<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1996
REGISTRATION NO. 333-06957
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
HYPERION TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4813 25-1669404
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
5 WEST THIRD STREET -- P.O. BOX 472
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------
DANIEL R. MILLIARD, PRESIDENT
HYPERION TELECOMMUNICATIONS, INC.
5 WEST THIRD STREET -- P.O. BOX 472
COUDERSPORT, PENNSYLVANIA 16915
(814) 274-9830
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
CARL E. ROTHENBERGER, JR., ESQUIRE
BUCHANAN INGERSOLL
PROFESSIONAL CORPORATION
21ST FLOOR, 301 GRANT STREET
PITTSBURGH, PENNSYLVANIA 15219
(412) 562-8826
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, please check the following box. [_]
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
OFFER TO EXCHANGE
13% SERIES B SENIOR DISCOUNT NOTES DUE 2003
FOR ANY AND ALL OUTSTANDING 13% SENIOR DISCOUNT NOTES DUE 2003
OF
HYPERION TELECOMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 11, 1996, UNLESS EXTENDED
---------------
Hyperion Telecommunications, Inc. ("Hyperion" or the "Company") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange $1,000 principal amount of 13%
Series B Senior Discount Notes of the Company (the "New Notes") for each
$1,000 principal amount of the issued and outstanding 13% Senior Discount
Notes due 2003 (the "Old Notes," and collectively with the New Notes, the
"Senior Notes"). As of the date of this Prospectus, $329,000,000 aggregate
principal amount at maturity of the Old Notes is outstanding. The terms of the
New Notes and the Old Notes are substantially identical in all material
respects, except for certain transfer restrictions and registration rights;
and except that holders of Old Notes are entitled to receive Liquidated
Damages (as defined) if (a) the Company fails to file any of the registration
statements required by the Registration Rights Agreement (as defined) on or
before the date specified for such filing, (b) any of such registration
statements is not declared effective by the Securities and Exchange Commission
(the "Commission") on or prior to the date specified for such effectiveness
(the "Effectiveness Target Date"), (c) the Company fails to consummate the
Exchange Offer within 30 business days of the Effectiveness Target Date with
respect to the Exchange Offer registration statement, or (d) a shelf
registration statement or the registration statement of which this Prospectus
forms a part (the "Exchange Offer Registration Statement") is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities (as defined) during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"). In the event of a
Registration Default, the Company is required to pay Liquidated Damages to
each holder of Transfer Restricted Securities, with respect to the first 90-
day period immediately following the occurrence of such Registration Default,
at a rate of 0.5% per annum, determined daily, on the Accreted Value of the
Senior Notes (or after April 15, 2001, on the principal amount of the Senior
Notes) as of the immediately preceding interest payment date. Such interest
rate will increase by an additional 0.25% per annum at the beginning of each
subsequent 90-day period up to a maximum aggregate increase of 2.0% per annum
until all Registration Defaults have been cured, at which time the accrual
rate borne by the Old Notes will be reduced to the original accrual rate. See
"Description of Senior Notes--Registration Rights; Liquidated Damages."
The Exchange Offer is being made to satisfy certain obligations of the
Company under the Registration Rights Agreement, dated as of April 15, 1996,
among the Company and the Initial Purchasers (the "Registration Rights
Agreement"). Upon consummation of the Exchange Offer, holders of Old Notes
that were not prohibited from participating in the Exchange Offer and did not
tender their Old Notes will not have any registration rights under the
Registration Rights Agreement with respect to such nontendered Old Notes and,
accordingly, such Old Notes will continue to be subject to the restrictions on
transfer contained in the legend thereon.
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Company believes that the New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder of such New Notes (other than
any such holder which is an "affiliate" of Hyperion within the meaning of Rule
405 under the Securities Act of 1933, as amended (the "Securities Act"))
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes and neither the holder nor any other person is engaging in or intends to
engage in a distribution of the New Notes. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes must acknowledge that
it will deliver a prospectus in connection with any resale of its New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of the New Notes received in exchange for
the Old Notes acquired by the broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale for a period of 365 days after the Exchange Date (as defined)
or, if earlier, until all participating broker-dealers have so resold. See
"Plan of Distribution."
(Continued on following page)
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1996
<PAGE>
The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture (as defined). For a more complete
description of the terms of the New Notes, see "Description of Senior Notes."
There will be no cash proceeds to the Company from the Exchange Offer. The New
Notes will be general obligations of the Company exclusively, will not be
secured by any assets of the Company, its Subsidiaries (as defined) or Joint
Ventures (as defined), will rank pari passu in right of payment with all
existing and future senior Indebtedness (as defined) of the Company and will
rank senior in right of payment to future subordinated Indebtedness of the
Company; however, because the Company is a holding company that conducts
substantially all of its business through its Subsidiaries and its Joint
Ventures, the New Notes will be effectively subordinated to all liabilities of
the Subsidiaries and Joint Ventures, including trade payables and indebtedness
incurred by its Subsidiaries and Joint Ventures. As of March 31, 1996, the
aggregate principal amount outstanding of such senior Indebtedness (excluding
trade payables and other accrued liabilities) of the Subsidiaries and Joint
Ventures would have been $25.9 million, substantially all of which were
Capital Lease Obligations and as of such date there would have been $3.0
million of accounts payable and other current liabilities of the Company
(excluding indebtedness due to Adelphia) that would have been pari passu with
the Senior Notes.
The Old Notes were originally issued and sold on April 15, 1996 as part of
an offering of 329,000 units consisting of $329,000,000 aggregate principal
amount at maturity of Old Notes and Warrants to purchase an aggregate of
613,427 shares of Common Stock of the Company (the Offering, as defined). The
Warrants are exercisable at $.01 per share upon the earlier of May 1, 1997 or
a change of control, and expire, if unexercised, on April 1, 2001. The Old
Notes and the Warrants began to trade separately on July 14, 1996. The
Offering was exempt from registration under the Securities Act in reliance
upon the exemptions provided by Rule 144A and by Section 4(2) of the
Securities Act. Accordingly, the Old Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an exemption from the registration requirements of the
Securities Act and applicable state securities laws is available.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on September 11, 1996, unless
extended (as it may be so extended, the "Expiration Date"), provided that the
Exchange Offer shall not be extended beyond 30 business days from the date of
this Prospectus. The date of acceptance for exchange of the Old Notes for the
New Notes (the "Exchange Date") will be the first business day following the
Expiration Date. Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date; otherwise such tenders are
irrevocable.
Prior to this Exchange Offer, there has been no public market for the Senior
Notes. The Old Notes have traded on the PORTAL Market. If a market for the New
Notes should develop, the New Notes could trade at a discount from their
initial offering price. The Company does not intend to apply for listing of
the New Notes on any securities exchange or in any automated quotation system.
There can be no assurance that an active trading market for the New Notes will
develop.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-4 under the Securities Act with respect to the Exchange
Offer. This Prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Exchange Offer, reference is made to such Registration
Statement and the exhibits and schedules filed as part thereof. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected without charge at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, and will also be available for inspection and copying at
the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048, and the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement may be obtained from the Public
Reference Section of the Commission upon payment of certain prescribed fees.
Electronic registration statements made through the Electronic Data Gathering,
Analysis, and Retrieval system are publicly available through the Commission's
Web site (http://www.sec.gov), which is maintained by the Commission and which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL HYPERION ACCEPT SURRENDERS
FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES LAWS OF SUCH JURISDICTION.
1
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the consolidated Financial Statements and Notes thereto,
appearing elsewhere in this Prospectus. For a description of certain terms used
in this Prospectus, see the Glossary attached to this Prospectus as Appendix A.
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Persons participating in this Exchange Offer are cautioned that such statements
are only predictions and that actual events or results may differ materially.
In evaluating such statements, participants in the Exchange Offer should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated by such forward-
looking statements. References in this Prospectus to the "Company" or
"Hyperion" mean Hyperion Telecommunications, Inc. together with its
subsidiaries, except where the context otherwise requires. Unless the context
otherwise requires, references herein to the "networks," the "Company's
networks" or the "Operating Companies' networks" mean the 13 telecommunications
networks owned by 11 Operating Companies (which, as defined herein, are (i)
wholly owned subsidiaries of the Company and (ii) joint venture partnerships
and corporations managed by the Company and in which the Company holds less
than a majority equity interest with one or more other partners). See "--
Company and Partnership Ownership." Currently, eight of the Operating Companies
(comprising 11 of the 13 networks) are partnerships that are 50% or less owned
by the Company, and the Operating Companies do not include the South Florida
Partnership (as defined herein). As described more fully herein, the Company
designs, constructs, manages and operates networks on behalf of the Operating
Companies, and it is through these networks that the Company and the Operating
Companies provide telecommunications services. Unless otherwise indicated, the
information in this Prospectus gives effect to a 10,000-to-one stock split on
April 8, 1996 of each outstanding share of the Company's Common Stock (as
defined).
THE COMPANY
Hyperion Telecommunications, Inc. ("Hyperion" or the "Company") is a leading
competitive local exchange carrier ("CLEC") that designs, constructs, operates
and manages state-of-the-art fiber optic networks and facilities. Based on its
review of information made publicly available by other CLECs, , the Company
believes it operates one of the three largest CLECs in the United States based
upon route miles and buildings connected. The Company's networks work in
conjunction with interexchange carriers ("IXCs") such as AT&T, MCI, Sprint,
WorldCom and others in order to offer small, medium and large businesses,
government and education end users a broad array of integrated, high quality
voice, video and enhanced data communications services. The Company, through
its 13 networks, currently offers traditional access services, including high
capacity interconnection between (i) points of presence ("POPs") of an IXC,
(ii) the POPs of different IXCs, (iii) a Local Exchange Carrier's Central
Office ("LEC-CO") and IXC POPs, (iv) end users and their selected IXCs and (v)
different locations of particular customers ("Private Line Services"). The
Company has also installed switches or remote switching capability in five of
its networks and plans to offer switched services, including customer dial
tone, in all of its operating markets by the end of 1996. Four of the Company's
networks also offer enhanced data services to their customers such as frame
relay, Asynchronous Transfer Mode ("ATM") data transport, business video
conferencing, private line data interconnect service and LAN connection and
monitoring services in certain markets in a partnership with !NTERPRISE, a
wholly-owned subsidiary of US West. These services, along with the long
distance services provided by IXCs, enable the Company to provide an integrated
telecommunications service offering to network customers that is more reliable,
has a superior level of service and is priced lower relative to that of the
incumbent local exchange carriers ("LECs") in markets served by the Company's
networks.
The Company currently manages and operates 13 networks which are primarily
clustered in three regions located in the eastern half of the United States and
which serve 19 cities with populations from at least 25,000 to more than
600,000. The Company also has four new networks under construction which will
serve 17 additional cities and which the Company will manage and operate upon
their expected completion in calendar year 1996. Eleven of the Company's
operating networks and three of its networks under construction are owned in
2
<PAGE>
partnership with several major cable television operators, including Tele-
Communications, Inc., Time Warner/Newhouse, Continental Cablevision, TKR Cable,
Lenfest Communications, InterMedia Partners and Multimedia/Gannett, and an
electric utility, PECO Energy, owner of the Philadelphia Electric Company
(collectively, the "Local Partners"). The Company believes that working with a
Local Partner significantly reduces the cost and time in developing a network
through the utilization of existing cable or utility facilities. The remaining
two operating networks and one network under construction are wholly-owned by
the Company and lease fiber capacity from Adelphia Communications Corporation
("Adelphia"), the Company's corporate parent, to achieve similar time and cost
savings in developing the networks.
The Company intends to increase the density of its existing network clusters
and expand into new geographic markets or clusters through the construction of
approximately ten new networks by the end of 1997. From the Company's inception
in October 1991 through March 31, 1996, the Company and its partners have
invested approximately $162 million to build and develop the network
infrastructure and operations. As of March 31, 1996, the Company's 13 operating
networks served 19 cities, and along with the four networks under construction,
included approximately 2,210 route miles of fiber optic cable and were
connected to approximately 822 buildings. For the year ended March 31, 1996,
the Company's 13 networks generated total revenues of approximately $7.9
million. The Company reports its interest in joint ventures pursuant to the
equity method of accounting on a basis consistent with generally accepted
accounting principles. The Company's revenues and EBITDA were approximately
$3.5 million and ($2.3) million, respectively, for the year ended March 31,
1996.
The Company believes the passage of the Telecommunications Act of 1996 (the
"Telecommunications Act") on February 8, 1996 will substantially expand the
market opportunities for the Company and its networks. The Telecommunications
Act provides for the removal of legal barriers to entering the local exchange
telecommunications market and directs the incumbent LECs to negotiate with
CLECs to resolve network and competitive issues such as interconnection of CLEC
and incumbent LEC networks, reciprocal compensation for termination of calls
originating on a competing network, telephone number portability, access to
rights-of-way and the unbundling of network services. The Telecommunications
Act may provide an incentive for incumbent LECs to cooperate with local
facilities-based competitors, such as the Company, on interconnection issues
because the existence of an interconnection agreement with a facilities-based
competitor is a prerequisite for incumbent LEC entry into the long distance
market unless no such facilities-based competitor has requested access and
interconnection in accordance with the terms of the Telecommunications Act.
Based upon data compiled by the Federal Communications Commission (the "FCC"),
the Company believes that the passage of the Telecommunications Act increases
the potential market for CLECs from approximately $26.3 billion to
approximately $97.1 billion annually due to the opening of the market for
switched services which will permit CLECs to offer a full range of local
telecommunications services including local dial tone, local calls, custom
calling features and intraLATA toll services for both business and residential
customers. In the markets where the Company's networks are currently operating
or under construction, the Company now believes it has an addressable market
opportunity of approximately $4.8 billion, substantially all of which is
currently provided by the incumbent LECs.
COMPANY STRATEGY
The Company, through its networks, is a leading provider of integrated local
telecommunications services to small, medium and large businesses, government
and educational end users and IXCs in its existing markets. The Company
differentiates its service offerings by partnering with local cable television
operators and utility companies to develop networks that will provide customers
with greater market coverage, lower costs and superior service. The Company's
networks also leverage the IXCs' name recognition and reputation for quality
and reliability by becoming preferred suppliers for IXCs of local
telecommunications services in the Company's markets. The IXCs market their
long distance services in conjunction with the Company's local service
offerings to provide end users with a fully integrated telecommunications
service offering in all of the Company's operating markets. Principal elements
of the Company's strategy include:
3
<PAGE>
Develop a Rapid Entry/Low Cost Approach with Local Partners. The Company
works with a Local Partner in order to significantly reduce the cost and time
to construct a fiber optic network, enable the Company to rapidly begin
offering services and lower the overhead associated with operating and
maintaining the Company's networks. Advantages of building the Company's
networks with Local Partners include (i) sharing the cost of building the fiber
optic network with a cable television system or utility system which the
Company believes reduces the cost of aerial fiber construction by approximately
62%, (ii) reducing the time and cost of obtaining access to rights-of-way and
building entrances and (iii) enabling the Company to leverage the Local
Partners' experience and capabilities for maintaining fiber optic cables
thereby significantly reducing the ongoing costs of a fiber optic network.
Through the partnerships, the Company has financed its expansion at a lower
cost relative to its competitors by utilizing pro rata equity investments and
Local Partner financings of a significant portion of fiber construction. Local
Partners provide most of the funds for the fiber build in a network and lease
the fiber capacity back to the partnership under long-term agreements.
Build Broad Network Coverage. The Company intends to build substantially
larger networks than the networks of the CLECs it competes with in its markets.
As of March 31, 1996, in all of the markets in which the Company and its
networks operate, management believes that the Company has the broadest network
coverage in terms of route miles of any of its CLEC competitors. The Company
believes that expanded network coverage will enable the Company to (i) provide
broader and more reliable coverage for network customers, (ii) carry a greater
amount of traffic on its own networks rather than on the networks of other
carriers thereby increasing the Company's revenues and profit margins, (iii)
increase the potential market available to the Company due to the greater
number of buildings, LEC-COs and customers that the Company's networks can
service, (iv) improve the value of the Company's networks to IXCs, cellular
providers and new telecommunications providers such as Personal Communications
Service ("PCS") operators that need wide backbone coverage, (v) offer services
in areas where there are fewer potential CLECs with facilities and (vi)
leverage the fixed cost structure of the Company's networks, particularly with
regard to network electronics such as switches.
Expansion through Development of Network Clusters. The Company intends to
build on its extensive network size by adding markets near its existing
networks and targeting markets in close proximity when establishing new
networks. Management believes that there are significant operating and
marketing advantages to locating its networks in clusters. Clustering enables
the Company to (i) take advantage of economies of scale in management,
construction, network operations and sales and marketing, (ii) optimize the
networks' switching capacity by utilizing remote switch capacity in nearby
cities, (iii) offer services to lower density traffic areas in which the
Company's networks are less likely to face strong competition from incumbent
LECs and other CLECs and (iv) increase the networks' ability to offer highly
reliable, end-to-end connectivity on a regional basis. The Company also
believes that creating regional networks will enable the Company to gain a
greater share of high margin long distance transport traffic.
Develop Strategic Relationships with IXCs. The Company, through its networks,
provides customers with an integrated, one-stop shopping approach to their
telecommunications needs through its strategic relationships with IXCs such as
AT&T, MCI, Sprint, WorldCom and others. The goal of these relationships is for
the Company's networks to offer their local services in conjunction with the
long distance services of these IXCs. Management believes that working in
partnership with IXCs instead of as a competitor will be attractive to IXCs and
enable the Company to (i) utilize extensive market information from the IXCs
regarding traffic patterns and building requirements to more optimally
construct and extend its networks, (ii) work closely with IXC account teams to
provide an integrated service approach to end users, (iii) increase market
penetration by capitalizing on the IXCs' name recognition and (iv) lower sales
and marketing costs by utilizing the extensive marketing resources and
salesforce of the IXCs to market the networks' products and services. In
pursuing this strategy, the Company has entered into a national service
agreement (the "National Service Agreement") with a major IXC pursuant to which
the Company's networks will be the major IXC's preferred supplier of dedicated
special access and switched access transport services.
4
<PAGE>
Expand Enhanced Service Offerings. Four of the Company's networks operate in
partnership with !NTERPRISE, a leading, nationwide network integrator that
designs, develops and deploys state-of-the-art data networks (including both
network services and equipment) to support and enhance the information systems
with which the networks' customers operate their businesses. Pursuant to the
partnership agreements, !NTERPRISE co-markets enhanced services, including
frame relay, ATM data transport, business video conferencing, private line data
interconnect service and LAN connection and monitoring services to the
networks' customers in the networks' respective markets. The Company believes
that the partnerships with !NTERPRISE provide the opportunity to offer network
customers a full complement of enhanced services more rapidly and without the
Company incurring the cost and overhead of establishing its own nationwide
enhanced services marketing, sales and installation effort. The Operating
Companies intend to enter into additional agreements with !NTERPRISE and other
service integrators in the future.
COMPANY AND PARTNERSHIP OWNERSHIP
The Company is an 89% owned subsidiary of Adelphia, the seventh largest cable
television company in the United States which as of March 31, 1996 owned or
managed cable television systems that served approximately 1.75 million
subscribers in 15 states. The balance of the Company is owned by senior
management which has extensive experience in the telecommunications field. The
Company manages and operates networks in 13 markets. The Company owns its 13
operating networks through (i) partnerships with seven Local Partners (the
"Operating Partnerships") and (ii) two wholly-owned subsidiaries of the Company
and one corporation in which it is a minority shareholder ("Operating
Corporations") (collectively the Operating Partnerships and the Operating
Corporations are referred to herein as the "Operating Companies"). The Company
is responsible for the network design, construction, management and operation
of the Operating Companies, for which it receives management fees. Prior to May
16, 1996, the Company also had an investment in a partnership operating in
southern Florida (the "South Florida Partnership") in which it had no
management responsibility.
The following is an overview of the Company's network structure as of August
1, 1996, except as noted below for the South Florida Partnership.
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED
DATE OF HYPERION
COMPANY MARKETS OPERATION(A) INTEREST LOCAL PARTNERS
- --------------- ------------ -------- -------------------------
OPERATING NETWORKS
- ------------------
<S> <C> <C> <C>
Northeast Cluster
Albany, NY(b).................. 2/95 50.0% Time Warner/Newhouse
Binghamton, NY(b).............. 3/95 20.0 Time Warner/Newhouse
Buffalo, NY.................... 1/95 40.0 Tele-Communications, Inc.
Time Warner/Newhouse
Syracuse, NY(b)................ 8/92 50.0 Time Warner/Newhouse
Vermont........................ 11/94 100.0 (c)
Mid-Atlantic Cluster
Charlottesville, VA............ 11/95 100.0 (c)
Harrisburg, PA................. 4/95 50.0 Lenfest Communications
New Brunswick, NJ.............. 11/95 19.7 TKR Cable(d)
Richmond, VA................... 9/93 37.0 Continental Cablevision
Mid-South Cluster
Louisville, KY................. 3/95 50.0(e) TKR Cable
Nashville, TN.................. 11/94 95.0(e) InterMedia Partners
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ACTUAL OR
EXPECTED
DATE OF HYPERION
COMPANY MARKETS OPERATION(A) INTEREST LOCAL PARTNERS
- --------------- ------------ -------- -----------------------
<S> <C> <C> <C>
Other Networks
Jacksonville, FL............... 9/92 20.0 Continental Cablevision
Wichita, KS.................... 9/94 49.9 Multimedia/Gannett
NETWORKS UNDER CONSTRUCTION(F)
- ------------------------------
Mid-Atlantic Cluster
Morristown, NJ................. 1996(g) 19.7 TKR Cable(d)
Philadelphia, PA............... 1996(g) 50.0 PECO Energy
Scranton/Wilkes-Barre, PA...... 1996(g) 100.0 (c)
Mid-South Cluster
Lexington, KY.................. 1996(g) 50.0(e) TKR Cable
NETWORK INVESTMENTS
- -------------------
South Florida(h)............... 1/94 15.7 (h)
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP; (ii) the network is capable of accepting traffic from IXCs and end
users; (iii) the Company's central office is fully functional and (iv) the
initial network SONET fiber rings have been completed.
(b) The interests in the Albany, Binghamton and Syracuse markets are all owned
by one Operating Partnership.
(c) Adelphia or its affiliate leases 100% of the fiber capacity to the
Operating Companies in these markets.
(d) Sutton Capital Associates also owns a minority interest.
(e) The Company's interest in these markets has recently changed. See "--Recent
Developments."
(f) The Company has entered into binding agreements with respect to the
construction of these networks.
(g) The Company expects each of these networks to be operational between August
1996 and December 1996.
(h) The Company was an investor in TCG South Florida, the South Florida
Partnership, with several other partners and had no management oversight
responsibility with regard to such partnership. On May 16, 1996, the
Company sold its investment in such partnership. See "--Recent
Developments."
RECENT DEVELOPMENTS
Sale of Partnership Interest in the South Florida Partnership. On May 16,
1996, the Company completed the sale of its 15.7% partnership interest in TCG
South Florida to Teleport Communications Group Inc. for an aggregate sales
price of approximately $11.6 million resulting in a pre-tax gain of
approximately $8.4 million. Amounts related to the South Florida Partnership
included in the Company's investments and equity in net loss of joint ventures
as of and for the year ended March 31, 1996 were approximately $3.4 million and
($0.8) million, respectively. As part of the transaction, the Company was
released from its covenant not to compete with respect to the South Florida
market. The Company plans to use the proceeds from the sale to continue to
expand and develop its existing markets, complete new networks under
construction and enter additional markets.
Other Changes in Partnership Interests. The Company recently entered into
agreements pursuant to which the Company's ownership interests in certain of
the Operating Partnerships have increased in three markets. These transactions
are consistent with the Company's goal to own at least a 50% interest in its
Operating Partnerships in the future, and where appropriate the Company may
consider similar transactions from time to time in its other markets. Following
the completion of the transactions described below, Hyperion owned at least 50%
of ten of its 17 then existing markets and markets under construction.
6
<PAGE>
Pursuant to a binding letter of intent with TKR, dated as of January 29,
1996, and a subsequent amendment to the related partnership agreement dated May
8, 1996, the Company has agreed to make additional capital contributions to its
Louisville, Kentucky Operating Partnership (which will also operate the network
under construction in Lexington, Kentucky) and has increased its partnership
ownership interest to 50%. The Company estimates that the required additional
capital contributions will be approximately $3.0 million.
Pursuant to a Purchase Agreement dated as of July 25, 1996 the Company
purchased general and limited partnership interests in the Nashville, Tennessee
Operating Partnership from InterMedia and Robin Media on August 1, 1996. The
aggregate purchase price was approximately $5 million and as a result of these
purchases the Company's ownership interest in this partnership was increased
from 25% to 95%.
National Service Agreement with Major IXC. The Company has entered into the
National Service Agreement with AT&T pursuant to which the Company's networks
will be the IXC's preferred supplier of dedicated special access and switched
access transport services. The National Service Agreement requires the Company
to provide such services to the IXC at a discount from the tariffed or
published incumbent LEC rates. The National Service Agreement is in effect in
all of the Company's markets. The Company believes that only four other CLECs
have comparable National Service Agreements and have passed AT&T's network
validation tests and operational readiness testing.
THE EXCHANGE OFFER
Securities Offered.......... Up to $329,000,000 aggregate principal amount
at maturity of 13% Series B Senior Discount
Notes due 2003 of the Company (the "New
Notes," and collectively with the Old Notes,
the "Senior Notes"). The terms of the New
Notes and the Old Notes are substantially
identical in all material respects, except
for certain transfer restrictions,
registration rights and liquidated damages
("Liquidated Damages") for Registration
Defaults relating to the Old Notes which will
not apply to the New Notes. See "Description
of Senior Notes."
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of New Notes for each $1,000
principal amount of Old Notes. See "The
Exchange Offer" for a description of the
procedures for tendering Old Notes. The
Exchange Offer satisfies the registration
obligations of the Company under the
Registration Rights Agreement. Upon
consummation of the Exchange Offer, holders
of Old Notes that were not prohibited from
participating in the Exchange Offer and did
not tender their Old Notes will not have any
registration rights under the Registration
Rights Agreement with respect to such
nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the
restrictions on transfer contained in the
legend thereon.
Tenders, Expiration Date;
Withdrawal.................
The Exchange Offer will expire at 5:00 p.m.,
New York City time, on September 11, 1996, or
such later date and time to which it is
extended, provided that the Exchange Offer
shall not be extended beyond 30 business days
from the date of this Prospectus. Tender of
7
<PAGE>
Old Notes pursuant to the Exchange Offer may
be withdrawn and retendered at any time prior
to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder as promptly as practicable after the
expiration or termination of the Exchange
Offer.
Federal Income Tax The Exchange Offer will not result in any
Considerations.............. income, gain or loss to the holders of Senior
Notes or the Company for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
Use of Proceeds............. There will be no proceeds to the Company from
the exchange of New Notes for the Old Notes
pursuant to the Exchange Offer.
Exchange Agent.............. Bank of Montreal Trust Company, the Trustee
under the Indenture, is serving as exchange
agent (the "Exchange Agent") in connection
with the Exchange Offer.
CONSEQUENCES OF EXCHANGING OR FAILURE TO EXCHANGE OLD NOTES PURSUANT TO THE
EXCHANGE OFFER
Generally, holders of Old Notes (other than any holder who is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the Exchange Offer may offer
their New Notes for resale, resell their New Notes, and otherwise transfer
their New Notes without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided such New Notes are acquired
in the ordinary course of the holder's business, such holders have no
arrangement with any person to participate in a distribution of such New Notes
and neither the holder nor any other person is engaging in or intends to engage
in a distribution of the New Notes. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of its New Notes. See "Plan
of Distribution." To comply with the securities laws of certain jurisdictions,
it may be necessary to qualify for sale or register the New Notes prior to
offering or selling such New Notes. The Company is required, under the
Registration Rights Agreement, to register the New Notes in any jurisdiction
requested by the holders, subject to certain limitations. Upon consummation of
the Exchange Offer, holders that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes, and accordingly, such Old Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon. In
general, Old Notes may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws. See "The Exchange Offer--
Consequences of Failure to Exchange."
SUMMARY DESCRIPTION OF SENIOR NOTES
Securities Offered.......... Up to $329,000,000 principal amount of 13%
Series B Senior Discount Notes due 2003 of
the Company (the "New Notes," and
collectively with the Old Notes, the "Senior
Notes"). The terms of the New Notes and the
Old Notes are substantially identical in all
material respects, except for certain
transfer restrictions, registration rights
and Liquidated Damages for Registration
Defaults relating to the Old Notes which will
not apply to the New Notes. See "Description
of Senior Notes."
8
<PAGE>
Maturity.................... April 15, 2003
Interest.................... Cash interest will not accrue on the Senior
Notes prior to April 15, 2001. Thereafter,
the Senior Notes will bear interest at the
rate of 13% per annum, payable semi-annually,
in cash, on April 15 and October 15 of each
year, commencing October 15, 2001.
Optional Redemption......... The Senior Notes may be redeemed at the
option of the Company, in whole or in part,
on or after April 15, 2001 at a premium
declining to par in 2002, plus accrued and
unpaid interest, if any, through the
redemption date.
On or before April 15, 1999, the Company may,
at its option, redeem up to 25% of the
aggregate principal amount at maturity of the
Senior Notes then outstanding at a redemption
price of 113.0% of the Accreted Value thereof
with the proceeds of (i) an Initial Public
Offering of common stock of the Company or
(ii) a sale of the Capital Stock (other than
the Disqualified Stock) of the
Company to a Strategic Investor; provided,
however, that at least 75% of the aggregate
principal amount at maturity of the Senior
Notes remains outstanding following any such
redemption and provided, further, that such
redemption shall occur within 90 days of the
date of the closing of such Initial Public
Offering or such sale to a Strategic
Investor, as the case may be.
Change of Control........... In the event of a Change of Control, the
holders of the Senior Notes will have the
right to require the Company to purchase
their Senior Notes at a price equal to 101%
of the Accreted Value thereof or in the case
of any such purchase on or after April 15,
2001, at 101% of the aggregate principal
amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase.
There can be no assurance that the Company
will have the financial resources necessary
to repurchase the Senior Notes upon a Change
of Control. See "Description of the Senior
Notes--Offer to Purchase upon Change of
Control."
Ranking..................... The Senior Notes are general unsecured
obligations of the Company. The Senior Notes
rank pari passu in right of payment with all
existing and future senior Indebtedness of
the Company and senior in right of payment to
all future subordinated Indebtedness of the
Company. In addition, holders of indebtedness
and other liabilities of the Company's
Subsidiaries and Joint Ventures will have
claims that are effectively senior to the
Senior Notes. As of March 31, 1996, the
aggregate principal amount outstanding of
such senior Indebtedness (excluding trade
payables and other accrued liabilities) of
the Subsidiaries and Joint Ventures would
have been $25.9 million, substantially all of
which were Capital Lease Obligations.
Covenants................... The indenture with respect to the Senior
Notes (the "Indenture") contains certain
covenants that, among other things, limit the
ability
9
<PAGE>
of the Company and its subsidiaries to incur
additional Indebtedness and issue preferred
stock, pay dividends or make other
distributions, repurchase Equity Interests
(as defined) or subordinated Indebtedness,
engage in sale and leaseback transactions,
create certain liens, enter into certain
transactions with affiliates, sell assets of
the Company or its subsidiaries, issue or
sell Equity Interests of the Company's
subsidiaries or enter into certain mergers
and consolidations. In addition, under
certain circumstances, the Company will be
required to offer to purchase Senior Notes at
a price equal to 100% of the Accreted Value
thereof or, in the case of any such purchase
on or after April 15, 2001, at 100% of the
principal amount thereof, plus accrued and
unpaid interest, if any, to the date of
purchase, with the proceeds of certain Asset
Sales (as defined). See "Description of the
Senior Notes."
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary financial data (except the unaudited information for
the fiscal years ended March 31, 1992 and 1993, pro forma information, Network
Data and Other Network and Operating Data ) are derived from, and should be
read in conjunction with, the audited Consolidated Financial Statements of the
Company and the related Notes thereto contained herein. The unaudited
information for the fiscal years ended March 31, 1992 and 1993, pro forma
information, Network Data and Other Network and Operating Data are derived from
other Company information. Except as noted below, the following table includes
financial and operating information relating to the South Florida Partnership
and the Company's 15.7% interest therein which was sold by the Company on May
16, 1996. See "Recent Developments." All of the following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service and
management fee revenue.......... $ -- $ 89 $ 434 $ 1,768 $ 3,521
Operating expenses:
Network operations.............. 2 19 330 1,382 2,690
Selling, general and
administrative.................. 211 921 2,045 2,524 3,084
Depreciation and amortization... -- 30 189 463 1,184
------ ------- ------- ------- --------
213 970 2,564 4,369 6,958
------ ------- ------- ------- --------
Operating income (loss).......... (213) (881) (2,130) (2,601) (3,437)
------ ------- ------- ------- --------
Interest expense and fees........ -- -- (2,164) (3,321) (6,088)
------ ------- ------- ------- --------
Loss before income taxes, equity
in net loss of joint ventures
and cumulative effect of change
in accounting principle......... $ (213) $(881) (4,294) (5,922) (9,525)
Income tax benefit............... -- -- 55 29 197
Equity in net loss of joint
ventures........................ -- (194) (528) (1,799) (4,292)
Cumulative effect of change in
accounting
for income taxes................ -- -- 42 -- --
------ ------- ------- ------- --------
Net income (loss)................ $ (213) $(1,075) $(4,725) $(7,692) $(13,620)
====== ======= ======= ======= ========
Net loss per weighted average
share of common stock........... $(0.02) $ (0.11) $ (0.47) $ (0.77) $ (1.36)
Weighted average shares of common
stock outstanding............... 10,000 10,000 10,000 10,000 10,000
Ratio of earnings to fixed
charges(a)...................... -- -- -- -- --
Cash dividends declared.......... -- -- -- -- --
Pro forma interest expense(b).... -- -- -- -- 27,796
Pro forma ratio of earnings to
fixed charges(c)................ -- -- -- -- --
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, PRO FORMA AS OF
------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1996(F)
----- ------- ------- -------- -------- ---------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 5 $ 118 $ -- $ -- $ -- $140,585
Working capital........ (291) (441) 1,377 936 (11,455) 129,130
Total assets........... 82 4,316 14,765 23,212 35,269 182,093
Senior Notes........... -- -- -- -- -- 163,705
Note payable--Adelphia. -- 4,814 19,968 35,541 50,855 25,855
Total liabilities...... 295 5,390 20,776 36,915 62,592 201,297
Stockholders' equity
(deficiency).......... (213) (1,074) (6,011) (13,703) (27,323) (19,204)
Book value per common
share................. (.02) (.11) (.60) (1.37) (2.73) (1.92)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
---------------------------------------
1992 1993 1994 1995 1996
----- ----- ------- -------- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER COMPANY DATA:
EBITDA(d)........................ $(213) $(851) $(1,941) $ (2,138) (2,253)
Capital expenditures and Company
investments in Operating
Companies and the South Florida
Partnership(e).................. 60 3,891 8,607 10,376 18,899
Cash used in operating
activities...................... 184 725 2,121 2,130 833
Cash used in investing
activities...................... 60 3,806 8,607 10,376 18,899
Cash provided by financing
activities...................... 248 4,645 10,609 12,506 19,732
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1996
---------
<S> <C>
NETWORK DATA (G):
Networks in operation................................................ 13
Cities served........................................................ 19
Network clusters..................................................... 3
Networks under construction.......................................... 4
Route miles.......................................................... 2,210
Fiber miles.......................................................... 106,080
Buildings connected.................................................. 822
LEC-COs collocated(h)................................................ 44
VGE circuits(i)...................................................... 186,292
Switches and remote switch modules installed......................... 5
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------
1992 1993 1994 1995 1996
---- ------ ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT
EMPLOYEE INFORMATION)
<S> <C> <C> <C> <C> <C>
OTHER NETWORK AND OPERATING DATA (J):
Network revenues(k)................... $ 0 $ 173 $ 1,028 $ 4,083 $12,186
Capital expenditures(l)............... 0 2,559 27,445 33,522 57,290
Fiber lease financings during
period(m)............................ 0 1,262 1,527 17,420 9,174
Employees(n).......................... 4 20 40 95 155
</TABLE>
- --------
(a) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes, plus fixed charges excluding
capitalized interest plus amortization of deferred financing costs and (ii)
fixed charges consist of interest expensed and capitalized. For the fiscal
years ended March 31, 1992, 1993, 1994, 1995 and 1996, the Company's
earnings were insufficient to cover fixed charges by $213, $1,075, $4,822,
$7,721 and $13,817, respectively.
(b) Pro forma interest expense assumes (i) repayment of $25.0 million of the
Adelphia Note (as defined) at an interest rate of 11.28%, (ii) gross
proceeds attributable to the issuance of the Senior Notes of $163.7
million, (iii) issuance of the Senior Notes at an interest rate of 13.0%
and (iv) original issue discount attributable to the Warrants.
12
<PAGE>
(c) On a pro forma basis, for the year ended March 31, 1996, the Company's
earnings would have been insufficient to cover fixed charges by $35,525.
(d) EBITDA consists of net income (loss) before equity in net loss of joint
ventures, interest, income taxes, depreciation and amortization for the
periods presented. It is a measure commonly used in the telecommunications
industry and is presented to assist in understanding the Company's
operating results. However, it is not intended to represent cash flow or
results of operations in accordance with generally accepted accounting
principles. See the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
(e) For the fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996, the
Company's capital expenditures (including capital expenditures relating to
its wholly-owned Operating Companies) were $60, $1,950, $3,097, $2,850 and
$6,084, respectively, and the Company's investments in its less than
wholly-owned Operating Companies and the South Florida Partnership were $0,
$1,941, $5,510, $7,526 and $12,815, respectively, for the same periods. See
the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
(f) Gives effect to (i) the consummation of the sale on April 15, 1996 of
329,000 Units ("Units") (the "Offering") consisting of $329,000 aggregate
principal amount at maturity of Senior Notes and Warrants to purchase an
aggregate of 613,427 shares of Common Stock of the Company, and the
allocation of approximately $163.7 million to the Senior Notes and
approximately $11.6 million to the Warrants and (ii) the application of the
estimated net proceeds from such sale, including the repayment of certain
indebtedness and loans to certain stockholders.
(g) Network Data is derived from the Company's records and presents information
for the Operating Companies, but does not include information for the South
Florida Partnership.
(h) LEC-CO collocated means that the Company has interconnected its network at
the LEC-CO.
(i) Voice grade equivalent circuits.
(j) Except for employees as discussed in note (n) below, the data presented
represent selected unaudited combined operating data of the Company's
Operating Companies (including the Company's two wholly-owned Operating
Companies) and the South Florida Partnership, and do not include data of
the Company on a stand alone basis.
(k) Includes the total of (i) the Operating Companies' revenues and (ii) the
South Florida Partnership's revenues.
(l) Represents investments made by the Operating Companies (including
investments made by Local Partners) and the South Florida Partnership in
property, plant and equipment (including capitalized leases).
(m) Fiber Lease Financing (as defined) represents the incremental borrowings by
the Operating Companies and the South Florida Partnership regarding fiber
assets accounted for as capital leases for each period presented.
(n) Employees includes combined employees of the Operating Companies and the
Company.
13
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business in connection with the Exchange Offer.
Consequences of Failure to Exchange. Upon consummation of the Exchange
Offer, holders of Old Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes and, accordingly, such Old Notes will continue to
be subject to the restrictions on transfer contained in the legend thereon. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not intend to register the
Old Notes under the Securities Act. Based on interpretations by the staff of
the Commission with respect to similar transactions, the Company believes that
the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by any holder of
such New Notes (other than any such holder which is an "affiliate" of Hyperion
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of its New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of the New Notes received in exchange for
the Old Notes acquired by the broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale for a period of 365 days after the Exchange Date or, if
earlier, until all participating broker-dealers have so resold. See "Plan of
Distribution." The New Notes may not be offered or sold unless they have been
registered or qualified for sale under applicable state securities laws or an
exemption from registration or qualification is available and is complied
with. The Company is required, under the Registration Rights Agreement, to
register the New Notes in any jurisdiction requested by the holders, subject
to certain limitations.
Absence of a Public Market. Prior to this Exchange Offer, there has been no
public market for the Old Notes. If a market for the New Notes should develop,
the New Notes could trade at a discount from their issue price or principal
amount. The Company does not currently intend to list the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active public market for
the New Notes will develop.
Negative Cash Flow and Operating Losses; Limited History of Operations. The
Company has experienced significant losses since its inception, with operating
losses of approximately ($2.1) million, ($2.6) million and ($3.4) million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively. The
Company expects to continue to incur substantial operating losses in the
foreseeable future as it pursues its plans to expand its networks, service
offerings and customer base. There can be no assurance that such losses will
not continue indefinitely. The Company currently accounts for its ownership
interests in the Operating Companies in which it does not have majority
ownership interest using the equity method and, therefore, the Company's
consolidated financial statements include only the Company's pro rata share of
the Operating Companies' and the South Florida Partnership's net losses as
equity in net losses of joint ventures.
The Company was formed in October 1991 and, as of March 31, 1996, ten of its
13 networks have been in operation for less than 24 months. Prospective
investors therefore have limited historical financial information
14
<PAGE>
about the Company upon which to base an evaluation of the Company's
performance. The development of the Company's businesses and the installation
and expansion of its networks require significant expenditures, a substantial
portion of which are made before any revenues may be realized. Certain of the
expenditures, including marketing, sales and general and administrative costs,
are expensed as incurred, while certain other expenditures, including network
design and construction, negotiation of rights-of-way and costs to obtain
legal and regulatory approval, are deferred until the applicable network is
operational. The Company will continue to incur significant expenditures in
connection with the construction, acquisition, development and expansion of
the Company's and Operating Companies' networks, services and customer base.
In light of the Company's limited operating history, its history of
significant operating losses and its expectation that it will continue to
incur significant expenses and operating losses for the foreseeable future,
there can be no assurance that the Company will be able to implement its
growth strategy, achieve or sustain profitability or generate sufficient cash
flow to service the Senior Notes. If the Company is unable to generate
positive cash flow, holders of the Senior Notes would be adversely affected.
Substantial Leverage. As of March 31, 1996, after giving pro forma effect to
the Offering, the Company's total amount of debt outstanding would have been
$189.6 million and the Company would have had a stockholders' deficiency of
$19.2 million. In addition, in each year since its inception, the Company's
earnings have been inadequate to cover its fixed charges by a substantial
margin. Commencing on October 15, 2001, semi-annual cash interest payments of
$21.4 million will be due on the Senior Notes, which substantially exceeds the
Company's gross revenues of approximately $3.5 million for the year ended
March 31, 1996.
Because the Company currently has a consolidated cash flow deficit, its
ability to make cash interest payments on the Senior Notes commencing on
October 15, 2001 and to repay its obligations on the Senior Notes at maturity
will be dependent on developing one or more sources of cash flow prior to the
date on which cash interest payment obligations begin on the Senior Notes. To
accomplish this the Company may seek to (i) refinance all or a portion of the
Senior Notes, (ii) sell all or a portion of its interests in one or more of
the Operating Companies, (iii) negotiate with its current Local Partners to
permit any excess cash generated by its Operating Companies to be distributed
to partners rather than invested in the businesses of such Operating Companies
and/or (iv) invest in companies that will make substantial cash distributions
on or before the maturity of the Senior Notes. There can be no assurance that
(i) there will be a market for the debt or equity securities of the Company in
the future, (ii) the Company will be able to sell assets in a timely manner or
on commercially reasonable terms or in an amount that will be sufficient to
make cash interest payments and repay the Senior Notes when due, (iii) the
Company will be able to persuade its Local Partners that cash generated by the
operations of the Operating Companies should be distributed to partners or
shareholders or (iv) the Company will be able to locate and invest in
companies that will be mature enough to make substantial cash contributions to
the Company prior to the maturity date of the Senior Notes. The inability of
the Company to develop any of the sources of liquidity described above could
adversely affect the holders of the Senior Notes.
In addition, the Company's ability to sell or transfer its or its
subsidiaries' ownership interest in the Operating Companies is subject to
limitations contained in the various subscription and partnership agreements,
including, in certain cases, complete prohibitions on sales or transfers for a
period of three to five years after formation and/or rights of first refusal.
Furthermore, none of the ownership interests in the Operating Companies are,
or are expected to be, publicly traded securities. As a result, the Company's
ability to liquidate any or all of the ownership interests in the Operating
Companies will be substantially limited, and there can be no guarantee that
the Company will be able to do so in a timely manner in the event of an
acceleration of the Senior Notes prior to their maturity or in order to
satisfy its obligations in respect of such securities in the event of a Change
of Control or to otherwise make payments on the Senior Notes prior to or at
their maturity.
Holding Company Structure; Inability to Access Cash Flow. The Company is a
holding company with substantially all of its operations conducted through the
Operating Companies and the Company expects that it could develop new networks
and operations in the future through Joint Ventures in which the Company will
15
<PAGE>
own less than 50% of the equity interests. Accordingly, the Company's cash
flow and, consequently, its ability to service its debt, including the Senior
Notes, is dependent on its pro rata share of the cash flow of the Operating
Companies and the payment of funds by those Operating Companies in the form of
management fees, loans, dividends, distributions or otherwise. The Operating
Companies are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the Senior Notes
or to make any funds available therefor, whether in the form of loans,
dividends, distributions or otherwise. Furthermore, the Company may be unable
to access the cash flow of certain of the Operating Companies because it holds
a 50% or less ownership interest in certain of such entities and, therefore,
does not have the requisite control to cause such entities to make
distributions or pay dividends (as applicable) to the partners or equity
holders (as applicable). In addition, such entities will be permitted to incur
indebtedness that may severely restrict or prohibit the making of
distributions, the payment of dividends (as applicable) or the making of
loans. The inability of the Company to receive cash from the Operating
Companies would adversely affect the holders of the Senior Notes.
Ranking. The Senior Notes are obligations of the Company exclusively and are
not secured by any of the assets of the Company, its subsidiaries or the
Operating Companies. Accordingly, holders of secured indebtedness of the
Company will have claims that are prior to the claims of the holders of the
Senior Notes to the extent of the assets securing such other indebtedness. In
addition, holders of indebtedness and other liabilities of the Company's
subsidiaries and the Joint Ventures will have claims that are effectively
senior to the Senior Notes. As of March 31, 1996, the aggregate principal
amount of such senior Indebtedness incurred by the Company's subsidiaries and
Joint Ventures (excluding trade payables and other accrued liabilities) was
approximately $25.9 million, substantially all of which were Capital Lease
Obligations. The Indenture permits certain indebtedness of the Company, its
Subsidiaries and the Joint Ventures to be secured. See "Description of the
Senior Notes."
Risks Associated with Joint Ventures. Most of the Operating Companies' Local
Partner Agreements (as defined) contain mandatory buy/sell provisions that,
after a certain number of years, can be initiated by either partner and result
in one partner purchasing all of the other partner's interests. Accordingly,
there can be no assurance that the Company and its subsidiaries will continue
to be in partnership with their current Local Partner, or any other partner,
in each of their respective markets, or that the Company or its subsidiaries
will have sufficient funds to purchase the partnership interest of such other
partner. In addition, if a partner triggers such buy/sell provisions and the
Company is unable to purchase the initiating partner's interests, the Company
will be forced to sell its interests to the partner, thereby terminating the
partnership, which could result in a material adverse effect on the future
cash flow of the Company.
The bankruptcy or insolvency of a Local Partner or an Operating Company
could result in the termination of the respective Local Partner Agreement and
the related Fiber Lease Agreement (as defined). The effect of such
terminations could be materially adverse to the Company and the respective
Operating Company. Similarly, all of the Management Agreements (as defined),
two of the Local Partner Agreements and five of the Fiber Lease Agreements can
be terminated by the respective Local Partner at various times during the next
seven years. While the Company believes such agreements will be renewed, there
can be no assurance that the Local Partner will not seek to terminate the
agreements. See "Business--Operating Agreements." Accordingly, the failure to
renew such agreements could materially adversely affect the Company and the
respective Operating Companies. In addition, the failure of a Local Partner to
make required capital contributions could have a material adverse effect on
the Company and the respective Operating Company.
The Indenture does not restrict Operating Companies in which the Company
owns a less than 45% interest with respect to the amount of indebtedness they
can incur. Accordingly, the Company's ability to access the cash flow and
assets of such Operating Companies may be severely limited. While none of the
Operating Companies currently have a substantial amount of indebtedness, there
can be no assurance that such Operating Companies will not incur substantial
indebtedness in the future. See "Description of the Senior Notes-- Incurrence
of Indebtedness and Issuance of Preferred Stock."
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Significant Future Capital Requirements. Expansion of the Company's existing
networks and services and the development of new networks and services require
significant capital expenditures. The Company's
operations have required and will continue to require substantial capital
investment for (i) the installation of electronics for switched services in
the Company's networks, (ii) the expansion and improvement of the Company's
NOCC and existing networks and (iii) the design, construction and development
of additional networks. The Company plans to make substantial capital
investments and investments in Operating Companies in connection with the
deployment of switches in all of its operating markets by the end of 1996, the
expansion of existing markets and the construction and development of new
markets. Expansion of the Company's networks will include the geographic
expansion of the Company's existing clusters and the development of new
markets. The Company expects to build networks in approximately ten additional
markets by the end of 1997. The Company estimates that it will require
approximately $110 million to $115 million to fund anticipated capital
expenditures, working capital requirements and operating losses of the Company
and to make investments in existing and new Operating Companies and to enter
certain additional markets during calendar 1996 and 1997. In order to achieve
its goal of entering ten new markets by the end of 1997, however, the Company
expects to be required to seek additional capital. The Company expects to fund
additional capital requirements through existing resources, secured credit
facilities at the Company and Operating Company levels, internally generated
funds, equity invested by Local Partners in Operating Companies, additional
Operating Companies and additional debt or equity financings, as appropriate.
The Company has also been required to fund the purchase of certain
partnership interests in the Louisville Operating Partnership and the
Nashville Operating Partnership and may be required to raise capital to
purchase the partnership interests of a Local Partner seeking to exercise its
right to sell its partnership interest. See "--Risks Associated with Joint
Ventures," "Prospectus Summary--Recent Developments" and "Business--Local
Partner Agreements." There can be no assurance, however, that the Company will
be successful in generating sufficient cash flow or in raising sufficient debt
or equity capital on terms that it will consider acceptable, or at all. The
lack of available additional capital would have a significant negative effect
on the Company's growth and its ability to effectively compete in the
telecommunications industry and would adversely impact the holders of the
Senior Notes. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The expectations of required future capital expenditures are based on the
Company's current estimates. There can be no assurance that actual
expenditures will not significantly exceed current estimates.
Expansion Risk. The Company is experiencing a period of rapid expansion
which the Company believes will increase further following the Offering. The
operating complexity of the Company, as well as the level of responsibility
for management personnel, has increased as a result of this expansion. The
Company's ability to manage such growth effectively will require it to
continue to expand and improve its operational and financial systems and to
expand, train and manage its employee base. The Company's inability to
effectively manage its expansion could have a material adverse effect on its
business and the holders of the Senior Notes.
Competition. In each of the markets served by the Company's networks, the
services offered by the Company compete principally with the services offered
by the incumbent LEC serving that area. Incumbent LECs have long-standing
relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. In light of the passage of the
Telecommunications Act, federal and state regulatory initiatives will provide
increased business opportunities to CLECs such as the Company, but regulators
are likely to provide incumbent LECs with increased pricing flexibility for
their services as competition increases. If incumbent LECs are allowed by
regulators to lower their rates substantially, engage in excessive volume and
term discount pricing practices for their customers, or charge CLECs excessive
fees for interconnection to the incumbent LECs' networks, the net income and
cash flow of CLECs, including the Operating Companies, could be materially
adversely affected.
The Telecommunications Act also establishes procedures under which the
Regional Bell Operating Companies ("RBOCs") can obtain authority to provide
long distance services if they comply with certain
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interconnection requirements. There has been significant merger activity among
the RBOCs in anticipation of entry into the long distance market. If RBOCs are
permitted to provide such services, they will ultimately be in
a position to offer single source service. This could result in decreased
market share for the major IXCs, which are the Company networks' major
customers. Such a result could have an adverse effect on the Company.
The Company also faces, and will continue to face, competition from other
current and potential market entrants, including other CLECs, AT&T, MCI,
Sprint and other IXCs, cable television companies, electric utilities,
microwave carriers, wireless telecommunications providers and private networks
built by large end users. A number of markets served by the Company already
are served by another CLEC or other CLECs. In addition, all three major IXCs
are expected to enter the market for local telecommunications services. MCI
has announced that it will invest more than $2.0 billion in fiber optic rings
and local switching equipment in major metropolitan markets throughout the
United States and AT&T has filed applications with state regulatory
authorities for authority to provide local telecommunications services in all
50 states. Although the Company has good relationships with the IXCs, there
are no assurances that any of these IXCs will not build their own facilities
or resell the services of other carriers rather than use the Company's
services when entering the market for local exchange services.
The Company also competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of
its business.
Many of the Company's current and potential competitors, particularly
incumbent LECs, have financial, personnel and other resources substantially
greater than those of the Company, as well as other competitive advantages
over the Company. See "Competition" for more detailed information on the
competitive environment faced by the Company.
Dependence on Business from IXCs. For the year ended March 31, 1996,
approximately 75% of the Operating Companies' combined revenues were
attributable to access services provided to IXCs, one of which accounted for
approximately 54% of such combined IXCs' revenues. The loss of access revenues
from IXCs in general or the loss of such single IXC as a customer could have a
material adverse effect on the Company's business. See "Business--Company
Strategy--Customer Strategy."
The Company's growth strategy assumes increased revenues from IXCs and end
users following the deployment of switches on the Company's networks and the
provision of switched access origination and termination services. In
addition, the Company competes in its markets with other CLECs for IXC
business. Accordingly, there is no assurance that the IXCs will continue to
increase their utilization of the Company's services, or will not reduce or
cease their utilization of the Company's services, either of which could have
a material adverse effect on the Company.
Furthermore, the Telecommunications Act establishes procedures under which
RBOCs can obtain authority to compete with the IXCs in the long distance
market. Due to the Operating Companies' dependence on business from IXCs, any
loss of market share by the IXCs could have a material adverse effect on the
Company.
Regulation and Risks of the Telecommunications Act. The Company is subject
to varying degrees of federal, state and local regulation. The Company is not
currently subject to price cap or rate of return regulation by the FCC, nor is
it currently required to obtain FCC authorization for the installation,
acquisition or operation of its network facilities. However, the FCC has
determined that nondominant carriers, such as the Company and the Operating
Companies, are required to file interstate tariffs on an ongoing basis. The
Telecommunications Act also requires the FCC to establish a subsidy mechanism
for universal telephone service to which the Company will be required to
contribute. The Operating Companies that provide intrastate services are also
generally subject to certification and tariff filing requirements by state
regulators and may also be subject to state reporting, customer service and
universal service requirements. Challenges to these tariffs by third parties
could cause the Company to incur substantial legal and administrative
expenses. In addition, under the Telecommunications Act, provision of switched
services by the Company could be subject to a far greater degree
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of regulation than previously experienced by the Company with regard to its
nonswitched services. See "Regulation--Telecommunications Act of 1996."
Although the Telecommunications Act eliminates legal barriers to entry, no
assurance can be given that changes in current or future regulations adopted
by the FCC or state regulators or other legislative or judicial initiatives
relating to the telecommunications industry would not have a material adverse
effect on the Company. In particular, the Company's belief that the entire $97
billion local exchange market may ultimately be open to CLEC competition
depends upon favorable interpretation of the Telecommunications Act, and the
ability of the Company and the Operating Companies to compete in these new
market segments may be adversely affected if incumbent LECs are granted
greater pricing flexibility and other regulatory relief that enables them to
impose costs on potential competitors or otherwise restrict the Company's
ability to serve its customers and attract new customers. In addition, the
Telecommunications Act removes entry barriers for all companies and could
increase substantially the number of competitors offering comparable services
in the Company's markets. See "Regulation--Overview" for more detailed
information on the regulatory environment in which the Company and the
Operating Companies operate.
Need to Obtain and Maintain Permits and Rights-of-Way. There can be no
assurance that the Company or the Operating Companies, through Local Partners,
Adelphia or their own efforts, will be able to maintain existing permits and
rights-of-way or to obtain and maintain the other permits and rights-of-way
needed to develop and operate existing and future networks. In addition, the
Company and the Operating Companies may require pole attachment agreements
with electric utilities to operate existing and future networks, and there can
be no assurance that such agreements will be obtained or will be obtainable on
reasonable terms. Failure to obtain or maintain such permits, rights-of-way
and agreements could have a material adverse effect on the Company's ability
to operate and expand its networks. See "Business--Operating Agreements--Fiber
Lease Agreements."
Control by Principal Shareholder. Adelphia owns approximately 89% of the
outstanding capital stock of the Company, with the remaining 11% owned by
certain of the Company's senior management (the "Management Shareholders").
Accordingly, Adelphia is able to control the vote on corporate matters
requiring shareholder approval, including, but not limited to, electing
directors, amending the Company's certificate of incorporation and approving
mergers or sales of substantially all of the Company's assets. In addition,
pursuant to a shareholders agreement, as amended, between the Company,
Adelphia and the Management Shareholders, Adelphia has the power to control
certain corporate transactions of the Company, including its ability to enter
into joint ventures and other business relationships, and Adelphia has the
right, under certain circumstances, to purchase the interests of the
Management Shareholders. In addition, Adelphia has agreed to vote its shares
of the Common Stock of the Company to elect the Management Shareholders to the
Company's Board of Directors. There can be no assurance that the interests of
Adelphia will not conflict with the interest of the holders of the Senior
Notes. See "Certain Relationships and Transactions."
Rapid Technological Changes. The telecommunications industry is subject to
rapid and significant changes in technology. While the Company believes that
for the foreseeable future these changes will neither materially affect the
continued use of fiber optic telecommunications networks nor materially hinder
the Company's ability to acquire necessary technologies, the effect of
technological changes on the businesses of the Company cannot be predicted.
Thus, there can be no assurance that technological developments will not have
a material adverse effect on the Company.
Dependence on Key Personnel. The success of the Company and its growth
strategy depends in large part on the Company's ability to attract and retain
key management, marketing and operations personnel. Currently, the Company's
businesses are managed by a small number of management and operating personnel
with certain other services, including financial and certain accounting
services, provided by Adelphia. There can be no assurance that the Company
will attract and retain the qualified personnel needed to manage, operate and
further develop its business. In addition, the loss of the services of any one
or more members of the Company's senior management team could have a material
adverse effect on the Company.
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Original Issue Discount; Possible Unfavorable Tax and Other Legal
Consequences for Holders of Senior Notes and the Company. The Senior Notes
were issued at a substantial discount from the stated principal amount
thereof. Consequently, holders of the Senior Notes should be aware that,
although interest will not accrue
on the Senior Notes prior to April 15, 2001, and there will be no periodic
payments of cash interest on the Senior Notes prior to October 15, 2001,
original issue discount (i.e., the difference between the stated redemption
price at maturity and the issue price of the Senior Notes) will accrue from
the issue date of the Senior Notes and will be includible as interest income
periodically (including for periods ending prior to April 15, 2001) in a
holder's gross income for U.S. federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. Similar
results may apply under state and other tax laws.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code, the claim of a holder of Senior Notes with respect to the
principal amount thereof may be limited to an amount equal to the sum of (i)
the initial offering price and (ii) that portion of the original issue
discount that is not deemed to constitute "unmatured interest" for purposes of
the U.S. Bankruptcy Code. Any original issue discount that was not amortized
as of any such bankruptcy filing would constitute "unmatured interest."
See "Certain Federal Income Tax Consequences."
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On April 15, 1996, Hyperion issued $329,000,000 aggregate principal amount
at maturity of Old Notes to Bear, Stearns & Co. Inc., Chase Securities Inc.
and NationsBanc Capital Markets, Inc., the Initial Purchasers. The issuance
was not registered under the Securities Act in reliance upon the exemption
under Rule 144A and Section 4(2) of the Securities Act. In connection with the
issuance and sale of the Old Notes, Hyperion entered into a Registration
Rights Agreement with the Initial Purchasers dated as of April 15, 1996 (the
"Registration Rights Agreement"), which requires Hyperion to cause the Old
Notes to be registered under the Securities Act or to file with the Commission
a registration statement under the Securities Act with respect to an issue of
new notes of Hyperion identical in all material respects to the Old Notes, and
use its best efforts to cause such registration statement to become effective
under the Securities Act and, upon the effectiveness of that registration
statement, to offer to the holders of the Old Notes the opportunity to
exchange their Old Notes for a like principal amount of New Notes, which will
be issued without a restrictive legend and may be reoffered and resold by the
holder without restrictions or limitations under the Securities Act. A copy of
the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Exchange Offer
is being made pursuant to the Registration Rights Agreement to satisfy
Hyperion's obligations thereunder.
Based on no-action letters issued by the staff of the Commission to third
parties, Hyperion believes that the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder of such New Notes (other than any such
holder which is an "affiliate" of Hyperion within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes and neither the holder nor any other person
is engaging in or intends to engage in a distribution of the New Notes. Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes cannot rely on such interpretation by the staff
of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), Hyperion will accept any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
Expiration Date. The Company will issue a principal amount of New Notes in
exchange for an equal principal amount of outstanding Old Notes tendered and
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. The date of acceptance for exchange of
the Old Notes for the New Notes (the "Exchange Date") will be the first
business day following the Expiration Date.
The terms of the New Notes and the Old Notes are substantially identical in
all material respects, except for certain transfer restrictions, registration
rights and Liquidated Damages for Registration Defaults relating to the Old
Notes which will not apply to the New Notes. See "Description of Senior
Notes." The New Notes will evidence the same debt as the Old Notes. The New
Notes will be issued under and entitled to the benefits of the Indenture
pursuant to which the Old Notes were issued.
As of the date of this Prospectus, $329,000,000 aggregate principal amount
at maturity of the Old Notes are outstanding. This Prospectus, together with
the Letter of Transmittal, is being sent to all registered holders.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with
the Exchange Offer. Hyperion intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Exchange Act, and the rules and regulations of
the Commission thereunder. Old Notes which are not tendered and were not
prohibited from being tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and to be subject to transfer
restrictions, but will not be entitled to any rights or benefits under the
Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer, on
the Exchange Date Hyperion will accept all Old Notes properly tendered and not
withdrawn and will issue New Notes in exchange therefor. For purposes of the
Exchange Offer, Hyperion shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if Hyperion has given oral or written
notice thereof to the Exchange Agent. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the New Notes from
Hyperion.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents; provided,
however, that Hyperion reserves the absolute right to waive any defects or
irregularities in the tender or conditions of the Exchange Offer. If any
tendered Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Notes or substitute Old Notes evidencing the unaccepted
portion, as appropriate, will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration or termination
of the Exchange Offer.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. Hyperion will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time, on
September 11, 1996, unless Hyperion, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall
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mean the latest date and time to which the Exchange Offer is extended;
provided that the Exchange Offer shall not be extended beyond 30 business days
after the date of this Prospectus.
In order to extend the Expiration Date, Hyperion will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, prior to 9:00 a.m., New York City
time, on the next business day after the then Expiration Date.
Hyperion reserves the right, in its sole discretion, (i) to delay accepting
any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer
if any of the conditions set forth below under "Conditions" shall not have
been satisfied, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer. Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by oral or written notice thereof. If
the Exchange Offer is amended in a manner determined by Hyperion to constitute
a material change, Hyperion will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of Old Notes of such amendment.
Without limiting the manner in which Hyperion may choose to make a public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, Hyperion shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to an appropriate news agency.
INTEREST ON THE NEW NOTES
Cash interest will not accrue on the New Notes prior to April 15, 2001.
Thereafter, the New Notes will bear interest at the rate of 13% per annum,
payable semi-annually, in cash, on April 15 and October 15 of each year,
commencing October 15, 2001.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Hyperion will not be
required to exchange any New Notes for any Old Notes, and may terminate or
amend the Exchange Offer before the acceptance of any Old Notes for exchange,
if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer
which seeks to restrain or prohibit the Exchange Offer or, in
Hyperion's judgment, would materially impair the ability of Hyperion to
proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule, order or regulation is interpreted,
by any government or governmental authority which, in Hyperion's
judgment, would materially impair the ability of Hyperion to proceed
with the Exchange Offer; or
(c) the Exchange Offer or the consummation thereof would otherwise violate
or be prohibited by applicable law.
If Hyperion determines in its sole discretion that any of these conditions
is not satisfied, Hyperion may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering holders, (ii) extend the Exchange
Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders who tendered such
Old Notes to withdraw their tendered Old Notes, or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Old Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, Hyperion will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and Hyperion will extend the Exchange
Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period.
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The foregoing conditions are for the sole benefit of Hyperion and may be
asserted by Hyperion regardless of the circumstances giving rise to any such
condition or may be waived by Hyperion in whole or in part at any time and
from time to time in its sole discretion. The failure by Hyperion at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any
such right, and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. Any determination by Hyperion
concerning the events described above shall be final and binding on all
parties.
PROCEDURES FOR TENDERING
The tender of Old Notes by a holder as set forth below and the acceptance
thereof by Hyperion will constitute an agreement between such holder and
Hyperion in accordance with the terms and subject to the conditions set forth
in this Prospectus and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must (i) complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless such tender is being effected pursuant to the procedure for
book-entry transfer described below) and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date,
or (ii) comply with the guaranteed delivery procedures described below.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO HYPERION. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering of
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership
may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes, with the
signature thereon guaranteed by an Eligible Institution. If the Letter of
Transmittal or any Old Notes or bond powers are signed by
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trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Hyperion,
evidence satisfactory to Hyperion of their authority to so act must be
submitted with the Letter of Transmittal.
Any financial institution that is a participant in the book-entry transfer
facility for the Old Notes, The Depository Trust Company ("DTC"), may make
book-entry delivery of Old Notes by causing DTC to transfer
such Old Notes into the Exchange Agent's account with respect to the Old Notes
in accordance with DTC's procedures for such transfer. Although delivery of
Old Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, an appropriate Letter of Transmittal with any required
signature guarantee and all other required documents must in each case be
transmitted to and received and confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by Hyperion in its sole discretion, which
determination will be final and binding. Hyperion reserves the absolute right
to reject any and all Old Notes not properly tendered or any Old Notes
Hyperion's acceptance of which would, in the opinion of counsel for Hyperion,
be unlawful. Hyperion also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. Hyperion's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Old Notes must be cured within such time as Hyperion shall
determine. Although Hyperion intends to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither Hyperion, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, Hyperion reserves the right in its sole discretion to purchase
or make offers for any Old Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder will also represent to Hyperion (i) that the New
Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such New Notes, whether or
not such person is the holder, (ii) that neither the holder nor any such
person has an arrangement or understanding with any person to participate in
the distribution of such New Notes and (iii) that neither the holder nor any
such other person is an "affiliate," as defined in Rule 405 under the
Securities Act, of Hyperion, or that if it is an "affiliate," it will comply
with the registration and prospective delivery requirements of the Securities
Act to the extent applicable.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or (iii) who cannot complete the procedures for book-entry
transfer of Old Notes to the Exchange Agent's account with DTC prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
24
<PAGE>
(b) On or prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate
number(s) of such Old Notes (if possible) and the principal amount of Old
Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five business trading days after the Expiration
Date, (i) the Letter of Transmittal (or facsimile thereof) together with
the certificate(s) representing the Old Notes and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent, or (ii) that book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC will be effected
and confirmation of such book-entry transfer will be delivered to the
Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all
tendered Old Notes in proper form for transfer and all other documents
required by the Letter of Transmittal, or confirmation of book-entry
transfer of the Old Notes into the Exchange Agent's account at DTC, are
received by the Exchange Agent within five business trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The holder tendering Old Notes exchanges, assigns and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred and exchanged. The holder represents and warrants to the
Company and the Exchange Agent that (i) it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire the New
Notes in exchange for the Old Notes, (ii) when the Old Notes are accepted for
exchange, the Company will acquire good and unencumbered title to the Old
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, (iii) it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes and (iv) acceptance of any tendered Old Notes by the Company and the
issuance of New Notes in exchange therefor will constitute performance in full
by the Company of its obligations under the Registration Rights Agreement and
the Company will have no further obligations or liabilities thereunder to such
holders (except with respect to accrued and unpaid Liquidated Damages, if
any). All authority conferred by the holder will survive the death or
incapacity of the holder and every obligation of the holder will be binding
upon the heirs, legal representatives, successors, assigns, executors and
administrators of the holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or that, if it
is an "affiliate," it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (ii) is
acquiring the New Notes offered in the ordinary course of its business and
(iii) has no arrangement with any person to participate in the distribution of
the New Notes.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
facsimile transmission or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to
25
<PAGE>
5:00 p.m., New York City time, on the Expiration Date. Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old Notes
to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Old
Notes), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawn Old Notes or otherwise comply with DTC's procedures. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by Hyperion, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for payment will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "Procedures
for Tendering" at any time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes whose Old Notes are not tendered or are tendered but
not accepted in the Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to
the existing restrictions upon transfer thereof and Hyperion will have no
further obligations to such holders, other than the Initial Purchaser, to
provide for the registration under the Securities Act of the Old Notes held by
them. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Old Notes
could be adversely affected.
EXCHANGE AGENT
Bank of Montreal Trust Company, the Trustee under the Indenture, has been
appointed as Exchange Agent of the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail, By Facsimile: Bank of Montreal Trust
by hand or by Overnight Courier Company Attention: Corporate Trust
Bank of Montreal Trust Company 77 Department
77 Water Street (212) 701-7684
New York, NY 10005 Confirm by Telephone:
Attention: Corporate Trust Department (212) 701-7653
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Hyperion. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, telephone or in person by officers and regular employees of
Hyperion and its affiliates.
26
<PAGE>
Hyperion has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. Hyperion, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith and will pay the
reasonable fees and expenses of holders in delivering their Old Notes to the
Exchange Agent.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Hyperion. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
Hyperion will pay all transfer taxes, if any, applicable to the exchange of
Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold, unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not intend to register the Old Notes under the Securities Act.
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Company believes that the New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder of such New Notes (other than
any such holder which is an "affiliate" of Hyperion within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes and neither the holder nor any other person
is engaging in or intends to engage in a distribution of the New Notes. If any
holder has any arrangement or understanding with respect to the distribution
of the New Notes to be acquired pursuant to the Exchange Offer, the holder (i)
could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes must acknowledge that it will deliver a prospectus in connection
with any resale of its New Notes. See "Plan of Distribution." The New Notes
may not be offered or sold unless they have been registered or qualified for
sale under applicable state securities laws or an exemption from registration
or qualification is available and is complied with. The Company is required,
under the Registration Rights Agreement, to register the New Notes in any
jurisdiction requested by the holders, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
27
<PAGE>
Upon consummation of the Exchange Offer, holders of the Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes and, accordingly,
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the New Notes in its ordinary
course of business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer. In this regard, the Company will make each person
participating in the Exchange Offer aware (through this Prospectus or
otherwise) that if the Exchange Offer is being registered for the purpose of
secondary resale, any holder using the Exchange Offer to participate in a
distribution of New Notes to be acquired in the registered Exchange Offer (i)
may not rely on the staff position enunciated in Morgan Stanley and Co. Inc.
(avail. June 5, 1991) and Exxon Capital Holding Corp. (avail. May 13, 1988) or
similar letters and (ii) must comply with registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in Hyperion's accounting records on the Exchange Date.
Accordingly, no gain or loss for accounting purposes will be recognized by
Hyperion. The expenses of the Exchange Offer will be expensed over the terms
of the New Notes.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
28
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to reflect the sale of the Units, consisting of
Senior Notes and Warrants, in the Offering. This table should be read in
conjunction with the Consolidated Financial Statements and related Notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS.............................. $ -- $140,585
======= ========
LONG-TERM DEBT
13% Senior Discount Notes due 2003................... $ -- $163,705
Note payable--Adelphia(2)............................ 50,855 25,855(3)
------- --------
TOTAL LONG-TERM DEBT................................... $50,855 $189,560
======= ========
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $.01 par value, 30,000,000 shares
authorized, 10,000,000 shares issued and
outstanding....................................... 100 100
Warrants............................................. -- 11,119(4)
Loans to stockholders................................ -- (3,000)
Accumulated deficit.................................. (27,423) (27,423)
------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY)................ (27,323) (19,204)
------- --------
TOTAL CAPITALIZATION................................... $23,532 $170,356
======= ========
</TABLE>
- --------
(1) Reflects the effect of approximately $175.3 million in gross proceeds from
the sale of the Units and the receipt of the net proceeds therefrom.
(2) The Company has an unsecured credit arrangement with Adelphia. The
Indenture provides certain restrictions on the ability of the Company to
make payments of interest and principal on this affiliate note (the
"Adelphia Note"). See "Description of the Senior Notes--Restricted
Payments."
(3) Reflects the repayment of $25.0 million of the Company's outstanding
indebtedness to Adelphia.
(4) Reflects approximately $11.6 million of gross proceeds from the sale of
the Units allocated to the Warrants, less approximately $0.4 million of
fees and expenses related to the Offering and attributed to the Warrants.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected financial and operating data (except the unaudited
information for the fiscal years ended March 31, 1992 and 1993, pro forma
information, Network Data and Other Network and Operating Data ) are derived
from, and should be read in conjunction with, the audited Consolidated
Financial Statements of the Company and the related Notes thereto contained
herein. The unaudited information for the fiscal years ended March 31, 1992
and 1993, pro forma information, Network Data and Other Network and Operating
Data are derived from other Company information. Except as noted below, the
following table includes financial and operating information relating to the
South Florida Partnership and the Company's 15.7% interest therein which was
sold by the Company on May 16, 1996. See "Recent Developments."All of the
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service
and management fee revenue.. $ -- $ 89 $ 434 $ 1,768 $ 3,521
Operating expenses:
Network operations.......... 2 19 330 1,382 2,690
Selling, general and
administrative.............. 211 921 2,045 2,524 3,084
Depreciation and
amortization................ -- 30 189 463 1,184
------ ------- ------- ------- --------
213 970 2,564 4,369 6,958
------ ------- ------- ------- --------
Operating income (loss)...... (213) (881) (2,130) (2,601) (3,437)
------ ------- ------- ------- --------
Interest expense and fees.... -- -- (2,164) (3,321) (6,088)
------ ------- ------- ------- --------
Loss before income taxes,
equity in net loss of joint
ventures and cumulative
effect of change in
accounting principle........ $ (213) $(881) (4,294) (5,922) (9,525)
Income tax benefit........... -- -- 55 29 197
Equity in net loss of joint
ventures.................... -- (194) (528) (1,799) (4,292)
Cumulative effect of change
in accounting
for income taxes............ -- -- 42 -- --
------ ------- ------- ------- --------
Net income (loss)............ $ (213) $(1,075) $(4,725) $(7,692) $(13,620)
====== ======= ======= ======= ========
Net loss per weighted average
share of common stock....... $(0.02) $ (0.11) $ (0.47) $ (0.77) $ (1.36)
Weighted average shares of
common stock outstanding.... 10,000 10,000 10,000 10,000 10,000
Ratio of earnings to fixed
charges(a).................. -- -- -- -- --
Cash dividends declared...... -- -- -- -- --
Pro forma interest
expense(b).................. -- -- -- -- 27,796
Pro forma ratio of earnings
to fixed charges(c)......... -- -- -- -- --
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, PRO FORMA AS OF
------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1996(F)
----- ------- ------- -------- -------- ---------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 5 $ 118 $ -- $ -- $ -- $140,585
Working capital........ (291) (441) 1,377 936 (11,455) 129,130
Total assets........... 82 4,316 14,765 23,212 35,269 182,093
Senior Notes........... -- -- -- -- -- 163,705
Note payable--Adelphia. -- 4,814 19,968 35,541 50,855 25,855
Total liabilities...... 295 5,390 20,776 36,915 62,592 201,297
Stockholders' equity
(deficiency)........... (213) (1,074) (6,011) (13,703) (27,323) (19,204)
Book value per common
share.................. (.02) (.11) (.60) (1.37) (2.73) (1.92)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------
1992 1993 1994 1995 1996
----- ----- ------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER COMPANY DATA:
EBITDA(d)...................... $(213) $(851) $(1,941) $ (2,138) $ (2,253)
Capital expenditures and
Company investments in
Operating Companies and the
South Florida Partnership(e).. 60 3,891 8,607 10,376 18,899
Cash used in operating
activities.................... 184 725 2,121 2,130 833
Cash used in investing
activities.................... 60 3,806 8,607 10,376 18,899
Cash provided by financing
activities.................... 248 4,645 10,609 12,506 19,732
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1996
---------
<S> <C>
NETWORK DATA (G):
Networks in operation................................................ 13
Cities served........................................................ 19
Network clusters..................................................... 3
Networks under construction.......................................... 4
Route miles.......................................................... 2,210
Fiber miles.......................................................... 106,080
Buildings connected.................................................. 822
LEC-COs collocated(h)................................................ 44
VGE circuits(i)...................................................... 186,292
Switches and remote switch modules installed......................... 5
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------
1992 1993 1994 1995 1996
---- ------ ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT EMPLOYEE
INFORMATION)
<S> <C> <C> <C> <C> <C>
OTHER NETWORK AND OPERATING DATA (J):
Network revenues(k)................... $ 0 $ 173 $ 1,028 $ 4,083 $12,186
Capital expenditures(l)............... 0 2,559 27,445 33,522 57,290
Fiber lease financings during
period(m)............................. 0 1,262 1,527 17,420 9,174
Employees(n).......................... 4 20 40 95 155
</TABLE>
- --------
(a) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes, plus fixed charges excluding
capitalized interest plus amortization of deferred financing costs and
(ii) fixed charges consist of interest expensed and capitalized. For the
fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996, the
Company's earnings were insufficient to cover fixed charges by $213,
$1,075, $4,822, $7,721 and $13,817, respectively.
(b) Pro forma interest expense assumes (i) repayment of $25.0 million of the
Adelphia Note (as defined) at an interest rate of 11.28%, (ii) gross
proceeds attributable to the issuance of the Senior Notes of $163.7
million, (iii) issuance of the Senior Notes at an interest rate of 13.0%
and (iv) original issue discount attributable to the Warrants.
(c) On a pro forma basis, for the year ended March 31, 1996, the Company's
earnings would have been insufficient to cover fixed charges by $35,525.
31
<PAGE>
(d) EBITDA consists of net income (loss) before equity in net loss of joint
ventures, interest, income taxes, depreciation and amortization for the
periods presented. It is a measure commonly used in the telecommunications
industry and is presented to assist in understanding the Company's
operating results. However, it is not intended to represent cash flow or
results of operations in accordance with generally accepted accounting
principles. See the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
(e) For the fiscal years ended March 31, 1992, 1993, 1994, 1995 and 1996, the
Company's capital expenditures (including capital expenditures relating to
its wholly-owned Operating Companies) were $60, $1,950, $3,097, $2,850 and
$6,084, respectively, and the Company's investments in its less than
wholly-owned Operating Companies and the South Florida Partnership were
$0, $1,941, $5,510, $7,526 and $12,815, respectively, for the same
periods. See the Company's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
(f) Gives effect to (i) the consummation of the sale on April 15, 1996 of
329,000 Units ("Units") (the "Offering") consisting of $329,000 aggregate
principal amount at maturity of Senior Notes and Warrants to purchase an
aggregate of 613,427 shares of Common Stock of the Company, and the
allocation of approximately $163.7 million to the Senior Notes and
approximately $11.6 million to the Warrants and (ii) the application of
the estimated net proceeds from such sale, including the repayment of
certain indebtedness and loans to certain stockholders.
(g) Network Data is derived from the Company's records and presents
information for the Operating Companies, but does not include information
for the South Florida Partnership.
(h) LEC-CO collocated means that the Company has interconnected its network at
the LEC-CO.
(i) Voice grade equivalent circuits.
(j) Except for employees as discussed in note (n) below, the data presented
represent selected unaudited combined operating data of the Company's
Operating Companies (including the Company's two wholly-owned Operating
Companies) and the South Florida Partnership, and do not include data of
the Company on a stand alone basis.
(k) Includes the total of (i) the Operating Companies' revenues and (ii) the
South Florida Partnership's revenues.
(l) Represents investments made by the Operating Companies (including
investments made by Local Partners) and the South Florida Partnership in
property, plant and equipment (including capitalized leases).
(m) Fiber Lease Financing (as defined) represents the incremental borrowings
by the Operating Companies and the South Florida Partnership regarding
fiber assets accounted for as capital leases for each period presented.
(n) Employees includes combined employees of the Operating Companies and the
Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's audited Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this Prospectus. Unless otherwise stated or the context
otherwise requires, the following information is as of March 31, 1996.
OVERVIEW
The Company, through its Operating Companies, provides a competitive
alternative to the telecommunications services offered by the incumbent LECs
in its markets. Since its inception in October 1991, the Company has
experienced substantial growth, building from its original two partnerships
which served two markets to serving 13 markets and 19 cities through its 11
Operating Companies. The Operating Companies' customers are principally small,
medium and large businesses and government and educational end users as well
as IXCs. The Company is also building four additional networks which are
expected to serve 17 additional cities and which it will manage and operate
upon their expected completion during calendar 1996. Prior to May 16, 1996,
the Company also owned a 15.7% investment in the South Florida Partnership in
which it had no management responsibility, which investment the Company sold
on May 16, 1996. See "--Recent Developments." The Company believes that its
strategy of utilizing Local Partners to develop its networks has allowed the
Company to build networks with greater coverage, lower upfront and ongoing
costs and superior service and reliability.
The Company's Operating Companies are made up of two wholly owned
subsidiaries and 11 investments where the Company owns 50% or less as of July
1, 1996. Results of the wholly owned subsidiaries are consolidated into the
Company's financial statements in this Prospectus. The Company's pro rata
share of the
32
<PAGE>
results of the Operating Companies where the Company owns 50% or less and the
South Florida Partnership are recorded under the caption "Equity in net loss
of joint ventures" in the Company's consolidated financial statements and
results of operations in this Prospectus utilizing the equity method of
accounting. Correspondingly, the Company's initial investments in these
Operating Companies and the South Florida Partnership are carried at cost, and
subsequently are adjusted for the Company's pro rata share of the Operating
Companies' and the South Florida Partnership's net losses, additional capital
contributions to the Operating Companies and the South Florida Partnership,
and distributions from the Operating Companies and the South Florida
Partnership to the Company. The Company is responsible for the design,
construction, management and operation of 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 and reported in the Company's consolidated
financial statements. 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 March 31, 1996, the Company's
networks and networks under construction had approximately 2,210 route miles,
approximately 106,080 fiber miles and were connected to approximately 822
buildings in 17 markets. The Operating Companies have also installed five
switches or remote modules which serve five markets, and the Company has built
its Network Operations and Control Center (the "NOCC") in Coudersport,
Pennsylvania, which provides for remote control, monitoring and diagnosis of
all of the Operating Companies' networks. Based on its review of information
made publicly available by other CLECs, the Company believes it is the third
largest CLEC in the United States based upon its Operating Companies'
networks' route miles or buildings connected. Funding for the development of
the Operating Companies has come from investments by the Company and the Local
Partners as well as from Fiber Lease Financings which enable the Company to
finance the building of fiber optic plant through long-term leases. The
combined capital invested through March 31, 1996 in (i) the Operating
Companies' networks, (ii) investments in the Company related to the NOCC and
other activities and (iii) the Company's and its partners' investments in the
South Florida Partnership has totaled approximately $162 million. Due to
savings achieved in the construction of fiber optic networks by working with
Local Partners, the Company believes that building a comparable level of
network infrastructure without Local Partners would require a substantially
greater level of capital investment.
The Company believes that as a result of the Telecommunications Act, the
potential market for its services has expanded significantly. According to the
Company's analysis of FCC data and its knowledge of the industry, the Company
estimates that the market for traditional access services and switched
services in its existing markets is approximately $4.8 billion. The Company
plans to deploy switches or remote switching modules in the balance of its
markets by the end of 1996 in order to more fully address this potential
market opportunity. See "Business" and "Regulation."
RECENT DEVELOPMENTS
Sale of Partnership Interest in the South Florida Partnership. On May 16,
1996, the Company completed the sale of its 15.7% partnership interest in TCG
South Florida to Teleport Communications Group Inc. for an aggregate sales
price of approximately $11.6 million resulting in a pre-tax gain of
approximately $8.4 million. Amounts related to the South Florida Partnership
included in the Company's investments and equity in net loss of joint ventures
as of and for the year ended March 31, 1996 were approximately $3.4 million
and ($0.8) million, respectively. As part of the transaction, the Company was
released from its covenant not to compete with respect to the South Florida
market. The Company plans to use the proceeds from the sale to continue to
expand and develop its existing markets, complete new networks under
construction and enter additional markets.
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Other Changes in Partnership Interests. The Company recently entered into
agreements pursuant to which the Company's ownership interests in certain of
the Operating Partnerships have increased in three markets. These transactions
are consistent with the Company's goal to own at least a 50% interest in its
Operating Partnerships in the future, and where appropriate the Company may
consider similar transactions from time to time in its other markets.
Following the completion of these transactions, Hyperion owned at least 50% of
ten of its 17 then existing markets and markets under construction. See
"Prospectus Summary--Recent Developments."
National Service Agreement with Major IXC. The Company has entered into a
National Service Agreement with AT&T pursuant to which the Company's networks
will be the IXC's preferred supplier of dedicated special access and switched
access transport services. The National Service Agreement requires the Company
to provide such services to AT&T at a discount from the tariffed or published
incumbent LEC rates. The National Service Agreement is in effect in all of the
Company's markets. The Company believes that only four other CLECs have
comparable National Service Agreements and have passed AT&T's network
validation tests and operational readiness testing.
RESULTS OF OPERATIONS
Fiscal 1996 in Comparison with Fiscal 1995
Revenues increased 99.2% to $3.5 million for the year ended March 31, 1996
("Fiscal 1996") from $1.8 million for the prior fiscal year. Approximately $1
million of the increase resulted from continued expansion in the number and
size of Operating Companies and the resulting increase in management fees, and
$0.6 million of the increase resulted from the Company's first wholly-owned
Operating Company, which operates in the Vermont market (the "Vermont
Operating Company"), generating revenues during the entire fiscal year.
Network operations expense increased 94.6% to $2.7 million in Fiscal 1996
from $1.4 million for the prior fiscal year. Approximately $0.8 million of the
increase was attributable to the Vermont Operating Company reporting expenses
relating to its operations for the entire fiscal year and $0.4 million was
attributable to the expansion of operations at the NOCC, including systems
upgrades.
Selling, general and administrative expense increased 22% to $3.1 million in
Fiscal 1996 from $2.5 million for the prior fiscal year. Of the increase,
approximately $0.4 million was attributable to corporate overhead increases to
accommodate the growth in the number of Operating Companies managed by the
Company, and $0.1 million was attributable to the full twelve-months of
operations at the Vermont Operating Company.
Depreciation and amortization expense increased 156% to $1.2 million in
Fiscal 1996 from $0.5 million for the prior fiscal year primarily as a result
of increased capital expenditures at the Vermont Operating Company and the
NOCC.
Interest expense increased 83% to $6.1 million in Fiscal 1996 from $3.3
million for the prior fiscal year. The increase was directly attributable to
increased borrowings from Adelphia which were used to fund investments in
Operating Companies and the South Florida Partnership, capital expenditures
and the Company's operations. All of the Company's interest expense was non-
cash and was added to amounts due to Adelphia.
Equity in net loss of joint ventures increased by 139% to ($4.3) million in
Fiscal 1996 from ($1.8) million for the prior fiscal year as two more
nonconsolidated Operating Companies began operations. The net loss for the
nonconsolidated Operating Companies and the South Florida Partnership for the
year ended March 31, 1996 aggregated approximately ($14.5) million. The net
losses of the Operating Companies for the year ended March 31, 1996 were
primarily the result of revenues only partially offsetting startup and other
costs and expenses associated with the design, construction, operation and
management of the networks of the Operating Companies, and the effect of the
typical lag time between the incurrence of such costs and expenses and the
subsequent generation of revenues by a network.
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<PAGE>
The number of nonconsolidated Operating Companies paying management fees to
the Company increased from nine at March 31, 1995 to eleven at March 31, 1996.
Such eleven Operating Companies and the networks under construction paid
management and monitoring fees to the Company aggregating approximately $2.4
million for Fiscal 1996, an increase of approximately $1.1 million over Fiscal
1995.
Net income (loss) increased from ($7.7) million for Fiscal 1995 to ($13.6)
million for the current fiscal year. The increase was primarily attributable
to greater interest expense, increased equity in the net losses of the
Company's joint ventures, and increased depreciation and amortization, as
noted above.
EBITDA decreased 5% to ($2.3) million in Fiscal 1996 from ($2.1) million for
the prior fiscal year. Increased revenues from management fees and the Vermont
Operating Company were more than offset by increased operating costs. EBITDA
consists of net income (loss) before equity in net loss of joint ventures,
interest, income taxes, depreciation and amortization for the periods
presented. It is a measure commonly used in the telecommunications industry
and is presented to assist in understanding the Company's operating results.
However, it is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles.
Fiscal 1995 in Comparison with Fiscal 1994
Revenues increased 307% from $0.4 million to $1.8 million from the year
ended March 31, 1994 ("Fiscal 1994") to the year ended March 31, 1995 ("Fiscal
1995"). Approximately $1.0 million of the increase in revenues resulted from
growth in the number of Operating Companies and the resulting management fees.
The number of nonconsolidated Operating Companies paying management fees to
the Company increased from three at March 31, 1994 to nine at March 31, 1995.
Approximately $.2 million of the increase was due to the Vermont Operating
Company which commenced operations during Fiscal 1995.
Network operations expense increased 319% from $0.3 million in Fiscal 1994
to $1.4 million in Fiscal 1995. Approximately $0.8 million of the increase was
the result of the expansion of the Company's NOCC staff and technical
resources staff required to support an increasing number of Operating
Companies that were operating during Fiscal 1995 and the expansion of the
Vermont Operating Company staff.
Selling, general, and administrative expense increased 23% from $2.0 million
in Fiscal 1994 to $2.5 million in Fiscal 1995. The change was primarily due to
increases in accounting, regulatory and marketing personnel to support
increased management and monitoring operations and, to a lesser extent, to
additional personnel and related costs for the commencement of operations at
the Vermont Operating Company.
Depreciation and amortization expense increased by 145% from $0.2 million in
Fiscal 1994 to $0.5 million in Fiscal 1995. Approximately two-thirds of the
increase was attributable to the addition of telecommunications monitoring
equipment totaling $1.5 million and the expansion of the telecommunications
networks in the Company's wholly-owned Operating Companies.
Interest expense increased by 53% from $2.2 million in Fiscal 1994 to $3.3
million in Fiscal 1995. The increase was primarily due to the increase in
borrowings from Adelphia to fund investments in Operating Companies and the
South Florida Partnership, capital expenditures and the Company's operations.
All of the Company's interest expense was non-cash and was added to amounts
due to Adelphia.
Equity in net loss of joint ventures increased by ($1.3) million from ($0.5)
million in Fiscal 1994 to ($1.8) million in Fiscal 1995. The increase was
primarily due to the six nonconsolidated Operating Companies beginning
operations in Fiscal 1995, resulting in a total of nine nonconsolidated
Operating Companies at year end. The net loss for such nine Operating
Companies and the South Florida Partnership for the year ended March 31, 1995
was approximately ($7.3) million. The net losses of the Operating Companies
for Fiscal 1995 were primarily the result of revenues only partially
offsetting startup and other costs and expenses associated with the design,
construction, operation and management of the networks of the Operating
Companies, and the effect of
35
<PAGE>
the typical lag time between the incurrence of such costs and expenses and the
subsequent generation of revenues by a network. The nine nonconsolidated
Operating Companies and networks under construction paid the Company an
aggregate of approximately $1.3 million in management and monitoring fees for
Fiscal 1995, an increase of $1.0 million over Fiscal 1994.
Net income (loss) increased ($3.0) million from ($4.7) million in Fiscal
1994 to ($7.7) million in Fiscal 1995. This increase was primarily the result
of the increase in the Company's operating loss, greater interest expense and
increased equity in the net losses of the Company's joint ventures, as noted
above.
EBITDA decreased by $0.2 million or 10% from ($1.9) million in Fiscal 1994
to ($2.1) million in Fiscal 1995. This decrease was the result of increasing
expenses incurred in advance of new networks becoming operational, which more
than offset increased revenues.
SUPPLEMENTARY OPERATING COMPANY REVENUE ANALYSIS
The Company believes that working with Local Partners to develop markets
enables the Company to build larger networks in a rapid and cost effective
manner. In pursuit of this strategy, the Company has entered into nine joint
ventures with Local Partners where the Company owns 50% or less of each
partnership or corporation. As a result of the Company's ownership position in
these joint ventures, a substantial portion of the Operating Companies'
results are reported by the Company on the equity method of accounting for
investments which only reflects the Company's pro rata share of net income or
loss of the Operating Companies. Because all of the assets, liabilities and
results of operations of the Operating Companies are not presented in the
Company's consolidated financial statements, financial analysis of these
Operating Companies based upon the Company's results does not represent a
complete measure of the growth or operations of the Operating Companies.
In order to provide an additional measure of the growth and performance of
all of the Company's networks, management of the Company analyzes a variety of
financial information including revenues. Revenues of the Operating Companies
indicate the level of activity in the Company's networks. Capital expenditures
of the Operating Companies along with network construction statistics, such as
route miles and buildings connected, indicate the extensiveness of the
Company's construction and expansion efforts in those markets. The financial
information set forth below, however, is not indicative of the Company's
overall financial position and investors should not place undue reliance on
such information when considering an investment in the Senior Notes.
The Operating Companies have shown substantial growth in revenues since the
Company's inception in October 1991. Total combined revenues for the Operating
Companies has increased approximately 136% from approximately $3.3 million in
Fiscal 1995 to approximately $7.8 million in Fiscal 1996. The Operating
Companies' revenues for the fiscal quarter ended March 31, 1996 were
approximately $2.4 million. There can be no assurance, however, that the
Operating Companies will continue to experience revenue growth at this rate,
or at all. See "Risk Factors--Negative Cash Flow and Operating Losses; Limited
History of Operation." Furthermore, there can be no assurance that the Company
will be able to benefit from such growth in revenues if such growth occurs.
See "Risk Factors--Holding Company Structure; Inability to Access Cash Flow."
<TABLE>
<CAPTION>
REVENUES
--------------------------------------
QUARTER ENDED
FISCAL FISCAL FISCAL MARCH 31,
CLUSTER 1994 1995 1996 1996
- ------- ------ ------ ------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Northeast................................ $706 $1,492 $3,991 $1,210
Mid-Atlantic............................. 4 288 735 244
Mid-South................................ -- 70 473 187
Other Networks........................... 255 1,401 2,564 798
---- ------ ------ ------
Total.................................. $965 $3,251 $7,763 $2,439
==== ====== ====== ======
</TABLE>
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The development of the Company's business and the installation and expansion
of the Operating Companies' networks, combined with the construction of the
Company's NOCC, have resulted in substantial capital expenditures and
investments during the past several years. Capital expenditures by the Company
were $3.1 million, $2.9 million and $6.1 million for Fiscal 1994, Fiscal 1995
and Fiscal 1996, respectively. Further, investments made in the Company's
nonconsolidated Operating Companies and the South Florida Partnership by the
Company were $5.5 million, $7.5 million and $12.8 million in Fiscal 1994,
Fiscal 1995 and Fiscal 1996, respectively. The Company expects that it will
continue to have substantial capital and investment requirements. The Company
also expects to have to continue to fund operating losses as the Company
develops and grows its business. See "Risk Factors--Significant Future Capital
Requirements."
Since its inception through March 31, 1996, substantially all of the
Company's direct expenditures for network construction, expansion, operations
and investments have been funded by Adelphia, which had invested as of March
31, 1996 approximately $50.9 million in loans (including accrued interest) in
the Company and $6.7 million in fiber network construction leased back to
certain Operating Companies and the South Florida Partnership. In addition,
Local Partners and the Company's partners in the South Florida Partnership in
the aggregate have contributed approximately $75.5 million as their pro rata
investment in those networks. These partners have also provided additional
capital of $29.3 million for the construction of the Company's and the South
Florida Partnership's networks through the partnership agreements by funding
the fiber construction of the network and then leasing the fiber back to the
partnership in long-term, renewable agreements (the "Fiber Lease Financings").
Collectively, Adelphia's and the Company's partners' investments and the Fiber
Lease Financings have totaled $162.4 million from the Company's inception
through March 31, 1996. Due to savings achieved in the construction of fiber
optic networks by working with Local Partners, the Company believes that
building a comparable level of network infrastructure without Local Partners
would require a substantially greater level of capital investment.
The Company has experienced negative cash flow since its inception. A
combination of operating losses, the substantial capital investments required
to build the Company's wholly-owned networks and its state-of-the-art NOCC,
and incremental investments in the Operating Companies has resulted in
substantial negative cash flow. See "Risk Factors--Negative Cash Flow and
Operating Losses; Limited History of Operations." For the fiscal years ended
March 31, 1994, 1995 and 1996, cash used in operating activities totalled $2.1
million, $2.1 million and $.8 million, respectively, cash used in investing
activities totalled $8.6 million, $10.4 million and $18.9 million,
respectively, and cash provided by financing activities totalled $10.6
million, $12.5 million and $19.7 million, respectively. Funding of the
Company's cash flow deficiency was principally accomplished through additional
borrowings from Adelphia. Interest and fees on this unsecured credit facility
are based upon the weighted average cost of unsecured borrowings of Adelphia.
The average interest rate charged for all periods through March 31, 1996 was
11.3% (excluding fees charged which were based on the amount borrowed). As of
March 31, 1996, no cash payments for interest or fees have been made by the
Company to Adelphia. The total cumulative amount of interest converted to note
principal at March 31, 1996 was $9.0 million.
The Company repaid $25.0 million of its indebtedness to Adelphia from the
proceeds of the Offering on April 15, 1996. As of April 15, 1996,
approximately $26.1 million of outstanding indebtedness owed to Adelphia was
evidenced by an unsecured subordinated note due April 16, 2003, that accrues
interest at 16.5% and is subordinated to the Senior Notes. Interest on the
subordinated note is payable quarterly in cash, through the issuance of
identical subordinated notes, or in any combination thereof, at the option of
the Company. Also, proceeds from the Offering were used on April 29, 1996 to
repay amounts related to capital expenditures, working capital requirements,
operating losses and pro-rata investments in joint ventures totalling $12.8
million incurred during the period January 1, 1996 to April 15, 1996, which
amounts had been funded during the same period through advances from Adelphia.
See "Certain Relationships and Transactions."
The competitive local telecommunication service business is a capital-
intensive business. The Company's operations have required and will continue
to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's networks, (ii) the
expansion and improvement of the
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<PAGE>
Company's NOCC and (iii) the design, construction and development of
additional networks. The Company plans to make substantial capital investments
and investments in Operating Companies in connection with the deployment of
switches in all of its operating markets by the end of 1996, the expansion of
existing markets and the construction and development of new markets.
Expansion of the Company's networks will include the geographic expansion of
the Company's existing clusters and the development of new markets. The
Company expects to build networks in approximately ten additional markets by
the end of 1997. The Company estimates that it will require approximately $110
million to $115 million to fund anticipated capital expenditures, working
capital requirements and operating losses of the Company and to make
investments in existing and new Operating Companies during calendar 1996 and
1997. The Company expects that it will have adequate resources to fund such
expenditures through the proceeds from the sale of the Units and internal
sources of funds including cash flow from operations. The Company also expects
to raise additional capital through a private or public equity placement in
the next 12 to 18 months. There can be no assurance, however, as to the
availability of funds from internal cash flow or from the private or public
equity markets. See "Risk Factors--Significant Future Capital Requirements."
Subsequent to March 31, 1996, the Company sold its interests in the South
Florida Partnership and increased its interests in three other markets. See
"Prospectus Summary--Recent Developments."
In addition, the Company expects that pro rata investments by the Company
and its Local Partners as well as Fiber Lease Financings and anticipated
vendor financings will be adequate to fund the requirements of the Operating
Companies for capital expenditures, operating losses and working capital for
existing networks, networks currently under construction and certain of the
Company's planned additional markets during calendar years 1996 and 1997.
There can be no assurance as to the availability of funds from internal cash
flow, the Local Partners or other external sources or as to the terms of such
financings. In addition, the Indenture provides certain restrictions upon the
Company's ability to incur additional indebtedness. The Company's inability to
fund pro rata investments required for the Operating Companies could result in
a dilution of the Company's interest in the individual Operating Companies or
could otherwise have a material adverse effect upon the Company and/or the
Operating Companies.
EFFECT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with SFAS No. 121, the Company reviews the carrying amounts of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. The adoption of SFAS No. 121 in the year ended March 31,
1995 had no effect on the consolidated financial statements of the Company.
IMPACT OF INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations or on the operations of the Operating
Companies over the past three fiscal years.
BUSINESS
INDUSTRY HISTORY
Deregulation, technological change and the increasingly information
intensive nature of the United States economy have significantly expanded the
role of telecommunications in business. In particular these changes have
accelerated the growth of certain aspects of the telecommunications market.
For example, industry sources estimate that voice traffic is growing at a rate
of approximately seven percent per year while data communications are growing
at three to five times that rate due to the increase in computerized
transaction
38
<PAGE>
processing and video applications, the movement to distributed data processing
and the rise of decentralized management structures, all of which require the
transmission of large amounts of information with speed, accuracy and
reliability.
The present structure of the U.S. telecommunications market resulted largely
from the divestiture of the "Bell System" in 1984 (the "Divestiture"). As part
of the Divestiture, seven RBOCs were created to offer services in
geographically defined areas called LATAs. The RBOCs were separated from the
long distance provider, AT&T, resulting in the creation of two distinct
industries: local exchange and interexchange (commonly known as long
distance). The Divestiture facilitated direct, open competition in the long
distance segment of the telecommunications market; however, it did not promote
competition in the local telecommunications market. Nonetheless, several
factors have served to promote competition in the local telecommunications
market and the emergence of competitive access providers ("CAPs"), including
(i) the incumbent LECs' monopoly position and regulated pricing structure,
which provided little incentive for incumbent LECs to reduce prices, improve
service or upgrade their networks, (ii) customer demand for an alternative to
the incumbent LEC monopoly, which demand grew rapidly and was spurred in part
by the development of competitive activities in the long distance market and
increasing demand for high quality, reliable services, (iii) the advancement
of fiber optic and digital electronic technologies (such as ATM and SONET),
which combined the ability to transmit voice, data and video at high speeds
with greatly increased capacity and reliability as compared to the incumbent
LECs' copper-based networks and (iv) the significant fees, called "access
charges," IXCs are required to pay to incumbent LECs for originating and
terminating calls on the incumbent LEC networks.
Established in the mid 1980s, CAPs were among the first competitors in the
local telecommunications market. CAPs provided non-switched services (i.e.,
dedicated special access and private line) by installing fiber optic
facilities connecting IXCs POPs within a metropolitan area and, in some cases,
connecting end users (primarily large businesses and government agencies) with
IXCs. CAPs used the substantial capacity and economies of scale inherent in
fiber optic cable to offer customers service that was generally less expensive
and of a higher quality than could be obtained from incumbent LECs. In
addition, CAPs offered customers shorter installation and repair intervals and
improved service reliability in comparison to incumbent LECs.
The Telecommunications Act, which was adopted on February 8, 1996, is
considered to be the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934 and will
substantially affect the development of competition for local telephone
services. Among the more significant provisions of the Telecommunications Act
are (i) the removal of legal barriers to entry in local telephone markets,
(ii) the requirement that incumbent LECs "interconnect" with competitors,
(iii) the establishment of procedures for incumbent LEC entry into new
markets, such as long distance and cable television, (iv) the relaxation of
the regulation of telecommunication services provided by incumbent LECs and
others and (v) the establishment of a subsidy mechanism for the preservation
of universal telephone service. The Company believes the Telecommunications
Act will position the competitive local telecommunications business for
significant growth as CAPs evolve into CLECs by expanding their networks and
service offerings. Of the $32 billion of access fees paid by IXCs to LECs in
1994, CAPs accounted for $294 million, or less than 1%. The Company expects
that the anticipated entry of incumbent LECs into the long distance business
will increase this penetration rate if IXCs seek alternatives to incumbent
LECs as sources of access to their customers. BOCs entering the inter-exchange
market also may use CAP facilities in areas outside their home regions.
Regulatory reform, together with increasing customer demand, will create more
opportunities for CLECs to introduce additional services, expand their
networks and address a larger customer base. The Company believes that these
changes afford CLECs the potential to grow significantly over the next several
years. The Company believes, based on data compiled by the FCC, that the
passage of the Telecommunications Act combined with earlier state regulatory
developments have increased the potential market for CLECs from approximately
$26.3 billion to approximately $97.1 billion annually due to the opening of
the market for switched services. This new market opportunity will permit
CLECs to offer a full range of local telecommunications services including
local dial tone, local calls, custom calling features and intraLATA toll
services for both business and residential customers. See "Competition" and
"Regulation--Overview."
39
<PAGE>
THE COMPANY
Hyperion is a leading CLEC that designs, constructs, operates and manages
state-of-the-art, fiber optic networks and facilities. Based on its review of
information made publicly available by other CLECs, the Company believes it
operates one of the three largest CLECs in the United States based upon route
miles and buildings connected. The Company's networks work in conjunction with
IXCs such as AT&T, MCI, Sprint, WorldCom and others in order to offer small,
medium and large businesses, government and education end users a broad array
of integrated, high quality voice, video and enhanced data communications
services. The Company, through its 13 networks, currently offers traditional
access services and has also installed switches or remote switching capability
in five of its networks and plans to offer switched services, including
customer dial tone, in all of its operating markets by the end of 1996. Four
of the Company's networks also offer enhanced data services to their customers
such as frame relay and ATM data transport. These services, along with the
long distance services provided by IXCs, enable the Company to provide an
integrated telecommunications service offering to network customers that is
more reliable, has a superior level of service and is priced lower relative to
that of the incumbent LECs in the markets served by the Company's networks.
The Company currently manages and operates 13 networks which are primarily
clustered in three regions located in the eastern half of the United States
and which serve 19 cities with populations from at least 25,000 to more than
600,000. The Company also has four new networks under construction which will
serve 17 additional cities and will be managed and operated by the Company
upon their expected completion in calendar year 1996. Eleven of the Company's
networks and three of its networks under construction are owned in partnership
with several major cable television operators including Tele-Communications,
Inc., Time Warner/Newhouse, Continental Cablevision, TKR Cable, Lenfest
Communications, InterMedia Partners and Multimedia/Gannett, and an electric
utility, PECO Energy, owner of the Philadelphia Electric Company. The Company
believes that working with Local Partners significantly reduces the cost and
time in developing a network through utilization of existing cable or utility
facilities. The remaining two operating networks and one network under
construction are wholly owned by the Company and lease fiber capacity from
Adelphia to achieve similar time and cost savings in developing the networks.
Due to savings achieved in the construction of fiber optic networks by working
with Local Partners, the Company believes that building a comparable level of
network infrastructure without Local Partners would require a substantially
greater level of capital investment.
The Company has targeted markets primarily in the eastern half of the United
States where it can leverage the Company's existing network infrastructure and
take advantage of the economies of scale associated with operating networks in
contiguous markets. Since the Company's inception in October 1991, the Company
and its partners have invested approximately $162 million to build and develop
the overall network infrastructure. As of March 31, 1996, the Company's 13
operating networks served 19 cities, and along with the four networks under
construction, included approximately 2,210 route miles of fiber optic cable
and were connected to approximately 822 buildings. The Company intends to
increase the density of its existing network clusters and expand into new
geographical markets or clusters through the construction of approximately ten
additional networks by the end of 1997. The Company will continue to focus on
developing networks in conjunction with Local Partners and managing and
operating these networks on behalf of the Operating Companies. The Company's
goal for future partnerships is to maintain at least a 50% equity interest in
these networks. The Company has recently entered into a partnership agreement
amendment with TKR and an agreement with InterMedia to increase its equity
interests to 50% in the Louisville and Lexington markets and to 95% in the
Nashville market. Following the completion of these transactions, Hyperion
owned at least 50% of ten of its 17 then existing markets and markets under
construction. See "Prospectus Summary--Recent Developments."
COMPANY STRATEGY
The Company, through its networks, is a leading provider of integrated local
telecommunications services to small, medium and large businesses, government
and educational end users and IXCs in its existing markets.
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The Company differentiates its service offering by partnering with local cable
television operators and utility companies to develop networks that will
provide customers with greater market coverage, lower costs and superior
service. The Company's networks leverage the IXCs' name recognition and
reputation for quality and reliability by becoming preferred suppliers for
IXCs of local telecommunications services in the Company's markets. The IXCs
market their long distance services in conjunction with the Company's local
service offerings to provide end users with a fully integrated
telecommunications service offering in all of the Company's operating markets.
Principal elements of the Company's network, market and customer strategies
include:
Network Strategy
Develop a Rapid Entry/Low Cost Approach with Local Partners. The Company
works with a Local Partner in order to significantly reduce the cost and time
to construct a fiber optic network, enable the Company to rapidly begin
offering services and lower the overhead associated with operating and
maintaining the Company's networks. Advantages of building the Company's
networks with Local Partners include (i) sharing the cost of building the
fiber optic network with a cable television system or utility system which the
Company believes reduces the cost of aerial fiber construction by
approximately 62%, (ii) reducing the time and cost of obtaining access to
rights-of-way and building entrances and (iii) enabling the Company to
leverage the Local Partners' experience and capabilities for building and
maintaining fiber optic cables thereby significantly reducing the upfront and
ongoing costs of a fiber optic network. Through the partnerships, the Company
has financed its expansion at a lower cost relative to its competitors by
utilizing pro rata equity investments and Local Partner financings of a
significant portion of fiber construction. Local Partners provide most of the
funds for the fiber build in a network and lease the fiber capacity back to
the partnership under long-term agreements. The partnership purchases and owns
the electronic and customer premises equipment associated with the networks.
The Company is able to lower the cost of building fiber optic networks by
working with Local Partners who own existing communications networks and
organizations that design, build and maintain these networks. The Company
achieves savings in the design, construction and maintenance of these fiber
optic networks because a substantial portion of these activities are shared
with existing efforts of the Local Partner. A significant portion of the
upfront savings is achieved in the construction of the fiber optic network.
The Company believes that, based upon its experience of building fiber optic
networks with Local Partners, the Company is able to achieve approximately a
62% reduction in aerial fiber optic construction costs versus constructing an
aerial fiber optic network without a Local Partner. The Company estimates that
approximately 70% of its network construction will be aerial and that the
Company can achieve similar savings in underground construction where conduit
is available. These estimates are based upon historical experience, and there
can be no assurance that the Company will be able to achieve similar results
in future efforts. These cost savings are achieved primarily through the
sharing of pole attachment costs ("Pole Attachment Costs") and the elimination
of costs of the engineering and rearrangement of cables to prepare telephone
poles for the attachment of new fiber optic cable ("Make Ready Costs"). An
analysis of the estimated cost savings for the Company for one mile of aerial
construction is set forth in the following table.
<TABLE>
<CAPTION>
COSTS WITH LOCAL PARTNER WITHOUT LOCAL PARTNER
- ----- ------------------ ---------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Make Ready Costs........... $ 0.0(a) $18.0(b)
Pole Attachment Costs...... 3.4(c) 5.0
Fiber Costs................ 8.0(d) 8.0
Splicing Costs............. 0.6(e) 0.6
----- -----
Total.................... $12.0(f) $31.6
===== =====
</TABLE>
- --------
(a) Assumes a fiber overlash of existing cable plant.
(b) Assumes an average cost of $200 per pole, 40 poles per mile, to move the
telephone and cable television wires in the communications space and the
replacement of two poles per mile.
41
<PAGE>
(c) Assumes the payment of a pro rata portion (approximately 33%) of such
costs by the Local Partner with respect to capacity to be available for
such partner's use.
(d) Represents the cost of the Operating Company's fiber that is installed on
the pole.
(e) Represents the cost of cutting and integrating new fiber components.
(f) In the above analysis, this would be the amount amortized by an applicable
Fiber Lease Financing between an Operating Company and its Local Partner.
Build Broad Network Coverage. The Company intends to build substantially
larger networks than the networks of the CLECs it competes with in its
markets. As of March 31, 1996, in all of the markets in which the Company and
its networks operate, management believes that the Company has the broadest
network coverage in terms of route miles of any of its CLEC competitors. The
Company believes that expanded network coverage will enable the Company to (i)
provide broader and more reliable coverage for network customers, (ii) carry a
greater amount of traffic on its own networks rather than on the networks of
other carriers thereby increasing the Company's revenues and profit margins,
(iii) increase the potential market available to the Company due to the
greater number of buildings, LEC-COs and customers that the Company's networks
can service, (iv) improve the value of the Company's networks to IXCs,
cellular providers and new telecommunications providers such as PCS operators
that need wide backbone coverage, (v) offer services in areas where there are
fewer potential CLECs with facilities and (vi) leverage the fixed cost
structure of the Company's networks, particularly with regard to network
electronics such as switches.
Market Strategy
Expansion through Development of Network Clusters. The Company's networks
are located primarily in the eastern half of the United States. The Company
expects to continue to focus on this region due to the eastern location of the
Company's existing networks and the Company's NOCC and headquarters. The
Company also believes that the eastern half of the United States, particularly
the Northeast, has greater concentrations of large business, government and
education end users and telecommunications traffic. The Company intends to
build networks in ten additional markets located near existing clusters or in
one or more new clusters by the end of 1997. Management believes that there
are significant operating and marketing advantages to locating its networks in
clusters. Clustering enables the Company to (i) take advantage of economies of
scale in management, construction, network operations and sales and marketing,
(ii) optimize the networks' switching capacity by utilizing remote switch
capacity in nearby cities that do not have switches, (iii) offer services to
lower density traffic areas in which the Company's networks are less likely to
face strong competition from incumbent LECs and other CLECs and (iv) increase
the networks' ability to offer highly reliable, end-to-end connectivity on a
regional basis. The Company also believes that creating regional networks will
enable the Company to gain a greater share of higher margin long distance
transport traffic.
Customer Strategy
Develop Strategic Relationships with IXCs. The Company, through its
networks, provides customers with an integrated, one-stop shopping approach to
their telecommunications needs through its strategic relationships with IXCs
such as AT&T, MCI, Sprint, WorldCom and others. The goal of these
relationships is for the Company's networks to offer their local services in
conjunction with the long distance services of these relationship IXCs.
Management believes that working in partnership with IXCs instead of as a
competitor will be attractive to IXCs and enable the Company to (i) utilize
extensive market information from the IXCs regarding traffic patterns and
building requirements to more optimally construct and extend its networks,
(ii) work closely with IXC account teams to provide an integrated service
approach to end users, (iii) increase market penetration by capitalizing on
the IXCs' name recognition and (iv) lower sales and marketing costs by
utilizing the extensive marketing resources and salesforce of the IXCs to
market the networks' products and services. In pursuing this strategy, the
Company has entered into the National Service Agreement with a major IXC
pursuant to which the
42
<PAGE>
Company's networks will be the IXC's preferred supplier of dedicated special
access and switched access transport services. The National Service Agreement
requires the Company to provide such services to the IXC at a discount from
the tariffed or published LEC rates. The National Service Agreement is
currently in effect in all of the Company's markets. See "Prospectus Summary--
Recent Developments."
Expand Enhanced Service Provider Offerings. Four of the Company's networks
operate in partnership with !NTERPRISE, a leading, nationwide network
integrator that designs, develops and deploys state-of-the-art data networks
(including both network services and equipment) to support and enhance the
information systems with which the networks' customers operate their
businesses. Pursuant to the partnership agreements, !NTERPRISE co-markets
enhanced services, including frame relay, ATM data transport, business video
conferencing, private line data interconnect service and LAN connection and
monitoring services to the networks' customers in the networks' respective
markets. The Company believes that the partnerships with !NTERPRISE provide
the opportunity to offer network customers a full complement of enhanced
services more rapidly and without the Company incurring the cost and overhead
of establishing its own nationwide enhanced services marketing, sales and
installation effort. The Operating Companies intend to enter into additional
agreements with !NTERPRISE and other service integrators in the future.
COMPANY SERVICES
Traditional Access Services
Special Access and Private Line Services. Non-switched dedicated
connections, including high capacity interconnections between (i) POPs of an
IXC, (ii) the POPs of different IXCs, (iii) large end users and their selected
IXCs and (iv) different locations of particular customers. These services are
billed at a flat, non-usage sensitive, monthly rate.
Collocated Special Access Services. A dedicated line carrying switched
transmissions from the IXC POP, through the LEC-CO to the end user.
Switched Access Transport Services. A dedicated line carrying switched
transmissions from the LEC-CO to an IXC POP.
Long Distance Transport Services. Non-switched, high capacity
interconnection services sold on a wholesale basis to IXCs and cellular and
PCS operators.
Switched Services
Local Exchange Services. Switched services providing dial tone to business
customers.
Long Distance Services. Switching and transport of interexchange traffic,
including voice, data and video billed on a minutes-of-use basis. The Company
intends to offer this service to its customers in conjunction with IXCs with
which it has developed strategic relationships.
Enhanced Services
The Company and the Operating Companies currently offer, or intend to offer,
their customers a broad array of high bandwidth, enhanced data services,
including frame relay, ATM transport services, business Internet access and
high speed video conferencing. Operating Companies currently offer some of
those services to customers in four markets through partnerships with
!NTERPRISE. !NTERPRISE is a wholly-owned subsidiary of US West that provides
enhanced data services to end users throughout the country. The Company
intends to service additional markets through joint ventures with !NTERPRISE
or other enhanced service providers. See""--Customer Strategy."
43
<PAGE>
MARKET SIZE
The following table sets forth the Company's estimate, based upon an
analysis of industry sources including industry projections and FCC data, of
the market size in the Company's current operating markets and markets under
construction for the services the Company offered in calendar year 1995. The
estimates, however, do not include estimates for long distance transport and
enhanced services which the Company expects will provide substantial revenue
opportunities. See "--Company Services." There is currently limited direct
information relating to these markets and therefore a significant portion of
the information set forth below is based upon estimates and assumptions made
by the Company. Management believes that these estimates are based upon
reliable information and that its assumptions are reasonable. There can be no
assurance, however, that these estimates will not vary substantially from the
actual market data. Investors should not place undue reliance on this
information in making an investment decision with respect to the Senior Notes.
<TABLE>
<CAPTION>
TRADITIONAL TOTAL REVENUE(B)
CLUSTER ACCESS SERVICES(A) SWITCHED SERVICES POTENTIAL
- ------- ------------------ ----------------- ----------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Northeast................. $ 67.9 $1,591.2 $1,659.1
Mid-Atlantic.............. 109.3 1,884.5 1,993.8
Mid-South................. 28.1 600.9 629.0
Other Networks............ 23.4 480.4 503.8
------ -------- --------
Total................... $228.7 $4,557.0 $4,785.7
====== ======== ========
</TABLE>
- --------
(a) Excludes long distance transport.
(b) Excludes the potential market for enhanced services.
THE COMPANY'S MARKETS
Overview
The Company currently manages and operates 13 networks. The networks are
owned by the Operating Companies, eight of which are Operating Partnerships
and three of which are Operating Corporations. Two of the Operating
Corporations are wholly-owned subsidiaries of the Company. The Company manages
and operates these networks through a combination of local management and
through the Company's headquarters and NOCC in Coudersport, Pennsylvania, and
the Company's marketing offices in Pittsburgh, Pennsylvania. The following
operating network market statistics are as of August 1, 1996, except for the
South Florida Partnership as noted below.
44
<PAGE>
OPERATING NETWORK MARKET STATISTICS
<TABLE>
<CAPTION>
DATE HYPERION
COMPANY MARKETS OPERATIONAL(A) INTEREST LOCAL PARTNERS
- --------------- -------------- -------- -------------------------
OPERATING NETWORKS
- ------------------
<S> <C> <C> <C>
Northeast Cluster
Albany, NY(b)............. 2/95 50.0% Time Warner/Newhouse
Binghamton, NY(b)......... 3/95 20.0 Time Warner/Newhouse
Buffalo, NY............... 1/95 40.0 Tele-Communications, Inc.
Time Warner/Newhouse
Syracuse, NY(b)........... 8/92 50.0 Time Warner/Newhouse
Vermont................... 11/94 100.0 (c)
Mid-Atlantic Cluster
Charlottesville, VA....... 11/95 100.0 (c)
Harrisburg, PA............ 4/95 50.0 Lenfest Communications
New Brunswick, NJ......... 11/95 19.7 TKR Cable(d)
Richmond, VA.............. 9/93 37.0 Continental Cablevision
Mid-South Cluster
Louisville, KY............ 3/95 50.0(e) TKR Cable
Nashville, TN............. 11/94 95.0(e) InterMedia Partners
Other Networks
Jacksonville, FL.......... 9/92 20.0 Continental Cablevision
Wichita, KS............... 9/94 49.9 Multimedia/Gannett
NETWORKS UNDER
CONSTRUCTION(F)
- ---------------
Mid-Atlantic Cluster
Morristown, NJ............ 1996(g) 19.7 TKR Cable(d)
Philadelphia, PA.......... 1996(g) 50.0 PECO Energy
Scranton/Wilkes-Barre, PA. 1996(g) 100.0 (c)
Mid-South Cluster
Lexington, KY............. 1996(g) 50.0(e) TKR Cable
NETWORK INVESTMENTS
- -------------------
South Florida(h).......... 1/94 15.7 (h)
</TABLE>
- --------
(a) Refers to the date on which (i) the network is connected to at least one
IXC POP; (ii) the network is capable of accepting traffic from IXCs and
end users; (iii) the Company's central office is fully functional and (iv)
the initial network SONET fiber rings have been completed.
(b) The interests in the Albany, Binghamton and Syracuse markets are all owned
by one Operating Partnership.
(c) Adelphia or its affiliate leases 100% of the fiber capacity to the
Operating Companies in these markets.
(d) Sutton Capital Associates also owns a minority interest.
(e) The Company's interest in these markets has recently changed. See
"Prospectus Summary--Recent Developments."
(f) The Company has entered into binding agreements with respect to the
construction of these networks.
(g) The Company expects each of these networks to be operational between
August 1996 and December 1996.
(h) The Company was an investor in TCG South Florida, the South Florida
Partnership, with several other partners and had no management oversight
responsibility with regard to such partnership. On May 16, 1996, the
Company sold its investment in such partnership. See "Prospectus Summary--
Recent Developments."
45
<PAGE>
CLUSTER STATISTICS(A)
<TABLE>
<CAPTION>
LATEST
ROUTE FIBER BUILDINGS QUARTER
CLUSTER MILES MILES CONNECTED VGES(B) REVENUES(C)
- ------- ----- ------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
Northeast........................... 626 30,048 260 46,894 $1,210
Mid-Atlantic........................ 666 31,968 169 44,517 244
Mid-South........................... 364 17,472 132 35,356 187
Other Networks...................... 554 26,592 261 59,525 798
----- ------- --- ------- ------
Total............................. 2,210 106,080 822 186,292 $2,439
===== ======= === ======= ======
</TABLE>
- --------
(a) Non-financial information is as of March 31, 1996.
(b) Voice grade equivalents circuits.
(c) Latest Quarter Revenues is for the quarter ended March 31, 1996.
OPERATING AGREEMENTS
Generally, subsidiaries of the Company enter into partnership agreements
with Local Partners to take advantage of the benefits of building networks in
conjunction with local cable television or utility operators. The typical
Operating Partnerships are formed and operated pursuant to three key
agreements: (i) a partnership agreement between the Company or one of its
wholly-owned subsidiaries and a cable television operator or electric utility
(the "Local Partner Agreement"); (ii) a fiber capacity lease agreement between
the Local Partner and the Operating Partnership (the "Fiber Lease Agreement");
and (iii) a management agreement between the Operating Company and the Company
or one of its subsidiaries (the "Management Agreement"). One of the Operating
Partnerships and two of the Operating Corporations have also entered into
agreements with !NTERPRISE, a wholly-owned subsidiary of US West, to co-market
enhanced services.
Local Partner Agreements
Each Local Partner Agreement establishes the structure of the applicable
Operating Partnership by determining, among other things, the partner's
capital contribution requirements, capital structure, purpose and scope of
business activities, transfer restrictions, dissolution procedures, duration
and competition restrictions, as well as the voting and buy/sell rights and
rights of first refusal of the partners of the Operating Partnership.
Ownership and Capital Contributions. The initial capital contributions and
percentage of ownership of the Operating Partnerships vary. Some of the Local
Partner Agreements establish maximum capital contributions such that each
partner's ultimate aggregate capital contribution is determined at the
Operating Partnership's inception. Initial capital contributions are paid on
an installment basis as determined by a management committee. Unless a
majority vote of the partners determines otherwise, capital contributions in
excess of the initial capital contribution are not required. Generally, the
percentage of ownership is also fixed at the Operating Partnership's
inception. Absent an agreement by the partners, generally, the only
circumstances that result in the dilution of such partner's ownership interest
are a partner's failure to make a capital contribution or its failure to
exercise a right of first refusal.
Matters Requiring a Vote. Most partner votes of an Operating Partnership
require only a majority vote; however, a unanimous vote of the partners is
required for, among other things, expansion of the scope of the business
activities in the defined business area, admission of additional partners and
merger or consolidation with any other entity if the Operating Partnership is
not the surviving entity.
Distributions. Generally, the Local Partner Agreements allow for
distributions to the partners; however, the Local Partner Agreements vary with
regard to the procedure for determining if, when and how much of a
46
<PAGE>
distribution should be made. In one Local Partnership Agreement, the Company,
through its affiliate, controls such determinations. In the remaining Local
Partner Agreements, the partners or the partnership's Managing Committee makes
such determinations by either majority approval or unanimous consent.
Transfer of Ownership. The Local Partner Agreements generally prohibit the
transfer of partnership interests, including most changes in control.
Generally, transfers of entire partnership interests to subsidiaries of a
partner's parent corporation and the sale or disposition of all or
substantially all of the stock or assets of a partner's parent are expressly
permitted in the typical Local Partner Agreement.
Rights of First Refusal; Buy/Sell Agreements. The partners of most of the
Operating Partnerships also retain certain rights of first refusal and
buy/sell rights. Generally, after a specified period of time, either partner
may transfer its interest to an unrelated third party if such partner first
offers its interest to the other partner at the same terms and the other
partner elects not to purchase the interest. In addition, in most of the
Operating Partnerships, either partner can, after a specified period of time,
make an offer to the other partner(s) to sell its own interest. Within 30 days
of submitting a price, the other partner must respond to the offer indicating
its election to either accept the offer to buy or sell at the offered price.
Certain partners in two of the partnerships have the right after a specified
period of time to put their interest in the respective partnership (i) to the
other partners at an amount equal to the fair market value of such partner's
interest pursuant to one agreement and (ii) to the Company at an amount equal
to the partner's capital contributions plus interest less any distributions
pursuant to the other agreement.
Term. Most of the Operating Partnerships were created in the last three and
half years and have a duration of 10 to 25 years unless earlier dissolved. Two
of the Local Partner Agreements contain provisions whereby the respective
Local Partner can terminate its interest, at such Local Partner's sole
discretion, prior to 2003. See "Risk Factors--Risks Associated with Joint
Ventures." Generally, each partner and certain of its affiliates are
restricted from competing with the Operating Partnership in the defined
business area so long as the partner is a partner plus two or three years
thereafter.
Fiber Lease Agreements
Generally, the Operating Partnerships lease fiber optic capacity from their
Local Partners. In some instances, the Operating Partnerships lease existing
fiber optic capacity and in other instances, the Operating Partnerships
request the Local Partners to construct new fiber optic capacity. Monthly
lease payments in both instances are based on the amortization of the Local
Partner's cost of construction and material costs over the term of the Fiber
Lease Agreement. Because construction and material costs are amortized over
the then current term of the Fiber Lease Agreement, it is possible for the
amount of a monthly lease payment to be significantly lower during a renewal
term unless the construction of additional fiber optic cable is scheduled for
such renewal term. Typically, the amount of the lease payments in a renewal
period equals the amount of monthly maintenance costs for the leased fiber
optic cable.
Each of the Fiber Lease Agreements is in its initial term. The initial terms
vary from 5 to 25 years in length. The Fiber Lease Agreements contain various
renewal options. Generally, either party can terminate the Fiber Lease
Agreement at the end of the then current term if the terminating party
provides prior written notice to the other party.
Throughout the term of the Fiber Lease Agreements and thereafter, title to
the fiber optic cable remains with the Local Partner. Similarly, the Operating
Partnerships retain title to all of their own electronics and switches that
become a part of the network. A Local Partner cannot sell the fiber subject to
the Fiber Lease Agreement to a third party unless its obligations under the
Fiber Lease Agreement are assumed by the third party.
47
<PAGE>
Management Agreements
Generally, the Company or a wholly-owned subsidiary of the Company provides
the Operating Partnerships with the following services pursuant to the
Management Agreement for a specified fee: general management, monitoring,
marketing, regulatory processing, accounting, engineering designing, planning,
construction, maintenance, operations, service ordering and billing. The term
of the typical Management Agreement is three or five years and automatically
renews for continuous one-year periods unless one party provides the other
with written notice that it intends to terminate the agreement.
Enhanced Service Agreements
Four of the Operating Companies have entered into partnership with
!NTERPRISE (the "!NTERPRISE Partnerships") in order to provide enhanced
services such as frame relay, ATM data transport, business video conferencing,
private line data interconnect service and LAN connection and monitoring
services. The partners in the !NTERPRISE Partnerships are required to
contribute equal amounts in order to retain their 50% ownership interests. The
business area serviced by the !NTERPRISE Partnerships is the same as that
serviced by the applicable Operating Partnership. The partners and their
respective affiliates are also prohibited from competing for as long as the
partners are partners plus two years thereafter. In addition, the partners
have a right of first refusal with regard to the sale of partnership interests
and, under certain circumstances, may put their interest to the partnership.
Generally, the !NTERPRISE Partnerships have a 20 year duration.
MAJOR IXC CERTIFICATION
AT&T, the major IXC with which the Company has entered into the National
Service Agreement, has established a certification process called Operational
Readiness Testing ("ORT") in order to determine whether a supplier's network,
systems and processes are capable of providing a level of service which meets
such major IXC's standards. ORT is a lengthy process comprised of the
following components: (i) Operational Readiness Assessment ("ORA"), (ii)
Network Validation Testing ("NVT") and (iii) Switch Network Validation Testing
("SNVT"). CLECs must pass such major IXC's ORT for access services to provide
access services to the major IXC and such major IXC's ORT for switched
services to provide switched services to such major IXC.
ORA is a one-time, in-depth evaluation to review all of the Operating
Company's processes and to verify that procedures are in place to govern
operations from initial design and construction through day-to-day operations
and maintenance. ORA is meant to ensure that every aspect of the Operating
Company's operations can deliver a product of high quality and reliability.
NVT is an ongoing evaluation process that continually evaluates existing
markets and potential markets. NVT reviews the networks' redundancy of power
supplies; the temperature, humidity and ambient condition controls; the fire
protection; the route diversity of the fiber network; the design of
electronics; the security and general appearance of the Operating Company's
facilities.
SNVT is an ongoing review that evaluates the performance and quality of the
Operating Company's switching capabilities.
The Company has successfully passed the NVT in Jacksonville and Louisville.
Passing these evaluations enables the Company's networks in such markets to
carry traditional dedicated access and switched access transport. The Company
is currently preparing for an ORA of its switch installations and a NVT of its
switch operations in two of its other markets. Passing the ORA and the NVT of
its switch operations in each market will enable the Company's networks in
those markets to carry switched traffic for such major IXC. The Company
believes that certifying the Operating Companies' switching operations will
significantly enhance the market opportunity for the Operating Companies'
services.
48
<PAGE>
SALES AND MARKETING
The Company targets its network sales and marketing activities at IXCs and
business, government and educational end users. The Company's IXC targets
include the major IXCs as well as smaller and regional IXCs. IXCs utilize the
Operating Companies' services primarily as a local component of their own
service offerings to end users. The Company also targets end users which
include small, medium and large businesses as well as government and
educational institutions. In many cases, the Company works in conjunction with
IXCs when marketing to these end users in order to leverage the name
recognition, marketing reputation and resources of IXCs. In order to increase
the value of the Company's networks to IXCs, the Company's networks do not
offer a competing long distance service offering to end users. The Company's
networks offer their services in accordance with tariffs filed with the FCC
for interstate services and state regulatory authorities for intrastate
services. The Operating Companies are classified as non-dominant carriers by
the FCC and therefore have substantial pricing flexibility and in many cases
may enter into customer and product specific agreements.
IXC Customers
The Company has national supplier agreements with all of the major IXCs. The
Company believes it can effectively provide IXCs with a full complement of
traditional access services as well as switched services. Factors that
increase the value of the Company's networks to IXCs include reliability,
state-of-the-art technology, route diversity, ease of ordering and customer
service. The Company also generally prices the services of an Operating
Company at a discount relative to the incumbent LEC. In order to further
complement the services provided to the IXCs, the Company integrates its
networks with IXC networks to enable the IXC to (i) access service, billing
and other data directly from the Company and (ii) electronically send
automated service requests to the Company.
An important component of the Company's strategy is to work with major IXCs
to develop an integrated local and long distance service offering to end
users. The Company believes this strategy will provide greater access to the
IXCs' large customer base and enable the Operating Companies to leverage the
IXCs' name recognition and reputation for reliability and quality. In pursuing
this strategy, the Company has entered into the National Service Agreement
with AT&T pursuant to which the Company's networks will be AT&T's preferred
supplier of dedicated special access and switched access transport services in
all of the Company's markets. The National Service Agreement requires the
Company to provide such services to AT&T at a discount from the tariffed or
published LEC rates.
The Company currently utilizes national account representatives to market to
IXC customers since the major IXCs have established national or regional
groups to manage and coordinate their purchasing of access services. These
groups assess CLECs not only upon price, quality, service and ease of
provisioning in a particular market, but also upon size, scope of operations
and financial stability in order to maximize the leverage of their CLEC
relationships. The Company focuses on serving the Operating Companies' IXC
customers in all of the Company's markets with a view to establishing national
preferred vendor relationships. The terms and conditions applicable to
services ordered by IXCs are generally specified in agreements under which
some services can be terminated by the IXC on 60 days or less notice. The
Company believes that the Operating Companies are well positioned to serve the
IXCs and that the Operating Companies generally have good relationships with
their respective IXC.
End Users
Each Operating Company works in conjunction with IXCs to offer an integrated
package of local and long distance service offerings to end users. Initially,
the Operating Company offers high quality access services to these end users
in combination with an IXC's long distance offerings. Building on its success
with the end users,
49
<PAGE>
the Operating Company attempts to increase the size and number of service
offerings it provides by working with customers to analyze the customers'
local telecommunications needs. In particular, the typical Operating Company
offers end users a variety of services, including local dial tone, frame
relay, ATM transport, business video conferencing and other services. The
Company believes that, based upon the Operating Companies' reputation
developed in conjunction with major IXCs, the Operating Companies will be able
to systematically increase their share of the end users' telecommunications
expenditures. The Company believes the networks will be able to compete for
end users' needs based upon price, reliability, product diversity, service and
custom solutions to end user needs. A significant component of an Operating
Company's reliability will be its ability to offer customers end-to-end SONET
ring construction for many localized applications. The Operating Companies'
construction of SONET rings combined with the Company's large network size
will enable the Operating Companies to offer superior coverage to the
incumbent LEC and many CLECs especially in second and third tier markets.
End users are currently marketed through Company direct sales
representatives in each market. The national sales organization also provides
support for the local sales groups and develops new product offerings and
customized telecommunications applications and solutions which address the
specific requirements of particular customers. In addition, the Company
markets the Operating Companies' products through advertisements, media
relations, direct mail and participation in trade conferences. End users
typically commit to a service agreement for a term of three to five years
which is either renegotiated or automatically converted to a month-to-month
arrangement at the end of the contract term.
Hyperion Enhanced Networks
The Company develops applications in conjunction with the Operating
Companies that are not specific to an IXC's traditional business or to a
particular partnership metropolitan area as special bid Hyperion Enhanced
Networks ("HENs"). HEN services include special construction of IXC networks,
campus networks, private carriage networks and other similar network
applications. HEN customers are currently marketed through Company national
account representatives in conjunction with special IXC or information service
provider groups that manage special network, campus, or junction applications.
The terms and conditions for HENs are generally specified in agreements with
three to five year terms which automatically renew to month-to-month
arrangements at the end of contract terms.
NETWORK DEVELOPMENT AND DESIGN
Prior to any network construction in a particular market, the Company's
corporate development staff reviews the demographic, economic, competitive and
telecommunications demand characteristics of the market. These characteristics
generally include market location, the size of the telecommunications market,
the number and size of business, institutional and government end users and
the economic prospects for the area. In addition, the Company also carefully
analyzes demand information provided by IXCs, including demand for end user
special access and volume of traffic from the LEC-CO and the IXC POPs. The
Company also analyzes market size utilizing a variety of data, including
available estimates of the number of interstate access and intrastate private
lines in the region. Such information is available from the FCC.
If a particular market targeted for development is deemed to have
sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, the Company's network planning and
design personnel, working in conjunction with the Company's Local Partner, or
Adelphia or one of Adelphia's affiliates, design a large regional network
targeted to provide access to the identified business, government and
institutional end user revenue base and to the IXC POPs and the LEC-COs in the
geographic area covered by the proposed network.
The actual network design is influenced by a number of market, cost and
technical factors including:
. Availability and ease of fiber deployment
. Location of IXC POPs
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. Density of telecommunication revenue based upon IXC information
. The Company's market information
. Cost of construction
The objective of the network design is to maximize revenue derived from
service to IXC POPs, LEC-COs and important customers in consideration of
network construction costs. In most cases, the Local Partner bears the costs
of construction for the required fiber, retains ownership of the fiber and
leases the fiber to the Operating Company. The fiber lease costs are
determined by amortizing the Operating Company's portion of the Local
Partner's cost of construction over the term of the Fiber Lease Agreement at
an assumed interest rate. This structure generally allows the Operating
Company to better match its capital costs to cash flows. See"--Fiber Lease
Agreements."
NETWORK CONSTRUCTION
The Company's networks are constructed to cost-effectively access areas of
significant end user telecommunications traffic, as well as the POPs of most
IXCs and the majority of the LEC-COs. The Company establishes with its Local
Partner or Adelphia general requirements for network design including,
engineering specifications, fiber type and amount, construction timelines and
quality control. The Company's engineering personnel provide project
management, including contract negotiation and overall supervision of the
construction, testing and certification of all facilities. The construction
period for a new network varies depending upon the number of route miles to be
installed, the initial number of buildings targeted for connection to the
network, the general deployment of the network and other factors. Networks
that the Company has installed to date have generally become operational
within six to ten months after the beginning of construction.
NETWORK OPERATING CONTROL CENTER
In Coudersport, Pennsylvania, the Company has built a NOCC that is equipped
with state-of-the-art system monitoring and control technology. The NOCC is a
single point interface for monitoring all of the Company's networks and
provisioning all services and systems necessary to operate the networks. The
NOCC currently supports all of the Company's networks including the management
of over 820 building connections, five switches or remote switching modules
and approximately 2,210 network route miles. The NOCC is designed to
accommodate the Company's anticipated growth in all existing markets as well
as in all the markets the Company plans to enter.
The NOCC is utilized for a variety of network management and control
functions including monitoring, managing and diagnosing the Company's SONET
networks, central office equipment, customer circuits and signals and the
Company's switches and associated equipment. The NOCC is also the location
where the Company provisions, coordinates, tests and accepts all orders for
switched and dedicated circuit orders. In addition, the NOCC maintains the
database for the Company's circuits and network availability. Network
personnel at the NOCC also develop and distribute a variety of software
utilized to manage and maintain the networks.
EQUIPMENT SUPPLY
The Company and the Operating Companies purchase fiber optic transmission
and other electronic equipment from Lucent Technologies, formerly AT&T Network
Systems ("Lucent"), Fujitsu, Tellabs, and other suppliers at negotiated
prices. The Company expects that fiber optic cable, equipment and supplies for
the construction and development of its networks will continue to be readily
available from Lucent, Fujitsu and other suppliers as required. The Company
has negotiated multi-year contracts for equipment with Lucent, Fujitsu, and
Tellabs. The Company and the Operating Companies have deployed two Lucent 5ESS
Switches ("5ESSs") and three remote switching modules in five of their current
markets. The Company and the Operating Companies plan to deploy eight
additional 5ESSs or remote switching modules during calendar 1996 and
additional 5ESSs and remote switching modules in each of the Company's future
operational markets.
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CONNECTIONS TO CUSTOMER LOCATIONS
Office buildings are connected by network backbone extensions to one of a
number of physical rings of fiber optic cable, which originate and terminate
at the Operating Company's central office. Signals are sent simultaneously on
both primary and alternate protection paths through a network backbone to the
Operating Company's central office. Within each building, Operating Company-
owned internal wiring connects the Operating Company's fiber optic terminal
equipment to the customer premises. Customer equipment is connected to
Operating Company-provided electronic equipment generally located where
customer transmissions are digitized, combined and converted to an optical
signal. The traffic is then transmitted through the network backbone to the
Operating Company's central office where it can be reconfigured for routing to
its ultimate destination on the network.
The Operating Company locates its fiber optic equipment in space provided by
the building owner or, more typically, on a customer's premises. IXCs often
enter into discussions with building owners to allow the Company to serve the
IXCs' customers. This network configuration enables the Company to share
electronic equipment among multiple customers, causes little interruption for
customers during installation and maintenance and allows the Company to
introduce new services rapidly and at low incremental cost.
EMPLOYEES
As of March 31, 1996, the Operating Companies and the Company employed a
total of 87 and 68 full-time employees, respectively, in support of the
Operating Companies' and the Company's operations. The Company also regularly
uses the services of its Local Partners, employees and contract technicians
for the installation and maintenance of its networks. None of the Operating
Companies' or the Company's employees is represented by a collective
bargaining agreement. The Company believes that the Operating Companies' and
the Company's relations with their respective employees are good.
PROPERTIES
The Company leases its principal executive offices in Coudersport,
Pennsylvania and its offices in Pittsburgh, Pennsylvania. Additionally, the
Company owns its NOCC facilities, and leases certain office space from
Adelphia, in Coudersport, Pennsylvania.
All of the fiber optic cable, fiber optic telecommunications equipment and
other properties and equipment used in the networks, are owned or leased by
the applicable Operating Company. See "--Company's Markets." Fiber optic cable
plant used in providing service is primarily on or under public roads,
highways or streets, with the remainder being on or under private property. As
of March 31, 1996, the Company's total telecommunications equipment in service
consists of fiber optic telecommunications equipment, fiber optic cable,
furniture and fixtures, leasehold improvements and construction in progress.
Such properties do not lend themselves to description by character and
location of principal units.
Substantially all of the fiber optic telecommunications equipment used in
the Company's networks is housed in multiple leased facilities in various
locations throughout the metropolitan areas served by the Company. The Company
believes that its properties and those of its Operating Companies are adequate
and suitable for their intended purpose.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings except for
claims and lawsuits arising in the normal course of business. The Company does
not believe that these claims or lawsuits will have a material effect on the
Company's financial condition or results of operations.
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COMPETITION
The Company operates in a highly competitive environment and has no
significant market share in any market in which it operates. In each of the
areas served by an Operating Company, services similar to those offered by the
Operating Company are offered by the incumbent LEC serving that area.
Incumbent LECs have long-standing relationships with their customers, have far
greater technical and financial resources and provide services that an
Operating Company may not currently be authorized by state regulators to
offer. See "Regulation--State Regulation." Following the enactment of the
Telecommunications Act, there has been significant merger activity among the
RBOCs which will result in competitors with even greater financial resources
and geographic scope than currently faced by the Company. In addition, in many
markets, the incumbent LEC currently is excused from paying license or
franchise fees or pays fees materially lower than those required to be paid by
the Operating Companies.
While new business opportunities will be made available to the Company
through the Telecommunications Act and other federal and state regulatory
initiatives, regulators are likely to provide the incumbent LECs with an
increased degree of flexibility with regard to pricing of their services as
competition increases. If the incumbent LECs elect to lower their rates and
can sustain lower rates over time, this may adversely affect the revenues of
the Operating Companies and the Company by placing downward pressure on the
rates the Operating Companies can charge. The Company believes this effect
will be offset by the increased revenues available by offering new services,
but if future regulatory decisions afford the incumbent LECs excessive pricing
flexibility or other regulatory relief, such decisions could have a material
adverse effect on the Company.
Competition for the Company's and the Operating Companies' services are
based on price, quality, network reliability, service features and
responsiveness to customer needs. The Company believes that its management
expertise, coupled with its highly reliable, state-of-the-art digital networks
and back-office infrastructure, which offer significant transmission capacity
at competitive prices, will allow it to compete effectively with the incumbent
LECs, which may not yet have fully deployed fiber optic networks in many of
the Company's target markets. The Company believes that the Operating
Companies price their services at a modest discount compared to the prices of
incumbent LECs while providing a higher level of customer service. The
Company's networks provide diverse access routing and redundant electronics,
design features not widely deployed by the incumbent LEC networks at the
present time. However, as incumbent LECs continue to upgrade their networks,
any competitive advantage held by the Company due to the superiority of its
facilities may diminish.
Other current or potential competitors of the Company's networks include
other CLECs, IXCs, wireless telecommunications providers, microwave carriers,
satellite carriers, private networks built by large end users and cable
television operators or utilities in markets in which the Company has not
partnered with one or the other. In many markets served by the Company, one or
more CLECs already are providing service. Furthermore, the three major IXCs
have announced ambitious plans to enter the local exchange market. There is no
assurance that these IXCs will choose to obtain local services from the
Operating Companies in the Company's markets. In addition, the
Telecommunications Act requires all local exchange providers, including new
entrants, to offer their services for resale. See "Regulation--
Telecommunications Act of 1996." This requirement permits companies to enter
the market for local telecommunications services without investing in new
facilities, thereby increasing the number of likely competitors in any given
market, and enables the IXCs to provide local services by reselling the
service of the incumbent LEC rather than using services provided by the
Company.
REGULATION
OVERVIEW
Telecommunications services provided by the Company and its networks are
subject to regulation by federal, state and local government agencies. At the
federal level, the FCC has jurisdiction over interstate services, which
constitute a majority of the Operating Companies' current services. Interstate
services, for the purpose of determining FCC jurisdiction, are communications
that originate in one state and terminate in another
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state or foreign country. State regulatory commissions exercise jurisdiction
over intrastate services. Intrastate services are communications that
originate and terminate in the same state. Additionally, municipalities and
other local government agencies may regulate limited aspects of the Company's
business, such as use of rights-of-way.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the Telecommunications Act of 1996 was signed into law
and is considered to be the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. The
Telecommunications Act will result in substantial changes in the marketplace
for voice, data and video services. These changes will open the local exchange
market to competition and will result in a substantial increase in the
addressable market for the Company's networks. Among its more significant
provisions, the Telecommunications Act (i) removes legal barriers to entry in
local telephone markets, (ii) requires incumbent LECs to "interconnect" with
competitors, (iii) establishes procedures for incumbent LEC entry into new
markets, such as long distance and cable television, (iv) relaxes regulation
of telecommunications services provided by incumbent LECs and all other
telecommunications service providers, and (v) directs the FCC to establish a
subsidy mechanism for the preservation of universal service.
Removal of Entry Barriers
Prior to enactment of the Telecommunications Act, many states limited the
services that could be offered by a company competing with the incumbent LEC.
See "--State Regulation." In these states, the incumbent LEC retained a
monopoly over basic local exchange services pursuant to state statute or
regulatory policy. In states with these legal barriers to entry, the Company
had been limited to the provision of dedicated telecommunications services,
which constitutes only a small portion of the local telephone market.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect
of prohibiting any person from providing interstate or intrastate
telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers.
This provision of the Telecommunications Act should enable the Operating
Companies to provide a full range of local telecommunications services in any
state. The Operating Companies will continue their policy of not providing
long distance services that compete with the major IXCs in order to enable the
Company to work with IXCs to provide an integrated local and long distance
service offering to end users. Although the Operating Companies will be
required to obtain certification from the state regulatory commission in
almost all cases, the Telecommunications Act limits substantially the ability
of a state commission to deny a request for certification filed by an
Operating Company. While this provision of the Telecommunications Act expands
significantly the markets available to the Operating Companies, it also
reduces the barriers to entry by other potential competitors and therefore
increases the level of competition the Operating Companies will face in all
their markets. See "Competition."
Access and Interconnection with LEC Facilities
A company cannot compete effectively with the incumbent LEC in the market
for switched local telephone services unless it is able to connect its
facilities with the incumbent LEC and obtain access to certain essential
services and resources under reasonable rates, terms and conditions. Incumbent
LECs historically have been reluctant to provide these services voluntarily
and generally have done so only when ordered to by state regulatory
commissions.
The Telecommunications Act imposes a number of access and interconnection
requirements on all local exchange providers, including CLECs, with additional
requirements imposed on incumbent LECs. These requirements will provide access
to certain networks under reasonable rates, terms and conditions.
Specifically,
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the Telecommunications Act requires the FCC to adopt rules within six months
under which LECs must provide the following:
Telephone Number Portability. Telephone number portability enables a
customer to keep the same telephone number when the customer switches local
exchange carriers. New entrants are at a competitive disadvantage without
telephone number portability because of inconvenience and costs to customers
that must change numbers.
Dialing Parity. All LECs must provide dialing parity, which means that a
customer calling to or from a CLEC network cannot be required to dial more
digits than is required for a comparable call originating and terminating on
the LEC's network.
Reciprocal Compensation. The duty to provide reciprocal compensation means
that LECs must terminate calls that originate on competing networks in
exchange for a given level of compensation and that they are entitled to
termination of calls that originate on their network for which they must pay a
given level of compensation.
Resale. A LEC may not prohibit or place unreasonable restrictions on the
resale of its services. In addition, incumbent LECs must offer services to
resellers at a wholesale rate that is less than the retail rate charged to end
users.
Access to Rights-of-Way. A LEC must provide access to its poles, ducts,
conduits and rights-of-way on a reasonable, nondiscriminatory basis.
Unbundling of Network Services. Incumbent LECs must offer unbundled access
to the various elements of their network. This requirement allows new entrants
to purchase elements of an incumbent LEC's network that may be necessary to
provide service to customers not located in the new entrants' networks.
On July 2, 1996 the FCC released its First Report and Order and Further
Notice of Proposed Rulemaking promulgating rules and regulations to implement
Congress' statutory directive concerning number portability (the "Number
Portability Order"). The FCC ordered all LECs to begin phased development of a
long-term service provider portability method in the 100 largest Metropolitan
Statistical Areas ("MSAs") no later than October 1, 1997, and to complete
deployment in those MSAs by December 31, 1998. Number portability must be
provided in those areas by all LECs to all requesting telecommunications
carriers. After December 31, 1998, each LEC must make number portability
available within six months after receiving a specific request by another
telecommunications carrier in areas outside the 100 largest area MSAs in which
the requesting carrier is operating or plans to operate. Until long-term
service portability is available, all LECs must provide currently available
number portability measures as soon as reasonably possible after a specific
request from another carrier. As new carriers are at a competitive
disadvantage without telephone number portability, the Number Portability
Order should enhance the Company's ability to offer service in competition
with the incumbent LECs, but it is uncertain how effective these regulations
will be in promoting number portability. The Number Portability Order does not
address how the costs of implementing long-term service portability will be
recovered. This issue is subject to an additional comment period and is not
expected to be decided until 1997.
On August 1, 1996 the FCC adopted its First Report 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 Order"). Based on the
FCC's press release of August 1, 1996, the Local Competition Order adopts a
national framework for interconnection but leaves to the individual states the
task of implementing the FCC's rules. The states are directed to base rates
for interconnection and unbundled elements on Total Element Long-Run
Incremental Cost ("TELRIC") studies that should prevent the incumbent LECs
from charging rates for interconnection and unbundled elements that
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are not cost-based. Because implementation of the Local Competition Order will
be at the state level, it is uncertain how these new requirements will affect
the Company. To the extent that the Local Competition Order reduces 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.
Although the Number Portability Order, the Local Competition Order and the
underlying statutory requirements are intended to benefit new entrants in the
local exchange market, such as the Operating Companies, it is uncertain how
effective these requirements will be until the FCC completes all of its
rulemaking proceedings under the Telecommunications Act and state regulators
begin to implement the FCC's requirements. In particular, if CLECs are unable
to obtain favorable agreements with the incumbent LEC regarding call
termination and resale of incumbent LEC facilities and services through
negotiation with the incumbent LEC or arbitration at state public utility
commissions, there is a diminished likelihood that an Operating Company will
be successful in its local exchange market.
Moreover, these requirements place burdens on an Operating Company when it
provides switched local exchange services that will benefit potential
competitors. In particular, the obligation to offer services for resale means
that a company can resell the Operating Company's services without investing
in facilities. Similarly, the obligation to provide access to rights-of-way is
of limited benefit to the Operating Companies, which already have such access
through their Local Partners, but benefits other potential competitors to a
far greater degree.
LEC Entry into New Markets
The Company's principal competitor in each market it enters is the incumbent
LEC. See "Competition." Prior to enactment of the Telecommunications Act,
incumbent LECs generally were prohibited from providing cable television
service pursuant to the "telco/cable cross-ownership prohibition" contained in
the Communications Act of 1934. In addition, the RBOCs generally were
prohibited by the MFJ (as defined) from providing interLATA (i.e., long
distance) services within the region in which they provide local exchange
service.
The Telecommunications Act repeals the telco/cable cross-ownership
prohibition and permits incumbent LECs to provide cable television service.
With this prohibition removed, incumbent LECs are more likely to invest in
fiber optic networks because those facilities will be able to generate a
revenue stream previously unavailable to the incumbent LECs. While incumbent
LEC entry into the video market may be the motivating factor for construction
of new facilities, these facilities also can be used by an incumbent LEC to
provide services that compete with the Company's networks.
The Telecommunications Act also eliminates the prospective effect of the MFJ
and establishes procedures under which an RBOC can enter the market for
interLATA services within its telephone service area. Before an RBOC can enter
the interLATA market, it must enter into a state-approved interconnection
agreement with a company that provides local exchange service to business and
residential customers predominantly over its own facilities. Alternatively, if
no such competitor requests interconnection, the RBOC can request authority to
provide interLATA services if it offers interconnection under state-approved
terms and conditions. The interconnection offered or provided by the RBOC must
comply with a "competitive checklist" that is comparable to the
interconnection requirements discussed above. See "--Telecommunications Act of
1996--Access and Interconnection with LEC Facilities."
The ability of the RBOCs to provide interLATA services enables them to
provide customers with a full range of local and long distance
telecommunications services. The provision of interLATA services by RBOCs is
expected to reduce the market share of the major long distance carriers, who
are the Company's networks' primary customers. Consequently, the entry of the
RBOCs into the long distance market may have adverse consequences on the
ability to generate revenues from the IXCs.
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Relaxation of Regulation
A long-term goal of the Telecommunications Act is to increase competition
for telecommunications services, thereby reducing the need for regulation of
these services. To this end, the Telecommunications Act requires the FCC to
streamline its regulation of incumbent LECs and permits the FCC to forbear
from regulating particular classes of telecommunications services or
providers. Since the Company is lightly regulated by the FCC, the potential
for regulatory forbearance likely will be more beneficial to the incumbent
LECs than the Company in the long run.
Pursuant to the forbearance provisions of the Telecommunications Act, the
Company has filed a petition requesting that the FCC reinstate its forbearance
policy with regard to tariff filing requirements for competitive providers of
interstate access services, such as the Company. See "--Federal Regulation."
This would relieve the Company of its biggest existing federal regulatory
burden. The FCC has not set a timetable for action on the Company's petition.
The Telecommunications Act eliminates the requirement that LECs obtain FCC
authorization before constructing new facilities for interstate services. The
Telecommunications Act also limits the FCC's ability to review LEC tariff
filings. These changes will increase the speed with which incumbent LECs are
able to introduce new service offerings and new pricing of existing services,
thereby increasing the incumbent LECs' ability to compete with the Company.
Preservation of Universal Service
One of the primary goals of the original Communications Act of 1934 was to
extend telephone service to all the citizens of the United States. This goal
has been achieved largely by keeping the rates for basic local exchange
service at a reasonable level. It was traditionally thought that incumbent
LECs were able to keep basic residential rates reasonable by subsidizing them
with revenues from business and IXC customers, and by subsidizing rural
service at the expense of urban customers. The existence and level of these
subsidies has been widely disputed in recent years because they are so
difficult to quantify.
The Telecommunications Act continues the goal of advancing and preserving
universal service by requiring the FCC to establish an explicit mechanism for
subsidizing service to those who might otherwise drop off the public switched
network. Although the details will be determined by the FCC, all carriers will
be required to contribute and carriers that serve eligible customers will be
able to receive subsidies. In addition, subsidies likely will be available for
companies that provide service to schools, libraries and hospitals.
Depending on how the FCC implements its statutory mandate, this subsidy
mechanism may provide an additional source of revenue to those LECs willing
and able to provide service to markets that are less desirable, either because
of the high cost of providing service or the limited revenues that might be
available. This could be advantageous to the Company or it could be beneficial
to the Company's competitors, depending on the geographic areas and type of
customers for which subsidies are available. For example, if distributions are
limited to companies that provide service to residential customers, the
Company may contribute more than it receives from the universal service fund
due to its focus on business customers.
FEDERAL REGULATION
Through a series of regulatory proceedings, the FCC has established
different levels of regulation for "dominant carriers" and "non-dominant
carriers." Only incumbent LECs are classified as dominant; all other providers
of domestic interstate services, including the Operating Companies, are
classified as non-dominant carriers. As a non-dominant carrier the Operating
Companies are subject to relatively limited regulation by the FCC. The
Operating Companies must offer interstate services at just and reasonable
rates in a manner that is not unreasonably discriminatory, subject to the
complaint provisions of the Communications Act of 1934, as amended.
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Presently, the Company is required to file tariffs listing the terms,
conditions and rates for its services. The FCC's policy of forbearing from
requiring non-dominant carriers to file tariffs was rejected by the U.S.
Supreme Court and its policy of permitting carriers to file tariffs listing a
range of rates for each service was rejected by the U.S. Court of Appeals for
District of Columbia Circuit. Under the Telecommunications Act, the FCC has
authority to reinstate its forbearance policy for non-dominant carriers. The
Company has filed a petition requesting the FCC to take this action with
regard to competitive providers of interstate access services, but there can
be no assurance that it will do so.
The FCC has adopted rules requiring incumbent LECs to provide "virtual
collocation" to CAPs for the purpose of interconnecting their competing
networks. These rules enable the Operating Companies to carry a portion of a
customer's interstate traffic to an IXC even if the customer is not located on
the Company's network. The Company has requested collocation in some, but not
all, of its markets. The incumbent LECs have proposed interconnection rates
that are being investigated by the FCC to determine whether they are
excessive. If the FCC orders the incumbent LECs to reduce these rates,
collocation will be a more attractive option for CLECs. Based on the press
release issued by the FCC on the Local Competition Order, incumbent LECs will
be required to provide both virtual collocation and actual collocation at
their switching offices.
Under the Telecommunications Act, an Operating Company may become subject to
additional federal regulatory obligations when it provides local exchange
service in a market. All LECs, including CLECs, must make their services
available for resale by other carriers, provide nondiscriminatory access to
rights-of-way, offer reciprocal compensation for termination of traffic and
provide dialing parity and telephone number portability. In addition, the
Telecommunications Act requires all telecommunications carriers to contribute
to the universal service mechanism established by the FCC and to ensure that
their services are accessible to and usable by persons with disabilities.
Because the FCC has yet to adopt all of the rules necessary to implement the
Telecommunications Act, it is uncertain how burdensome these requirements will
be for the Company and the Operating Companies. The obligation to provide
services for resale by others potentially limits any competitive advantage
held by the Company by virtue of its state-of-the-art facilities because other
carriers, including the incumbent LEC and the IXCs, can simply resell the
Operating Companies' services. Similarly, the obligation to provide access to
rights-of-way benefits certain competitors more than the Company, which
already has such access through its Local Partners. Most of the other
obligations impose costs on the Operating Companies that also will be borne by
competing carriers so the competitive implication of these requirements should
not be significant if they are implemented fairly by the FCC.
As part of its decision requiring incumbent LECs to provide virtual
collocation, the FCC also granted incumbent LECs flexibility to reduce their
rates for interstate access services in markets where a CAP is collocated.
This flexibility includes the ability to offer volume and term discounts and
to deaverage access rates in different "zones" in a state based on the level
of traffic. In addition, the FCC has granted two incumbent LECs further
flexibility in their most competitive markets and the FCC could grant in the
future similar waivers in markets served by the Operating Companies. The FCC
also is considering granting incumbent LECs additional pricing flexibility in
its pending proceeding regarding incumbent LEC price caps. With the passage of
the Telecommunications Act and the anticipated increase in the level of
competition faced by incumbent LECs, the FCC could grant incumbent LECs
substantial pricing flexibility with regard to interstate access services. It
is also anticipated that the prices incumbent LECs charge for access services
will be substantially reduced as a result of the FCC's reform of the current
access charge regime and the adoption of universal service rules. A Federal-
State Joint Board mandated by the Telecommunications Act is required to make
recommendations regarding universal service by November 8, 1996, and new
universal service rules must be in place by May 8, 1997. The FCC has stated
that it intends to tie access charge reform to universal service reform, with
a notice of proposed rulemaking to be issued in November and an order in the
first half of 1997. To the extent these regulatory initiatives enable or
require incumbent LECs to offer selectively reduced rates for access services,
the
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rates the Operating Companies may charge for access services will be
constrained. The Operating Companies' rates also will be constrained by the
fact that competitors other than the incumbent LECs are subject to the same
streamlined regulatory regime as the Operating Companies and can price their
services to meet competition.
STATE REGULATION
Most state public utility commissions require companies that wish to provide
intrastate common carrier services to be certified to provide such services.
These certifications generally require a showing that the carrier has adequate
financial, managerial and technical resources to offer the proposed services
in a manner consistent with the public interest.
Operating Companies have been certificated to provide telecommunications
services in Florida, Kansas, Kentucky, New York, Pennsylvania, Tennessee,
Vermont and Virginia. The New Jersey Operating Company currently has an
application for initial operating authority pending before the New Jersey
Board of Public Utilities. The certificates in New York, Florida and Tennessee
permit the Operating Companies to provide a full range of local
telecommunications services, including basic local exchange service. In light
of the Telecommunications Act, the Operating Companies will request removal of
any restrictions that now exist on its certificates in the remaining states
and anticipate that requests will be granted. See "--Telecommunications Act of
1996--Removal of Entry Barriers." In addition, the Telecommunications Act will
enable the Company to enter new states providing a full range of local
services upon certification. In certain states, each of the Company, its
subsidiaries and the Operating Companies may be subject to additional state
regulatory requirements, including tariff filing requirements, in order to
begin offering the telecommunications services for which such entities have
been certificated. Many states also may have additional regulatory
requirements such as reporting and customer service requirements and universal
service contributions.
In addition to obtaining certification, an Operating Company must negotiate
terms of interconnection with the incumbent LEC before it can begin providing
switched services. Most states in which the Company operates have not adopted
rules governing the interconnection of competing networks. Under the
Telecommunications Act, the FCC has adopted interconnection requirements. See
"--Telecommunications Act of 1996--Access and Interconnection with LEC
Facilities." These rules establish guidelines for the states to follow when
reviewing interconnection agreements and should greatly facilitate the
negotiation of interconnection agreements, although it is anticipated that
some incumbent LECs may remain reluctant to comply with interconnection
requests, thereby delaying an Operating Company's ability to provide switched
services. State regulators are responsible for resolving any disputes that
cannot be resolved through negotiation between carriers.
The Operating Companies are not presently subject to price regulation or
rate of return regulation in any state, although there can be no assurance
this will not change when the Operating Companies begin providing switched
services in some states. In most states, an Operating Company is required to
file tariffs setting forth the terms, conditions and prices for intrastate
services. In some states, an Operating Company's tariff lists a rate range or
set prices on an individual case basis.
Several states have allowed incumbent LECs rate and tariff flexibility,
particularly for services deemed subject to competition. This pricing
flexibility increases the ability of the incumbent LEC to compete with an
Operating Company and constrains the rates an Operating Company may charge for
its services. In light of the additional competition that is expected to
result from the Telecommunications Act, states may grant incumbent LECs
additional pricing flexibility. At the same time, some incumbent LECs may
request increases in local exchange rates to offset revenue losses due to
competition.
LOCAL GOVERNMENT AUTHORIZATIONS
An Operating Company may be required to obtain from municipal authorities
street opening and construction permits to install and expand its fiber optic
networks in certain cities. In some cities, the Local Partners or
subcontractors may already possess the requisite authorizations to construct
or expand the Company's
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networks. An Operating Company or its Local Partners also must obtain a
license to attach facilities to utility poles in order to build and expand
facilities. Because utilities that are owned by a cooperative or municipality
are not subject to federal pole attachment regulation, there are no assurances
that an Operating Company or its Local Partners will be able to obtain pole
attachments from these utilities at reasonable rates, terms and conditions.
In some of the areas where the Operating Companies provide service, their
Local Partners pay license or franchise fees based on a percent of gross
revenue. In addition, in areas where the Company does not use facilities
constructed by a Local Partner, the Operating Company may be required to pay
such fees. There are no assurances that certain municipalities that do not
currently impose fees will not seek to impose fees in the future, nor is there
any assurance that, following the expiration of existing franchises, fees will
remain at their current levels. In many markets, other companies providing
local telecommunications services, particularly the incumbent LECs, currently
are excused from paying license or franchise fees or pay fees that are
materially lower than those required to be paid by the Operating Company or
Local Partner. The Telecommunications Act requires municipalities to charge
nondiscriminatory fees to all telecommunications providers, but it is
uncertain how quickly this requirement will be implemented by particular
municipalities in which the Company operates or plans to operate or whether it
will be implemented without a legal challenge initiated by the Company or
another CLEC.
If any of the existing Local Partner Agreements or Fiber Lease Agreements
held by a Local Partner or an Operating Company for a particular market were
terminated prior to its expiration date and the Local Partner or Operating
Company were forced to remove its fiber optic cables from the streets or
abandon its network in place, even with compensation, such termination could
have a material adverse effect on the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
John J. Rigas............... 71 Chairman and Director
James P. Rigas.............. 38 Vice Chairman, Executive Vice President and
Director
Michael J. Rigas............ 42 Vice Chairman, Executive Vice President and
Director
Timothy J. Rigas............ 40 Vice Chairman, Executive Vice President,
Treasurer
and Director
Daniel R. Milliard.......... 49 President, Secretary and Director
Charles R. Drenning......... 51 Vice President and Director
Paul D. Fajerski............ 47 Vice President and Director
Randolph S. Fowler.......... 44 Vice President and Director
</TABLE>
John J. Rigas is the Chairman of the Board of the Company. He also is the
founder, Chairman, Chief Executive Officer and President of Adelphia. Mr.
Rigas has owned and operated cable television systems since 1952. Among his
business and community service activities, Mr. Rigas is Chairman of the Board
of Directors of Citizens Bank Corp., Inc., Coudersport, Pennsylvania and a
member of the Board of Directors of the Charles Cole Memorial Hospital. He is
a director of the National Cable Television Association and a member of its
Pioneer Association and a past President of the Pennsylvania Cable Television
Association. He is also a member of the Board of Directors of C-SPAN and the
Cable Advertising Bureau, and is a Trustee of St. Bonaventure University. He
graduated from Rensselaer Polytechnic Institute with a B.S. in Management
Engineering in 1950.
John J. Rigas is the father of Michael J. Rigas, Timothy J. Rigas and James
P. Rigas, each of whom currently serves as a director and executive officer of
the Company.
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<PAGE>
James P. Rigas is Vice Chairman and Executive Vice President of the Company,
Executive Vice President, Strategic Planning of Adelphia and a Vice President
of Adelphia's other subsidiaries. He has been with Adelphia since 1986. Mr.
Rigas graduated from Harvard University (magna cum laude) in 1980 and received
a Juris Doctor degree and an M.A. degree in Economics from Stanford University
in 1984. From June 1984 to February 1986, he was a consultant with Bain & Co.,
a management consulting firm.
Michael J. Rigas is Vice Chairman and Executive Vice President of the
Company, Executive Vice President, Operations of Adelphia and a Vice President
of Adelphia's other subsidiaries. He has been with Adelphia since 1981. From
1979 to 1981, he worked for Webster, Chamberlain & Bean, a Washington, D.C.
law firm. Mr. Rigas graduated from Harvard University (magna cum laude) in
1976 and received his Juris Doctor degree from Harvard Law School in 1979.
Timothy J. Rigas is Vice Chairman and Executive Vice President and Treasurer
of the Company, Executive Vice President, Chief Financial Officer, Chief
Accounting Officer and Treasurer of Adelphia, and a Vice President of
Adelphia's other subsidiaries. He has been with Adelphia since 1979. Mr. Rigas
graduated from the University of Pennsylvania, Wharton School, with a B.S.
degree in Economics (cum laude) in 1978.
Daniel R. Milliard is President and Secretary of Hyperion, and Senior Vice
President and Secretary of Adelphia and its subsidiaries. Mr. Milliard
currently spends approximately 95% of his time on concerns of the Company. He
has been with Adelphia since 1982. He served as outside general counsel to
Adelphia's predecessors from 1979 to 1982. Mr. Milliard graduated from
American University in 1970 with a B.S. degree in Business Administration. He
received an M.A. degree in Business from Central Missouri State University in
1971, where he was an Instructor in the Department of Finance, School of
Business and Economics, from 1971-73, and received his Juris Doctor degree
from the University of Tulsa School of Law in 1976. He is a member of the
Board of Directors of Citizens Bank Corp., Inc. in Coudersport, Pennsylvania
and is President of the Board of Directors of the Charles Cole Memorial
Hospital.
Charles R. Drenning is Vice President, Engineering operations. Prior to
joining Hyperion in this capacity in October 1991, Mr. Drenning was a District
Sales manager for Penn Access Corporation. In addition, he has over 22 years
experience with AT&T and the Bell System, where he served in a number of
executive level positions in sales and marketing, accounting, data processing,
research and development, and strategic planning. Mr. Drenning began his
career with AT&T as a member of the technical staff of Bell Laboratories in
Columbus, Ohio. His seven years of research work at the laboratories included
both hardware and software development for central office switching equipment.
Mr. Drenning holds a B.S. in Electrical Engineering and an M.S. in Computer
Information Science from Ohio State University. He is a member of the
Pennsylvania Technical Institute and IEEE.
Paul D. Fajerski is Vice President, Marketing and Sales. Prior to joining
Hyperion in this capacity in October 1991, Mr. Fajerski was a District Sales
Manager for Penn Access Corporation, a competitive access provider in
Pittsburgh, Pennsylvania. In addition, he has over 13 years experience with
AT&T and the Bell System where he served in a number of executive level
positions in sales and marketing. Mr. Fajerski holds a B.S. in Business
Administration from the College of Steubenville.
Randolph S. Fowler is Vice President, Business Development and Regulatory
Affairs. Prior to joining Hyperion in this capacity in October 1991, Mr.
Fowler was Vice President of Marketing for Penn Access Corporation, a
competitive access provider in Pittsburgh, Pennsylvania. He previously served
for four years as Director of Technology Transfer and Commercial Use of Space
in two NASA-sponsored technology transfer programs. In addition, he has over
17 years experience with AT&T and the Bell System, where he served in a number
of executive level positions in sales and marketing, operations, human
resources, business controls, and strategy development. Mr. Fowler holds a
B.S. in Business Administration from the University of Pittsburgh. He has
developed and taught courses in Marketing, Network Management, and Regulation
for the University of Pittsburgh's Graduate Program in Telecommunications. Mr.
Fowler is a contributing author for the Encyclopedia of Telecommunications.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the Company's last three
fiscal years ending March 31, 1996 to the Company's President and the other
most highly compensated executive officers whose total annual salary and bonus
exceeds $100,000.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION(A) FISCAL YEAR SALARY BONUS ALL OTHER COMPENSATION
- ------------------------------ ----------- -------- ------- ----------------------
<S> <C> <C> <C> <C>
Daniel R. Milliard...... 1996 $207,474 $ -- $5,250(c)
President and Secretary 1995 187,412(b) -- 5,350(c)
1994 183,484(b) -- 5,250(c)
Charles R. Drenning..... 1996 $139,982 $25,000 $ --
Vice President 1995 128,254 17,345 --
1994 105,379 21,250 --
Paul D. Fajerski........ 1996 $139,982 $25,000 $ --
Vice President 1995 128,254 17,345 --
1994 105,379 21,250 --
Randolph S. Fowler...... 1996 $139,982 $25,000 $ --
Vice President 1995 128,254 17,345 --
1994 105,379 21,250 --
</TABLE>
- --------
(a) James P. Rigas, Michael J. Rigas and Timothy J. Rigas are not employed by
the Company, and the Company does not reimburse Adelphia for any services
they provide to the Company.
(b) Daniel R. Milliard is not employed by the Company, but is compensated by
Adelphia for his services to the Company pursuant to an employment
agreement with Adelphia. The Company, however, reimburses Adelphia for Mr.
Milliard's base salary, insurance premium payments and other benefits paid
by Adelphia.
(c) Fiscal 1996, 1995 and 1994 amounts include (i) life insurance premiums
paid during each respective fiscal year pursuant to the employment
agreement of Daniel R. Milliard with Adelphia, in the premium payment
amounts of $4,500 during Fiscal 1996, $4,600 during Fiscal 1995, and
$4,500, during Fiscal 1994, on policies owned by Mr. Milliard and (ii)
$750 in matching contributions for Mr. Milliard under Adelphia's 401(k)
savings plan for each of Fiscal 1996, 1995 and 1994.
DIRECTOR COMPENSATION
The directors do not receive any compensation for services rendered to the
Company in their capacities as directors.
EMPLOYMENT CONTRACTS
Each of Messrs. Drenning, Fajerski and Fowler (the "Management
Shareholders") have employment agreements with the Company which expire on
October 20, 1998. The employment agreements provide for base salary, bonuses
and benefits, and contain noncompetition and nondisclosure provisions. The
employment agreements also provide for base pay and bonuses to be paid to each
Management Shareholder that are comparable to industry average base pay and
bonuses paid by comparable companies for comparable positions. Mr. Milliard is
also a senior vice president and secretary of Adelphia and has an employment
agreement with Adelphia which provides for base salary and insurance premium
payments and benefits. The Company reimburses Adelphia for Mr. Milliard's base
salary, insurance premium payments and benefits paid by Adelphia.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The Company was founded in October 1991. From the Company's inception
through March 31, 1996, Adelphia, which owns 89% of the Company's outstanding
common stock, provided all the equity capital to the Company and also made
loans and advances totaling approximately $50.9 million. The Company repaid
$25 million of such indebtedness to Adelphia from the proceeds of the Offering
on April 15, 1996, on which date the
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<PAGE>
remaining $26.1 million, including accrued interest and fees of approximately
$1.2 million for the period January 1, 1996 through April 15, 1996, was
evidenced by an unsecured subordinated note due April 16, 2003 that accrues
interest at an annual rate of 16.5% and is subordinated to the Senior Notes
upon Senior Note defaults. Interest on the subordinated note is payable
quarterly in cash, through the issuance of identical subordinated notes or in
any combination thereof, at the option of the Company. Interest (excluding
fees relating to amounts borrowed) accrued on the indebtedness to Adelphia at
an annual rate of 11.3% prior to April 15, 1996.
Messrs. Drenning, Fajerski and Fowler together hold 11% of the Company's
outstanding common stock, and are parties to a shareholder agreement, as
amended ("Shareholder Agreement") with Adelphia. The Shareholder Agreement
provides, among other things, (i) that upon the earlier of (a) the termination
of employment of any Management Shareholder or (b) after October 7, 1998, such
Management Shareholder may put his shares to Adelphia for fair market value,
unless such put rights are terminated as a result of the registration of the
Company's Common Stock under the Securities Act; (ii) for Adelphia to vote its
shares in the Company to elect each Management Shareholder to the Board of
Directors of the Company; and (iii) for certain buy/sell and termination
rights and duties among Adelphia and the Management Shareholders.
The Company has also entered into Term Loan and Stock Pledge Agreements
("Loan Agreements") with each of the Management Shareholders. Pursuant to the
Loan Agreements, each Management Shareholder has borrowed $1 million from the
Company. Each of these loans accrues interest at the average rate at which the
Company can invest cash on a short-term basis, is secured by a pledge of the
borrower's common stock in the Company, and matures upon the earlier of (i)
October 8, 1998 or (ii) the date when the Company's common stock is registered
under the 1933 Act and the Management Shareholders have the right to sell
their shares pursuant to the registration rights agreement discussed below.
Each Loan Agreement also provides that any interest accruing on a loan from
the date six months after the date of such loan shall be offset by a bonus
payment which shall be paid when principal and interest thereon are due and
which shall include additional amounts to pay income taxes applicable to such
bonus payment. The Company has also agreed to provide the Management
Shareholders with one collective demand registration right and certain
piggyback registration rights in an initial public offering of the Company's
common stock.
During Fiscal 1994, 1995 and 1996, the Company incurred charges from
Adelphia of $214,000, $209,000 and $250,000, respectively, for the provision
to the Company of shared corporate overhead services in areas such as
personnel, payroll, management information services, shared use of office and
network facilities and support equipment. The Company expects that charges for
the provision of similar services by Adelphia to the Company, or by the
Company to Adelphia, will continue to be incurred or charged by the Company in
the future. The transactions related to the provision of these services have
been based on allocation of Adelphia's costs incurred for these services, and
do not necessarily represent the cost to the Company had these services been
provided on an arm's length basis. During Fiscal 1995 and 1996, the Company
paid Adelphia or certain of Adelphia's affiliates fiber lease payments of
$303,000 and $1,022,000, respectively.
OWNERSHIP OF CAPITAL STOCK
The Company previously had authorized capital consisting of 1,000 shares of
Common Stock, par value of $1.00 per share. Prior to the closing of the
Offering of the Units, the Company recapitalized (the "Recapitalization") by
(i) amending its authorized capital to consist of 30,000,000 shares of Common
Stock, par value $0.01 per share ("Common Stock") 5,000,000 shares of
Preferred Stock, par value $0.01 per share ("Preferred Stock"), and (ii)
declaring a stock split resulting in 10,000,000 shares of Common Stock being
outstanding. As of the date hereof, Adelphia owns 8,900,020 shares of Common
Stock and Messrs. Drenning, Fajerski and Fowler each own 366,660 shares of
Common Stock. In connection with the closing of the Offering of the Units, the
Company issued Warrants which will be exercisable to purchase 613,427 shares
of Common Stock at an exercise price of $0.01 per share. In addition, Adelphia
and Messrs. Drenning, Fajerski and Fowler are parties to a shareholders
agreement. See "Certain Relationships and Transactions."
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<PAGE>
The following table provides information, as of July 1, 1996, with respect
to the beneficial ownership of the Company's Common Stock by (i) each person
known by the Company to be a beneficial owner of more than 5% of any class of
the Company's voting securities, (ii) the directors and executive officers and
(iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF
COMMON STOCK COMMON STOCK
------------ -------------
<S> <C> <C>
Adelphia Communications Corporation (1).............. 8,900,020 89.0%
Charles R. Drenning (2).............................. 366,660 3.67%
Paul D. Fajerski (2)................................. 366,660 3.67%
Randolph S. Fowler (2)............................... 366,660 3.67%
All executive officers and directors as a group
(eight persons)..................................... 1,099,980 11.0%
</TABLE>
- --------
(1) The business address of Adelphia Communications Corporation is the same as
the Company. In their capacity as executive officers of Adelphia, the
following persons share or may be deemed to share voting and dispositive
power over the shares of Common Stock, subject to the discretion of the
Board of Directors of Adelphia: John J. Rigas, Michael J. Rigas, Timothy
J. Rigas, James P. Rigas and Daniel R. Milliard.
(2) The business address of each such holder is 2570 Boyce Plaza, Pittsburgh,
Pennsylvania 15241.
DESCRIPTION OF THE SENIOR NOTES
GENERAL
The New Notes, like the Old Notes, will be issued pursuant to the Indenture,
dated April 15, 1996 (the "Indenture"), between the Company and Bank of
Montreal Trust Company, as trustee (the "Trustee"). The terms of the Senior
Notes include those stated in the Indenture and those made part of the
Indenture by reference
to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The terms of
the New Notes are substantially identical to the Old Notes in all material
respects (including interest rate and maturity), except that (i) the New Notes
will not be subject to the restrictions on transfer (other than with respect
to holders that are broker-dealers, persons who participated in the
distribution of the Old Notes or affiliates) and (ii) the Registration Rights
Agreement covenants regarding registration and the related Liquidated Damages
(other than those that have accrued and were not paid) with respect to
Registration Defaults will have been deemed satisfied. The Senior Notes are
subject to all such terms, and holders of Senior Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified by reference to the Indenture, including the definitions
therein of certain terms used below. A copy of the Indenture and Registration
Rights Agreement is available as set forth under "Available Information." The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions." As used in this section, the term "Company"
refers only to Hyperion Telecommunications, Inc. and not to its subsidiaries.
As of the date of this Prospectus, $329,000,000 principal amount of the Old
Notes was outstanding.
RANKING
The Senior Notes rank senior in right of payment to all subordinated
Indebtedness of the Company. The Senior Notes rank pari passu in right of
payment with all senior borrowings.
The Company is the sole obligor with respect to the Senior Notes, however
the operations of the Company are conducted through its Subsidiaries and Joint
Ventures and, therefore, the Company is dependent upon the operations and cash
flow of its Subsidiaries and Joint Ventures to meet its obligations, including
its obligations under the Senior Notes. The Senior Notes are effectively
subordinated to all indebtedness and other liabilities and commitments
(including, without limitation, trade payables and lease obligations) of the
Company's
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<PAGE>
Subsidiaries and Joint Ventures. Any right of the Company to receive assets of
any of its Subsidiaries and Joint Ventures upon such Subsidiary's or Joint
Venture's liquidation or reorganization (and the consequent right of the
holders of the Senior Notes to participate in those assets) is effectively
subordinated to the claims of that Subsidiary's or Joint Venture's creditors
except to the extent that the Company is itself recognized as a creditor of
such Subsidiary or Joint Venture, in which case the claims of the Company are
still subordinate to the claims of such creditors who hold any security in the
assets of such Subsidiary or Joint Venture and to the claims of such creditors
who hold indebtedness of such Subsidiary or Joint Venture senior to that held
by the Company. As of March 31, 1996, the aggregate principal amount of such
senior Indebtedness incurred by the Company's Subsidiaries and Joint Ventures
(excluding trade payables and other accrued liabilities) was approximately
$25.9 million, substantially all of which were Capital Lease Obligations. See
"Risk Factors--Holding Company Structure; Inability to Access Cash Flow."
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are senior unsecured obligations of the Company, limited in
aggregate principal amount to $329.0 million at maturity and will mature on
April 15, 2003. The Senior Notes were
offered at a substantial discount from their principal amount at maturity,
along with the Warrants, to generate gross proceeds of approximately $175.3
million. See "Certain Federal Income Tax Considerations--The Senior Notes--
Original Issue Discount." Until April 15, 2001, no interest will accrue on the
Senior Notes, but the Accreted Value will accrete (representing the
amortization of original issue discount) between the date of original issuance
and April 15, 2001, on a semi-annual bond equivalent basis using a 360-day
year comprised of twelve 30-day months, such that the Accreted Value shall be
equal to the full principal amount of the Senior Notes on April 15, 2001.
Beginning on April 15, 2001, interest on the Senior Notes will accrue at a
rate of 13% per annum and will be payable semi-annually in cash on April 15
and October 15, commencing on October 15, 2001, to holders of record on the
immediately preceding April 1 and October 1. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Senior Notes will be payable
at the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of
interest may be made by check mailed to the holders of the Senior Notes at
their respective addresses set forth in the register of holders of Senior
Notes; provided that all payments with respect to Senior Notes the holders of
which have given wire transfer instructions to the Company will be required to
be made by wire transfer of same day funds to the accounts specified by the
holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Senior Notes are issued in denominations of $1,000 and
integral multiples thereof.
OPTIONAL REDEMPTION
The Senior Notes are not be redeemable at the Company's option prior to
April 15, 2001. Thereafter, the Senior Notes will be subject to redemption at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning on April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 106.5%
2002 and thereafter............................................ 100.0%
</TABLE>
Notwithstanding the foregoing, the Company, on or prior to April 15, 1999,
may redeem up to a maximum of 25% of the aggregate principal amount of the
Senior Notes then outstanding at a redemption price of 113.0% of the Accreted
Value thereof, with the net proceeds from either (i) an Initial Public
Offering of the common stock of the Company or (ii) a sale of the Capital
Stock (other than Disqualified Stock) of the Company to a Strategic Investor
in a single transaction or a series of related transactions for at least $25.0
million; provided
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that, in either case, at least 75% in aggregate principal amount of the Senior
Notes remain outstanding immediately after the occurrence of such redemption;
and provided, further, that such redemption shall occur within 90 days of the
date of the closing of such Initial Public Offering or such sale to a
Strategic Investor, as the case may be.
MANDATORY REDEMPTION
Except as set forth below under "--Offer to Purchase upon Change of Control"
and "--Certain Covenants--Asset Sales," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the Senior
Notes.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
make an offer (the "Change of Control Offer") to each holder of Senior Notes
to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such holder's Senior Notes at a purchase price equal to 101% of
the aggregate principal amount thereof plus accrued and unpaid interest to the
date of repurchase (or, in the case of repurchases of Senior Notes prior to
April 15, 2001, at a purchase price equal to 101% of the Accreted Value
thereof as of the date of repurchase), in accordance with the procedures set
forth in the Indenture. Within ten days following any Change of Control, the
Company will mail a notice to each holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Senior Notes pursuant to the procedures required by the Indenture and
described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of the Senior Notes as a result of a Change
of Control.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the holders of the Senior Notes to require that
the Company repurchase or redeem the Senior Notes in the event of a takeover,
recapitalization or similar transaction.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act) other than the Principals or their Affiliates, (ii) the adoption
of a plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person," other than the
Principals and their Affiliates, becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the voting power of the Capital Stock of the
Company, (iv) the consummation of the first transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" becomes the "beneficial owner," directly or indirectly, of more of
the voting power of the Capital Stock of the Company than is at the time
"beneficially owned" by the Principals and their Affiliates in the aggregate
or (v) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors. For purposes of this
definition, any transfer of an Equity Interest of an entity that was formed
for the purpose of acquiring voting power of Capital Stock of the Company will
be deemed to be a transfer of such portion of such voting power of Capital
Stock as corresponds to the portion of the equity of such entity that has been
so transferred.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Senior Notes to require the Company to repurchase such Senior Notes
as a result of a sale, lease, transfer, conveyance or other disposition of
less than all of the assets of the Company to another person may be uncertain.
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<PAGE>
SELECTION AND NOTICE
If fewer than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Notes are listed, or, if the Senior
Notes are not so listed, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided that no Senior Notes of
$1,000 or less shall be redeemed in part. Notices of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of Senior Notes to be redeemed at its
registered address. If any Senior Note is to be redeemed in part only, the
notice of redemption that relates to such Senior Note shall state the portion
of the principal amount thereof to be redeemed. A new Senior Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of
the holder thereof upon cancellation of the original Senior Note. On and after
the redemption date, interest ceases to accrue on Senior Notes or portions of
them called for redemption.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that (i) the Company will not, and will not permit
any of its Subsidiaries or Joint Ventures to, directly or indirectly: (a)
declare or pay any dividend or make any other payment or distribution on
account of the Company's Equity Interests (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or dividends or distributions payable to the Company or any Wholly
Owned Subsidiary); (b) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of the Company or any direct or indirect parent of
the Company (other than Equity Interests owned by the Company or any Wholly
Owned Subsidiary of the Company); or (c) purchase, redeem or otherwise acquire
or retire for value, prior to a scheduled mandatory sinking fund payment date
or maturity date, any Indebtedness of the Company which ranks subordinated in
right to payment to the Senior Notes and (ii) the Company will not, and will
not permit any of its Subsidiaries or Permitted Joint Ventures to, make any
Investment other than a Permitted Investment (all such payments and other
actions set forth in clauses (i) and (ii) above being collectively referred to
as "Restricted Payments") unless, at the time of and after giving effect to
such Restricted Payment:
(x) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(y) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments (including, without limitation, all Restricted
Payments referred to in clauses (a), (b) and (c)(1) below but excluding
those made under clauses (c)(2) and (d) below) made by the Company and its
Subsidiaries after the date of the Indenture is less than the sum of: (1)
the excess of (A) Cumulative Pro Forma EBITDA over (B) 2.0 times Cumulative
Interest Expense plus (2) the aggregate net cash proceeds received by the
Company (other than from a Subsidiary or Joint Venture) (A) as capital
contributions to the Company, (B) from the issuance and sale of Equity
Interests, other than Disqualified Stock, and (C) from the issuance and
sale of Indebtedness that is convertible into Capital Stock (other than
Disqualified Stock), to the extent such Indebtedness is actually converted
into such Capital Stock (clauses (A), (B) and (C) collectively referred to
as "Equity Issuances"), other than any such net cash proceeds from Equity
Issuances that were used as set forth in clause (c) and (d) below; and
(z) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness other than Permitted
Indebtedness.
The foregoing provisions will not prohibit the following Restricted
Payments:
(a) the payment of any Required Capital Contribution;
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(b) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture;
(c) so long as no Default or Event of Default shall have occurred and be
continuing, Restricted Joint Venture Investments, which at the time any
such Restricted Joint Venture Investment was made, did not cause the
aggregate amount of all Restricted Joint Venture Investments then
outstanding under this clause (c) to exceed (1) $20.0 million plus (2) the
net cash proceeds from Equity Issuances not used as set forth in clause
(y) above and clause (d) below;
(d) so long as no Default or Event of Default shall have occurred and be
continuing, the making of any Investment in a Telecommunications Business
out of the net cash proceeds from Equity Issuances not used as set forth
in clauses (y) and (c)(2) above; or
(e) so long as no Default or Event of Default shall have occurred and be
continuing, the making of loans and advances to senior management in an
amount not to exceed $3.0 million.
For purposes of this covenant, in the event that a Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture, all of the then outstanding Investments made by such entity since the
date of the Indenture, shall be deemed to have been made as of the date that
such Restricted Joint Venture becomes a Permitted Joint Venture or otherwise
ceases to be a Restricted Joint Venture; provided that if a Restricted Joint
Venture ceases to be a Restricted Joint Venture as a result of (i) the loss of
its Local Partner or (ii) the loss of management control of such Restricted
Joint Venture, then the provisions of this paragraph shall not be applied to
such entity.
The amount of all Restricted Payments, other than cash, shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of such
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to such Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, directly or indirectly, whether in a single transaction or a
series of related transactions occurring within any twelve-month period, make
any Asset Sale, unless:
(i) the Company or the Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair
market value (as determined in good faith by the Board of Directors) for
the shares or assets sold or otherwise disposed of; and
(ii) at least 90% of such consideration consists of cash,
provided that
(A)an amount equal to the fair market value (as determined in good faith
by the Board of Directors) of:
(1) Telecommunications Related Assets received by the Company or any
Subsidiary from the transferee that will be used by the Company or
such Subsidiary in the operation of a Telecommunications Business;
(2) the Voting Stock of any Person engaged in a Telecommunications
Business received by the Company or any Subsidiary; provided that
on the date such Voting Stock is received, such Investment in
Voting Stock constitutes a Permitted Joint Venture Investment; or
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(3) the publicly tradeable Voting Stock of any person engaged in the
Telecommunications Business received by the Company or any
Subsidiary as consideration for a sale of an Equity Interest in
any Restricted Joint Venture, will, for the purposes of this
covenant, be deemed to be cash which was applied in accordance
with the first sentence of the penultimate paragraph of this
covenant; and
(B)in the case the event of a sale by (1) Hyperion Telecommunications of
Pennsylvania, Inc., (2) Hyperion Telecommunications of Tennessee, Inc. or
(3) Hyperion Telecommunications of New York, Inc. of its partnership
interest in its respective partnership to its respective partner in the
manner specified by the related partnership agreement (y) the principal
amount of any seller note issued to the Company or any of its Wholly Owned
Subsidiaries will be deemed to be cash for purposes of this covenant and
(z) the payments of principal pursuant to such seller note shall be deemed
to be Net Cash Proceeds (for purposes of the penultimate paragraph of this
covenant) as and when such payments are received.
For purposes of this covenant, the first $1.0 million of Net Cash Proceeds
received from Asset Sales in any fiscal year shall not be subject to the
restrictions contained in this covenant.
The Indenture provides that, in determining the fair market value with
respect to any Asset Sale or series of related Asset Sales involving aggregate
consideration in excess of $10.0 million, the Board of Directors of the
Company must obtain an opinion as to the fairness to the holders of the Senior
Notes of such Asset Sales from a financial point of view issued by a
nationally recognized investment banking firm with total assets in excess of
$1.0 billion; provided that no such opinion is required if such Asset Sale is
in accordance with the terms of any Local Partnership Agreement to which the
Company or any of its Subsidiaries is a party on the date of the Indenture.
The Indenture also provides that the Company may apply the Net Cash Proceeds
from such Asset Sale to an investment in Telecommunications Related Assets in
a Telecommunications Service Market within 180 days after any Asset Sale;
provided that if the Company determines to make such investment in a New
Telecommunications Service Market, the Company will (y) within 180 days of
such Asset Sale, deliver to the Trustee a resolution adopted by a majority of
the Board of Directors set forth in an Officer's Certificate certifying that
the Company intends to utilize the Net Cash Proceeds of such Asset Sale to
invest in a specific new Telecommunications Service Market and (z) complete
such investment within 360 days of such Asset Sale. The Company will be deemed
to have completed its investment for purposes of the preceding clause (z), so
long as the Company has (i) a business plan that sets forth the Company's
investment plans for the applicable Telecommunications Service Market and (ii)
issued all material purchase orders to the appropriate parties that are
necessary to complete such business plan. Any Net Cash Proceeds from an Asset
Sale that are not invested as provided in the preceding sentence shall
constitute Excess Proceeds. When the aggregate amount of Excess Proceeds
exceeds $2.5 million, the Company shall offer to purchase (an "Asset Sale
Offer") from all holders of the Senior Notes the maximum principal amount of
Senior Notes that may be purchased out of the Excess Proceeds, at an offer
price in cash equal to 100% of aggregate principal amount thereof, plus
accrued and unpaid interest to the date of repurchase (or, in the case of
repurchases of Senior Notes prior to April 15, 2001, at a purchase price equal
to 100% of the Accreted Value thereof as of the date of repurchase) in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate principal amount thereof, plus accrued and unpaid interest to
the date of repurchase (or, in the case of repurchases of Senior Notes prior
to April 15, 2001, the Accreted Value thereof as of the date of repurchase) of
the Senior Notes tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company may use such remaining Excess Proceeds for any
purpose not prohibited by the Indenture. If the aggregate principal amount
thereof, plus accrued and unpaid interest to the date of repurchase (or, in
the case of repurchases of Senior Notes prior to April 15, 2001, the Accreted
Value thereof as of the date of repurchase) of Senior Notes surrendered by
holders thereof exceeds the amount of Excess Proceeds, the Company shall
select the Senior Notes to be purchased on a pro rata basis. Upon completion
of such offer, the amount of Excess Proceeds shall be reset at zero. Pending
application of the Net Cash Proceeds as set forth above from Asset Sales, all
such Net Cash Proceeds will be placed in escrow for the
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benefit of the holders of the Senior Notes. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Senior Notes as a result
of an Asset Sale.
Notwithstanding the foregoing, the Company will not, and will not permit any
Subsidiary to, directly or indirectly, make any Asset Sale of any Equity
Interests of any Subsidiary (at least 80% of the voting power of the Capital
Stock of which is owned by the Company) except pursuant to an Asset Sale of
all of the Equity Interests of such Subsidiary; provided that any sale of any
Equity Interest of any such Subsidiary to a Strategic Investor shall be deemed
not to be an Asset Sale for purposes of this covenant, so long as such sale of
such Equity Interests does not result in such Subsidiary ceasing to be a
Subsidiary of the Company.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries or Joint Ventures to, directly or indirectly, create, incur,
issue, assume, guaranty or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including, without limitation, Acquired Indebtedness) and that
the Company will not issue any Disqualified Stock and will not permit any of
its Subsidiaries or Joint Ventures to issue any shares of Preferred Stock;
provided that the Company may incur Indebtedness (including Acquired
Indebtedness) or issue shares of Disqualified Stock if the Company's
Consolidated Leverage Ratio as of the last day of the Company's most recently
ended fiscal quarter for which internal financial statements are available
immediately preceding the date on which such Indebtedness is incurred, or such
Disqualified Stock is issued, as the case may be, would have been (a) greater
than zero and less than 5.5 to 1.0, if such incurrence or issuance is on or
prior to March 31, 1999, and (b) greater than zero and less than 5.0 to 1.0,
if such incurrence or issuance is after March 31, 1999, determined on a pro
forma basis (including pro forma application of the net proceeds therefrom) as
if such Indebtedness had been incurred, or such Disqualified Stock had been
issued, as the case may be, at the beginning of such fiscal quarter.
The foregoing provisions do not apply to:
(i) the incurrence of Indebtedness by the Company, any Subsidiary (other
than a General Partner Subsidiary) or any Permitted Joint Venture pursuant
to Credit Agreement(s), provided that the aggregate principal amount of
such Credit Agreement(s) at any one time outstanding under this clause (i)
does not exceed $50.0 million for the Company, all of its Subsidiaries
(other than a General Partner Subsidiary) and all of its Permitted Joint
Ventures combined;
(ii) the incurrence of Vendor Debt by the Company, any Subsidiary (other
than a General Partner Subsidiary) or any Permitted Joint Venture, provided
that the aggregate principal amount of such Vendor Debt does not exceed 80%
of the purchase price or cost of the construction, acquisition or
improvement of the applicable Telecommunications Related Assets;
(iii) Refinancing Indebtedness;
(iv) the incurrence of Indebtedness by the Company not to exceed, at any
one time outstanding, 2.0 times the net cash proceeds received by the
Company from the issuance and sale of its Capital Stock (other than
Disqualified Stock) to a Person other than a Subsidiary or a Joint Venture
of the Company, provided that such Indebtedness (y) does not mature prior
to the Stated Maturity of the Senior Notes and has a Weighted Average Life
to Maturity longer than the Senior Notes and (z) is subordinated to the
Senior Notes;
(v) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate principal amount (or accreted value, as applicable) at any time
outstanding not to exceed $10.0 million;
(vi) the incurrence by any Restricted Joint Venture of Non-Recourse Debt,
provided that if any Non-Recourse Debt of a Restricted Joint Venture ceases
to be Non-Recourse Debt, such event shall be deemed to constitute an
incurrence of Indebtedness as of the date such Indebtedness ceases to be
Non-Recourse Debt; and
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(vii) the guarantee of Indebtedness by a General Partner Subsidiary in
connection with the incurrence of Indebtedness by the Restricted Joint
Venture of which such General Partner Subsidiary is a general partner.
For purposes of this covenant, the Indenture provides that, in the event
that the Company proposes to incur Indebtedness pursuant to clause (iv) above,
the Company shall, simultaneously with the incurrence of such Indebtedness,
deliver to the Trustee a resolution of the Board of Directors set forth in an
Officers' Certificate stating that the sale or sales of Capital Stock forming
the basis for the incurrence of such Indebtedness (i) constitutes a long term
investment in the Company and (ii) has not been made for the purpose of
circumventing this covenant. The Indenture also provides that, in event that
the Company rescinds, reverses or unwinds such sale of Capital Stock or
otherwise returns or refunds all or any portion of the net cash proceeds of
such sale of Capital Stock (whether by dividend, distribution or otherwise)
within 270 days of the date of the incurrence of such Indebtedness, such
Indebtedness will be deemed to be incurred on the date of, and immediately
after giving effect to, such rescission, reversal, unwinding, return or
refund.
For purposes of this covenant, in the event that a Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture, all of the then outstanding Indebtedness of such entity shall be
deemed to have been incurred as of the date that such Restricted Joint Venture
becomes a Permitted Joint Venture or otherwise ceases to be a Restricted Joint
Venture.
In addition to the foregoing provisions, the Indenture permits the Company's
Subsidiaries (other than General Partner Subsidiaries) and Permitted Joint
Ventures to incur Indebtedness (including Acquired Debt) all of the net
proceeds of which are used by such Subsidiary or Permitted Joint Venture
directly in connection with the design, construction, development or
acquisition of a Telecommunications Service Market if, as of the last day of
the Company's most recently ended fiscal quarter for which internal financial
statements are available immediately preceding the date on which such
Indebtedness is incurred, either (a) the aggregate principal amount of all
Indebtedness of such Subsidiary or such Permitted Joint Venture does not
exceed 1.75 times the Invested Equity Capital of such Subsidiary or such
Permitted Joint Venture; or (b) the Consolidated Leverage Ratio of such
Subsidiary or such Permitted Joint Venture would not have been greater than
3.5 to 1.0, in each case determined on a pro forma basis (including pro forma
application of the net proceeds therefrom) as if such Indebtedness had been
incurred at the beginning of such fiscal quarter; provided that any
Indebtedness incurred by any Subsidiary of the Company or any Permitted Joint
Venture (other than Related Networks) pursuant to this paragraph shall be non-
recourse with respect to the Company or any other Subsidiary of the Company or
any other Joint Venture.
LIENS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries or Permitted Joint Ventures to, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens.
LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, enter into any Sale and Leaseback Transaction; provided
that the Company or any Subsidiary (other than a General Partner Subsidiary)
may enter into a Sale and Leaseback Transaction if (i) the Company or other
entity could have incurred the Indebtedness relating to such Sale and
Leaseback Transaction pursuant to the "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and "--Liens" covenants to incur secured
Indebtedness in an amount equal to the Attributable Debt with respect to such
transaction, (ii) the net proceeds of such Sale and Leaseback Transaction are
at least equal to the fair market value of such property as determined in good
faith by the Board of Directors of the Company and (iii) such proceeds are
applied in accordance with the "--Asset Sales" covenant.
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DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to:
(i)(a) pay dividends or make any other distributions to the Company or
any of its Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any indebtedness owed to the Company or any of its Subsidiaries,
(ii) make loans or advances to the Company or any of its Subsidiaries,
(iii) grant liens or grant security interests on its asset in favor of
the holders of the Senior Notes or guarantee the payment of the Senior
Notes; or
(iv) transfer any of its properties or assets to the Company or any of
its Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the date of the Indenture;
(b) any Credit Agreement creating or evidencing Indebtedness
permitted by the Indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof;
(c) the Indenture and the Senior Notes;
(d) applicable law;
(e) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with
past practices;
(f) purchase money obligations or Vendor Debt for property acquired
in the ordinary course of business that impose restrictions of the
nature described in clause (iv) above on the property so acquired;
(g) Indebtedness incurred pursuant to the last paragraph under the
"--Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant, provided that such encumbrance or restriction only relates to
the Subsidiary or Permitted Joint Venture incurring such Indebtedness;
and
(h) Refinancing Indebtedness, provided that such encumbrances or
restrictions are no more restrictive than those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of
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the Company under the Senior Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after
the transaction equal to or greater than the Consolidated Net Worth of the
Company immediately preceding the transaction and (B) will, at the time of
such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to the "--Incurrence of Indebtedness and
Issuance of Preferred Stock" covenant contained herein.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Subsidiary, other than those that would have
been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person; and
(ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution adopted by
a majority of the disinterested members of the Board of Directors and a
majority of the Independent Directors of the Company set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above; and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration
in excess of $10.0 million, an opinion as to the fairness to the holders of
the Senior Notes of such Affiliate Transaction from a financial point of
view issued by a nationally recognized consulting firm, business valuation
firm or investment banking firm;
provided that: (i) all agreements and arrangements with Affiliates, including
without limitation the Local Partner Agreements, the Fiber Lease Agreements,
the Management Agreements, network monitoring agreements and transactions in
connection therewith or pursuant thereto existing on the date of the Indenture
and through the current term thereof; (ii) all arrangements and transactions
with Adelphia, including existing intercompany Indebtedness, overhead charges
made in the ordinary course of business, fiber lease arrangements and similar
services existing on the date of the Indenture and through the current term
thereof; (iii) all employment arrangements approved by the Board of Directors;
(iv) all Restricted Payments made pursuant to the covenant entitled "--
Restricted Payments;" (v) transactions between or among the Company and/or its
Wholly Owned Subsidiaries; (vi) transactions between a General Partner
Subsidiary and the Restricted Joint Venture of which such General Partner
Subsidiary is a general partner; and (vii) management and network monitoring
agreements between the Company and any of its Joint Ventures, shall not be
deemed Affiliate Transactions.
LOANS TO SUBSIDIARIES AND JOINT VENTURES
The Indenture provides that all loans to Subsidiaries or Joint Ventures made
by the Company from time to time after the date of the Indenture will be
evidenced by Intercompany Notes in favor of the Company. The Indenture also
provides that all loans by the Company to any Subsidiary or Joint Venture
outstanding on the date of the Indenture will be evidenced by an unsecured
Intercompany Note. The Indenture prohibits loans by Subsidiaries to other
Subsidiaries and prohibits loans by Subsidiaries to Joint Ventures in which
such Subsidiary does not have an Equity Interest, except that such loans may
be (i) incurred and maintained between and among
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the Company, its Subsidiaries and Permitted Joint Ventures in connection with
the incurrence of Indebtedness pursuant to clause (i) of the covenant entitled
"--Incurrence of Indebtedness and Issuance of Preferred Stock" or (ii)
incurred and maintained between and among Related Networks in connection with
the incurrence of Indebtedness by such Related Networks pursuant to the
proviso in the last paragraph of the covenant entitled "--Incurrence of
Indebtedness and Issuance of Preferred Stock." A form of Intercompany Note is
attached as an annex to the Indenture.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, conduct its business in a fashion that would cause it to
be required to register as an "investment company" (as that term is defined in
the Investment Company Act of 1940, as amended) or otherwise become subject to
regulation under the Investment Company Act of 1940.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any holder of any Senior
Notes for or as inducement to any consent, waiver or amendment of any terms or
provisions or the Senior Notes unless such consideration is offered to be paid
or agreed to be paid to all holders of the Senior Notes which so consent,
waive or agree to amend in the time frame set forth in solicitation documents
relating to such consent, waiver or agreement.
INDEPENDENT DIRECTORS
The Company is required, no later than 360 days from the date of the
Indenture, to have at least two members of its Board of Directors who are
neither officers nor employees of the Company or its Affiliates (the
"Independent Directors"). Any transaction requiring the approval of the
majority of the Independent Directors shall be prohibited at any time that
there are not at least two Independent Directors on the Company's Board of
Directors. If Hyperion fails to comply with this covenant, Hyperion will pay
Liquidated Damages to each holder of Senior Notes (i) with respect to the
first 90-day period immediately following the occurrence of such default at a
rate of 0.5% per annum, determined daily, on the Accreted Value of the Senior
Notes (or after April 15, 2001, on the principal amount of the Senior Notes)
and (ii) at the beginning of each subsequent 90-day period at a rate increased
by an additional 0.25% per annum up to a maximum aggregate increase of 2.0%
per annum until such default has been cured.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Subsidiary to, engage in any
business other than the Telecommunications Business and such business
activities as are incidental or related thereto.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Senior Notes are outstanding, the Company is required to furnish
to the holders of Senior Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants; (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports;
and (iii) on a quarterly basis, certain financial information and operating
data with respect to each Subsidiary and Joint Venture engaged in a
Telecommunications Business, in the form specified by Schedule E of the
Indenture. In addition, whether or not required by the rules and
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regulations of the Commission, the Company is required to file a copy of all
such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any Senior
Notes remain outstanding, it will furnish to the holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest on the Senior
Notes;
(ii) default in payment when due of the principal of or premium, if any,
on the Senior Notes;
(iii) failure by the Company to comply with the provisions described
under the captions "--Change of Control," "--Asset Sales," "--Restricted
Payments," or "--Merger, Consolidation or Sale of Assets";
(iv) failure by the Company to comply with the provisions described under
the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock,"
provided that for purposes of the penultimate paragraph of such covenant,
in the event that the Company fails to comply with such covenant because
indebtedness is deemed to be incurred by a Restricted Joint Venture solely
as a result of such Restricted Joint Venture ceasing to be a Restricted
Joint Venture as a result of (i) the loss of a Local Partner or (ii) the
loss of management control of such Restricted Joint Venture, such failure
shall continue for 90 days;
(v) failure by the Company for 30 days after notice to comply with any of
its other agreements in the Indenture or the Senior Notes;
(vi) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries
(or the payment of which is guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(vii) failure by the Company or any of its Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are not
paid within, discharged by or stayed for a period of 60 days;
(viii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries or any of its Joint Ventures
that would, if it were a Subsidiary, constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Senior Notes may
declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together,
would constitute a Significant Subsidiary, all outstanding Senior Notes will
become due and payable without further action or notice. Holders of the Senior
Notes may not enforce the Indenture or the Senior Notes except as provided in
the Indenture. Subject to certain limitations, holders of a majority in
principal
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amount of the then outstanding Senior Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
Senior Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Senior Notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted
by law upon the acceleration of the Senior Notes. If an Event of Default
occurs prior to April 15, 2001 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding the prohibition on redemption of the Senior Notes prior to April 15,
2001, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the Senior Notes.
The holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the holders of all
of the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Senior Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Senior Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Senior Notes by
accepting a Senior Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Senior Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance") except for:
(i) the rights of holders of outstanding Senior Notes to receive payments
in respect of the principal of, premium, if any, and interest on such
Senior Notes when such payments are due from the trust referred to below;
(ii) the Company's obligations with respect to the Senior Notes
concerning issuing temporary Senior Notes, registration of Senior Notes,
mutilated, destroyed, lost or stolen Senior Notes and the maintenance of an
office or agency for payment and money for security payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with
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respect to the Senior Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, rehabilitation
and insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the holders of the Senior Notes, cash in U.S. dollars, non-
callable Government Securities, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Senior Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Company must
specify whether the Senior Notes are being defeased to maturity or to a
particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders of
the outstanding Senior Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance
had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the holders of the
outstanding Senior Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(vii) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of Senior Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent
provided for relating to the Legal Defeasance or the Covenant Defeasance
have been complied with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
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The Company is not required to transfer or exchange any Senior Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Senior Note for a period of 15 days before a selection of Senior Notes to be
redeemed.
The registered holder of a Senior Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the Indenture or
the Senior Notes may be amended or supplemented with the consent of the
holders of at least a majority in aggregate outstanding principal amount of
the Senior Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Senior
Notes), and any existing default or compliance with any provision of the
Indenture or the Senior Notes may be waived with the consent of the holders of
a majority in principal amount of the then outstanding Senior Notes (including
consents obtained in connection with a tender offer or exchange offer for
Senior Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting holder):
(i) reduce the principal amount of Senior Notes whose holders must
consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any Senior
Note or alter the provisions with respect to the redemption of the Senior
Notes (other than provisions relating to the covenants described above
under the caption "--Offer to Purchase Upon Change of Control" and "--Asset
Sales");
(iii) reduce the rate of or change the time for payment of interest on
any Senior Note;
(iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Senior Notes (except a rescission of
acceleration of the Senior Notes by the holders of at least a majority in
aggregate principal amount of the Senior Notes and a waiver of the payment
default that resulted from such acceleration);
(v) make any Senior Note payable in money other than that stated in the
Senior Notes;
(vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Senior Notes to
receive payments of principal of or premium, if any, or interest on the
Senior Notes;
(vii) waive a redemption payment with respect to any Senior Note (other
than a payment required by the covenants described above under the captions
"Offer to Purchase upon Change of Control" or "Certain Covenants--Asset
Sales"); and
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Senior
Notes, the Company and the Trustee may amend or supplement the Indenture or
the Senior Notes to cure any ambiguity, defect or inconsistency, to provide
for uncertificated Senior Notes in addition to or in place of certificated
Senior Notes, to provide for the assumption of the Company's obligations to
holders of Senior Notes in the case of a merger or consolidation, to make any
change that would provide any additional rights or benefits to the holders of
Senior Notes or that does not adversely affect the legal rights under the
Indenture of any such holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign. The Trustee also serves as Registrar and
Paying Agent and Trustee under certain indentures governing debt securities of
Adelphia.
The holders of a majority in principal amount of the then outstanding Senior
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Senior Notes, unless such holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers entered into the Registration Rights
Agreement pursuant to which the Company agreed to file the Exchange Offer
Registration Statement with the Commission. If (i) the Company is not required
to file the Exchange Offer Registration Statement or permitted to consummate
the Exchange Offer because the Exchange Offer is not permitted by applicable
law or Commission policy or (ii) any holder of Transfer Restricted Securities
notifies the Company within the specified time period that (A) it is
prohibited by law or Commission policy from participating in the Exchange
Offer or (B) that it may not resell the New Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer
and owns Senior Notes acquired directly from the Company or an affiliate of
the Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Senior Notes by the holders thereof who
satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its
best efforts to cause the applicable registration statement to be declared
effective as promptly as possible by the Commission. For purposes of the
foregoing, "Transfer Restricted Securities" means each Old Note until (i) the
date on which such Old Note has been exchanged by a person other than a
broker-dealer for a New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for a New
Note, the date on which such New Note is sold to a purchaser who receives from
such broker-dealer on or prior to the date of such sale a copy of the
prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Old Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Senior Note is distributed to the
public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will use its
best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to October 12, 1996, (ii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to
issue, on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission, New
Notes in exchange for all Old Notes tendered prior thereto in the Exchange
Offer and (iii) if obligated to file the Shelf Registration Statement, the
Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
(and in any event by October 12, 1996) and to cause the Shelf Registration to
be declared effective by the Commission on or prior to 30 days after such
obligation arises. If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the Commission on or prior to the date specified for
such effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
Consummate the Exchange Offer within 30 business days of the
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Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (d) above a "Registration
Default"), then the Company must pay Liquidated Damages to each holder of
Transfer Restricted Securities, with respect to the first 90-day period
immediately following the occurrence of such Registration Default, at a rate
of 0.5% per annum, determined daily, on the Accreted Value of the Senior Notes
(or after April 15, 2001, on the principal amount of the Senior Notes) as of
the immediately preceding interest payment date. Such interest rate will
increase by an additional 0.25% per annum at the beginning of each subsequent
90-day period up to a maximum aggregate increase of 2.0% per annum until all
Registration Defaults have been cured, at which time the accrual rate borne by
the Senior Notes will be reduced to the original accrual rate. All accrued
Liquidated Damages will be paid by the Company on each Damages Payment Date to
the Global Senior Note holder by wire transfer of immediately available funds
or by federal funds check and to holders of Certificated Securities by mailing
checks to their registered addresses.
Holders of Old Notes are required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and are required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions set forth
above.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Hyperion
Telecommunications, Inc., 5 West Third Street, Coudersport, Pennsylvania
16915; Attention: Controller.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination prior to April 15,
2001, with respect to any Senior Note, the sum of (a) the initial offering
price (which shall be calculated by discounting the aggregate principal amount
at maturity of such Senior Note at a rate of 13% per annum, compounded semi-
annually on each April 15 and October 15 from April 15, 2001 to the date of
issuance) of such Senior Note and (b) the portion of the excess of the
principal amount of such Senior Note over such initial offering price which
shall have been accreted thereon through such date, such amount to be so
accreted on a daily basis at the rate of 13% per annum of the initial offering
price of such Senior Note, compounded semi-annually on each April 15 and
October 15 from the date of issuance of the Senior Notes through the date of
determination, computed on the basis of a 360-day year of twelve 30-day
months.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise. For
purposes of the Indenture, beneficial ownership of 10% or more
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of the Voting Stock of a Person shall be deemed to be control; provided, that
no Local Partner will be deemed an affiliate of a Subsidiary or a Joint
Venture solely as a result of such Local Partner's ownership of more than 10%
of the Voting Stock of such Subsidiary or Joint Venture.
"Annualized Pro Forma EBITDA" means with respect to any Person, such
Person's Pro Forma EBITDA for the latest fiscal quarter for which internal
financial statements are then available multiplied by four.
"Asset Sale" means
(i) the sale, lease, conveyance, disposition or other transfer of any
assets (including, without limitation, by way of a Sale and Leaseback
Transaction) other than (a) sales of inventory in the ordinary course of
business consistent with past practices and (b) issuances and sales by the
Company of its Equity Interests (provided that the sale, lease, conveyance,
disposition or other transfer of all or substantially all of the assets of
the Company and its Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "--Change of
Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant), and
(ii) the issuance or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Subsidiaries or Joint Ventures, in
the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess
of $1.0 million or (b) for net proceeds in excess of $1.0 million.
Notwithstanding the foregoing: (x) a transfer of assets by the Company to a
Wholly Owned Subsidiary or by a Subsidiary to the Company or to another Wholly
Owned Subsidiary, (y) an issuance of Equity Interests by a Subsidiary to the
Company or to a Wholly Owned Subsidiary and (z) a Restricted Payment that is
permitted by the covenant described above under the caption "--Restricted
Payments" will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any U.S. commercial bank having
capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and
(iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above and (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. or Standard
& Poor's Corporation and in each case maturing within six months after the
date of acquisition.
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"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person for such period determined on a
consolidated basis in accordance with GAAP: (a) the amount of interest in
respect of Indebtedness (including amortization of original issue discount,
amortization of debt issuance costs, and non-cash interest payments on any
Indebtedness and the interest portion of any deferred payment obligation) and
(b) the interest component of rentals in respect of any Capital Lease
Obligation paid, in each case whether accrued or scheduled to be paid or
accrued by such Person during such period to the extent such amounts were
deducted in computing Consolidated Net Income, determined on a consolidated
basis in accordance with GAAP. For purposes of this definition, interest on a
Capital Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by such Person to be the rate of interest implicit in
such Capital Lease Obligation in accordance with GAAP consistently applied.
"Consolidated Leverage Ratio" means, for any Person, as of any date, the
ratio of (i) the sum of the aggregate outstanding amount of all Indebtedness
of a Person and its Subsidiaries (other than any Indebtedness of a General
Partner Subsidiary to the extent that such Indebtedness has been incurred in
connection with such General Partner Subsidiary's partnership interest in the
Restricted Joint Venture of which such General Partner Subsidiary is a general
partner) determined on a consolidated basis in accordance with GAAP to (ii)
Annualized Pro Forma EBITDA.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions actually paid
in cash to the referent Person or a Wholly Owned Subsidiary thereof, (ii) the
Net Income of any Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of the
foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Agreement" means, with respect to any Person, any agreement entered
into by and among such Person and one or more commercial banks or financial
institutions, providing for senior term or revolving credit borrowings of a
type similar to credit agreements typically entered into by commercial banks
and financial
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institutions, including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
agreement and related agreements may be amended, extended, refinanced,
renewed, restated, replaced or refunded from time to time.
"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense of the Company paid or accrued by the Company from and after
the first day of the first fiscal quarter beginning after the date of the
Indenture to the end of the fiscal quarter immediately preceding a proposed
Restricted Payment, determined on a consolidated basis in accordance with
GAAP.
"Cumulative Pro Forma EBITDA" means the cumulative EBITDA of the Company
from and after the first day of the first fiscal quarter beginning after the
date of the Indenture to the end of the fiscal quarter immediately preceding
the date of a proposed Restricted Payment, or, if such cumulative EBITDA for
such period is negative, minus the amount by which such cumulative EBITDA is
less than zero.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the Senior Notes mature.
"EBITDA" means, for any Person, for any period, an amount equal to (A) the
sum of (i) Consolidated Net Income for such period plus (ii) the provision for
taxes for such period based on income or profits to the extent such income or
profits were included in computing Consolidated Net Income and any provision
for taxes utilized in computing net loss under clause (i) hereof plus (iii)
Consolidated Interest Expense for such period, plus (iv) depreciation for such
period on a consolidated basis plus (v) amortization of intangibles for such
period on a consolidated basis, plus (vi) any other non-cash items reducing
Consolidated Net Income for such period minus (B) all non-cash items
increasing Consolidated Net Income for such period, all for such Person and
its Subsidiaries determined in accordance with GAAP consistently applied.
"Enhanced Services Provider" means (i) !NTERPRISE, a wholly owned subsidiary
of US West, (ii) any nationally recognized Person which provides enhanced
telecommunications services, including but not limited to frame relay,
Asynchronous Transfer Mode data transport, business video conferencing,
private line data interconnect service and LAN connection and monitoring
services, or (iii) any Person that has at least 500 existing enhanced data
services installations in the United States.
"Enhanced Services Venture" means any entity in which any Qualified
Subsidiary or Permitted Joint Venture owns at least 50% of the Equity
Interest, provided that the remainder of the Equity Interest is owned by an
Enhanced Services Provider.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means the Senior Notes and any other Indebtedness of
the Company and its Subsidiaries in existence on the date of the Indenture.
"Existing Networks" means the telecommunications networks operated by all
Joint Ventures, the Company and its Subsidiaries, including all networks under
construction, on the date of the Indenture.
"Fiber Lease Agreements" means the agreements relating to fiber leases as
set forth on Schedule A to the Indenture.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and
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pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the date of the
Indenture.
"General Partner Subsidiary" means a direct or indirect Wholly Owned
Subsidiary of the Company that (i) is a general partner or stockholder of a
Restricted Joint Venture and (ii) (a) is not engaged in any trade or business
other than the holding, voting, disposing of or taking any action with respect
to its Equity Interest in such Restricted Joint Venture, (b) has no material
assets other than its Equity Interest in such Restricted Joint Venture, (c)
has no material liabilities other than liabilities arising (A) as a result of
the guarantee by such General Partner Subsidiary's guarantee of Indebtedness
incurred by the Restricted Joint Venture of which such General Partner
Subsidiary is a general partner or (B) by operation of law; provided that, for
purposes of this definition, Hyperion Telecommunications of Virginia, Inc. and
Hyperion Telecommunications of New York, Inc. shall be deemed to be General
Partner Subsidiaries for all purposes in the Indenture so long as Hyperion
Telecommunications of Virginia, Inc. and Hyperion Telecommunications of New
York, Inc. do not engage in any operations or business that is materially
different from the operations or business engaged in by such companies on the
date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, (a) any liability of any
Person, whether or not contingent (i) for borrowed money, or under any
reimbursement obligation relating to a letter of credit, bankers' acceptance
or note purchase facility; or (ii) evidenced by a bond, note, debenture or
similar instrument (including a purchase money obligation); or (iii) for the
payment of money relating to a lease that is required to be classified as a
Capitalized Lease Obligation in accordance with GAAP; or (iv) for Disqualified
Stock; or (v) for preferred stock of any Subsidiary (other than preferred
stock held by the Company or any of its Subsidiaries); (b) any liability of
others described in the preceding clause (a) that the Person has guaranteed,
that is recourse to such Person or that is otherwise its legal liability; and
(c) any amendment, supplement, modification, deferral, renewal, extension or
refunding of any liability of the types referred to in clauses (a) and (b)
above.
"Initial Public Offering" means an initial underwritten public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act of 1933, as amended.
"Intercompany Notes" means the intercompany notes issued by Subsidiaries and
Joint Ventures of the Company in favor of the Company or its Subsidiaries to
evidence loans by the Company to such Subsidiary or Joint Venture, in each
case, in the form attached as Annex A to the Indenture.
"Invested Equity Capital" means, with respect to any Company's Subsidiaries
or Joint Ventures as of any date, the sum of (i) the total dollar amount
contributed in cash plus the value of all property contributed (valued at the
lower of fair market value of such property at the time of contribution,
determined in good faith by the Company's Board of Directors, or the book
value of such property at the time of contribution on the books of the Person
making such contribution) to such Subsidiary or Joint Venture, as the case may
be, since the date of its formation in the form of common equity plus, without
duplication, (ii) the total dollar amount contributed in cash plus the value
of all property contributed (valued at the lower of fair market value of such
property at the time of contribution, determined in good faith by the
Company's Board of Directors, or the book value of such property at the time
of contribution on the books of the Person making such contribution) to such
Subsidiary or Joint Venture, as the case may be, since the date of its
formation by Local Partners (and their Affiliates) in consideration of the
issuance of preferred equity on a basis that is substantially proportionate to
their common equity interests plus, without duplication, (iii) the total
dollar amount contributed in cash plus the value of all property contributed
(valued at the lower of fair market value of such property at the time of
contribution, determined in good faith by the Company's Board of Directors, or
the book value of such property at the time of contribution on the books of
the Person making such contribution) to such Subsidiary or Joint Venture since
the date of its formation by the Company in consideration of the issuance of
preferred equity less (iv) the fair market
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value of all dividends and other distributions (in respect of any Equity
Interest and in whatever form and however designated) made by such Subsidiary
or Joint Venture, as the case may be, since the date of its formation to the
holders of its common equity (and their Affiliates) provided that in no event
shall the aggregate amount of such dividends and other distributions made by
such Subsidiary or Joint Venture, as the case may be, to any such Person (or
its Affiliates) reduce the Invested Equity Capital of such Subsidiary or Joint
Venture, as the case may be, by more than the total contributions (per clauses
(i) through (iii) above) to such Subsidiary or Joint Venture, as the case may
be, by such Person (and its Affiliates).
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), capital contributions,
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities
by the Company for consideration consisting solely of common equity securities
of the Company shall not be deemed to be an Investment. If the Company or any
Subsidiary of the Company sells or otherwise disposes of any Equity Interests
of any direct or indirect Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary
of the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Subsidiary not sold or disposed of.
"Joint Venture" means a corporation, partnership or other entity engaged in
one or more Telecommunications Businesses (i) in which the Company or its
Subsidiaries owns, directly or indirectly, an Equity Interest with the balance
of the Equity Interest thereof being held by one or more Local Partners and
(ii) that is managed and operated by the Company or any of its Subsidiaries.
"Joint Venture Investment" means Investments in Joint Ventures.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Local Partner" means, with respect to any Joint Venture, (i) the Joint
Venture partners set forth on Schedule B to the Indenture, and (ii) any other
Person, provided that such other Person (a) is a major cable company or
utility that has a substantial presence within the specific market of such
Joint Venture, which presence shall be evidenced, (1) in the case of a cable
company, by such company having a market share consisting of at least 50% of
the total number of cable subscribers in such market and (2) in the case of a
utility company, by such company having at least 75% of the total customer
base of such market or (b) is a Wholly Owned Subsidiary of a major cable
company or utility that (1) meets the criteria set forth in the immediately
preceding clause (a) or (2) has all of its initial capital contributions under
the agreement governing the Joint Venture fully and unconditionally
guaranteed, until such time as all such contributions have been made, by one
or more Persons who meet the criteria set forth in the immediately preceding
clause (a).
"Local Partner Agreements" means the joint venture agreements with Local
Partners, as set forth on Schedule C to the Indenture.
"Management Agreements" means the agreements governing the management of the
networks, as set forth on Schedule D to the Indenture.
"Net Cash Proceeds" means the aggregate cash proceeds received by the
Company or any of its Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale and principal payments
on indebtedness
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received in any Asset Sale, as and when received), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof (after taking into account any available tax credits or deductions and
any tax sharing arrangements) and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to Sale and Leaseback Transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries
and (ii) any extraordinary or nonrecurring gain or loss, together with any
related provision for taxes on such extraordinary or nonrecurring gain or
loss.
"New Telecommunications Service Market" means a Telecommunications Service
Market in an area that is not within ten miles of any of the Company's
Existing Networks.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Subsidiaries nor any of its Permitted Joint Ventures (a)
provides credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or indirectly
liable (as a guarantor, co-obligor or otherwise) or (c) constitutes the
lender; (ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against a Restricted Joint
Venture) would permit (upon notice, lapse of time, the occurrence, or failure
to occur, of any other condition or event or any combination thereof) any
holder of any other Indebtedness of the Company, any of its Subsidiaries or
any of its Permitted Joint Ventures to declare a default on such other
Indebtedness or cause or permit the payment thereof to be accelerated prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company, any of its Subsidiaries or any of its Permitted Joint Ventures;
provided that the recourse (if any) of a holder of such Indebtedness to the
General Partner Subsidiary of a Restricted Joint Venture in which such General
Partner Subsidiary is a general partner as a result of being a general partner
of such Restricted Joint Venture will not be considered credit support or
direct or indirect liability of such General Partner Subsidiary for purposes
of clauses (i)(a), (ii)(b) and (iii) above.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means
(a) any Investment in a Wholly Owned Subsidiary of the Company that is
engaged, either directly or indirectly through a Qualified Subsidiary or
Joint Venture, in the Telecommunications Business;
(b) any Investment in a Qualified Subsidiary of the Company that is
directly engaged in the Telecommunications Business;
(c) any Investment in Cash Equivalents;
(d) any Investment in a Person that is not a Subsidiary of the Company,
if as a result of such Investment (i)(A) such Person becomes a Qualified
Subsidiary or Wholly Owned Subsidiary of the Company or (B) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Qualified Subsidiary and (ii)(A) such Wholly Owned Subsidiary, either
directly or indirectly through a Qualified Subsidiary or a Joint Venture,
is engaged in the Telecommunications Business or (B) such Qualified
Subsidiary is directly engaged in the Telecommunications Business;
(e) any Permitted Joint Venture Investment;
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(f) any Investment made as a result of the receipt of non-cash
consideration (whether or not such non-cash consideration is deemed to be
cash for the purposes of such covenant) from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Certain Covenants--Asset Sales"; or
(g) any Investment in an Enhanced Services Venture.
"Permitted Joint Venture" means any Joint Venture in which the Company has,
directly or indirectly, a 45% or greater Equity Interest.
"Permitted Joint Venture Investment" means any Joint Venture Investment by
the Company or a Wholly Owned Subsidiary of the Company if, after such Joint
Venture Investment, the Company has, directly or indirectly, a 45% or greater
Equity Interest in such Joint Venture.
"Permitted Liens" means
(i) Liens on the property of the Company, any Subsidiary or any Permitted
Joint Venture securing Obligations under Indebtedness that may be incurred
pursuant to clause (i) of the covenant entitled "--Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(ii) Liens in favor of the Company;
(iii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company, any Subsidiary or any
Permitted Joint Venture; provided that such Liens were in existence prior
to the contemplation of such merger or consolidation and do not extend to
any assets other than those of the Person merged into or consolidated with
the Company;
(iv) Liens on property existing at the time of acquisition thereof by the
Company, any Subsidiary or any Permitted Joint Venture, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(v) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(vi) Liens existing on the date of the Indenture;
(vii) Liens on property of Subsidiaries and Permitted Joint Ventures
securing Obligations under Indebtedness incurred pursuant to the proviso in
the last paragraph of the covenant entitled "--Incurrence of Indebtedness
and Issuance of Preferred Stock," but only to the extent that (a) in the
case of Subsidiaries and Permitted Joint Ventures that are incurring
Indebtedness other than Related Network Debt, such Liens secure only such
Indebtedness incurred by such Subsidiary or such Joint Venture; and (b) in
the case of Subsidiaries and Joint Ventures that are incurring Related
Network Debt, such Liens secure only such Related Network Debt;
(viii) Liens securing Obligations under the Senior Notes and the
Indenture;
(ix) Liens securing Obligations under Vendor Debt pursuant to clause (ii)
of the covenant entitled "--Incurrence of Indebtedness and Issuance of
Preferred Stock," provided that the principal amount of such Vendor Debt
secured by such Lien does not exceed 100% of the purchase price or cost of
acquisition, construction or improvement of the Telecommunications Related
Assets subject to such Liens;
(x) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
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(xi) Liens incurred in the ordinary course of business of the Company,
any Subsidiary or any Permitted Joint Venture with respect to obligations
that do not exceed $5.0 million at any one time outstanding and that (a)
are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company, such Subsidiary or such Permitted Joint Venture;
and
(xii) Liens securing Refinancing Indebtedness, but only if, and to the
extent, that such Liens that are incurred in connection with such
Refinancing Indebtedness do not encumber any assets or properties (or
interests therein) other than those assets or properties (or interests
therein) subject to Liens pursuant to the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Preferred Stock" for any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Principals" means John J. Rigas and members of his immediate family, any of
their respective spouses, estates, lineal descendants, heirs, executors,
personal representatives, administrators, trusts for any of their benefit and
charitable foundations to which shares of the Company's Capital Stock
beneficially owned by any of the foregoing have been transferred.
"Pro Forma EBITDA" means, for any Person, for any period, the EBITDA of such
Person as determined on a consolidated basis in accordance with GAAP
consistently applied, after giving effect to the following: (i) if, during or
after such period, such Person or any of its Subsidiaries shall have made any
Asset Sale, Pro Forma EBITDA for such Person and its Subsidiaries for such
period shall be reduced by an amount equal to the Pro Forma EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Sale for the period or increased by an amount equal to the Pro Forma
EBITDA (if negative) directly attributable thereto for such period and (ii)
if, during or after such period, such Person or any of its Subsidiaries
completes an acquisition of any Person or business which immediately after
such acquisition is a Subsidiary of such Person or a Subsidiary of such
Person, Pro Forma EBITDA shall be computed so as to give pro forma effect to
such Asset Sale or the acquisition of such Person or business, as the case
maybe.
"Qualified Subsidiary" means any Subsidiary of the Company in which a Local
Partner or Local Partners own at least 5% but less than 50% of the Equity
Interests of such Subsidiary; provided that such Subsidiary remains a
Subsidiary of the Company at all times for purposes of the Indenture.
"Refinancing Indebtedness" means any Indebtedness of the Company, any of its
Subsidiaries or any of its Permitted Joint Ventures issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness of the Company, any of its Subsidiaries
or any of its Permitted Joint Ventures; provided that: (i) the principal
amount (or accreted value, if applicable) of such Refinancing Indebtedness
does not exceed the principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Senior Notes, such
Refinancing Indebtedness has a final maturity date later than the final
maturity date of the Senior Notes, and is subordinated in right of payment to
the Senior Notes
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on terms at least as favorable to the holders of Senior Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iv) to the extent that
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded was secured by Liens, any Liens being incurred in connection with
such Refinancing Indebtedness do not encumber any assets or properties (or
interests therein) other than those assets or properties (or interests
therein) subject to Liens pursuant to the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (v) such Indebtedness is incurred either by the Company, the
Subsidiary or the Permitted Joint Venture who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Related Network Debt" means any Credit Agreement entered into by and among
the Qualified Subsidiaries and/or Permitted Joint Ventures that comprise a
Related Network.
"Related Networks" means any group of Qualified Subsidiaries or Permitted
Joint Ventures in which the same Local Partner owns, or the same group of
Local Partners own, all the Equity Interests of each such Qualified Subsidiary
or Permitted Joint Venture that comprise such Related Network that are not
owned by the Company.
"Required Capital Contribution" means any capital contribution made by
Hyperion Telecommunications, Inc. of Florida, pursuant to that certain
partnership agreement, relating to TCG South Florida, dated November 1, 1993.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Joint Venture" means any Joint Venture that is not a Permitted
Joint Venture, but only if such Joint Venture: (a) has no Indebtedness other
than Non-Recourse Debt; (b) is not a party to any agreement, contract,
arrangement or understanding with the Company, any of its Subsidiaries or any
of its Permitted Joint Ventures unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company,
such Subsidiary or such Permitted Joint Venture than those that might be
obtained at the time from Persons who are not Affiliates of the Company; and
(c) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company, any of its Subsidiaries or any of
its Permitted Joint Ventures. If, at any time, a Restricted Joint Venture
fails to meet the requirements of a Restricted Joint Venture by becoming a
Permitted Joint Venture or otherwise, it shall thereafter cease to be a
Restricted Joint Venture for purposes of the Indenture and (i) all of the then
outstanding Indebtedness of such entity shall be deemed to be incurred as of
the date on which such entity becomes a Permitted Joint Venture or otherwise
ceases to be a Restricted Joint Venture for purposes of the covenant entitled
"--Incurrence of Indebtedness and Issuance of Preferred Stock" (and if such
Indebtedness is not permitted to be incurred as of such date under such
covenant, the Company shall be in default of such covenant) and (ii) all of
the then outstanding Investments made by such entity since the date of the
Indenture, shall be deemed to have been made as of the date that such
Restricted Joint Venture becomes a Permitted Joint Venture or otherwise ceases
to be a Restricted Joint Venture for purposes of the covenant entitled "--
Restricted Payments" (and if such Investments are not permitted to be made as
of such date under such covenant, the Company shall be in default of such
covenant).
"Restricted Joint Venture Investment" means any Joint Venture Investment by
a General Partner Subsidiary if, after such Joint Venture Investment, such
Joint Venture is a Restricted Joint Venture.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 365 days
after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any Person
to whom funds have been or are to be advanced by lender or investor on the
security of such property or asset. The stated maturity of such arrangement
shall be the date of the last payment of rent or any other amount due under
such arrangement prior to the first date on which such arrangement may be
terminated by the lessee without payment of a penalty.
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"Significant Subsidiary" means, any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable.
"Strategic Investor" means a corporation, partnership or other entity
engaged in one or more Telecommunications Businesses that has, or 80% or more
of the voting power of the Capital Stock of which is owned by a Person that
has, an equity market capitalization, at the time (i) of its initial
Investment in the Company or (ii) it purchases an Equity Interest in a
Subsidiary or Joint Venture of the Company, as the case may be, in excess of
$2.0 billion.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership of which more than 50% of the partnership's capital accounts,
distribution rights or general or limited partnership interests are owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) creating, developing or
marketing communications related network equipment, software and other devices
for use in a telecommunications business or (iii) evaluating, participating or
pursuing any other activity or opportunity that is primarily related to those
identified in (i) or (ii) above; provided that the determination of what
constitutes a Telecommunications Business shall be made in good faith by the
Board of Directors of the Company.
"Telecommunications Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended
for use in connection with a Telecommunications Business.
"Telecommunications Service Market" means a network built by the Company to
service a market.
"Vendor Debt" means any purchase money Indebtedness of the Company or any
Subsidiary incurred in connection with the acquisition of Telecommunications
Related Assets and which purchase money Indebtedness was extended by the
vendor of such Telecommunications Related Assets or an affiliate thereof.
"Voting Stock" of any person means Capital Stock of such person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such person, whether at all times or only so
long as no senior class of securities has voting power by reason of any
contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or a
combination thereof.
90
<PAGE>
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes will initially be
issued in the form of one or more registered notes in global form (the "New
Global Note," and together with the global notes representing the Old Notes,
the "Global Note"). The New Global Note will be deposited on the Exchange Date
with, or on behalf of, the Depositary and registered in the name of the Global
Note Holder.
New Notes that were issued as described below under "Certificated
Securities" will be issued in the form of registered definitive certificates
(the "Series B Certificated Securities"). Upon the transfer to a qualified
institutional buyer of Certificated Securities initially issued to a purchaser
of the Units who does not hold its interest in the Units, the Senior Notes and
the Warrants (a "Non-Global Purchaser"), such Certificated Securities may,
unless the Global Note has previously been exchanged for Certificated
Securities, be exchanged for an interest in the Global Note representing the
amount of the Senior Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers, banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively,
the "Indirect Participants" or the "Depositary's Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Persons who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through the
Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary ownership of the Senior Notes evidenced by the Global Note will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Holders are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Senior Notes
evidenced by the Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Senior
Notes, the Global Note Holder will be considered the sole Holder under the
Indenture of any Senior Notes evidenced by the Global Note. Beneficial owners
of Senior Notes evidenced by the Global Note will not be considered the owners
or Holders thereof under the Indenture for any purpose, including with respect
to the giving of any directions, instructions or approvals to the Trustee
thereunder. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records of the Depositary or for
maintaining, supervising or reviewing any records of the Depositary relating
to the Senior Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidation Damages, if any, on any Senior Notes registered in the name of the
Global Note Holder on the applicable record date will be payable by the
Trustee to or at the direction of the Global Note Holder in its capacity as
the registered Holder under the Indenture. Under the terms of the Indenture,
the Company and the Trustee may treat the Persons in whose names Senior Notes,
including the Global Note, are registered as the owners thereof for the
purpose of receiving such payments. Consequently, neither the Company nor the
Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of Senior Notes (including principal,
premium, if any, interest and Liquidation Damages, if any). The Company
believes, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records
91
<PAGE>
of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Senior Notes
will be governed by standing instructions and customary practice and will be
the responsibility of the Depositary's Participants or the Depositary's
Indirect Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Senior Notes in the form of Certificated Securities. Upon any
such issuance, the Trustee is required to register such Certificated
Securities in the name of, and cause the same to be delivered to, such Person
or Persons (or the nominee of any thereof). If (i) the Company notifies the
Trustee in writing that the Depositary is no longer willing or able to act as
a depositary and the Company is unable to locate a qualified successor within
90 days or (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of Senior Notes in the form of
Certificated Securities under the Indenture, then, upon surrender by the
Global Note Holder of its Global Note, Senior Notes in such form will be
issued to each Person that the Global Note Holder and the Depositary identify
as being the beneficial owner of the related Senior Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Senior Notes, and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Note Holder or
the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Senior Notes
represented by the Global Senior Note (including principal, premium, if any,
interest and Liquidated Damages, if any) be made in immediately available
funds. With respect to Certificated Securities, however, the Company will make
all payments of principal, premium, if any, interest and Liquidated Damages,
if any, by mailing a check to each Holder's registered address. Secondary
trading in long-term notes and debentures of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the Senior Notes
represented by the Global Note are expected to be eligible to trade in the
PORTAL Market and to trade in the Depositary's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such Senior
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in the
Certificated Securities will also be settled in immediately available funds.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, in the opinion of Buchanan Ingersoll Professional
Corporation, counsel to the Company, sets forth the material federal income
tax consequences relevant to the exchange of the Old Notes for the New Notes,
but does not purport to be a complete analysis of all potential tax effects.
The following is based upon the Code, Treasury Regulations, Internal Revenue
Service ("IRS") rulings and pronouncements and judicial decisions now in
effect, all of which are subject to change at any time by legislative,
judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the New
Notes. The following discussion assumes that holders hold the Old Notes and
the New Notes as capital assets within the meaning of Section 1221 of the
Code. The Company has not sought and will not seek any rulings from the IRS
with respect to the positions of the Company discussed below.
The tax treatment of a holder may vary depending on his or its particular
situation or status. This summary does not address the tax consequences to
taxpayers who are subject to special rules such as insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign entities
and individuals, persons holding
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<PAGE>
Old Notes or New Notes as a part of a hedging or conversion transaction or a
straddle and holders whose "functional currency" is not the U.S. dollar, or
aspects of federal income taxation that may be relevant to a prospective
investor based upon such investor's particular tax situation. In addition, the
description does not consider the effect of any applicable foreign, state,
local or other tax laws.
EACH HOLDER SHOULD CONSULT HIS OR ITS OWN TAX ADVISER AS TO THE PARTICULAR
TAX CONSEQUENCES TO HIM OR IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE
The exchange of the New Notes for Old Notes should not constitute a
recognition event for federal income tax purposes. Consequently, no gain or
loss should be recognized by holders upon receipt of the New Notes. For
purposes of determining gain or loss upon the subsequent exchange of New
Notes, a holder's basis in the New Notes will be the same as a holder's basis
in the Old Notes exchanged therefor. Holders should be considered to have held
the New Notes from the time of their original acquisition of the Old Notes. As
used herein, the term "Senior Note" refers to both an Old Note and a New Note
received in exchange therefor.
THE SENIOR NOTES
Original Issue Discount. The Senior Notes will be issued with original issue
discount ("OID") for federal income tax purposes. Accordingly, a holder
generally will be required to recognize taxable income with respect to the
Senior Notes as the OID accrues, regardless of the holder's method of income
tax accounting.
The amount of OID on a Senior Note will be equal to the excess of the
"stated redemption price at maturity" of the Senior Note over the issue price
of the Senior Note. The stated redemption price at maturity of each Senior
Note will be the sum of all payments, including principal and interest,
required to be made thereunder until maturity. The issue price of a Senior
Note will be equal to that portion of the issue price of the Unit allocable to
the Senior Note. Accordingly, the Senior Notes will be issued with a
substantial amount of OID.
Taxation of Original Issue Discount. A holder of a Senior Note is required
to include in gross income an amount equal to the sum of the "daily portions"
of the OID for the Senior Note for all days during the taxable year in which
such holder holds the Senior Note ("accrued OID") without regard to when the
cash to which such income is attributable is received. The daily portion of
OID is determined by allocating to each day in any "accrual period" a pro rata
portion of OID allocable to that accrual period. The amount of OID allocable
to any full accrual period is an amount equal to the product of the Senior
Note's adjusted issue price at the beginning of such accrual period and its
yield to maturity (determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual period).
OID allocable to the final accrual period is the difference between the amount
payable at maturity and the adjusted issue price at the beginning of the final
accrual period. Special rules apply for calculating OID for an initial short
accrual period. The "adjusted issue price" of a Senior Note at the beginning
of any accrual period is equal to its issue price increased by the accrued OID
for each prior accrual period and reduced by the amount of any payments made
on such Senior Note on or before the first day of the accrual period. The
yield-to-maturity is the discount rate that, when used in computing the
present value of all principal and interest payments to be made on the Senior
Note, produces an amount equal to its issue price.
The accrual period generally is the six-month period ending on the day in
each calendar year corresponding to the day before the maturity date of the
Senior Note or the date six months before such day. The initial accrual period
of a Senior Note is the short period beginning on the issue date and ending
before the first day of the first full accrual period.
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<PAGE>
Applicable High Yield Discount Obligation
If the yield-to-maturity on the Senior Notes equals or exceeds the sum of
(x) the applicable federal long-term rate (a rate published by the IRS each
month for application during the following month) in effect at the time of
issuance of the Senior Notes (the "AFR") plus (y) five percentage points, the
Senior Notes will be considered "applicable high yield discount obligations"
under Section 163(i) of the Code. If so, the Company will not be allowed to
take a deduction for interest (including OID) accrued on the Senior Notes for
federal income tax purposes until such time as the Company actually pays such
interest (including OID) in cash or in other property (other than stock or
debt of the Company or certain related persons).
Moreover, if the yield-to-maturity on the Senior Notes exceeds the sum of
(x) the AFR and (y) 6% (such excess shall be referred to hereafter as the
"Disqualified Yield"), the deduction for interest (including OID) accrued on
the Senior Notes will be permanently disallowed (regardless of whether the
Company actually pays such interest or OID in cash or in other property) for
federal income tax purposes to the extent such interest or OID is attributable
to the Disqualified Yield on the Senior Notes ("Dividend-Equivalent
Interest"). For purposes of the dividends-received deduction, such Dividend-
Equivalent Interest will be treated as a dividend to the extent it is deemed
to have been paid out of the Company's current or accumulated earnings and
profits. Accordingly, a holder of a Senior Note that is a corporation may be
entitled to take a dividends-received deduction with respect to any Dividend-
Equivalent Interest received by such corporate holder on such Senior Note.
Sale, Redemption, Retirement or Other Taxable Disposition of Senior
Notes. In general, the holder of a Senior Note will recognize gain or loss
upon the sale, redemption, retirement or other taxable disposition of the
Senior Note measured by the difference between (i) the amount of cash and the
fair market value of property received in exchange therefor and (ii) the
holder's adjusted tax basis in the Senior Note.
An initial holder's tax basis in a Senior Note will generally be equal to
the portion of the issue price of a Unit allocated to such Senior Note
increased by the OID previously includible in gross income and reduced by any
payments on the Senior Note.
Any gain or loss on the sale, redemption, retirement or other taxable
disposition of a Senior Note should be capital gain or loss, provided the
Senior Note was a capital asset in the hands of the holder. Any capital gain
or loss will be long-term capital gain or loss if the Senior Note has been
held for more than one year and otherwise will be short-term capital gain or
loss.
Holders should be aware that the resale of a Senior Note may be affected by
the "market discount" rules of the Code under which a subsequent purchaser of
Senior Note acquiring the Senior Note at a market discount generally would be
required to include as ordinary income a portion of the gain realized upon the
disposition or retirement of such Senior Note to the extent of the market
discount that has accrued while the debt instrument was held by such holder.
INFORMATION REPORTING; BACKUP WITHHOLDING
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of the Senior Notes, other than
corporations and other exempt holders, information with respect to interest
paid and the amount of OID accrued on the Senior Notes. Holders who purchase
Senior Notes for an amount other than the adjusted issue price and/or on a
date other than the first day of an accrual period are required to determine
for themselves the amount of OID, if any, they are required to include in
gross income for federal income tax purposes.
The backup withholding rules require a payor to deduct and withhold a tax if
(i) the payee fails to furnish a taxpayer identification number ("TIN") to the
payor, (ii) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (iii) the payee has failed to report properly the receipt of a
"reportable payment" on one or more occasions and the IRS has notified the
payor that withholding is required, or (iv) there has been a failure
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<PAGE>
of the payee to certify under the penalty of perjury that the payee is not
subject to withholding under Section 3406 of the Code. If any one of the
foregoing events occurs, the Company, its paying agent or other withholding
agent will be required to withhold a tax equal to 31% of any "reportable
payment" made in connection with the Senior Notes. A "reportable payment"
includes, among other things, interest (including OID) paid in respect of a
Senior Note and amounts paid through brokers in retirement of a Senior Note.
Any amounts withheld from a payment to a holder under the backup withholding
rules will be allowed as a refund or credit against such holder's federal
income tax, provided that the required information is furnished to the IRS.
Certain holders (including, among others, corporations and certain tax-exempt
organizations) are not subject to the backup withholding and information
reporting requirements. A holder should consult his or its tax advisor as to
his or its qualification for exemption from backup withholding and the
procedure for obtaining such an exemption.
DEDUCTIBILITY OF ORIGINAL ISSUE DISCOUNT
The deduction by the Company in respect of OID accrued with respect to the
Senior Notes will be limited in part and deferred in part if the Senior Notes
are "applicable high yield discount obligations." The Company anticipates that
the Senior Notes will be applicable high yield discount obligations because,
among other things, it is expected that the yield to maturity of the Senior
Notes will exceed the sum of the AFR plus five percentage points. If the
Senior Notes are applicable high yield discount obligations, then (i) if the
yield to maturity of the Senior Notes exceeds the sum of the AFR plus six
percentage points (such excess referred to below as the "Disqualified Yield"),
the deduction for OID accrued on the Senior Notes will be permanently
disallowed to the extent such OID is attributable to the Disqualified Yield,
and such OID would be treated as dividends to corporate holders of the Senior
Notes for purposes of the dividends-received deduction (to the extent that
such amounts would have been treated as dividends had they been distributions
made by the Company with respect to its stock), and (ii) the remainder of the
OID on the Senior Notes would not be deductible by the Company until paid.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes
acquired as a result of market-making activities or other trading activities.
The Company has agreed that it will make this Prospectus available to any
broker-dealer for use in connection with any such resale for a period of 365
days after the Expiration Date or until all participating broker-dealers have
so resold.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concession from any
such broker-dealer and/or the purchasers of any New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant
to the Exchange Offer and any broker-dealer that participates in a
distribution of New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any resale of New Notes and
any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person
95
<PAGE>
participating in the Exchange Offer is acquiring the New Notes in its ordinary
course of business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
LEGAL MATTERS
The validity of the New Notes will be passed upon on behalf of the Company
by Buchanan Ingersoll Professional Corporation, Pittsburgh, Pennsylvania.
EXPERTS
The financial statements as of March 31, 1995 and 1996 and for each of the
three years in the period ended March 31, 1996 included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to a change in the method of
accounting for income taxes), and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
96
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets, March 31, 1995 and 1996....................... F-3
Consolidated Statements of Operations, Years Ended March 31, 1994, 1995 and
1996 ..................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficiency), Years Ended
March 31, 1994,
1995 and 1996............................................................. F-5
Consolidated Statements of Cash Flows, Years Ended March 31, 1994, 1995 and
1996...................................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hyperion Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of Hyperion
Telecommunications, Inc. and subsidiaries as of March 31, 1995 and 1996 and
the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
March 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hyperion Telecommunications,
Inc. and subsidiaries at March 31, 1995 and 1996 and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the consolidated financial statements, effective
April 1, 1993, the Company changed its method of accounting for income taxes.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
June 28, 1996 (August 1, 1996 as to the
sixth paragraph of Note 6)
F-2
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
----------------
1995 1996
------- -------
<S> <C> <C>
ASSETS:
- -------
Current assets:
Cash and cash equivalents.................................. $ -- $ --
Other current assets....................................... 511 282
Due from affiliates--net................................... 1,799 --
------- -------
Total current assets..................................... 2,310 282
Investments.................................................. 12,564 21,087
Property, plant and equipment--net........................... 7,538 12,561
Other assets--net............................................ 712 1,045
Deferred income taxes--net................................... 88 294
------- -------
Total.................................................... $23,212 $35,269
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
- --------------------------------------------------
Current liabilities:
Accounts payable........................................... $ 1,169 $ 2,529
Due to affiliates--net..................................... -- 8,707
Other current liabilities.................................. 205 501
------- -------
Total current liabilities................................ 1,374 11,737
Note payable--Adelphia....................................... 35,541 50,855
------- -------
Total liabilities........................................ 36,915 62,592
------- -------
Commitments and contingencies (Note 6)
Stockholders' equity (deficiency):
Common stock, $.01 par value, 30,000,000 shares authorized,
10,000,000 shares outstanding........................... 100 100
Accumulated deficit........................................ (13,803) (27,423)
------- -------
Total stockholders' equity (deficiency).................. (13,703) (27,323)
------- -------
Total.................................................... $23,212 $35,269
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1994 1995 1996
------- ------- ----
<S> <C> <C> <C>
Revenues........................................... $ 434 $ 1,768 $ 3,521
------- ------- --------
Operating expenses:
Network operations............................... 330 1,382 2,690
Selling, general and administrative.............. 2,045 2,524 3,084
Depreciation and amortization.................... 189 463 1,184
------- ------- --------
Total.......................................... 2,564 4,369 6,958
------- ------- --------
Operating loss..................................... (2,130) (2,601) (3,437)
Interest expense and fees.......................... (2,164) (3,321) (6,088)
------- ------- --------
Loss before income taxes, equity in net loss of
joint ventures and
cumulative effect of change in accounting
principle......................................... (4,294) (5,922) (9,525)
Income tax benefit................................. 55 29 197
------- ------- --------
Loss before equity in net loss of joint ventures
and cumulative effect of
change in accounting principle.................... (4,239) (5,893) (9,328)
Equity in net loss of joint ventures............... (528) (1,799) (4,292)
------- ------- --------
Loss before cumulative effect of change in
accounting principle............................... (4,767) (7,692) (13,620)
Cumulative effect of change in accounting for
income taxes....................................... 42 -- --
------- ------- --------
Net loss........................................... $(4,725) $(7,692) $(13,620)
======= ======= ========
Loss per weighted average share of common stock
before cumulative
effect of change in accounting principle.......... $ (0.48) $ (0.77) $ (1.36)
Cumulative effect per weighted average share of
common stock of
change in accounting for income taxes............. 0.01 -- --
------- ------- --------
Net loss per weighted average share of common
stock.............................................. $ (0.47) $ (0.77) $ (1.36)
======= ======= ========
Weighted average shares of common stock
outstanding........................................ 10,000 10,000 10,000
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT EQUITY (DEFICIENCY)
------ ----------- -------------------
<S> <C> <C> <C>
Balance, March 31, 1993.................. $100 $ (1,386) $ (1,286)
Net loss............................... -- (4,725) (4,725)
---- -------- --------
Balance, March 31, 1994.................. 100 (6,111) (6,011)
Net loss............................... -- (7,692) (7,692)
---- -------- --------
Balance, March 31, 1995 100 (13,803) (13,703)
Net loss............................... -- (13,620) (13,620)
---- -------- --------
Balance, March 31, 1996.................. $100 $(27,423) $(27,323)
==== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(4,725) $( 7,692) $(13,620)
Adjustments to reconcile net loss to net cash
used
in operating activities:
Depreciation................................. 183 397 1,061
Amortization................................. 6 66 123
Equity in net loss of joint ventures......... 528 1,799 4,292
Non-cash interest expense.................... 2,164 3,321 6,088
Cumulative effect of accounting change....... (42) -- --
Deferred income taxes........................ (9) (37) (206)
Changes in operating assets and liabilities:
Other assets--net.......................... (535) (550) (227)
Accounts payable........................... 223 499 1,360
Other liabilities--net..................... 86 67 296
------- -------- --------
Net cash used in operating activities............ (2,121) (2,130) (833)
------- -------- --------
Cash flows from investing activities:
Expenditures for property, plant and
equipment.................................... (3,097) (2,850) (6,084)
Investments in joint ventures................. (5,510) (7,526) (12,815)
------- -------- --------
Cash used in investing activities................ (8,607) (10,376) (18,899)
------- -------- --------
Cash flows from financing activities:
Borrowings on notes payable--Adelphia......... 12,990 12,252 9,226
Advances from (to) related parties............ (2,381) 254 10,506
------- -------- --------
Net cash provided by financing activities........ 10,609 12,506 19,732
------- -------- --------
Net decrease in cash and cash equivalents........ (119) -- --
Cash and cash equivalents beginning of year...... 119 -- --
------- -------- --------
Cash and cash equivalents end of year............ $ -- $ -- $ --
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The consolidated financial statements include the accounts of Hyperion
Telecommunications, Inc. and its wholly-owned subsidiaries (the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation. The Company was formed in 1991 and is an 89% owned subsidiary
of Adelphia Communications Corporation ("Adelphia"). The remaining 11% is
owned by certain key Company officers.
The Company provides telecommunications service through its subsidiaries and
joint ventures, in which it has less than a majority equity interest. The
Company's efforts have been directed primarily toward becoming an owner and
manager of competitive local exchange carrier ("CLEC") business
telecommunications services in selected mid-sized cities. The Company
generally partners with a local cable television or utility company, whose
fiber facilities are located in the market areas, to build competitive access
fiber optic networks. The Company then operates the networks for a management
fee. Each network provides local special access, carrier-to-carrier, and
point-to-point telecommunications services to major businesses and government
customers. The Company's revenues are derived from a combination of direct
business telecommunication services provided by its subsidiaries and
management fees from its unconsolidated joint ventures.
Joint ventures in which the Company does not have a majority interest are
accounted for under the equity method of accounting.
Cash and cash equivalents
Cash and cash equivalents generally consist of highly liquid instruments
with an initial maturity date of three months or less.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Costs capitalized include amounts directly associated with
network engineering, design and construction.
Provision for depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the assets
beginning in the month the asset is available for use or is acquired.
The estimated useful lives of the Company's principal classes of property,
plant and equipment are as follows:
<TABLE>
<S> <C>
Telecommunications networks...................................... 10-20 years
Network monitoring equipment..................................... 5-10 years
Other............................................................ 3-10 years
</TABLE>
Revenue Recognition
The Company recognizes revenues related to management and network monitoring
of the joint ventures in the month that the related services are provided. The
Company recognizes revenue from telecommunications services in the month the
related service is provided. Revenues on billings to customers for services in
advance of providing such services are deferred and recognized when earned.
F-7
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Loss Per Common Share
The computation of loss per common share is based upon the weighted average
number of common shares outstanding. All references in the accompanying
consolidated financial statements to the number of shares of common stock have
been retroactively restated to reflect the stock split (See Note 5).
Income Taxes
Deferred income taxes are recognized for the tax effects of temporary
differences between financial statement and income tax bases of assets and
liabilities and for loss carryforwards for which income tax benefits are
expected to be realized in future years. A valuation allowance is established
to reduce deferred tax assets to the net amount that management believes will
more likely than not be realized. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Other Assets
Costs incurred in developing new networks or expanding existing networks,
including network design, negotiating rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.
Pre-operating costs represent certain nondevelopment costs incurred during the
pre-operating phase of a newly constructed network and are amortized over
five-year periods commencing with the start of operations.
Asset Impairments
The Company reviews the carrying value of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of these assets may not be recoverable. Measurement of any
impairment would include a comparison of estimated future operating cash flows
anticipated to be generated during the remaining life of the assets with their
net carrying value. An impairment loss would be recognized as the amount by
which the carrying value of the assets exceeds their fair value.
Financial Instruments
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. Concentration of
credit risk with respect to accounts receivable is limited due to the
dispersion of the Company's customer base among different entities and
geographic areas. The carrying value of the Note Payable--Adelphia (see Note
4) at March 31, 1995 and 1996 approximates its fair value based upon the terms
of the note in comparison with other similar instruments.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------
1995 1996
------ -------
<S> <C> <C>
Telecommunications networks.................................. $1,704 $ 6,312
Network monitoring equipment................................. 3,244 5,267
Construction in process...................................... 2,910 2,245
Other........................................................ 270 388
------ -------
8,128 14,212
Less accumulated depreciation................................ (590) (1,651)
------ -------
Total...................................................... $7,538 $12,561
====== =======
</TABLE>
(3) INVESTMENTS
The equity method of accounting is used to account for investments in joint
ventures in which the Company owns less than a majority interest. Under this
method, the Company's initial investment is recorded at cost and subsequently
adjusted for the amount of its equity in the net income or losses of its joint
ventures. Dividends or other distributions are recorded as a reduction of the
Company's investment. Investments in joint ventures accounted for using the
equity method reflect the Company's equity in their underlying net assets.
The Company's nonconsolidated investments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
OWNERSHIP ----------------
PERCENTAGE 1995 1996
---------- ------- -------
<S> <C> <C> <C>
EQUITY BASIS INVESTMENTS:
Continental Fiber Technologies (Jacksonville)..... 20% $ 1,467 $ 4,701
Multimedia Hyperion Telecommunications (Wichita).. 49.9% 1,445 2,620
Louisville Lightwave.............................. 20% 531 996
NewChannels Hyperion Telecommunications (Albany).. 50% 924 999
NewChannels Hyperion Telecommunications
(Binghamton)...................................... 20% 355 504
NHT Partnership (Buffalo)......................... 40% 1,369 2,457
NewChannels Hyperion Telecommunications
(Syracuse)........................................ 50% 2,957 3,140
Hyperion of Harrisburg............................ 50% 701 1,600
Hyperion of Tennessee (Nashville)................. 25% 695 1,345
Alternet of Virginia (Richmond)................... 37% 1,633 3,406
New Jersey Fiber Technologies (New Brunswick)..... 19.7% 9 956
TCG of South Florida.............................. 15.7% 2,981 4,679
Other ............................................ Various 18 497
------- -------
15,085 27,900
Cumulative equity in net losses................... (2,521) (6,813)
------- -------
Total Investments................................. $12,564 $21,087
======= =======
</TABLE>
F-9
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3) INVESTMENTS, CONTINUED
Summarized combined unaudited financial information for the Company's
investments being accounted for using the equity method of accounting as of
and for the years ended March 31, 1994, 1995 and 1996, is as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Current assets................................... $ 7,278 $ 6,842 $ 5,709
Non-current assets............................... 29,410 59,870 109,583
Current liabilities.............................. 10,345 6,444 11,683
Non-current liabilities.......................... 2,743 20,858 25,912
Revenues......................................... 1,028 3,894 11,513
Net loss......................................... (2,059) (7,319) (14,475)
</TABLE>
On May 16, 1996, the Company sold its 15.7% interest in TCG of South Florida
to a third party for approximately $11,618 cash resulting in a pre-tax gain of
approximately $8,400. Amounts related to TCG of South Florida included in the
Company's investments and equity in net loss of joint ventures as of and for
the year ended March 31, 1996 were $3,422 and $778, respectively.
(4) FINANCING ARRANGEMENTS
Note Payable--Adelphia
The Company has an unsecured credit arrangement with Adelphia which had no
repayment terms prior to April 15, 1996. On April 15, 1996, $25,000 of the
proceeds from the sale of the 13% Senior Discount Notes and Warrants discussed
below were used to repay a portion of this obligation. Interest expense and
fees on this credit arrangement were based upon the weighted average cost of
unsecured borrowings of Adelphia during the corresponding periods.
Interest at 11.28% per annum plus fees was charged on the Note Payable--
Adelphia for the years ended March 31, 1994, 1995 and 1996. The total amount
of interest converted to note principal at March 31, 1996 is $9,007.
Effective April 15, 1996, the remaining balance due on the Note Payable--
Adelphia is evidenced by an unsecured subordinated note due April 16, 2003.
This obligation bears interest at 16.5% per annum with interest payable
quarterly in cash; by issuing additional subordinated notes; or a combination
of cash and additional subordinated notes, all of which is at the Company's
option.
13% Senior Discount Notes and Warrants
On April 15, 1996, the Company issued $329,000 of 13% Senior Discount Notes
(the "Senior Notes") due April 15, 2003 and 329,000 warrants to purchase an
aggregate of 613,427 shares of its common stock. Proceeds to the Company, net
of discounts, commissions, and other transaction costs were approximately
$168,600. Such net proceeds were used to pay $25,000 of the Note Payable--
Adelphia discussed above, to make loans of $3,000 to certain key Company
officers (see Note 5) and to fund the Company's capital expenditures, working
capital requirements, operating losses and its pro-rata investments in joint
ventures. Use of proceeds from the Senior Notes also included the repayment of
amounts related to capital expenditures, working capital requirements,
operating losses and pro-rata investments in joint ventures totaling $12,800
incurred during the period from January 1, 1996 to April 15, 1996. These
amounts had been funded during the same time period through advances from
Adelphia.
F-10
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4) FINANCING ARRANGEMENTS, CONTINUED
Prior to April 15, 2001, interest on the Senior Notes is not payable in
cash, but is added to principal. Thereafter, interest is payable semi-annually
commencing October 15, 2001. The Senior Notes are unsecured and are senior to
the Note Payable--Adelphia and all future subordinated indebtedness. On or
before April 15, 1999 and subject to certain restrictions, the Company may
redeem, at its option, up to 25% of the aggregate principal amount of the
Senior Notes at a price of 113% of the Accreted Value (as defined in the
Indenture). On or after April 15, 2001, the Company may redeem, at its option,
all or a portion of the Senior Notes at 106.5% which declines to par in 2002,
plus accrued interest.
The holders of the Senior Notes may put the Senior Notes to the Company at
any time at a price of 101% upon the occurrence of a Change of Control (as
defined in the Indenture). In addition, the Company will be required to offer
to purchase Senior Notes at a price of 100% with the proceeds of certain asset
sales (as defined in the Indenture).
The Indenture stipulates, among other things, limitations on additional
borrowings, issuance of equity instruments, payment of dividends and other
distributions, repurchase of equity interests or subordinated debt, sale--
leaseback transactions, liens, transactions with affiliates, sales of Company
assets, mergers and consolidations.
In accordance with a registration rights agreement, the Company has agreed
to file a registration statement offering to exchange the Senior Notes for
Series B Senior Discount Notes registered under the Securities Act of 1933, as
amended (the "Securities Act"). Terms of the Series B Senior Discount Notes
will be substantially the same as the Senior Notes. Under certain
circumstances, if the above exchange is not consummated or such registration
is not filed or effective within the time periods stipulated in the agreement,
the Company must pay liquidated damages to the holders of the Senior Notes
ranging from .5% per annum to 2.0% per annum based on the amount of additional
time required to consummate the exchange. The Company is in the process of
filing the required registration statement and does not expect to incur any
liquidated damages.
The Warrants are exercisable at $.01 per share upon the earlier of May 1,
1997 or a Change of Control. Unless exercised, the Warrants expire on April 1,
2001. The number of shares and the exercise price for which a warrant is
exercisable are subject to adjustment under certain circumstances. In
accordance with a registration rights agreement, the Company has agreed to
file shelf registration statements under the Securities Act covering the
Warrants and the Warrant Shares. Under certain circumstances, if the shelf
registrations are not effective within the time period specified in the
agreement, the Company must pay liquidated damages to the holders of the
Warrants or Warrant Shares ranging from $.0025 to $.0125 per week per Warrant
or per Warrant Share then issuable based on the amount of additional time
required to accomplish the shelf registrations.
If the Senior Notes and Warrants had been issued on April 1, 1995, interest
expense would have been $21,708 for the year ended March 31, 1996.
F-11
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1966
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(4) FINANCING ARRANGEMENTS, CONTINUED
The following unaudited pro forma balance sheet has been prepared assuming
that the issuance of the Senior Notes and Warrants had occurred on March 31,
1996.
PRO FORMA BALANCE SHEET MARCH 31, 1996 (DOLLARS IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
AS PRO FORMA PRO
REPORTED ADJUSTMENTS(A) FORMA
-------- -------------- --------
<S> <C> <C> <C>
Cash and cash equivalents.................... $ -- $140,585 $140,585
Other current assets......................... 282 -- 282
-------- -------- --------
Total current assets......................... 282 140,585 140,867
-------- -------- --------
Other assets................................. 34,987 6,239 41,226
-------- -------- --------
Total assets................................. $ 35,269 $146,824 $182,093
======== ======== ========
Current liabilities.......................... $ 11,737 $ -- $ 11,737
Senior Notes................................. -- 163,705 163,705
Notes Payable--Adelphia...................... 50,855 (25,000) 25,855
-------- -------- --------
Total liabilities............................ 62,592 138,705 201,297
-------- -------- --------
Stockholders' equity (deficiency):
Common Stock.............................. 100 -- 100
Warrants.................................. -- 11,119 11,119
Loans to stockholders..................... -- (3,000) (3,000)
Accumulated deficit....................... (24,423) -- (27,423)
-------- -------- --------
Total Stockholders equity (deficiency)....... (27,323) 8,119 (19,204)
-------- -------- --------
$ 35,269 $146,824 $182,093
======== ======== ========
</TABLE>
- --------
(a) Amounts represent sources and uses of funds provided by the issuance of
the Senior Notes and Warrants as follows:
<TABLE>
<S> <C>
Proceeds from Senior Notes.................................................. $163,705
Proceeds from Warrants...................................................... 11,559
Underwriters' fee and transaction costs applicable to Senior Notes.......... (6,239)
Underwriters' fee and transaction costs applicable to Warrants.............. (440)
Repayment of portion of Note Payable--Adelphia.............................. (25,000)
Loans to stockholders....................................................... (3,000)
--------
Net cash proceeds........................................................... $140,585
========
</TABLE>
F-12
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(5) STOCKHOLDERS' EQUITY
The common stock of the Company held by Adelphia and certain key Company
officers (the "Officers") is subject to sale and transfer restriction
provisions. These provisions state that none of the Officers may transfer any
shares unless they have offered to sell such shares to Adelphia (or the other
remaining Officers if Adelphia declines) at a price per share equal to the
terms of the proposed third party sale or exchange.
In accordance with a shareholder agreement, upon termination of employment
or at any time after October 7, 1996, the Officers could have required
Adelphia to purchase all their outstanding shares (the "Officers' Option"). At
any time after October 7, 2001, Adelphia could have required the Officers to
sell all of their outstanding shares to Adelphia (the "Adelphia Option"). The
price per share shall be equal to the fair market value of the shares as
determined by a nationally recognized financial advisor selected by Adelphia
and the Officers.
On March 19, 1996, such shareholder agreement was amended primarily to (i)
grant the Officers certain registration rights regarding their common stock;
(ii) extend the Officers' Option date until after October 7, 1998; (iii)
extend the Adelphia Option date until after October 7, 2003 and (iv) provide
for aggregate loans to the Officers of $3,000 from the proceeds received from
the private placement of the Senior Notes and Warrants discussed in Note 4.
Such loans, including accrued interest at a rate equal to the rate which the
Company is able to invest cash on a short-term basis, are secured by a pledge
of each Officer's common stock in the Company and are payable to the Company
on the earlier of October 8, 1998 or the date of the registration of an equity
security of the Company as described below. Also, an amount equal to the
interest that accrues on such loans from the date six months after the date
the loans are made until due and payable will be satisfied through additional
compensation to the Officers. The shareholder agreement is terminated upon the
registration of an equity security of the Company under the Securities Act or
the Securities Exchange Act of 1934, as amended, which equity security is of
the same class as the equity security held by the Officers.
On March 19, 1996, the Board of Directors of the Company approved a ten
thousand-for-one stock split of its common stock and the reduction of the par
value from $1.00 per share to $.01 per share. All references in the
accompanying consolidated financial statements to the number of shares of
common stock and the par value have been retroactively restated to reflect
this stock split and par value reduction. In addition, on March 19, 1996, the
Board of Directors approved charter amendments to increase the Company's
authorized shares of common stock from 1,000 shares to 30,000,000 shares and
authorized 5,000,000 shares of preferred stock with terms of such preferred
stock to be determined by the Board of Directors of the Company. No preferred
stock has been issued by the Company.
(6) COMMITMENTS AND CONTINGENCIES
The Company rents office space, node space and fiber under leases with terms
which are generally less than one year or under agreements that are generally
cancelable on short notice. Total rental expense under all operating leases
aggregated $65, $478, and $1,210 for the years ended March 31, 1994, 1995 and
1996, respectively.
F-13
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) COMMITMENTS AND CONTINGENCIES, CONTINUED
The minimum future lease obligations under the noncancelable operating
leases as of March 31, 1996 are approximately:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1997................................................. $140
1998................................................. 14
1999................................................. 13
2000................................................. 4
2001................................................. 4
Thereafter........................................... --
</TABLE>
Under certain investment agreements, the Company has committed to make
specific capital contributions to the joint ventures. Total capital
commitments to be made as a result of these agreements at March 31, 1996 was
$2,299.
Certain investors in two of the joint ventures have the right after a
specified period of time to sell their interest to the Company. Under one
agreement, the sales price represents the investor's aggregate capital
contribution less distributions plus interest accrued at the prime rate. The
Company's obligation under this commitment at March 31, 1996 was approximately
$2,946. The sales price under the second agreement is equal to the fair market
value of such investor's interest.
The Company has agreed that it will make all required capital contributions
to Louisville Lightwave that are necessary to increase its ownership to 50%.
The Company expects these capital contributions will aggregate approximately
$3,000.
On August 1, 1996, the Company purchased additional general and limited
partnership interests in Hyperion of Tennessee for approximately $5,000, which
increases the Company's ownership of Hyperion of Tennessee to 95%. The
following unaudited financial information for the year ended March 31, 1996
assumes that this acquisition had occurred on April 1, 1995:
<TABLE>
<S> <C>
Revenues $ 3,963
Net loss before extraordinary items 15,239
Net loss 15,239
Net loss per weighted average share of common
stock $1.52
</TABLE>
The Company has entered into employment agreements with certain key Company
officers, the terms of which expire on October 20, 1998, as amended. The
employment agreements provide for base salary, benefits and bonuses payable if
specified management goals are attained. In addition, the employment
agreements contain noncompetition and nondisclosure provisions.
The President of the Company has an employment agreement with Adelphia where
he is a vice president and secretary. His agreement provides for base salary,
benefits and insurance premium payments. The Company reimburses Adelphia for
such payments.
The Company's operations and the operations of its joint ventures may be
adversely affected by changes and developments in governmental regulation,
competitive forces and technology. The telecommunications industry is subject
to extensive regulation at the federal, state and local levels. On February 8,
1996, President
F-14
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) COMMITMENTS AND CONTINGENCIES, CONTINUED
Clinton signed the Telecommunications Act of 1996 (the "Telecommunications
Act"), the most comprehensive reform of the nation's telecommunications laws
since the Communications Act of 1934.
The more significant provisions of the Telecommunications Act and certain
of its possible effects are as follows:
The Telecommunications Act removes legal barriers of entry in local
telephone markets. This provision should enable the Company to provide a
full range of services in any state while potentially increasing the level
of competition the Company faces in all its markets.
The Telecommunications Act requires incumbent Local Exchange Company's
("LECs") to "interconnect" with competitors which will provide access to
certain networks under reasonable rates, terms and conditions. It is
uncertain how effective these requirements will be or their impact on the
Company until the FCC completes its rulemaking proceedings requiring the
LECs to provide telephone number portability, dialing parity, reciprocal
compensation, resale, access to rights-of-way and unbundling of network
services.
The Telecommunications Act establishes procedures for LEC and Bell
Operating Company ("BOC") entry into new markets, including long distance
and cable television service. The Company's management believes LECs are
now more likely to invest in fiber optic networks and enter the video
market which will generate a revenue stream previously unavailable to them.
These facilities can then also be used to provide services that compete
with the Company. By allowing the BOC to enter the long distance market,
this may reduce the market share of the major long distance carriers (the
Company's joint ventures' primary customers) and have adverse consequences
on the Company's joint ventures' ability to generate revenues from the long
distance carriers.
The Telecommunications Act eliminates the requirement that LECs obtain FCC
authorization before constructing new facilities for interstate services
and limits the FCC's ability to review LEC tariff filings. The changes will
increase the speed with which the LECs are able to introduce new service
offerings and new pricing of existing services, thereby increasing the
LEC's ability to compete with the Company.
The Telecommunications Act requires the FCC to establish an explicit
mechanism for subsidizing service to markets that are less desirable,
either because of the high cost of providing service or the limited
revenues that might be available. This could be advantageous to the Company
or it could be beneficial to the Company's competitors depending on the
geographic areas and the type of customers for which subsidies are
available.
F-15
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(7) RELATED PARTY TRANSACTIONS
The following table summarizes the transactions with related parties which
are included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
REVENUES:
Management fees....................................... $ 261 $1,045 $1,950
Network monitoring fees............................... 51 217 446
Special access fees................................... -- 189 651
Interest.............................................. -- 65 199
------ ------ ------
Total................................................. $ 312 $1,516 $3,246
====== ====== ======
EXPENSES:
Interest expense and fees............................. $2,164 $3,321 $6,088
Allocated corporate costs............................. 214 209 250
Fiber leases.......................................... -- 303 1,022
------ ------ ------
Total................................................. $2,378 $3,833 $7,360
====== ====== ======
</TABLE>
Management fees from related parties represent fees received by the Company
from its unconsolidated joint ventures for the performance of financial,
legal, regulatory and other administrative services.
Network monitoring fees represent fees received by the Company for technical
support for the monitoring of each individual joint venture's
telecommunications system.
Interest represents interest charged on certain affiliate receivable
balances with joint ventures.
Special access fees represent amounts charged to joint ventures for use of
the network of a wholly-owned subsidiary of the Company.
Interest expense and fees relate to the Note Payable--Adelphia (See Note 4).
Allocated corporate costs represent costs incurred by Adelphia on behalf of
the Company for the administration and operation of the Company. These costs
include charges for office space and shared services such as finance
activities, information systems, computer services, human resources, and
taxation. Such costs were estimated by Adelphia and do not necessarily
represent the actual costs required for these services.
Fiber lease expense represents amounts paid to various subsidiaries of
Adelphia for the utilization of existing cable television plant for
development and operation of the consolidated operating networks.
(8)INCOME TAXES
The Company and its corporate subsidiaries adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
effective April 1, 1993. The cumulative effect of adopting SFAS No. 109 at
April 1, 1993 was to decrease net loss by $42 for the year ended March 31,
1994. Adoption of SFAS No. 109 had no other effect on net loss for the year
ended March 31, 1994.
F-16
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES, CONTINUED
Adelphia and its corporate subsidiaries (including the Company) file a
consolidated federal income tax return. For financial reporting purposes,
current and deferred income tax assets and liabilities are computed on a
separate company basis. The valuation allowance is adjusted for benefits
associated with filing a consolidated income tax return, similar to provisions
of the Internal Revenue Code. At March 31, 1996, the Company had net operating
loss carryforwards for federal income tax purposes of $23,100 expiring through
2011.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carryforwards.
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
------- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Differences between book and tax basis of intangible
assets................................................. $ 404 $ 119
Net operating loss carryforwards........................ 4,823 9,302
Investment in Partnerships.............................. 327 1,401
Other................................................... 27 134
------- --------
Total.................................................. 5,581 10,956
Valuation allowance..................................... (5,295) (10,459)
------- --------
Total.................................................. 286 497
------- --------
DEFERRED TAX LIABILITIES:
Differences between book and tax basis of property,
plant and equipment................................... 198 203
------- --------
Net deferred tax asset................................... $ 88 $ 294
======= ========
</TABLE>
The net change in the total valuation allowance for the years ended March
31, 1995 and 1996 was an increase of $3,111 and $5,164, respectively.
Income tax benefit for the years ended March 31, 1994, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current....................................................... $46 $(8) $ (9)
Deferred...................................................... 9 37 206
--- --- ----
Total......................................................... $55 $29 $197
=== === ====
</TABLE>
F-17
<PAGE>
HYPERION TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES, CONTINUED
A reconciliation of the statutory federal income tax rate and the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 35.0% 35.0% 35.0%
Change in valuation allowance............................ (42.0) (39.0) (34.6)
State taxes, net of federal benefit and other............ 8.1 4.4 1.0
----- ----- -----
Income tax benefit....................................... 1.1% .4% 1.4%
===== ===== =====
</TABLE>
F-18
<PAGE>
APPENDIX A
GLOSSARY
Access Charges--The fees paid by long distance carriers to LECs for
originating and terminating long distance calls over the LECs' local networks.
ATM (Asynchronous Transfer Mode)--A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits
of a standard fifty-three bit-long packet or cell. ATM-based packet transport
was specifically developed to allow switching and transmission of mixed voice,
data and video (sometimes referred to as "multi-media" information) at varying
rates. The ATM format can be used by many different information systems,
including LANs.
Broadband--Broadband communications systems can transmit large quantities of
voice, data and video by way of digital or analog signals. Examples of
broadband communication systems include DS-3 fiber optic systems, which can
transmit 672 simultaneous voice conversations, or a broadcast television
station signal, that transmits high resolution audio and video signals into
the home. Broadband connectivity is also an essential element for interactive
multimedia applications.
CAP (Competitive Access Provider)--A company that provides its customers
with an alternative to the incumbent local telephone company for local
transport of private line, special access and interstate transport of switched
access telecommunications services. CAPs are also referred to in the industry
as alternative local telecommunications service providers (ALTs), metropolitan
area network providers (MANs) and alternative access vendors (AAVs).
Central Offices or LEC-COs--The switching centers or central switching
facilities of the LECs or CLECs.
Centrex--Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the
carrier's premises and not at the premises of the customer. These features
include direct dialing within a given phone system, direct dialing of incoming
calls, and automatic identification of outbound calls. This is a value-added
service that LECs and CLECs can provide to a wide range of customers who do
not have the size or the funds to support their own on-site PBX.
CLEC (Competitive Local Exchange Carrier)--A CAP that also provides switched
local telecommunications services.
Collocation--The ability of a CAP, IXC or end user to connect its network to
a LEC-COs. Physical collocation occurs when a CAP places its network
connection equipment inside the LEC-COs. Virtual collocation is an alternative
to physical collocation pursuant to which the LEC permits a CAP to connect its
network to the LEC-COs on comparable terms, even though the CAP's network
connection equipment is not physically located inside the central offices.
Dedicated Lines--Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the public switched network).
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video and data.
A-1
<PAGE>
Dialing Parity--Dialing parity exists when a customer calling to or from the
network of a CLEC is not required to dial any more digits than for a
comparable call originating and terminating on the incumbent LEC's network.
Diverse Access Routing--A telecommunications network configuration in which
signals are transported simultaneously along two different paths so that if
one cable is cut, traffic can continue in the other direction without
interruption to its destination. The Company's networks generally provide
diverse access routing.
DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
FCC--Federal Communications Commission
Fiber Mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
Fiber Optics--Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. A strand of
fiber optic cable is as thick as a human hair yet is said to have more
bandwidth capacity than copper cable the size of a telephone pole.
Fiber Optic Ring Network--Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self-healing" optical fiber ring
architecture known as SONET.
Frame Relay--Frame relay is a high speed data packet switching service used
to transmit data between computers. Frame relay supports data units of
variable lengths at access speeds ranging from 56 kilobits to 1.5 megabits.
This service is appropriate for connecting LANs, but is not appropriate for
voice and video applications due to the variable delays which can occur. Frame
relay was designed to operate at higher speeds on modern fiber optic networks.
Frame Relay Service--Data communications service that functions as a fast
packet transport service of variable length data packets between customer
designated locations and supports the establishment of software defined
logical connections and circuits that act as private facilities on a public
platform.
Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
Interconnection Decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC-COs to any CAP, IXC or end user seeking such
interconnection for the provision of interstate special access and switched
access transport services.
lnterLATA Calls--InterLATA calls are calls that pass from one LATA to
another. Typically, these calls are referred to as long distance calls. The
Telecommunications Act establishes procedures under which the RBOCs can
receive authority to provide interLATA services.
A-2
<PAGE>
IntraLATA Calls--IntraLATA calls, also known as short haul calls, are those
calls that originate and terminate within the same LATA. All states allow
intraLATA competition, but dialing parity still does not exist in most states
and very little LEC intraLATA revenue has been won by competitors.
IXC (Interexchange or Long Distance Carriers)--Usually referred to as long
distance carriers. There are many facilities-based IXCs, including AT&T, MCI,
WorldCom and Sprint, as well as a select few CAPs that provide interexchange
service.
Kilobit--One thousand bits of information. The information-carrying capacity
(i.e., bandwidth of a circuit may be measured in "kilobits per second.")
LANs (Local Area Networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as work stations, printers
and high-speed modems. LANs may include dedicated computers or file servers
that provide a centralized source of shared files and programs.
LATAs--The geographically defined Local Access and Transport Areas in which
LECs are authorized by the MFJ to provide local exchange services. These LATAs
roughly reflect the population density of their respective states (for example
California has 11 LATAs while Wyoming has one). There are 164 LATAs in the
United States.
LEC (Local Exchange Carrier)--A company providing local telephone services.
LEC-COs--Local Exchange Carrier's central office.
Local Exchange Areas--A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without
toll charges to the calling or called party.
Megabit--One million bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "megabits per second."
MFJ (Modified Final Judgment)--The MFJ was a consent decree entered into in
1982 between AT&T and the Department of Justice which forced the breakup of
the old Bell System through the divestiture of the seven separate Regional
Bell Operating Companies (RBOCs) from AT&T. Divestiture resulted in two
distinct segments of the telecommunications service market: local and long
distance. This laid the groundwork for intense competition in the long
distance industry, but essentially created seven separate regionally-based
local exchange service monopolies. The Telecommunications Act removes most MFJ
restrictions on a prospective basis from AT&T and the RBOCs.
Network Systems Integration--Involves the creation of a turnkey
telecommunications network including (i) route and site selection and
obtaining rights of way and legal authorizations to install the network; (ii)
design and engineering of the system, including technology and vendor
assessment and selection, determining fiber optic circuit capacity, and
establishing reliability/flexibility standards; and (iii) project and
construction management, including contract negotiations, purchasing and
logistics, installation as well as testing and construction management.
Number Portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
Off-Net--A customer that is not physically connected to one of the Company's
networks but who is accessed through interconnection with a LEC network.
On-Net--A customer that is physically connected to one of the Company's
networks.
A-3
<PAGE>
PCS (Personal Communications Service)--A type of wireless telephone system
that uses light, inexpensive handheld sets and communicates via low power
antennas.
PBX--A Private Branch Exchange is a switching system within an office
building which allows calls from outside to be routed directly to the
individual instead of through a central number. A PBX also allows for calling
within an office by way of four digit extensions. Centrex is a service which
can simulate this service from an outside switching source, thereby
eliminating the need for a large capital expenditure on a PBX.
Physical Collocation--Physical Collocation occurs when a CAP places its own
network connection equipment inside the LEC-CO. The Telecommunications Act
gives the FCC authority to mandate physical collocation. See Virtual
Collocation.
POPs (Points of Presence)--Locations where an IXC has installed transmission
equipment in a service area that serves as, or relays calls to, a network
switching center of that IXC.
Private Line--A private, dedicated telecommunications connection between
different end user locations (excluding IXC POPs).
Private Line Data Interconnect Service--A data transport service utilizing
data products and on-net private line facilities that are packaged together
with data products.
Public Switched Network--That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Public Utility Commission--A state regulatory body which regulates
utilities, including telephone companies providing intrastate services. In
some states this regulatory body may have a different name, such as public
service commission.
RBOCs (Regional Bell Operating Companies)--The seven local telephone
companies established by the MFJ. The RBOCs were prohibited from providing
interLATA services and from manufacturing telecommunications equipment under
the MFJ, but the Telecommunications Act of 1996 establishes procedures for
lifting these restrictions.
Reciprocal Compensation--The compensation paid by a local carrier for
termination of a local call on the network of a competing carrier which is
obligated to pay a comparable charge to terminate traffic on the network of
the first carrier. Reciprocal compensation is distinct from the one way access
charges by which the IXCs compensate LEC's for originating or terminating
traffic.
Redundant Electronics--A telecommunications facility using two separate
electronic devices to transmit a telecommunications signal so that if one
device malfunctions, the signal may continue without interruption.
Route Miles--The number of miles of the telecommunications path in which
fiber optic cables are installed as it would appear on a network map.
Second and Third Tier Markets--Metropolitan markets in the United States
with population bases ranging from 250,000 to two million.
Special Access Services--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CAP, which lines or
circuits run to or from the IXC POPs. Examples of special access services are
telecommunications lines running between POPs of a single IXC, from one IXC
POP to the POP of another IXC or from an end user to its IXC POP. Special
access services do not require the use of switches.
A-4
<PAGE>
SONET (Synchronous Optical Network)--SONET is the electronics and network
architecture which enable transmission of voice, video and data (multimedia)
at very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by re-routing calls within the network. If the line is cut,
the traffic is simply reversed and sent to its destination around the other
side of the ring.
Switch--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
Switched Access Transport Services--Transportation of switched traffic along
dedicated lines between the LEC central offices and IXC POPs.
Switched Services--Services which utilize a switch, as opposed to dedicated
services which are non-switch. These services are the greatest source of
revenue for carriers.
Switched Traffic--Telecommunications traffic along a switched network.
Virtual Collocation--Virtual collocation is an alternative to physical
collocation in which the CAPs connect their equipment to the LECs facilities
from a remote location and request that the LEC install the necessary
electronics in its central office which is then leased by the LEC to the CAP
for charges which are generally higher than the charges for physical
collocation. However, the CAP avoids payment of the initial capital costs for
the leased facilities which the CAP must incur under physical collocation.
Voice Grade Equivalent Circuit--One DS-0. One voice grade equivalent circuit
is equal to 64 kilobits of bandwidth per second.
A-5
<PAGE>
===============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
HYPERION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER
OF TRANSMITTAL NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
HYPERION SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. NEITHER THIS PROSPECTUS
NOR THE ACCOMPANYING LETTER OF TRANSMITTAL CONSTITUTES AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
------------
TABLE OF CONTENTS
Page
<TABLE>
<S> <C>
Available Information....................................................... 1
Prospectus Summary.......................................................... 2
Risk Factors................................................................ 14
The Exchange Offer.......................................................... 20
Use of Proceeds............................................................. 28
Capitalization.............................................................. 29
Selected Consolidated Financial and
Operating Data............................................................. 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 32
Business.................................................................... 38
Competition................................................................. 53
Regulation.................................................................. 53
Management.................................................................. 60
Certain Relationships and Transactions...................................... 62
Ownership of Capital Stock.................................................. 63
Description of the Senior Notes............................................. 64
Certain Federal Income Tax Considerations................................... 92
Plan of Distribution........................................................ 95
Legal Matters............................................................... 96
Experts..................................................................... 96
Index to Financial Statements............................................... F-1
Glossary.................................................................... A-1
</TABLE>
===============================================================================
===============================================================================
LOGO
HYPERION TELECOMMUNICATIONS, INC.
13% SENIOR DISCOUNT NOTES DUE 2003, SERIES B
----------------
PROSPECTUS
----------------
AUGUST 12, 1996
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides in general that
a corporation may indemnify its directors, officers, employees or agents
against expenditures (including judgments, fines, amounts paid in settlement
and attorneys' fees) made by them in connection with certain lawsuits to which
they may be made parties by reason of their being directors, officers,
employees or agents and shall so indemnify such persons against expenses
(including attorneys' fees) if they have been successful on the merits or
otherwise. The bylaws of Hyperion provide for indemnification of the officers
and directors of Hyperion to the full extent permissible under Delaware law.
Hyperion's Certificate of Incorporation also provides, pursuant to Section
102(b)(7) of the Delaware General Corporation Law, that directors of Hyperion
shall not be personally liable to Hyperion or its stockholders for monetary
damages for breach of fiduciary duty as a director for acts or omissions,
provided that directors shall nonetheless be liable for breaches of the duty
of loyalty, bad faith, intentional misconduct, knowing violations of law,
unlawful distributions to stockholders, or transactions from which a director
derived an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Purchase Agreement dated as of April 10, 1996 between the
Registrant and Bear, Stearns & Co. Inc., Chase Securities Inc. and
NationsBanc Capital Markets, Inc. (collectively, the "Initial
Purchasers").
2.1* Purchase Agreement effective as of May 13, 1996 between Teleport
Communications Group Inc. and Hyperion Telecommunications of
Florida, Inc.
3.1* Certificate of Incorporation of Registrant, together with all
amendments thereto.
3.2* Bylaws of Registrant.
4.1* Indenture, dated as of April 15, 1996, between the Registrant and
Bank of Montreal Trust Company.
4.2 Form of Note (contained in Indenture filed as Exhibit 4.1).
4.3* Registration Rights Agreement dated as of April 15, 1996, between
the Registrant and the Initial Purchasers.
4.4* Subordinated Note dated April 15, 1996 by the Company in favor of
Adelphia.
5.1* Opinion of Buchanan Ingersoll Professional Corporation.
8.1* Tax Opinion of Buchanan Ingersoll Professional Corporation
(contained in Exhibit 5.1)
10.1* Employment Agreement between the Registrant and Charles R.
Drenning.
10.2* Employment Agreement between the Registrant and Paul D. Fajerski.
10.3* Employment Agreement between the Registrant and Randolph S.
Fowler.
10.4 Employment Agreement dated July 1, 1986 between Adelphia and
Daniel R. Milliard. Exhibit 10.15 to Adelphia's Registration
Statement No. 33-6974 on Form S-1 is incorporated herein by
reference.
10.5* Pre-Incorporation and Shareholder Restrictive Agreement between
Adelphia, Paul D. Fajerski, Charles R. Drenning and Randolph S.
Fowler.
10.6* Term Loan Note dated May 10, 1996 between Charles R. Drenning in
favor of Registrant in the amount of $1,000,000.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.7* Term Loan Note dated May 10, 1996 between Paul D. Fajerski in
favor of Registrant in the amount of $1,000,000.
10.8* Term Loan Note dated May 10, 1996 between Randolph S. Fowler in
favor of Registrant in the amount of $1,000,000.
10.9* Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Charles R. Drenning.
10.10* Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Paul D. Fajerski.
10.11* Term Loan and Stock Pledge Agreement dated May 10, 1996 between
the Registrant and Randolph S. Fowler.
10.12* Letter Agreement dated March 19, 1996 between the Registrant,
Charles R. Drenning, Paul D. Fajerski, Randolph S. Fowler and
Adelphia.
10.13* Warrant Agreement dated as of April 15, 1996, by and among
Hyperion Telecommunications, Inc. and Bank of Montreal Trust
Comapny.
10.14* Warrant Registration Rights Agreement dated as of April 15, 1996,
by and among Hyperion Telecommunications, Inc. and the Initial
Purchasers.
10.15* Form of Management Agreement.
12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Buchanan Ingersoll Professional Corporation (contained
in its opinion filed as Exhibit 5.1 hereto).
23.2* Consent of Deloitte & Touche LLP.
24.1* Power of Attorney (appearing on Signature Page).
25.1* Form T-1 Statement of Eligibility of Trustee.
27.1* Financial Data Schedule.
99.1* Form of Letter of Transmittal and Notice of Guaranteed Delivery.
</TABLE>
- --------
*Previously filed.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
The Registrant hereby undertakes to respond to requests for information that
is incorporated by reference into the prospectus pursuant to Item 4, 10(b),
11, or 13 of this form, within one business day of receipt of such request,
and to send the incorporated documents by first-class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed part of the Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at such time shall be
deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Provided, however, that paragraphs (3)(i) and (3)(ii) above do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(6) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Coudersport, Commonwealth of Pennsylvania, on the 9th day of August, 1996.
HYPERION TELECOMMUNICATIONS, INC.
/s/ Daniel R. Milliard
By: ________________________________
Daniel R. Milliard President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this amendment to this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
* Chairman and Director
- ------------------------- August 9,
John J. Rigas 1996
* Vice Chairman, Executive Vice
- ------------------------- President and Director August 9,
Michael J. Rigas 1996
* Vice Chairman, Executive Vice
- ------------------------- President, Treasurer, Chief August 9,
Timothy J. Rigas Financial Officer and Director 1996
* Vice Chairman, Executive Vice
- ------------------------- President and Director August 9,
James P. Rigas 1996
/s/ Daniel R. Milliard President, Secretary, Chief
- ------------------------- Executive Officer and Director August 9,
Daniel R. Milliard 1996
* Vice President and Director
- ------------------------- August 9,
Charles R. Drenning 1996
* Vice President and Director
- ------------------------- August 9,
Paul D. Fajerski 1996
* Vice President and Director
- ------------------------- August 9,
Randolph S. Fowler 1996
* Chief Accounting Officer
- ------------------------- August 9,
Edward E. Babcock 1996
*/s/ Daniel R. Milliard
- ------------------------- August 9,
Daniel R. Milliard, as 1996
Attorney In Fact
II-4
