14, 1996, 0 shares of Class A Common Stock, par value $0.01, and
10,000,000 shares of Class B Common Stock, par value $0.01, of the registrant
were outstanding.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1996
and September 30, 1996.............................................3
Consolidated Statements of Operations - Three
and Six Months Ended September 30, 1995 and 1996...................4
Consolidated Statements of Cash Flows - Six
Months Ended September 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....................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................23
Item 2. Changes in Securities.............................................23
Item 3. Defaults Upon Senior Securities.................................23
Item 4. Submission of Matters to a Vote of Security Holders.............23
Item 5. Other Information...............................................23
Item 6. Exhibits and Reports on Form 8-K..................................24
SIGNATURES.................................................................25
<PAGE>
Item 1. Financial Statements
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
March 31, September 30,
1996 1996
--------- ---------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $ -- $ 110,595
Other current assets 282 532
--------- ---------
Total current assets 282 111,127
Investments 21,087 28,120
Property, plant and equipment - net 12,561 30,857
Other assets - net 1,045 7,218
Deferred income taxes - net 294 414
--------- ---------
Total $ 35,269 $ 177,736
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable $ 2,529 $ 1,953
Due to affiliates - net 8,707 167
Other current liabilities 501 859
--------- ---------
Total current liabilities 11,737 2,979
13% Senior Discount Notes due 2003 -- 174,570
Note payable - Adelphia 50,855 25,855
Other debt -- 1,274
--------- ---------
Total liabilities 62,592 204,678
Commitments and contingencies (Note 4)
Stockholders' equity (deficiency):
Class A Common Stock, $0.01 par value, 300,000,000
shares authorized and 0 shares outstanding -- --
Class B Common Stock, $0.01 par value, 150,000,000
shares authorized and 10,000,000 shares outstanding 100 100
Class B Common Stock Warrants -- 11,087
Loans to Stockholders -- (3,000)
Accumulated deficit (27,423) (35,129)
--------- ---------
Total stockholders' equity (deficiency) (27,323) (26,942)
--------- ---------
Total $ 35,269 $ 177,736
========= =========
See notes to interim consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 612 $ 1,175 $ 1,298 $ 2,277
-------- -------- -------- --------
Operating expenses:
Network operations 613 728 1,241 1,587
Selling, general and administrative 534 1,164 1,365 2,191
Depreciation and amortization 278 886 528 1,581
-------- -------- -------- --------
Total 1,425 2,778 3,134 5,359
-------- -------- -------- --------
Operating loss (813) (1,603) (1,836) (3,082)
Other income (expense):
Gain on sale of investment -- -- -- 8,405
Interest income 10 1,696 26 3,129
Interest expense and fees (1,372) (7,108) (2,700) (13,277)
-------- -------- -------- --------
Loss before income taxes and
equity in net loss of joint ventures (2,175) (7,015) (4,510) (4,825)
Income tax benefit 59 120 78 117
-------- -------- -------- --------
Loss before equity in net loss
of joint ventures (2,116) (6,895) (4,432) (4,708)
Equity in net loss of joint ventures (845) (1,362) (1,642) (2,998)
-------- -------- -------- --------
Net loss $ (2,961) $ (8,257) $ (6,074) $ (7,706)
======== ======== ======== ========
Net loss per weighted average
share of common stock $ (0.30) $ (0.78) $ (0.61) $ (0.73)
======== ======== ======== ========
Weighted average shares of
common stock outstanding
(in thousands) 10,000 10,613 10,000 10,576
======== ======== ======== ========
</TABLE>
See notes to interim consolidated financial statements.
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months
Ended September 30,
------------------------
1995 1996
--------- ---------
Cash flows from operating activities:
Net loss $ (6,074) $ (7,706)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 456 848
Amortization 72 733
Noncash interest expense 2,700 10,865
Equity in net loss of joint ventures 1,642 2,998
Gain on sale of investment -- (8,405)
Deferred income tax benefit -- (120)
Change in operating assets and liabilities:
Other assets - net 59 (719)
Accounts payable and other current liabilities (207) (586)
--------- ---------
Net cash used in operating activities (1,352) (2,092)
--------- ---------
Cash flows from investing activities:
Net cash used for acquisition -- (5,040)
Expenditures for property, plant and equipment (3,316) (10,680)
Proceeds from sale of investment -- 11,618
Investments in joint ventures (4,763) (13,991)
--------- ---------
Net cash used in investing activities (8,079) (18,093)
--------- ---------
Cash flows from financing activities:
Proceeds from debt -- 163,705
Proceeds from issuance of stock warrants -- 11,087
Costs associated with debt financing -- (6,374)
Loans to stockholders -- (3,000)
Borrowing on (repayment of) note payable - Adelphia 8,097 (25,000)
Advances from (to) related parties 1,334 (9,638)
--------- ---------
Net cash provided by financing activities 9,431 130,780
--------- ---------
Increase in cash and cash equivalents -- 110,595
Cash and cash equivalents, beginning of period -- --
--------- ---------
Cash and cash equivalents, end of period $ -- $ 110,595
========= =========
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 and six months ended September 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. The results of operations for the six months ended September 30, 1996,
are not necessarily indicative of the results to be expected for the year ending
March 31, 1997.
1. Significant Events Subsequent to March 31, 1996:
Common Stock Changes. On October 3, 1996, the Board of Directors of
the Company approved charter amendments to (i) increase the Company's authorized
shares from 30,000,000 shares of Common Stock to 150,000,000 shares of Class B
Common Stock, (ii) authorize 300,000,000 shares of a second class of common
stock (Class A Common Stock), and (iii) reclassify each previously authorized
and outstanding share of Common Stock as Class B Common Stock. Holders of the
Class A Common Stock and Class B Common Stock vote as a single class on all
matters submitted to a vote of the stockholders, with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to ten votes. In addition, each share of Class B Common Stock is
automatically convertible into one share of Class A Common Stock at the option
of the holder. In the event a cash dividend is paid, the holders of the Class A
Common Stock and the Class B Common Stock will be paid an equal amount per share
of common stock.
Long Term Stock Compensation Plan. On October 3, 1996, the Board of
Directors and Stockholders of the Company approved the Company's 1996 Long-Term
Compensation Plan (the "1996 Plan"). The 1996 Plan provides for the grant of (i)
options which qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, (ii) options which do not
so qualify, (iii) share awards (with or without restrictions on vesting), (iv)
stock appreciation rights and (v) stock equivalent or phantom units. The number
of shares of Class A Common Stock available for issuance initially will be
1,750,000. Such number is to increase each year by (1%) of outstanding shares of
all classes of the Company's Common Stock, up to a maximum of 2,500,000 shares.
Options, awards and units may be granted under the 1996 Plan to directors,
officers, employees and consultants. The 1996 Plan provides that incentive stock
options must be granted with an exercise price of not less than the fair market
value of the underlying Common Stock on the date of grant. Options outstanding
under the Plan may be exercised by paying the exercise price per share through
various alternative settlement methods. No stock options, stock awards, stock
appreciation rights or phantom stock units have been granted under the Plan.
Issuance of 13% Senior Discount Notes and Warrants. On April 15,
1996, the Company issued $329,000 in the aggregate principal amount at maturity
of 13% Senior Discount Notes due April 15, 2003 and 329,000 warrants to purchase
an aggregate of 613,427 shares of its Class B 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 and to make loans of $3,000 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 13% Senior Discount Notes ("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
("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.
Other Changes in Partnership Interests. 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
September 30, 1996, the required additional capital contributions were
approximately $1,000.
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%. The acquisition has
been accounted for using the purchase method. Accordingly, the financial results
of the acquired operations have been included in the consolidated results of the
Company effective August 1, 1996.
Time Warner Letter of Intent. Under a non-binding letter of intent
with Time Warner, dated as of June 17, 1996, the Company would consolidate its
investment interests in the State of New York by (i) increasing its ownership
interest in the Buffalo network to 50% and in the Syracuse network to 100% and
(ii) eliminating its ownership interests in and management responsibility for
the Albany and Binghamton networks. In addition, the letter of intent provides
that, upon the consummation of the transaction, neither party will be subject to
the non-competition provisions contained in the existing partnership agreements
with respect to the markets from which they are withdrawing. The consummation of
the transaction is subject to numerous terms and conditions including the
negotiation and execution of definitive, binding agreements. No assurances can
be given as to whether or when, or the terms upon which, such transaction will
be consummated.
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.
<PAGE>
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
Ownership March 31, September 30,
Percentage 1996 1996
--------------- ------------------ ------------------
Investments accounted for using the equity method:
<S> <C> <C> <C>
Continental Fiber Technologies (Jacksonville) 20.0 $ 4,701 $ 6,443
Multimedia Hyperion Telecommunications (Wichita) 49.9 2,620 2,832
Louisville Lightwave (1) 50.0 (1) 996 3,032
NewChannels Hyperion Telecommunications (Albany) 50.0 999 924
NewChannels Hyperion Telecommunications (Binghamton) 20.0 504 504
NHT Partnership (Buffalo) 40.0 2,457 3,737
NewChannels Hyperion Telecommunications (Syracuse) 50.0 3,140 3,215
Hyperion of Harrisburg 50.0 1,600 2,169
Hyperion of Tennessee (Nashville) 95.0 (2) 1,345 --
Alternet of Virginia (Richmond) 37.0 3,406 6,012
New Jersey Fiber Technologies (New Brunswick) 19.7 956 1,586
TCG of South Florida 15.7 4,679 --
PECO-Hyperion (Philadelphia) 50.0 -- 4,650
Other Various 497 752
---------------- -------------------
27,900 35,856
Cumulative equity in net losses (6,813) (7,736)
---------------- -------------------
Total Investments $ 21,087 $ 28,120
================ ===================
<FN>
(1) As discussed in Note 1, the Company has committed to make additional
capital contributions of approximately $1,000 relating to the increase
in its ownership percentage.
(2) As discussed in Note 1, the Company increased its ownership in this
partnership on August 1, 1996, and accordingly, has consolidated this
investment effective August 1, 1996.
</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 and Hyperion of Tennessee for all periods, is as follows:
March 31, September 30,
1996 1996
--------- ---------
Current assets $ 3,262 $ 11,098
Non-current assets 74,055 112,714
Current liabilities 6,043 11,118
Non-current liabilities 17,718 31,868
Six Months Ended
September 30,
------------------------
1995 1996
--------- ---------
Revenues $ 2,830 $ 5,275
Net loss (3,129) (7,460)
3. Supplemental Cash Flow Information:
There were no cash payments made for interest for the six months
ended September 30, 1995 and 1996, respectively.
4. 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 the Company's unaudited Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Form 10-Q and 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 and six months ended September 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 majority-owned 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 18 telecommunications networks (including three networks under
construction) owned as of September 30, 1996 by 14 Operating Companies (which,
as defined herein, are (i) wholly and majority 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 September 30, 1996, the Company has experienced substantial growth,
building from its original two partnerships covering two networks to covering 18
networks and 33 cities through its 14 Operating Companies. 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 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 three wholly-owned
subsidiaries, one majority owned subsidiary and 10 joint venture investments
(through which the Company has an interest in 14 networks) in which the Company
owns 50% or less as of September 30, 1996. Results of the wholly and majority
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 the Operating Companies and receives
management fees from the Operating Companies for its management and network
monitoring services. Management fees, which are generally based on the Company's
cost of providing such service, 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, although in the
future, the Company expects that majority owned Operating Companies' revenues
will represent an increasing proportion of the Company's revenues.
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 September 30,
1996, the Company's networks and networks under construction had approximately
2,887 route miles, approximately 138,571 fiber miles and were connected to
approximately 1,101 buildings. The Operating Companies have also installed six
switches or remote modules which serve six markets. 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. Excluding investments in
the South Florida Partnership, the combined capital invested through September
30, 1996 by the Company and the local partners in the Operating Companies'
networks, the NOCC and other activities totaled approximately $198,500.
Recent Developments
Common Stock Changes. On October 3, 1996, the Board of Directors of
the Company approved charter amendments to (i) increase the Company's authorized
shares from 30,000,000 shares of Common Stock to 150,000,000 shares of Class B
Common Stock, (ii) authorize 300,000,000 shares of a second class of common
stock (Class A Common Stock), and (iii) reclassify each previously authorized
and outstanding share of Common Stock as Class B Common Stock. Holders of the
Class A Common Stock and Class B Common Stock vote as a single class on all
matters submitted to a vote of the stockholders, with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to ten votes. In addition, each share of Class B Common Stock is
automatically convertible into one share of Class A Common Stock. In the event a
cash dividend is paid, the holders of the Class A Common Stock and the Class B
Common Stock will be paid an equal amount per share of common stock.
<PAGE>
Long Term Stock Compensation Plan. On October 3, 1996, the Board of
Directors and Stockholders of the Company approved the Company's 1996 Long-Term
Compensation Plan (the "1996 Plan"). The 1996 Plan provides for the grant of (i)
options which qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, (ii) options which do not
so qualify, (ii) share awards (with or without restrictions on vesting), (iv)
stock appreciation rights and (v) stock equivalent or phantom units. The number
of shares of Class A Common Stock available for issuance initially will be
1,750,000. Such number is to increase each year by (1%) of outstanding shares of
all classes of the Company's Common Stock, up to a maximum of 2,500,000 shares.
Options, awards and units may be granted under the 1996 Plan to directors,
officers, employees and consultants. The 1996 Plan provides that incentive stock
options must be granted with an exercise price of not less than the fair market
value of the underlying Common Stock on the date of grant. Options outstanding
under the Plan may be exercised by paying the exercise price per share through
various alternative settlement methods. No stock options, stock awards, stock
appreciation rights or phantom stock units have been granted under the Plan.
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
Class B 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 and to make loans of $3,000 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 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.
<PAGE>
Other Changes in Partnership Interests. The Company recently entered
into agreements pursuant to which the Company's ownership interests in certain
of the Operating Companies have increased in three markets. These transactions
are consistent with the Company's goal to own at least a 50% interest in its
Operating Companies in the future, and where appropriate the Company may
consider similar transactions from time to time in its other 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 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 September 30, 1996, the required additional capital contributions
were approximately $1,000.
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%.
Time Warner Letter of Intent. Under a non-binding letter of intent
with Time Warner, dated as of June 17, 1996, the Company would consolidate its
Operating Companies' interests in the State of New York by (i) increasing its
ownership interest in the Buffalo network to 50% and in the Syracuse network to
100% and (ii) eliminating its ownership interests in and management
responsibility for the Albany and Binghamton networks. In addition, the letter
of intent provides that, upon the consummation of the transaction, neither party
will be subject to the non-competition provisions contained in the existing
partnership agreements with respect to the markets from which they are
withdrawing. The consummation of the transaction is subject to numerous terms
and conditions including the negotiation and execution of definitive, binding
agreements. No assurances can be given as to whether or when, or the terms upon
which, such transaction will be consummated.
Results of Operations
Three Months Ended September 30, 1996 in Comparison with Three Months Ended
September 30, 1995
Revenues increased 92% to $1,175 for the three months ended September
30, 1996 from $612 for the same quarter in the prior fiscal year. Growth in
revenues of $563 resulted from continued expansion in the number and size of
Operating Companies and the resultant increase in management fees of $327.
Revenues from majority and wholly owned Operating Companies also increased
approximately $236 as compared to the same quarter in the prior fiscal year due
to increases in the customer base and the impact of consolidation of the
Nashville Operating Company during the current fiscal quarter.
Network operations expense increased 19% to $728 for the three months
ended September 30, 1996 from $613 for the same quarter in the prior fiscal
year. The increase was attributable to the expansion of operations at the NOCC,
the increased number and size of the Operating Companies which resulted in
increased employee related costs and equipment maintenance costs, and the
consolidation of the Nashville Operating Company during the current fiscal
quarter.
Selling, general and administrative expense increased 118% to $1,164
for the three months ended September 30, 1996 from $534 for the same quarter in
the prior fiscal year. The increase was due to both corporate and NOCC overhead
cost increases resulting from growth in the number of Operating Companies
managed and monitored by the Company and the impact of consolidation of the
Nashville Operating Company in the current fiscal quarter.
Depreciation and amortization expense increased 219% to $886 during
the three months ended September 30, 1996 from $278 for the same quarter in the
prior fiscal year primarily as a result of increased amortization of $241 of
costs incurred 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 majority and wholly owned Operating Companies.
Interest income for the three months ended September 30, 1996
increased by $1,686 to $1,696 from $10 for the same quarter in the prior fiscal
year as a result of interest income earned on investment of the proceeds of the
13% Senior Discount Notes and Warrants during the current quarter.
Interest expense and fees increased 418% to $7,108 during the three
months ended September 30, 1996 from $1,372 for the same period in the prior
fiscal year. The increase was directly attributable to $5,950 of interest
expense 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 61% to $1,362
during the three months ended September 30, 1996 from $845 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
September 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 10 at September 30, 1995 to 11 at September
30, 1996. These Operating Companies and networks under construction paid
management and monitoring fees to the Company, which are included in revenues,
aggregating approximately $736 for the three months ended September 30, 1996, an
increase of approximately $327 over the same quarter in the prior fiscal year.
The nonconsolidated Operating Companies' net losses, including networks under
construction, for the three months ended September 30, 1996 aggregated
approximately $4,310.
Net loss increased from $2,961 for the three months ended September
30, 1995 to $8,257 for the same quarter in the current fiscal year. The
increased net loss was primarily attributable to higher interest expense
associated with the 13% Senior Discount Notes, increased equity in the net
losses of the Company's joint ventures, and increased depreciation and
amortization partially offset by increased interest income on investment of the
proceeds from the 13% Senior Discount Notes.
<PAGE>
Six Months Ended September 30, 1996 in Comparison with Six Months Ended
September 30, 1995
Revenues increased 75% to $2,277 for the six months ended September
30, 1996 from $1,298 for the same period in the prior fiscal year. Growth in
revenues of $979 resulted from continued expansion in the number and size of
Operating Companies and the resultant increase in management fees of $653 over
the same period in the prior fiscal year period. Revenues from majority and
wholly-owned Operating Companies also increased approximately $326 as compared
to same period in the prior fiscal year due to increases in the customer base
and the impact of consolidation of the Nashville Operating Company during the
current fiscal quarter.
Network operations expense increased 28% to $1,587 for the six months
ended September 30, 1996 from $1,241 for the same period in the prior fiscal
year. Substantially all of the increase was attributable to the expansion of
operations at the NOCC, as well as the increased number and size of the
Operating Companies which resulted in increased employee related costs and
equipment maintenance costs.
Selling, general and administrative expense increased 61% to $2,191
for the six months ended September 30, 1996 from $1,365 for the same period in
the prior fiscal year. Corporate and NOCC overhead costs increased due to growth
in the number of Operating Companies managed and monitored by the Company.
Depreciation and amortization expense increased 199% to $1,581 during
the six months ended September 30, 1996 from $528 for the same period in the
prior fiscal year primarily as a result of increased amortization of $483 of
costs incurred 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.
Interest income for the six months ended September 30, 1996 increased
by $3,103 to $3,129 from $26 for the same period in the prior fiscal year as a
result of interest income earned on investment of the proceeds of the 13% Senior
Discount Notes and Warrants.
Interest expense and fees increased 392% to $13,277 during the six
months ended September 30, 1996 from $2,700 for the same period in the prior
fiscal year. The increase was directly attributable to $10,865 of interest
expense 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 83% to $2,998
during the six months ended September 30, 1996 from $1,642 for the same period
in the prior fiscal year as more nonconsolidated Operating Companies began
operations. The net losses of the Operating Companies for the six months ended
September 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 10 at September 30, 1995 to 11 at September
30, 1996. These Operating Companies and networks under construction paid
management and monitoring fees to the Company, which are included in revenues,
aggregating approximately $1,534 for the six months ended September 30, 1996, an
increase of approximately $653 over the same period in the prior fiscal year.
The nonconsolidated Operating Companies' net losses, including networks under
construction, for the six months ended September 30, 1996 aggregated
approximately $7,460.
Net loss increased from $6,074 for the six months ended September 30,
1995 to $7,706 for the same period in the current fiscal year. The increase was
primarily attributable to greater interest expense associated with the 13%
Senior Discount Notes, increased equity in the net losses of the Company's joint
ventures, and increased depreciation and amortization reduced by higher interest
income and the gain recognized for the sale of the Company's investment in TCG
of South Florida.
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 10
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 including revenues; earnings before interest
expense, income taxes, depreciation and amortization ("EBITDA"); and capital
expenditures. While EBITDA is not an alternative to operating income as defined
by generally accepted accounting principles, the Company's management believes
EBITDA is a meaningful measure of performance. Revenues and EBITDA 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 network construction and expansion efforts in
those markets. The financial information set forth below, however, is not
indicative of the Company's overall financial position.
Revenues
-----------------------------------------------------------
Three Months Ended Six Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
Cluster 1995 1996 1995 1996
---------- ---------- ---------- ----------
Northeast $ 927 $ 1,296 $ 1,723 $ 2,561
Mid-Atlantic 132 467 307 812
Mid-South 116 276 191 515
Other Networks 574 1,212 1,129 2,289
---------- ---------- ---------- ----------
Total $ 1,749 $ 3,251 $ 3,350 $ 6,177
========== ========== ========== ==========
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.
EBITDA
-----------------------------------------------------------
Three Months Ended Six Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
Cluster 1995 1996 1995 1996
---------- ---------- ---------- ----------
Northeast $ (273) $ 43 $ (528) $ 258
Mid-Atlantic (278) (1,026) (293) (1,779)
Mid-south (164) (193) (280) (424)
Other Networks 80 431 201 684
---------- -------- -------- --------
Total $ (635) $ (745) $ (900) $ (1,261)
========== ======== ======== ========
Capital Expenditures
------------------------------------------------------------
Three Months Ended Six Months Ended
--------------------------- ----------------------------
September 30, September 30, September 30, September 30,
Cluster 1995 1996 1995 1996
----------- ---------- ---------- ----------
Northeast $ 1,850 $ 8,161 $ 3,696 $ 10,192
Mid-Atlantic 2,562 24,264 5,164 32,066
Mid-south 2,723 4,580 4,425 6,190
Other Networks 8,840 4,340 10,671 6,784
--------- -------- -------- --------
Total $ 15,975 $ 41,345 $ 23,956 $ 55,232
========= ======== ======== ========
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 $3,316 and $10,680 for the six months ended September 30, 1995 and 1996,
respectively. Further, investments made by the Company in nonconsolidated
Operating Companies and the South Florida Partnership were $4,763 and $13,991
for the six months ended September 30, 1995 and 1996, respectively. The Company
expects that it will continue to have substantial capital and investment
commitments. The Company also expects to continue to fund operating losses as
the Company develops and grows its business.
Through September 30, 1996, Adelphia had made loans and advances
totaling approximately $66,000, including accrued interest, to the Company and
leased $1,300 in fiber network construction to certain Operating Companies.
During April 1996, the Company repaid $37,800 of such loans and advances. In
addition, local partners have invested approximately $67,000 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 $33,400 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. In addition, the Company used $30,800 to fund
its pro rata investment in the networks, capital expenditures and operations.
Collectively, Adelphia's and the Company's partners' investments and the fiber
lease financings have totaled $198,500 from the Company's inception through
September 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 13% 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. Interest accrued through September 30, 1996 on the
amount outstanding to Adelphia totaled $2,300.
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 the Company's networks 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
mid-1997, (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 continue to build new networks in additional
markets, which the Company anticipates will include additional networks with
local partners. The Company estimates that it will require substantial capital
to fund anticipated capital expenditures, working capital requirements and
operating losses of the Company and to make investments in existing and new
Operating Companies. The Company expects that it will have adequate resources to
fund such short and long term liquidity needs through the proceeds from the
offering of the 13% Senior Discount Notes and Warrants, anticipated vendor
financings, internal sources of funds including cash flow from operations and
additional debt or equity financings as appropriate. There can be no assurance,
however, as to the availability of funds from internal cash flow or from private
or public equity markets.
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 year 1997 and 1998.
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 13% 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.
With respect to the Company's decision not to proceed at this time
with an initial public offering of Class A Common Stock, see the Company's Form
8-K filed on November 13, 1996, which is incorporated herein by reference.
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.
A number of parties have filed appeals from the FCC's August 8, 1996
First Report and Order. These appeals have been consolidated in the United
States Court of Appeals for the Eighth Circuit. On October 15, 1996 the Eighth
Circuit issued an order which stayed the effectiveness of key provisions of the
First Report and Order. The court's decision suspended virtually all of the
pricing rules established by the FCC, which include the rules requiring
incumbent LECs to provide unbundled network elements and interconnection based
upon a pricing methodology set by the FCC, as well as the default of proxy
prices established by the FCC for network elements, interconnection, and resale
at wholesale rates of incumbent LEC services. The court's decision also
suspended the regulation which entitles any competitor to obtain from an
incumbent LEC any interconnection term or unbundled element price at the same
rates, terms, and conditions as those elements or services are available to any
other competitor. Nothing in the court order prevents negotiations and
arbitrations from continuing, and, despite the stay, a majority of the
arbitration decisions thus far adopted by the state commissions appear to be
consistent with the FCC's pricing rules. The court has scheduled arguments on
the appeal cases in January 1997, with no decision expected for several months
thereafter.
On November 7, 1996, as required by the Telecommunications Act, a
Federal-State Joint Board adopted recommendations to the FCC looking toward the
adoption of new universal service support mechanisms. As a telecommunications
service provider, the Company is a potential contributor to a federal universal
service support mechanism and would be a potential recipient of funds from such
a mechanism. The Company has not yet determined the impact of such a mechanism.
<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
At a joint meeting of the Board of Directors and the stockholders held
on October 3, 1996, the stockholders of the Company voted on and approved the
following items:
(a) The election of the following persons to comprise the full Board
of Directors of the Company: John J. Rigas , Michael J. Rigas, Timothy J.
Rigas, James P. Rigas, Daniel R. Milliard, Charles R. Drenning, Paul D. Fajerski
and Randolph S. Fowler;
(b) The amendment and restatement of the Company's Certificate of
incorporation (see Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments - Common
Stock Changes"); and
(c) The adoption of the Company's 1996 Long Term Compensation Plan (see
Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments -- Long-Term Stock Compensation
Plan").
The voting on each of the above-mentioned items was as follows:
Class of Stock Votes For Votes Withheld
Class A -- --
Class B 100,000,000 --
Item 5. Other Information
None
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3.1 Certificate of Incorporation of Registrant, together
with all amendments thereto (Incorporated herein by reference is Exhibit 3.1 to
Registrant's Registration Statement on Form 8- A, dated October 23, 1996.)
Exhibit 3.2 Bylaws of Registrant (Incorporated herein by
reference is Exhibit 3.2 to Registrant's Registration Statement on Form 8-A,
dated October 23, 1996.)
Exhibit 4.1 First Supplemental Indenture, dated as of September
11, 1996, between the Registrant and Bank of Montreal Trust Company
(Incorporated herein by reference is Exhibit 4.2 of Registrant's Registration
Statement No. 333-13663 on Form S-1.)
Exhibit 4.2 Form of 13% Senior Discount Note (Incorporated
herein by reference is Exhibit 4.3 to Registrant's Registration Statement No.
333-13663 on Form S-1.)
Exhibit 4.3 Subordinated Note dated April 15, 1996 by the
Company in favor of Adelphia (corrected) (Filed herewith.)
Exhibit 10.01 Long-Term Compensation Plan (Incorporated herein
by reference is Exhibit 10.17 to Registrant's Registration Statement
No. 333-13663 on Form S-1.)
Exhibit 10.02 Registration Rights Agreement among Charles R.
Drenning, Paul D. Fajerski, Randolph S. Fowler, Adelphia Communications
Corporation and the Company (Incorporated herein by reference is Exhibit 10.18
to Registrant's Registration Statement No. 333-13663 on Form S-1.)
Exhibit 10.03 Registration Rights Agreement between Adelphia
Communications Corporation and the Company (Incorporated herein by reference is
Exhibit 10.19 to Registrant's Registration Statement No. 333-13663 on
Form S-1.)
Exhibit 27.01 Financial Data Schedule (supplied for the
information of the Commission).
(b) Reports on Form 8-K:
Form 8-Ks were filed on October 29, November 13 and
November 14, 1996 which reported information under items 5 and 7 thereof.
No financial statements were filed.
<PAGE>
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: November 14, 1996 By: /s/ Timothy J. Rigas
----------------------
Timothy J. Rigas
Vice Chairman, Chief
Financial Officer(authorized
officer), and Treasurer
Date: November 14, 1996 By: /s/ Edward E. Babcock, Jr.
--------------------------
Edward E. Babcock, Jr.
Vice President, Finance and
Chief Accounting Officer
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<PERIOD-END> SEP-30-1996
<CASH> 110,595
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0
0
<COMMON> 100
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<TOTAL-LIABILITY-AND-EQUITY> 177,736
<SALES> 0
<TOTAL-REVENUES> 2,277
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EXHIBIT 4.3
SUBORDINATED NOTE
$25,855,432.00 Coudersport, Pennsylvania
April 15, 1996
For value received, the undersigned, Hyperion Telecommunications, Inc.
a Delaware corporation ("Company"), promises to pay to the order of Adelphia
Communications, Inc., a Delaware corporation ("Lender"), in accordance with the
terms hereof, TWENTY-FIVE MILLION EIGHT HUNDRED FIFTY FIVE THOUSAND FOUR HUNDRED
THIRTY-TWO AND NO/100 DOLLARS ($25,855,432.00) on April 16, 2003. Company
further promises to pay to the order of Lender interest on the unpaid principal
amount hereof from time to time outstanding at the rate of SIXTEEN AND ONE HALF
PERCENT (16.5%) per annum, payable on the last day of each March, June,
September and December after the date hereof. Interest on this Subordinated Note
may be paid in cash, through the issuance of additional principal amount of
Subordinated Notes identical hereto (valued at 100% of their principal amount),
or in any combination thereof at the option of the Company.
All payments of principal and interest on this Subordinated Note are
hereby expressly subordinated to the prior payment in full in cash of all sums
owing on or with respect to the Series A and Series B 13% Senior Discount
Subordinated Notes due 2003 (the "Senior Indebtedness") issued pursuant to that
certain Indenture dated April 15, 1996 between Company and Bank of Montreal
Trust Company, as trustee (the "Trustee") in accordance with the following:
1. Upon the occurrence of any default in the payment of any
obligation under or with respect to Senior Indebtedness, no payment or
distribution of any assets of the Company of any kind or character may be made
on account of the principal of or premium, if any, or interest on or any other
obligation under or with respect to, this Subordinated Note or on account of the
purchase, redemption, defeasance or other acquisition of or in respect of, this
Subordinated Note unless and until such default shall have been cured or waived
or shall have ceased to exist or such Senior Indebtedness shall have been
discharged or paid in full, in cash or, as acceptable to each and every holder
of Senior Indebtedness, in any other manner, after which the Company may resume
making any and all required payments in respect of this Subordinated Note,
including any missed payments.
2. Upon the occurrence and during the continuance of any
non-payment default with respect to any Senior Indebtedness pursuant to which
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the maturity thereof may be accelerated (a "Non-payment Default"), no payment
or distribution of any assets of the Company of any kind or character
(excluding distributions of equity interests or securities subordinated to the
same extent as this Subordinated Note) may be made on account of the principal
of or premium, if any, or interest on, or any other obligation under, this
Subordinated Note or on account of the purchase, redemption, defeasance or other
acquisition of, or in respect of, this Subordinated Note for the period
hereafter specified (the "Payment Blockage Period"). The Payment Blockage Period
shall commence upon the receipt of notice of the Non-payment Default by the
Company from the Trustee and shall end on the earliest of (i) the 179th day
after such commencement, (ii) the date on which such Non-payment Default (and
all Non-payment Defaults as to which notice is also given after such Payment
Blockage Period is initiated) is cured, waived or ceases to exist or on which
such Senior Indebtedness is discharged or paid in full or (iii) the date on
which such Payment Blockage Period (and all Non-payment Defaults as to which
notice is given after such Payment Blockage Period is initiated) shall have been
terminated by written notice to the Company from the Trustee initiating such
Payment Blockage Period, after which, in the case of each of clauses (i), (ii)
and (iii) the Company may resume making any and all required payments in respect
of the Subordinated Note, including any missed payments. In no event will a
Payment Blockage Period extend beyond 179 days from the date of the receipt by
the Company of the notice initiating such Payment Blockage Period (such 179-day
period referred to as the "Initial Period"), unless in the case of each of the
foregoing clauses (i), (ii) and (iii), the maturity of any Senior Indebtedness
shall have been accelerated or any payment default thereunder shall exist. Any
number of notices of Non-payment Defaults may be given during the Initial
Period; provided that during any period of 365 consecutive days only one Payment
Blockage Period, during which payment of principal of, or premium, if any, or
interest on, the Subordinated Note may not be made, may commence and the
duration of such period may not exceed 179 days, unless in the case of each of
clauses (i), (ii) and (iii), the maturity of any Senior Indebtedness shall have
been accelerated or any payment default thereunder shall exist. No Non-payment
Default will respect to any Senior Indebtedness that exists or was continuing on
the date of the commencement of any Payment Blockage Period will be, or can be,
made the basis for the commencement of a second Payment Blockage Period, whether
or not within a period of 365 consecutive days.
3. In the event of any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or other similar
case or proceeding in connection therewith, relative to the Company or its
assets, or any liquidation, dissolution or other winding up of the Company,
whether voluntary or involuntary, and whether or not involving insolvency or
bankruptcy, or any assignment for the benefit of creditors of any other
marshaling of assets or liabilities of the Company, all Senior Indebtedness must
be paid in full, in cash or,
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as acceptable to each and every holder of Senior Indebtedness, in any other
manner, before any payment or distribution is made on account of the principal
of or premium, if any, or interest on or any other obligation under or with
respect to the Subordinated Note or on account of the purchase, redemption,
defeasance or other acquisition of, or in respect of, this Subordinated Note.
4. In the event that the Lender receives any payment of
principal of, interest on, or premium, if any, with respect to the Subordinated
Note at a time when such Lender, has actual knowledge that such payment is
prohibited by the terms of this Note, such payment shall be held by the Lender,
in trust for the benefit of, and shall be paid forthwith over and delivered,
upon written request, to, the holders of Senior Indebtedness for application to
the payment of all obligations with respect to Senior Indebtedness remaining
unpaid to the extent necessary to pay such obligations in full in accordance
with their terms, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Indebtedness.
Company hereby expressly waives presentment, demand, notice, protest,
and all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and an action for amounts due
hereunder shall immediately accrue.
This Note shall be governed by, construed and enforced in accordance
with the laws of the State of Delaware without regard to principles of choice of
law.
HYPERION TELECOMMUNICATIONS, INC.
/s/ Daniel R. Milliard
Name: Daniel R. Milliard
Title: President
